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 June 30, 20212022
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
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 77-0160744 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
5980 Horton Street, Suite 405 | |
Emeryville | |
CA | 94608 |
(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 share | LGND | The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one) | | | | | | | | | | | | | | |
Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
Emerging Growth Company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 30, 2021,August 5, 2022, the registrant had 16,676,53216,882,751 shares of common stock outstanding.
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS | | | | | | | | |
PART I. FINANCIAL INFORMATION | |
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PART II. OTHER INFORMATION | |
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GLOSSARY OF TERMS AND ABBREVIATIONS |
Abbreviation | Definition |
20202021 Annual Report | Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the SEC on February 24, 202128, 2022 |
2023 Notes | $750.0 million aggregate principal amount of convertible senior unsecured notes due 2023 |
Ab Initio | Ab Initio Biotherapeutics, Inc. |
Amgen | Amgen, Inc. |
ANDAAPAC | Abbreviated New Drug ApplicationAvista Public Acquisition Corp. II |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Aziyo | Aziyo Med, LLC |
CE | Captisol-enabled |
Company | Ligand Pharmaceuticals Incorporated, including subsidiaries |
CorMatrix | CorMatrix Cardiovascular, Inc. |
CVR | Contingent value right |
Crystal | Crystal Bioscience, Inc. |
CStone Pharmaceuticals | CStone Pharmaceuticals (Suzhou) Co., Ltd. |
CyDex | CyDex Pharmaceuticals, Inc. |
Dianomi TherapeuticsEMA | Dianomi Therapeutics, Inc.European Medicines Agency |
ESPP | Employee Stock Purchase Plan, as amended and restated |
FASB | Financial Accounting Standards Board |
FDA | Food and Drug Administration |
GAAP | Generally accepted accounting principles in the United States |
Gilead | Gilead Sciences, Inc. |
GRA | Glucagon receptor antagonist |
Icagen | Icagen, Inc. |
IND | Investigational New DrugLLC |
Ligand | Ligand Pharmaceuticals Incorporated, including subsidiaries |
Merger Agreement | Agreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub |
Merger Sub | Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC |
Metabasis | Metabasis Therapeutics, Inc. |
NDA | New Drug Application |
OmniAb | OmniAb, Inc. |
OmniAb Business | Ligand's antibody discovery business |
Pfenex | Pfenex Inc. |
Pfenex CVR | Contingent value rights agreement, dated September 30, 2020, by and between Ligand and Pfenex |
Pfizer | Pfizer Inc. |
Q2 2020 | The Company's fiscal quarter ended June 30, 2020 |
Q2 2021 | The Company's fiscal quarter ended June 30, 2021 |
Q2 2022 | The Company's fiscal quarter ended June 30, 2022 |
SBC | Share-based compensation expense |
SEC | Securities and Exchange Commission |
SelexisSeparation Agreement | Selexis, SA |
sNDA | Supplemental New Drug Application |
Taurus | Taurus Biosciences, LLC |
Teva | Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd.Separation and Actavis, LLC, collectivelyDistribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb |
Travere | Travere Therapeutics, Inc. |
Viking | Viking Therapeutics, Inc. |
xCella | xCella Biosciences, Inc. |
YTD | Year-to-date |
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value) | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 21,863 | | | $ | 47,619 | |
Short-term investments | 279,972 | | | 363,567 | |
Accounts receivable, net | 58,156 | | | 56,847 | |
Inventory | 39,946 | | | 26,487 | |
Income taxes receivable | 4,694 | | | 2,217 | |
Other current assets | 6,270 | | | 3,822 | |
Total current assets | 410,901 | | | 500,559 | |
Deferred income taxes, net | 27,882 | | | 24,320 | |
Intangible assets, net | 572,006 | | | 595,330 | |
Goodwill | 190,517 | | | 189,662 | |
Commercial license and other economic rights, net | 10,638 | | | 10,979 | |
Property and equipment, net | 17,628 | | | 14,434 | |
Operating lease right-of-use assets | 6,500 | | | 6,892 | |
Financing lease right-of-use assets | 17,383 | | | 15,842 | |
Other assets | 2,828 | | | 4,267 | |
Total assets | $ | 1,256,283 | | | $ | 1,362,285 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 17,273 | | | $ | 3,784 | |
Accrued liabilities | 10,107 | | | 18,530 | |
Current contingent liabilities | 5,650 | | | 39,884 | |
Deferred revenue | 17,147 | | | 29,435 | |
Current operating lease liabilities | 2,275 | | | 1,885 | |
Current financing lease liabilities | 45 | | | 6,593 | |
Total current liabilities | 52,497 | | | 100,111 | |
2023 convertible senior notes, net | 315,318 | | | 442,293 | |
Long-term contingent liabilities | 9,121 | | | 9,249 | |
Deferred income taxes, net | 60,053 | | | 64,598 | |
Long-term operating lease liabilities | 4,771 | | | 5,643 | |
Other long-term liabilities | 28,006 | | | 30,866 | |
Total liabilities | 469,766 | | | 652,760 | |
Commitments and contingencies | 0 | | 0 |
Stockholders' equity: | | | |
Preferred stock, $0.001 par value; 5,000 shares authorized; 0 issued and outstanding at June 30, 2021 and December 31, 2020 | 0 | | | 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, respectively | 17 | | | 16 | |
Additional paid-in capital | 346,578 | | | 318,358 | |
Accumulated other comprehensive loss | (861) | | | (801) | |
Retained earnings | 440,783 | | | 391,952 | |
Total stockholders' equity | 786,517 | | | 709,525 | |
Total liabilities and stockholders' equity | $ | 1,256,283 | | | $ | 1,362,285 | |
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| June 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 5,280 | | | $ | 19,522 | |
Short-term investments | 142,655 | | | 321,586 | |
Accounts receivable, net | 62,308 | | | 85,453 | |
Inventory | 24,773 | | | 27,326 | |
Income taxes receivable | 964 | | | 6,193 | |
Other current assets | 7,804 | | | 4,671 | |
Total current assets | 243,784 | | | 464,751 | |
Deferred income taxes, net | 35,654 | | | 34,482 | |
Intangible assets, net | 528,364 | | | 551,040 | |
Goodwill | 181,206 | | | 181,206 | |
Commercial license rights, net | 10,267 | | | 10,110 | |
Property and equipment, net | 30,954 | | | 20,511 | |
Operating lease right-of-use assets | 24,711 | | | 16,542 | |
Financing lease right-of-use assets | 15,032 | | | 16,207 | |
Other assets | 6,316 | | | 2,741 | |
Total assets | $ | 1,076,288 | | | $ | 1,297,590 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 19,153 | | | $ | 8,403 | |
Accrued liabilities | 14,551 | | | 17,579 | |
Income taxes payable | 3,782 | | | — | |
Current contingent liabilities | 2,258 | | | 2,588 | |
Deferred revenue | 10,584 | | | 10,996 | |
Current operating lease liabilities | 2,501 | | | 2,053 | |
Current financing lease liabilities | 50 | | | 46 | |
2023 convertible senior notes, net | 114,974 | | | — | |
Total current liabilities | 167,853 | | | 41,665 | |
2023 convertible senior notes, net | — | | | 320,717 | |
Long-term contingent liabilities | 6,961 | | | 8,483 | |
Deferred income taxes, net | 42,669 | | | 59,095 | |
Long-term operating lease liabilities | 27,088 | | | 15,494 | |
Long-term deferred revenue | 7,428 | | | 9,270 | |
Other long-term liabilities | 21,924 | | | 21,707 | |
Total liabilities | 273,923 | | | 476,431 | |
Commitments and contingencies | 0 | | 0 |
Stockholders' equity: | | | |
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at June 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.001 par value; 60,000 shares authorized; 16,882 and 16,767 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 17 | | | 17 | |
Additional paid-in capital | 335,471 | | | 372,969 | |
Accumulated other comprehensive loss | (1,066) | | | (917) | |
Retained earnings | 467,943 | | | 449,090 | |
Total stockholders' equity | 802,365 | | | 821,159 | |
Total liabilities and stockholders' equity | $ | 1,076,288 | | | $ | 1,297,590 | |
See accompanying notes to unaudited condensed consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenues: | | | | | | | |
Royalties | $ | 8,616 | | | $ | 7,181 | | | $ | 15,728 | | | $ | 13,746 | |
Captisol | 62,509 | | | 24,468 | | | 93,781 | | | 45,577 | |
Contract revenue | 13,550 | | | 9,771 | | | 30,316 | | | 15,258 | |
Total revenues | 84,675 | | | 41,420 | | | 139,825 | | | 74,581 | |
Operating costs and expenses: | | | | | | | |
Cost of Captisol | 30,593 | | | 7,644 | | | 38,746 | | | 12,327 | |
Amortization of intangibles | 11,779 | | | 3,875 | | | 23,565 | | | 7,410 | |
Research and development | 15,953 | | | 12,732 | | | 33,832 | | | 24,623 | |
General and administrative | 14,711 | | | 10,069 | | | 27,028 | | | 19,333 | |
Other operating income | (34,100) | | | 0 | | | (33,800) | | | 0 | |
Total operating costs and expenses | 38,936 | | | 34,320 | | | 89,371 | | | 63,693 | |
Income from operations | 45,739 | | | 7,100 | | | 50,454 | | | 10,888 | |
Other income (expense): | | | | | | | |
Gain (loss) from short-term investments | (6,864) | | | 23,460 | | | 6,197 | | | (7,281) | |
Interest income | 233 | | | 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 taxes | 33,301 | | | 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) | |
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Basic net income (loss) per share | $ | 1.84 | | | $ | 1.38 | | | $ | 2.95 | | | $ | (0.13) | |
Shares used in basic per share calculations | 16,659 | | | 16,055 | | | 16,548 | | | 16,292 | |
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Diluted net income (loss) per share | $ | 1.79 | | | $ | 1.32 | | | $ | 2.84 | | | $ | (0.13) | |
Shares used in diluted per share calculations | 17,172 | | | 16,694 | | | 17,210 | | | 16,292 | |
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| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Royalties | $ | 17,959 | | | $ | 8,616 | | | $ | 31,654 | | | $ | 15,728 | |
Captisol | 29,545 | | | 62,509 | | | 41,667 | | | 93,781 | |
Contract revenue | 9,915 | | | 13,550 | | | 29,791 | | | 30,316 | |
Total revenues | 57,419 | | | 84,675 | | | 103,112 | | | 139,825 | |
Operating costs and expenses: | | | | | | | |
Cost of Captisol | 12,361 | | | 30,593 | | | 17,060 | | | 38,746 | |
Amortization of intangibles | 11,824 | | | 11,779 | | | 23,637 | | | 23,565 | |
Research and development | 19,118 | | | 15,953 | | | 39,425 | | | 33,832 | |
General and administrative | 14,585 | | | 14,711 | | | 32,765 | | | 27,028 | |
Other operating income | — | | | (34,100) | | | — | | | (33,800) | |
Total operating costs and expenses | 57,888 | | | 38,936 | | | 112,887 | | | 89,371 | |
Income (loss) from operations | (469) | | | 45,739 | | | (9,775) | | | 50,454 | |
Other income (expense): | | | | | | | |
Gain (loss) from short-term investments | (1,909) | | | (6,864) | | | (14,786) | | | 6,197 | |
Interest income | 298 | | | 233 | | | 432 | | | 529 | |
Interest expense | (438) | | | (4,883) | | | (1,227) | | | (10,714) | |
Other income (expense), net | 1,882 | | | (924) | | | 4,580 | | | (7,401) | |
Total other expense, net | (167) | | | (12,438) | | | (11,001) | | | (11,389) | |
Income (loss) before income taxes | (636) | | | 33,301 | | | (20,776) | | | 39,065 | |
Income tax benefit (expense) | (259) | | | (2,576) | | | 4,496 | | | 9,766 | |
Net (loss) income | $ | (895) | | | $ | 30,725 | | | $ | (16,280) | | | $ | 48,831 | |
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Basic net (loss) income per share | $ | (0.05) | | | $ | 1.84 | | | $ | (0.97) | | | $ | 2.95 | |
Shares used in basic per share calculations | 16,868 | | | 16,659 | | | 16,846 | | | 16,548 | |
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Diluted net (loss) income per share | $ | (0.05) | | | $ | 1.79 | | | $ | (0.97) | | | $ | 2.84 | |
Shares used in diluted per share calculations | 16,868 | | | 17,172 | | | 16,846 | | | 17,210 | |
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See accompanying notes to unaudited condensed consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss): | $ | 30,725 | | | $ | 22,086 | | | $ | 48,831 | | | $ | (2,045) | |
Unrealized net gain (loss) on available-for-sale securities, net of tax | (5) | | | 2,742 | | | (60) | | | (30) | |
Foreign currency translation | 0 | | | (185) | | | 0 | | | (2,064) | |
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Comprehensive income (loss) | $ | 30,720 | | | $ | 24,643 | | | $ | 48,771 | | | $ | (4,139) | |
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| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | $ | (895) | | | $ | 30,725 | | | $ | (16,280) | | | $ | 48,831 | |
Unrealized net loss on available-for-sale securities, net of tax | (35) | | | (5) | | | (149) | | | (60) | |
Comprehensive (loss) income | $ | (930) | | | $ | 30,720 | | | $ | (16,429) | | | $ | 48,771 | |
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See accompanying notes to unaudited condensed consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)thousands)
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| Common Stock | Additional paid in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity |
| Shares | Amount |
Balance at January 1, 2021 | 16,080 | | $ | 16 | | $ | 318,358 | | $ | (801) | | $ | 391,952 | | $ | 709,525 | |
Issuance of common stock under employee stock compensation plans, net | 572 | | 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, 2021 | 16,652 | | $ | 17 | | $ | 336,621 | | $ | (856) | | $ | 410,058 | | $ | 745,840 | |
Issuance of common stock under employee stock compensation plans, net | 24 | | — | | 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, 2021 | 16,676 | | $ | 17 | | $ | 346,578 | | $ | (861) | | $ | 440,783 | | $ | 786,517 | |
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| Common Stock | Additional paid in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity |
| Shares | Amount |
Balance at December 31, 2021 | 16,767 | | $ | 17 | | $ | 372,969 | | $ | (917) | | $ | 449,090 | | $ | 821,159 | |
ASU 2020-06 adoption, net of tax (Note 1) | — | | — | | (51,130) | | — | | 35,133 | | (15,997) | |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 94 | | — | | (5,515) | | — | | — | | (5,515) | |
Share-based compensation | — | | — | | 9,044 | | — | | — | | 9,044 | |
Unrealized net loss on available-for-sale securities, net of deferred tax | — | | — | | — | | (114) | | — | | (114) | |
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Net loss | — | | — | | — | | — | | (15,385) | | (15,385) | |
Balance at March 31, 2022 | 16,861 | | $ | 17 | | $ | 325,368 | | $ | (1,031) | | $ | 468,838 | | $ | 793,192 | |
Issuance of common stock under employee stock compensation plans, net | 21 | | — | | 604 | | — | | — | | 604 | |
Share-based compensation | — | | — | | 9,499 | | — | | — | | 9,499 | |
Unrealized net loss on available-for-sale securities, net of deferred tax | — | | — | | — | | (35) | | — | | (35) | |
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Net loss | — | | — | | — | | — | | (895) | | (895) | |
Balance at June 30, 2022 | 16,882 | | $ | 17 | | $ | 335,471 | | $ | (1,066) | | $ | 467,943 | | $ | 802,365 | |
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| Common Stock | Additional paid in capital | Accumulated other comprehensive loss | Retained earnings (Accumulated deficit) | Total stockholders' equity |
| Shares | Amount |
Balance at January 1, 2020 | 16,823 | | $ | 17 | | $ | 367,326 | | $ | (216) | | $ | 400,105 | | $ | 767,232 | |
Issuance of common stock under employee stock compensation plans, net | 105 | | — | | (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, 2020 | 16,050 | | $ | 16 | | $ | 295,940 | | $ | (4,867) | | $ | 370,807 | | $ | 661,896 | |
Issuance of common stock under employee stock compensation plans, net | 21 | | — | | 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, 2020 | 16,071 | | $ | 16 | | $ | 304,404 | | $ | (2,310) | | $ | 392,893 | | $ | 695,003 | |
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| Common Stock | Additional paid in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity | | | | | |
| Shares | Amount | | | | | |
Balance at January 1, 2021 | 16,080 | | $ | 16 | | $ | 318,358 | | $ | (801) | | $ | 391,952 | | $ | 709,525 | | | | | | |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 572 | | 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) | | | | | | |
Warrant and bond hedge unwind transactions | — | | — | | 396 | | — | | — | | 396 | | | | | | |
Reacquisition of equity due to 2023 debt extinguishment, net of tax | — | | — | | (11,118) | | — | | — | | (11,118) | | | | | | |
| | | | | | | | | | | |
Net income | — | | — | | — | | — | | 18,106 | | 18,106 | | | | | | |
Balance at March 31, 2021 | 16,652 | | $ | 17 | | $ | 336,621 | | $ | (856) | | $ | 410,058 | | $ | 745,840 | | | | | | |
Issuance of common stock under employee stock compensation plans, net | 24 | | — | | 1,103 | | — | | — | | 1,103 | | | | | | |
Share-based compensation | — | | — | | 10,216 | | — | | — | | 10,216 | | | | | | |
Unrealized net gain on available-for-sale securities, net of deferred tax | — | | — | | — | | (5) | | — | | (5) | | | | | | |
| | | | | | | | | | | |
Reacquisition of equity due to 2023 debt extinguishment, net of tax | — | | — | | (1,362) | | — | | — | | (1,362) | | | | | | |
Net income | — | | — | | — | | — | | 30,725 | | 30,725 | | | | | | |
Balance at June 30, 2021 | 16,676 | | $ | 17 | | $ | 346,578 | | $ | (861) | | $ | 440,783 | | $ | 786,517 | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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See accompanying notes to unaudited condensed consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands) | | | | | | | | | | | |
| Six months ended |
| June 30, |
| 2021 | | 2020 |
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 assets | 25,179 | | | 7,869 | |
Amortization of premium (discount) on investments, net | 109 | | | 1,198 | |
Amortization of debt discount and issuance fees | 9,073 | | | 12,442 | |
Amortization of commercial license and other economic rights | 206 | | | 2,733 | |
Loss (gain) on debt extinguishment | 7,175 | | | (659) | |
Share-based compensation | 18,621 | | | 13,012 | |
Deferred income taxes | (9,766) | | | (8,890) | |
Loss (gain) from short-term investments | (6,197) | | | 7,281 | |
Other | 595 | | | (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 activities | 31,131 | | | 41,304 | |
| | | |
Cash flows from investing activities: | | | |
Purchase of short-term investments | (96,136) | | | (336,726) | |
Proceeds from sale of short-term investments | 150,648 | | | 179,431 | |
Proceeds from maturity of short-term investments | 34,600 | | | 452,405 | |
Cash paid for acquisition, net of cash acquired | 0 | | | (15,140) | |
| | | |
Purchase of property and equipment | (4,794) | | | (791) | |
Other | 135 | | | 2,600 | |
Net cash provided by investing activities | 84,453 | | | 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 settlement | 16,855 | | | 0 | |
Payments to convertible bond holders for warrant purchases | (16,459) | | | 0 | |
Net proceeds from stock option exercises and ESPP | 27,584 | | | 1,550 | |
Taxes paid related to net share settlement of equity awards | (5,901) | | | (1,429) | |
Share repurchase | 0 | | | (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 cash | 0 | | | (160) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (25,956) | | | 43,613 | |
Cash, cash equivalents and restricted cash at beginning of period | 47,963 | | | 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) | |
| | | | | | | | | | | |
| Six months ended |
| June 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net (loss) income | $ | (16,280) | | | $ | 48,831 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Change in estimated fair value of contingent liabilities | (1,266) | | | (33,502) | |
Depreciation and amortization of intangible assets | 26,921 | | | 25,179 | |
Amortization of premium on investments, net | 44 | | | 109 | |
Amortization of debt discount and issuance fees | 501 | | | 9,073 | |
Amortization of commercial license rights | (190) | | | 206 | |
Loss (gain) on debt extinguishment | (3,326) | | | 7,175 | |
Share-based compensation | 18,543 | | | 18,621 | |
Deferred income taxes | (12,925) | | | (9,766) | |
Loss (gain) from short-term investments | 14,786 | | | (6,197) | |
Lease amortization expense | 3,054 | | | 2,113 | |
Other | (67) | | | 595 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 23,208 | | | (2,659) | |
Inventory | 9,740 | | | (2,326) | |
Accounts payable and accrued liabilities | (4,357) | | | (4,340) | |
Income tax receivable and payable | 9,011 | | | (2,477) | |
Deferred revenue | (2,254) | | | (14,605) | |
Other assets and liabilities | (1,254) | | | (4,899) | |
Net cash provided by operating activities | 63,889 | | | 31,131 | |
| | | |
Cash flows from investing activities: | | | |
Purchase of short-term investments | (38,472) | | | (96,136) | |
Proceeds from sale of short-term investments | 177,554 | | | 150,648 | |
Proceeds from maturity of short-term investments | 24,830 | | | 34,600 | |
Cash paid for equity method investment | (750) | | | — | |
Purchase of property and equipment | (11,463) | | | (4,794) | |
Other | 33 | | | 135 | |
Net cash provided by investing activities | 151,732 | | | 84,453 | |
| | | |
Cash flows from financing activities: | | | |
Repurchase of 2023 Notes | (223,303) | | | (153,381) | |
Payments under financing lease obligations | (27) | | | (9,188) | |
Proceeds from convertible bond hedge settlement | — | | | 16,855 | |
Payments to convertible bond holders for warrant purchases | — | | | (16,459) | |
Net proceeds from stock option exercises and ESPP | 1,011 | | | 27,584 | |
Taxes paid related to net share settlement of equity awards | (5,922) | | | (5,901) | |
Payments to CVR Holders | (1,416) | | | (1,050) | |
Payments for OmniAb transaction costs | (206) | | | — | |
Net cash used in financing activities | (229,863) | | | (141,540) | |
Net decrease in cash, cash equivalents and restricted cash | (14,242) | | | (25,956) | |
Cash, cash equivalents and restricted cash at beginning of period | 19,522 | | | 47,963 | |
Cash, cash equivalents and restricted cash at end of period | $ | 5,280 | | | $ | 22,007 | |
| | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | |
Interest paid | $ | 1,038 | | | $ | 1,737 | |
Taxes paid | $ | 20 | | | $ | 3,552 | |
Restricted cash in other current assets | $ | — | | | $ | 144 | |
| | | |
Supplemental schedule of non-cash activity: | | | |
| | | |
| | | |
| | | |
Accrued fixed asset purchases | $ | 3,800 | | | $ | 359 | |
Accrued inventory purchases | $ | 9,161 | | | $ | 12,695 | |
| | | |
Unrealized loss on AFS investments | $ | (149) | | | $ | (60) | |
See accompanying notes to unaudited condensed consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 20202021 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, “contract revenue” and “service revenue” presented in the condensed consolidated statement of operations for the three and six months ended June 30, 2021 have been combined into “contract revenue” in the condensed consolidated statement of operations to conform with 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 20202021 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 PandemicReclassifications
TheCertain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current COVID-19 worldwide pandemicperiod presentation. Specifically, “long-term deferred revenue” has presented substantial public health and economic challenges and is affecting our employees and partners, patients, communities and business operations, as well asbeen added to 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 staffcondensed consolidated balance sheet, separated from “other long-term liabilities” in our research and development laboratories and other facilities. The continued spread of the COVID-19 pandemic and the measures taken by the governments of countries have affected, and could continue to affect, our business and the business of our partners, including future disruptions to our supply chain and the manufacture or shipment of drug substance and finished drug product for Captisol, delays by us or our partners in the initiation or enrollment of patients in clinical trials, discontinuations by patients enrolled in clinical trials, difficulties launching or commercializing products and other related activities, which could delay ongoing clinical trials, increase development costs, reduce royalty revenues and have a material adverse effect on our business, financial condition and results of operations. Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues.
Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead and the Gilead consortium (a consortium of manufacturing partners that Gilead is working with to bring efforts together to help maximize global supply) for remdesivir, the first FDA-approved treatment for COVID-19 for the
treatment of patients with COVID-19 requiring hospitalization. In addition, certain of our OmniAb 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.prior period presentation.
Accounting Standards Not YetUpdates, Recently Adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Equity (“ASU 2020-06”). The guidance simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Consequently, a convertible debt instrument, such as the Company’s 2023 Notes, will be accounted for as a single liability measured at its amortized cost, if no other features require bifurcation and recognition as derivatives. The new guidance simplifies accountingalso requires the if-converted method to be applied for all 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 standardrequires additional disclosures. ASU 2020-06 is effective for fiscal years beginning after December 15, 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 doadopted this guidance effective January 1, 2022 under the modified retrospective approach and the comparative information has not believe that any other recently issued, but not yet effectivebeen restated and continues to be presented according to accounting pronouncements, if adopted, would havestandards in effect for those periods. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption and our 2023 Notes are no longer bifurcated into separate liability and equity components. The principal amount of the 2023 Notes is classified as a material impact on oursingle liability measured at amortized cost in the condensed consolidated financial statements or disclosures.balance sheet for the period ended June 30, 2022. Upon adoption of ASU 2020-06 on January 1 2022, we recorded an adjustment to the 2023 Notes liability component, deferred tax liabilities, additional paid-in-capital and retained earnings. This adjustment was calculated based on the carrying amount of the 2023 Notes as if it had always been treated as a single liability measured at amortized cost. Furthermore, we recorded an adjustment to the debt issuance costs contra liability and equity (additional paid-in-capital) components under the same premise, as if debt issuance costs had always been treated as a contra liability only. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2023 Notes by $20.4 million, reduced deferred tax liabilities by $4.4 million, reduced additional paid-in capital by $51.1 million and increased retained earnings by $35.1 million. The net balance of the 2023 Notes at January 1, 2022 was $341.1 million which included an unamortized discount of $2.2 million.
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.
We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Royalties
We receive royalty revenue on sales by our partners of products covered by patents that we own.or our partners own under contractual agreements. 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 whenno sooner than 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, which have not been material, 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
We recognize revenueRevenue from Captisol sales is recognized when control of Captisol material is transferred or intellectual property license rights are granted 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.products or rights. 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. WeFor Captisol material or intellectual property license rights, we consider aour performance obligation satisfied once we have transferred control of the product or granted the intellectual property rights, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. We have elected to recognize the cost for freight and shipping when or after control over Captisol material has transferred to the customer as an expense in cost of Captisol. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost of freight and shipping when control over Captisol material has transferred to the customer as an expense in Cost of Captisol. 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.
Contract Revenue
Our contracts with customers often include variable consideration in the form of contingent milestone payments. We include contingent milestone payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone payment is based on sales, 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 milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services.
For R&D services we recognize revenue over time and we measure our progress using an input method. The input methods we use are 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 it will take us to complete the activities, or the costs we may 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 numerous estimates and use significant 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.
Some customer contracts are sublicenses which require that we make payments to an upstream licensor related to license fees, milestones and royalties which we receive from customers. In such cases, we evaluate the determination of gross revenue as a principal versus net revenue as an agent reporting based on each individual agreement.
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 aany contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the three and six months ended June 30, 2022 and 2021, the amount recognized as revenue that was previously deferred was $10.3$4.1 million, and $16.1$10.3 million, respectively. During the three and six months ended June 30, 2020,2022 and 2021, the amount recognized as revenue that was previously deferred was $2.0$6.1 million, and $2.4$16.1 million, respectively.
Disaggregation of Revenue
The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):
| | | Three months ended | | Six months ended | | Three months ended | | Six months ended |
| | June 30, | | June 30, | | June 30, | | June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Royalties | Royalties | | | | | | | | Royalties | | | | | | | |
| Kyprolis | $ | 5,440 | | | $ | 5,481 | | | $ | 9,727 | | | $ | 9,886 | | |
| Evomela | 2,193 | | | 1,199 | | | 4,526 | | | 2,775 | | |
| Other | 983 | | | 501 | | | 1,475 | | | 1,085 | | |
Kyprolis | | Kyprolis | $ | 7,127 | | | $ | 5,440 | | | $ | 11,749 | | | $ | 9,727 | |
Evomela | | Evomela | 2,394 | | | 2,193 | | | 5,095 | | | 4,526 | |
Teriparatide injection | | Teriparatide injection | 5,502 | | | 264 | | | 8,413 | | | 264 | |
Rylaze | | Rylaze | 2,317 | | | — | | | 3,966 | | | — | |
Other | | Other | 619 | | | 719 | | | 2,431 | | | 1,211 | |
| | $ | 8,616 | | | $ | 7,181 | | | $ | 15,728 | | | $ | 13,746 | | | $ | 17,959 | | | $ | 8,616 | | | $ | 31,654 | | | $ | 15,728 | |
| Captisol | Captisol | | $ | 62,509 | | | $ | 24,468 | | | $ | 93,781 | | | $ | 45,577 | | Captisol | |
Captisol - Core | | Captisol - Core | $ | 3,325 | | | $ | 9,682 | | | $ | 9,551 | | | $ | 10,935 | |
Captisol - COVID(1) | | Captisol - COVID(1) | 26,220 | | | 52,827 | | | 32,116 | | | 82,846 | |
| | | $ | 29,545 | | | $ | 62,509 | | | $ | 41,667 | | | $ | 93,781 | |
| Contract revenue | Contract revenue | | Contract revenue | |
| Service Revenue | $ | 7,360 | | | $ | 4,582 | | | $ | 12,822 | | | $ | 7,939 | | |
| License Fees | 1,050 | | | 660 | | | 2,093 | | | 1,635 | | |
| Milestone | 3,600 | | | 3,472 | | | 12,017 | | | 3,806 | | |
| Other | 1,540 | | | 1,057 | | | 3,384 | | | 1,878 | | |
| $ | 13,550 | | | $ | 9,771 | | | $ | 30,316 | | | $ | 15,258 | | |
Service Revenue | | Service Revenue | $ | 5,453 | | | $ | 7,360 | | | $ | 10,599 | | | $ | 12,822 | |
License Fees | | License Fees | 1,608 | | | 1,050 | | | 4,694 | | | 2,093 | |
Milestone | | Milestone | 1,275 | | | 3,600 | | | 10,364 | | | 12,017 | |
Other | | Other | 1,579 | | | 1,540 | | | 4,134 | | | 3,384 | |
| | | $ | 9,915 | | | $ | 13,550 | | | $ | 29,791 | | | $ | 30,316 | |
Total | Total | $ | 84,675 | | | $ | 41,420 | | | $ | 139,825 | | | $ | 74,581 | | Total | $ | 57,419 | | | $ | 84,675 | | | $ | 103,112 | | | $ | 139,825 | |
(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.
Short-term Investments
Our short-term investments consist of the following at June 30, 20212022 and December 31, 20202021 (in thousands): | | | | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
June 30, 2022 | | June 30, 2022 | | | | | | | | | | | |
Bank deposits | | Bank deposits | $ | 2,504 | | | | $ | — | | | | $ | (61) | | | | $ | 2,443 | | |
Corporate bonds | | Corporate bonds | 4,904 | | | | — | | | | (121) | | | | 4,783 | | |
| Corporate equity securities | | Corporate equity securities | 5,807 | | | | 307 | | | | (3,703) | | | | 2,411 | | |
Mutual fund | | Mutual fund | 112,535 | | | | — | | | | (1,228) | | | | 111,307 | | |
US government securities | | US government securities | 2,246 | | | | — | | | | (71) | | | | 2,175 | | |
Warrants | | Warrants | — | | | | 129 | | | | — | | | | 129 | | |
| | | $ | 127,996 | | | | $ | 436 | | | | $ | (5,184) | | | | $ | 123,248 | | |
Viking common stock | | Viking common stock | | | | | | | | 19,407 | | |
Total short-term investments | | Total short-term investments | | | | | | | | $ | 142,655 | | |
| December 31, 2021 | | December 31, 2021 | | | | | | | |
Bank deposits | | Bank deposits | $ | 63,389 | | | | $ | 13 | | | | $ | (21) | | | | $ | 63,381 | | |
Corporate bonds | | Corporate bonds | 29,308 | | | | 17 | | | | (38) | | | | 29,287 | | |
| Commercial paper | | Commercial paper | 36,008 | | | | 2 | | | | (12) | | | | 35,998 | | |
Corporate equity securities | | Corporate equity securities | 5,807 | | | | 402 | | | | (2,027) | | | | 4,182 | | |
Mutual fund | | Mutual fund | 152,136 | | | | — | | | | (249) | | | | 151,887 | | |
US government securities | | US government securities | 5,577 | | | | — | | | | (23) | | | | 5,554 | | |
Warrants | | Warrants | — | | | | 408 | | | | — | | | | 408 | | |
| | | $ | 292,225 | | | | $ | 842 | | | | $ | (2,370) | | | | $ | 290,697 | | |
Viking common stock | | Viking common stock | | | | | | | | 30,889 | | |
Total short-term investments | | Total short-term investments | | | | | | | | $ | 321,586 | | |
| | | June 30, 2021 | | December 31, 2020 | |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | |
| Bank deposits | $ | 33,560 | | | $ | 13 | | | $ | (2) | | | $ | 33,571 | | | $ | 84,120 | | | $ | 35 | | | $ | (1) | | | $ | 84,154 | | |
Corporate bonds | 25,965 | | | 62 | | | (2) | | | 26,025 | | | 30,512 | | | 99 | | | (1) | | | 30,610 | | |
Agency bonds | 2,500 | | | 0 | | | (1) | | | 2,499 | | | 4,499 | | | 2 | | | 0 | | | 4,501 | | |
Commercial paper | 19,258 | | | 12 | | | 0 | | | 19,270 | | | 45,459 | | | 27 | | | (1) | | | 45,485 | | |
Corporate equity securities | 5,807 | | | 172 | | | (310) | | | 5,669 | | | 4,466 | | | 360 | | | (1,388) | | | 3,438 | | |
Mutual fund | 151,949 | | | 53 | | | 0 | | | 152,002 | | | 151,512 | | | 386 | | | 0 | | | 151,898 | | |
Treasury bill | 0 | | | 0 | | | 0 | | | 0 | | | 3,999 | | | 0 | | | 0 | | | 3,999 | | |
Warrants | 0 | | | 713 | | | 0 | | | 713 | | | 0 | | | 393 | | | 0 | | | 393 | | |
| $ | 239,039 | | | $ | 1,025 | | | $ | (315) | | | $ | 239,749 | | | $ | 324,567 | | | $ | 1,302 | | | $ | (1,391) | | | $ | 324,478 | | |
Viking common stock | | | | | | | 40,223 | | | | | | | | 32,763 | | |
Viking warrants | | | | | | | 0 | | | | | | | | 6,326 | | |
Total short-term investments | | | | | | | $ | 279,972 | | | | | | | | $ | 363,567 | | |
During the six months ended June 30, 2021, we exercised all outstanding Viking warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. As of June 30, 2021, we have 0 Viking warrants outstanding.
Gain (loss) from short-term investments in our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.
Allowances are recorded for available-for-sale debt securities with unrealized losses. This limits the amount of credit losses that can be recognized for available-for-sale debt securities to 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 credit losses standard did not have a material impact on our available-for-sale debt securities during the three and six months ended June 30, 2021.2022.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):
| | | June 30, 2021 | | June 30, 2022 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within one year | Within one year | $ | 57,997 | | | $ | 58,050 | | Within one year | $ | 6,423 | | | $ | 6,274 | |
After one year through five years | After one year through five years | 23,286 | | | 23,316 | | After one year through five years | 3,230 | | | 3,127 | |
Total | Total | $ | 81,283 | | | $ | 81,366 | | Total | $ | 9,653 | | | $ | 9,401 | |
Our investment policy is capital preservation and we only investedinvest in U.S.-dollar denominated investments. We held a total of 78 positions which were in an unrealized loss position as of June 30, 2021.2022. 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 and 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, 0no credit losses were recognized for the three and six months ended June 30, 2021.2022.
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 six months ended June 30, 2021,2022, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our business and recorded an adjustment of $0.04$(0.1) million and $0.1$(0.2) million of allowance for credit losses, respectively, as of June 30, 2021.2022.
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.
We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write-downs related to obsolete inventory recorded for the three and six months ended June 30, 2022 and 2021. As of June 30, 2021, we have made advanced payments for2022 inventory from our supplierconsists of Captisol totaling $50.2 million. We have applied credits for such inventory purchasesprepayments of $15.8$18.9 million, and will utilize the remaining advanced payments to offset a portionas of the purchase price for futureDecember 31, 2021 inventory consists of Captisol purchases.prepayments of $24.6 million.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands): | | | | | | | | | | | |
| June 30, | | December 31, |
| 2021 | | 2020 |
Indefinite-lived intangible assets | | | |
Goodwill | $ | 190,517 | | | $ | 189,662 | |
Definite lived intangible assets | | | |
Complete technology | 277,980 | | | 277,740 | |
Less: accumulated amortization | (71,276) | | | (63,600) | |
Trade name | 2,642 | | | 2,642 | |
Less: accumulated amortization | (1,378) | | | (1,312) | |
Customer relationships | 40,700 | | | 40,700 | |
Less: accumulated amortization | (16,932) | | | (15,597) | |
Contractual relationships | 362,000 | | | 362,000 | |
Less: accumulated amortization | (21,730) | | | (7,243) | |
Total goodwill and other identifiable intangible assets, net | $ | 762,523 | | | $ | 784,992 | |
| | | |
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
Indefinite-lived intangible assets | | | |
Goodwill | $ | 181,206 | | | $ | 181,206 | |
Definite lived intangible assets | | | |
Complete technology | 281,578 | | | 280,617 | |
Less: accumulated amortization | (86,740) | | | (78,991) | |
Trade name | 2,642 | | | 2,642 | |
Less: accumulated amortization | (1,510) | | | (1,444) | |
Customer relationships | 40,700 | | | 40,700 | |
Less: accumulated amortization | (19,602) | | | (18,267) | |
Contractual relationships | 362,000 | | | 362,000 | |
Less: accumulated amortization | (50,704) | | | (36,217) | |
Total goodwill and other identifiable intangible assets, net | $ | 709,570 | | | $ | 732,246 | |
| | | |
Prior to 2022, we only had 1 reporting unit and reportable segment. In connection with the announcement in March 2022 of our intention to separate the OmniAb business pursuant to a distribution to Ligand’s stockholders of Ligand’s shares in OmniAb followed by a merger with APAC, management concluded that we now had two reporting units and reportable segments - the OmniAb business and the Ligand core business. See Note 2, Segment Information, for additional information. We performed a fair value analysis utilizing a combination of income approach and market approach to determine the fair value of each segment in order to appropriately allocate the goodwill between the segments as of the announcement date. The following table presents our allocation of goodwill balance by segment (in thousands):
| | | | | |
| Fair Value |
Goodwill | |
Ligand core business | $ | 105,673 | |
OmniAb business | 75,533 | |
| $ | 181,206 | |
Commercial License and Other Economic Rights
Commercial license and other economic rights consist of the following (in thousands): | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | Gross | | Adjustments(1) | | Net | | Gross | | Adjustments(2) | | Net | | Gross | | Adjustments(1) | | Net | | Gross | | Adjustments(2) | | Net |
Aziyo and CorMatrix | Aziyo and CorMatrix | | $ | 17,696 | | | $ | (9,470) | | | $ | 8,226 | | | $ | 17,696 | | | $ | (9,588) | | | $ | 8,108 | | Aziyo and CorMatrix | | $ | 17,696 | | | $ | (9,425) | | | $ | 8,271 | | | $ | 17,696 | | | $ | (9,461) | | | $ | 8,235 | |
Selexis and Dianomi | Selexis and Dianomi | | 10,602 | | | (8,190) | | | 2,412 | | | 10,602 | | | (7,731) | | | 2,871 | | Selexis and Dianomi | | 10,602 | | | (8,606) | | | 1,996 | | | 10,602 | | | (8,727) | | | 1,875 | |
Total | Total | | $ | 28,298 | | | $ | (17,660) | | | $ | 10,638 | | | $ | 28,298 | | | $ | (17,319) | | | $ | 10,979 | | Total | | $ | 28,298 | | | $ | (18,031) | | | $ | 10,267 | | | $ | 28,298 | | | $ | (18,188) | | | $ | 10,110 | |
(1) Amounts represent accumulated amortization to principal of $11.5 million and credit loss adjustments of $6.5 million as of June 30, 2022.
(2) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.0 million as of June 30, 2021.
(2) Amounts represent accumulated amortization to principal of $11.3 million and credit loss adjustments of $6.0$6.5 million as of December 31, 2020.2021.
Commercial license and other economics rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis, S.A. (Selexis) in April 2013 and April 2015, CorMatrix Cardiovascular, Inc. (CorMatrix) in May 2016, which was later acquired by Aziyo in 2017, and Dianomi Therapeutics, Inc. in January 2019. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and development in accordance with ASC 310, Receivables, as further discussed below and in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 20202021 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,
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 June 30, 2021 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.
Prior to 2020, we accounted for commercial license rights related to developmental 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 financial asset in accordance with ASC 310, and 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 Selexis as of June 30, 2021 is 21%. 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.
We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the 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 three and six months ended June 30, 2021,2022, we further considered the current and expected future economic and market conditions surrounding the novel coronavirus (COVID-19) pandemic and concluded no further adjustment was needed on the allowance for credit losses as of June 30, 2021.2022.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands): | | | June 30, | | December 31, | | June 30, | | December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Compensation | Compensation | $ | 3,684 | | | $ | 8,810 | | Compensation | $ | 4,669 | | | $ | 6,532 | |
Professional fees | Professional fees | 977 | | | 977 | | Professional fees | 1,828 | | | 2,046 | |
Amounts owed to former licensees | Amounts owed to former licensees | 446 | | | 421 | | Amounts owed to former licensees | 2,674 | | | 630 | |
Royalties owed to third parties | Royalties owed to third parties | 52 | | | 693 | | Royalties owed to third parties | — | | | 149 | |
Return reserve | Return reserve | 105 | | | 687 | | Return reserve | — | | | 2,420 | |
Acquisition related liabilities | Acquisition related liabilities | 1,500 | | | 1,500 | | Acquisition related liabilities | — | | | 1,000 | |
Subcontractor | Subcontractor | 0 | | | 733 | | Subcontractor | 1,756 | | | 1,759 | |
Supplier | Supplier | 681 | | | 604 | | Supplier | 1,995 | | | 848 | |
Accrued interest | Accrued interest | 295 | | | 464 | | Accrued interest | — | | | 291 | |
Other | Other | 2,367 | | | 3,641 | | Other | 1,629 | | | 1,904 | |
Total accrued liabilities | Total accrued liabilities | $ | 10,107 | | | $ | 18,530 | | Total accrued liabilities | $ | 14,551 | | | $ | 17,579 | |
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.period. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
SBC - Research and development expenses | $ | 4,556 | | | $ | 3,019 | | | $ | 8,495 | | | $ | 5,416 | |
SBC - General and administrative expenses | 5,660 | | | 4,340 | | | 10,126 | | | 7,596 | |
| $ | 10,216 | | | $ | 7,359 | | | $ | 18,621 | | | $ | 13,012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended | | |
| June 30, | | June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
SBC - Research and development expenses | $ | 4,501 | | | $ | 4,556 | | | $ | 8,415 | | | $ | 8,495 | | | | | |
SBC - General and administrative expenses | 4,998 | | | 5,660 | | | 10,128 | | | 10,126 | | | | | |
| $ | 9,499 | | | $ | 10,216 | | | $ | 18,543 | | | $ | 18,621 | | | | | |
The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, | | June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Risk-free interest rate | 0.9% | | 0.4% | | 0.5% | | 1.1% |
Dividend yield | 0 | | 0 | | 0 | | 0 |
Expected volatility | 54% | | 69% | | 62% | | 55% |
Expected term | 5.5 | | 5.1 | | 5.0 | | 4.8 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended | | |
| June 30, | | June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Risk-free interest rate | 3.0% | | 0.9% | | 3.0% | | 0.5% | | | | |
Dividend yield | — | | — | | — | | — | | | | |
Expected volatility | 50% | | 54% | | 50% | | 62% | | | | |
Expected term (years) | 4.8 | | 5.5 | | 4.8 | | 5.0 | | | | |
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 (Loss) Income (Loss) Per Share
Basic net (loss) income (loss) per share is calculated by dividing net (loss) income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted net loss per share is computed based on the sum of the weighted average number of common shares outstanding during 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 applicablemaximum conversion price of the respective notes.price. 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 ended | | Six months ended |
| June 30, | | June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Weighted average shares outstanding: | 16,659 | | | 16,055 | | | 16,548 | | | 16,292 | |
Dilutive potential common shares: | | | | | | | |
Restricted stock | 69 | | | 40 | | | 90 | | | 0 | |
Stock options | 444 | | | 599 | | | 572 | | | 0 | |
Shares used to compute diluted income per share | 17,172 | | | 16,694 | | | 17,210 | | | 16,292 | |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 5,087 | | | 7,832 | | | 4,684 | | | 8,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended | | |
| June 30, | | June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Weighted average shares outstanding: | 16,868 | | | 16,659 | | | 16,846 | | | 16,548 | | | | | |
Dilutive potential common shares: | | | | | | | | | | | |
Restricted stock | — | | | 69 | | | — | | | 90 | | | | | |
Stock options | — | | | 444 | | | — | | | 572 | | | | | |
| | | | | | | | | | | |
Shares used to compute diluted income per share | 16,868 | | | 17,172 | | | 16,846 | | | 17,210 | | | | | |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 6,794 | | | 5,087 | | | 6,400 | | | 4,684 | | | | | |
For the three months ended June 30, 2022, due to the net loss for the period, all of the 0.2 million weighted average equity awards and 0.9 million of potentially dilutive shares in connection with the adoption of ASU 2020-06 were anti-dilutive. 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-dilutive2022, due to the net loss for the period.period, all of the 0.3 million weighted average equity awards and 1.8 million of potentially dilutive shares in connection with the adoption of ASU 2020-06 were anti-dilutive. Under the new standard, we are required to reflect the dilutive effect of the 2023 Notes by application of the if-converted method.
2. Segment Information
ASC 280, Segment reporting, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and for which discrete financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.
We are a biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. Our operating segments are identified in the same manner as they are reported internally and used by our chief operating decision maker for the purpose of evaluating performance and allocating resources. Historically, we have disclosed 1 reportable segment. On March 23, 2022, we entered into the Merger Agreement, pursuant to which APAC will combine with OmniAb, and acquire the OmniAb Business, in a Reverse Morris Trust transaction. Immediately prior to the Merger and pursuant to the Separation Agreement, we will, among other things, transfer the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc. to OmniAb (the “Reorganization”) and, in connection therewith, will distribute (the “Distribution”) to Ligand stockholders 100% of the common stock of OmniAb. Immediately following the Distribution, Merger Sub will merge with and into OmniAb (the “Merger”), with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of APAC.
In connection with the execution of the Merger Agreement, we have made organizational changes to better align our organizational structure with our strategy and operations, and management has reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operate the following 2 reportable segments: (1) OmniAb business and (2) Ligand core business. The OmniAb business segment is focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines.
Our chief operating decision maker relies on internal management reporting processes that provide revenue and operating income by reportable segment for making financial decisions and allocating resources. Segment operating income (loss) represents income (loss) before income taxes, interest income, interest expense, other income (expense), net, unallocated share-based compensation, and unallocated corporate overhead. Our management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed.
The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results and was derived from each segment’s internal financial information as used for corporate management purposes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
OmniAb business revenue | | | | | | | |
Royalties | $ | 139 | | | $ | — | | | $ | 402 | | | $ | — | |
Contract | 7,153 | | | 5,821 | | | 16,068 | | | 14,380 | |
Total OmniAb business revenue | 7,292 | | | 5,821 | | | 16,470 | | | 14,380 | |
Ligand core business revenue | | | | | | | |
Royalties | 17,820 | | | 8,616 | | | 31,252 | | | $ | 15,728 | |
Captisol - Core | 3,325 | | | 9,682 | | | 9,551 | | | 10,935 | |
Captisol - COVID | 26,220 | | | 52,827 | | | 32,116 | | | 82,846 | |
Contract | 2,762 | | | 7,729 | | | 13,723 | | | 15,936 | |
Total Ligand core business revenue | 50,127 | | | 78,854 | | | 86,642 | | | 125,445 | |
Total revenue | $ | 57,419 | | | $ | 84,675 | | | $ | 103,112 | | | $ | 139,825 | |
| | | | | | | |
Segment operating income (loss) | | | | | | | |
OmniAb business | $ | (8,998) | | | $ | (7,806) | | | $ | (15,187) | | | $ | (12,410) | |
Ligand core business | 17,039 | | | 61,834 | | | 27,030 | | | 80,280 | |
Total segment operating income | 8,041 | | | 54,028 | | | 11,843 | | | 67,870 | |
| | | | | | | |
Unallocated corporate items | | | | | | | |
Shared-based compensation | 5,136 | | | 5,748 | | | 10,793 | | | 10,618 | |
Other corporate expenses | 3,374 | | | 2,541 | | | 10,825 | | | 6,798 | |
Total unallocated corporate items | 8,510 | | | 8,289 | | | 21,618 | | | 17,416 | |
Income (loss) from operations | $ | (469) | | | $ | 45,739 | | | $ | (9,775) | | | $ | 50,454 | |
3. 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): | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | Assets: | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | |
Short-term investments, excluding Viking(1) | Short-term investments, excluding Viking(1) | | $ | 5,669 | | | $ | 233,368 | | | $ | 712 | | | $ | 239,749 | | | $ | 3,438 | | | $ | 320,647 | | | $ | 393 | | | $ | 324,478 | | Short-term investments, excluding Viking(1) | | $ | 4,586 | | | $ | 118,533 | | | $ | 129 | | | $ | 123,248 | | | $ | 9,735 | | | $ | 280,553 | | | $ | 409 | | | $ | 290,697 | |
Investment in Viking common stock | Investment in Viking common stock | | 40,223 | | | 0 | | | 0 | | | 40,223 | | | 32,763 | | | 0 | | | 0 | | | 32,763 | | Investment in Viking common stock | | 19,407 | | | — | | | — | | | 19,407 | | | 30,889 | | | — | | | — | | | 30,889 | |
Investment in Viking warrants(2) | | 0 | | | 0 | | | 0 | | | 0 | | | 6,326 | | | 0 | | | 0 | | | 6,326 | | |
| Total assets | Total assets | | $ | 45,892 | | | $ | 233,368 | | | $ | 712 | | | $ | 279,972 | | | $ | 42,527 | | | $ | 320,647 | | | $ | 393 | | | $ | 363,567 | | Total assets | | $ | 23,993 | | | $ | 118,533 | | | $ | 129 | | | $ | 142,655 | | | $ | 40,624 | | | $ | 280,553 | | | $ | 409 | | | $ | 321,586 | |
Liabilities: | Liabilities: | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | |
Crystal contingent liabilities(3) | | $ | 0 | | | $ | 0 | | | $ | 800 | | | $ | 800 | | | $ | 0 | | | $ | 0 | | | $ | 800 | | | $ | 800 | | |
| CyDex contingent liabilities | CyDex contingent liabilities | | 0 | | | 0 | | | 376 | | | 376 | | | 0 | | | 0 | | | 508 | | | 508 | | CyDex contingent liabilities | | $ | — | | | $ | — | | | $ | 317 | | | $ | 317 | | | $ | — | | | $ | — | | | $ | 349 | | | $ | 349 | |
Metabasis contingent liabilities(4)(2) | Metabasis contingent liabilities(4)(2) | | 0 | | | 3,930 | | | 0 | | | 3,930 | | | 0 | | | 3,821 | | | 0 | | | 3,821 | | Metabasis contingent liabilities(4)(2) | | — | | | 2,400 | | | — | | | 2,400 | | | — | | | 3,358 | | | — | | | 3,358 | |
Icagen contingent liabilities(5)(3) | Icagen contingent liabilities(5)(3) | | 0 | | | 0 | | | 5,625 | | | 5,625 | | | 0 | | | 0 | | | 6,404 | | | 6,404 | | Icagen contingent liabilities(5)(3) | | — | | | — | | | 5,542 | | | 5,542 | | | — | | | — | | | 7,364 | | | 7,364 | |
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 | | |
xCella contingent liabilities(4) | | xCella contingent liabilities(4) | | — | | | — | | | 960 | | | 960 | | | — | | | — | | | — | | | — | |
Amounts owed to former licensor | Amounts owed to former licensor | | 31 | | | 0 | | | 0 | | | 31 | | | 60 | | | 0 | | | 0 | | | 60 | | Amounts owed to former licensor | | 72 | | | — | | | — | | | 72 | | | 86 | | | — | | | — | | | 86 | |
Total liabilities | Total liabilities | | $ | 31 | | | $ | 3,930 | | | $ | 10,841 | | | $ | 14,802 | | | $ | 60 | | | $ | 3,821 | | | $ | 45,312 | | | $ | 49,193 | | Total liabilities | | $ | 72 | | | $ | 2,400 | | | $ | 6,819 | | | $ | 9,291 | | | $ | 86 | | | $ | 3,358 | | | $ | 7,713 | | | $ | 11,157 | |
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.
4.2.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. During the three and six months ended June 30, 2022, we adjusted the balance of the Metabasis CVR liability $(0.4) million and $(1.0) million to mark to market, respectively.
5.3.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 six months ended June 30, 2021,2022, we paid $1.1$1.5 million contingent liability based on revenue milestones to 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.shareholders, respectively. During the three and six months ended June 30, 2021,2022, we reducedadjusted the contingentbalance of the Icagen CVR liability by $34.1$0.2 million and $33.8$(0.3) 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.mark to market, respectively.
7.4.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,three and six months ended June 30, 2022, management recorded an$0.5 million and $1.0 million of earnout liability to be allocated to the cost of the acquired assets due to contingencies being met as part of the acquisition agreement.agreement, respectively.
A reconciliation of the level 3 financial instruments as of June 30, 20212022 is as follows (in thousands):
| | | | | |
Fair value of level 3 financial instruments as of December 31, 20202021 | $ | 45,3127,713 | |
Payments to CVR holders and other contingent payments | (1,050)(1,545) | |
Fair value adjustments to contingent liabilities | (33,661)(309) | |
Contingent liabilities from xCella asset acquisition | 240960 |
Fair value of level 3 financial instruments as of June 30, 20212022 | $ | 10,8416,819 | |
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.
During the second quarter of 2021, inIn connection with the Pfenex CVR fair value evaluation,organizational changes to the Company’s reportable segments, we also evaluatedre-allocated goodwill between the related indefinite-lived contractual relationship intangible for recoverability2 identified reporting units (OmniAb business and Ligand core business). We performed a goodwill impairment analysis immediately before and after the allocation of goodwill and concluded there was no impairment.
Other than the above mentioned triggering event, At June 30, 2022, there were no other triggering events identified andindicators of impairment at either of the reporting units.
At June 30, 2022, there were no indicationindicators of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the three and six months ended June 30, 2021.assets.
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):
| | | | | |
Cash | $ | 51,407 | |
Restricted cash | 200 | |
Accounts and unbilled receivables | 1,359 | |
Property and equipment, net | 7,823 | |
Right-of-use asset | 3,070 | |
Other assets | 1,338 | |
Intangibles acquired | 385,000 | |
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.
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 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-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 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. 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 allocation of the purchase price consisted of (1) $1.8 million of fair value of tangible assets acquired, (2) $(0.8) million of liabilities assumed, (3) $12.8 million of acquired intangibles, (4) $(3.7) million of deferred revenue in connection with assumed performance obligations under a collaboration agreement, (5) $0.8 million of deferred tax asset associated with the deferred revenue, and (6) $9.0 million of goodwill, the majority of which is deductible for tax purposes.
Acquired intangibles include $11.1 million of customer relationships and $1.7 million of core technology. The fair values of the customer relationships were based on a discounted cash flow analysis incorporating the estimated future cash flows from these relationships during the contractual term. These cash flows were then discounted to present value using a discount rate of 17%. The fair value of the customer relationships is being amortized on a straight-line basis over the weighted average estimated useful life of 9.6 years. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 17%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 10 years. The total acquired intangibles are being amortized on a straight-line basis over the estimated useful life of 9.7 years.
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. The maximum conversion rate of the 2023 Notes is 5.2317 per $1,000 principal amount of the 2023 Notes which represents a maximum conversion price of approximately $191.14.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(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 June 30, 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 millionfees, is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. Notes, and the effective interest rate as of June 30, 2022 is 0.5%. During the three months ended June 30, 2022 we recognized a total of $0.4 million in interest expense which includes $0.2 million in contractual interest expense and $0.2 million in amortized issuance costs. During the six months ended June 30, 2022 we recognized a total of $1.2 million in interest expense which includes $0.7 million in contractual interest expense and $0.5 million in amortized issuance costs.
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.
During the six months ended June 30, 2021, we repurchased $149.6$152.0 million in principal of the 2023 Notes for $153.7$156.0 million in cash, including accrued interest of $0.3 million. After the repurchases, approximately $343.3 million in principal amount of the 2023 Notes were outstanding as of December 31, 2021.
During the three months ended June 30, 2022, we repurchased $62.0 million in principal amount of the 2023 Notes for $60.0 million in cash, including accrued interest of $0.01 million. We accounted for the repurchase as a debt extinguishment, which resulted in (1) a lossgain of $7.2$1.8 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the three months ended June 30, 2022, and a $0.3 million reduction in debt discount.
During the six months ended June 30, 2022, we repurchased $227.8 million in principal amount of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million. We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $3.3 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the six months ended June 30, 2021, (2)2022, and a $13.5$1.2 million reduction in debt discount, and (3) a $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 June 30, 2021.discount.
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
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 January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.
In MarchDuring the year ended December 31, 2021, in connection with the repurchases of $104.5$152.0 million in principal of the 2023 Notes for $109.1$156.0 million in cash, including accrued interest of $0.2$0.3 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$18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,597,750.2,559,254. We received $16.9$18.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 645,500.598,021. These unwind transactions resulted in a $0.4$0.5 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of MarchDecember 31, 2021.
The following table summarizes information about the 2023 Notes (in thousands): | | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021(1) |
Principal amount of the 2023 Notes outstanding | Principal amount of the 2023 Notes outstanding | $ | 345,729 | | | $ | 495,280 | | Principal amount of the 2023 Notes outstanding | $ | 115,499 | | | $ | 343,301 | |
Unamortized discount (including unamortized debt issuance cost) | Unamortized discount (including unamortized debt issuance cost) | (30,411) | | | (52,987) | | Unamortized discount (including unamortized debt issuance cost) | (525) | | | (22,584) | |
Total long-term portion of notes payable | Total long-term portion of notes payable | $ | 315,318 | | | $ | 442,293 | | Total long-term portion of notes payable | $ | 114,974 | | | $ | 320,717 | |
| Carrying value of equity component of the 2023 Notes | $ | 27,776 | | | $ | 48,397 | | |
| Fair value of the 2023 Notes outstanding (Level 2) | Fair value of the 2023 Notes outstanding (Level 2) | $ | 341,687 | | | $ | 466,053 | | Fair value of the 2023 Notes outstanding (Level 2) | $ | 110,590 | | | $ | 341,801 | |
|
(1) - Balances as of December 31, 2021 reported before the adoption of ASU 2020-06.
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 six months ended June 30, 2022 and 2021 was (40.7)% and 7.7%, and 21.6% 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, 2022 was due primarily to the tax deductions related to foreign derived intangible income tax credit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation and non-deductible ISO related stock compensation expense during the period. The variance from the U.S. federal 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 ofQ2 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 windfallsbenefits 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 21.5% and 10.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2020 were primarily attributable to the mix of earnings in the jurisdictions with lower statutory rates than the U.S. offset by tax deductions related to stock award activities and tax deductions related to foreign derived intangible income tax credits.
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 20202021 Annual Report.
The following is a summary of our stock option and restricted stock activity and related information: | | | Stock Options | | Restricted Stock Awards | | Stock Options | | Restricted Stock Awards |
| | Shares | | Weighted-Average Exercise Price | | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Exercise Price | | Shares | | Weighted-Average Grant Date Fair Value |
Balance as of December 31, 2020 | 2,561,822 | | | $ | 85.59 | | | 206,202 | | | $ | 106.88 | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | 2,199,598 | | | $ | 106.00 | | | 264,143 | | | $ | 138.21 | |
Granted | Granted | 318,381 | | | $ | 164.30 | | | 158,456 | | | $ | 171.44 | | Granted | 734,218 | | | $ | 91.58 | | | 186,526 | | | $ | 87.32 | |
Options exercised/RSUs vested | Options exercised/RSUs vested | (533,451) | | | $ | 52.00 | | | (95,607) | | | $ | 126.49 | | Options exercised/RSUs vested | (25,798) | | | $ | 20.53 | | | (133,173) | | | $ | 120.66 | |
Forfeited | Forfeited | (83,489) | | | $ | 106.98 | | | (6,790) | | | $ | 126.23 | | Forfeited | (30,417) | | | $ | 67.60 | | | (1,378) | | | $ | 137.16 | |
Balance as of June 30, 2021 | 2,263,263 | | | $ | 103.79 | | | 262,261 | | | $ | 138.23 | | |
Balance as of June 30, 2022 | | Balance as of June 30, 2022 | 2,877,601 | | | $ | 103.50 | | | 316,118 | | | $ | 115.58 | |
As of June 30, 2021,2022, outstanding options to purchase 1.31.6 million shares were exercisable with a weighted average exercise price per share of $91.50.$102.10.
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 June 30, 2021, 46,8662022, 38,007 shares were available for future purchases under the ESPP.
Share Repurchases
We did 0t have any share repurchases during the 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 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. We did not have any share repurchases during the three and six months ended June 30, 2022. Authorization to repurchase $248.8 million of our common stock remained available as of June 30, 2021.2022.
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. 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® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. The parties entered into a settlement agreement on June 1, 2021 and the 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® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging
that these patents, each of which relates to Captisol, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin. Lupin filed an answer on December 11, 2019 and counterclaimed for declaratory judgments of invalidity and non-infringement as to all 4 patents and CyDex filed its answer to Lupin’s counterclaims on January 2, 2020. The parties entered into a settlement agreement on April 26, 2021 and the lawsuit has been dismissed.
On October 31, 2019, we received 3 civil complaints filed in the USU.S. 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 companyCompany 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.
In May and August of 2019, Pfenex Inc., which 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 ‘345 patent,” entitled “Expression System”), which is owned by GlaxoSmithKline Biologicals S.A. (“GSK”), with the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. In November 2019 and February 2020, the Board 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 owned by Pfenex, with the PTAB of the U.S. Patent and Trademark Office. On June 29, 2020, GSK filed a motion to withdraw IPR2020-00890, which was granted on August 28, 2020. In October 2020, Pfenex and GSK executed a confidential settlement agreement agreeing to terminate the proceedings before the PTAB resolving these issues. Pfenex and GSK filed a joint 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, 2020. The PTAB subsequently granted the parties’ joint motion to terminate in IPR2020-00962 on December 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.These 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.
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 reducedthat its royalty going forward.payments end as of May 4, 2022, the expiration date of one of the patents licensed under the agreement. CyDex contends that Baxter has not paid the royalties due to CyDex under the terms of the license agreement. On April 6, 2021, Baxter initiated an arbitration with the
American Arbitration Association pursuant to the arbitration provision of the license agreement. On April 21, 2021, CyDex filed an Answering Statement and Counterdemand. On May 5,December 2, 2021, Baxter filed an Answering StatementAmended Notice of Arbitration Demand also seeking a declaration limiting the “royalty term” of the license agreement to “the later of i) the expiration of the licensed patent; or ii) when there are no longer any CyDex patents listed in responsethe Orange Book for Nexterone.” Baxter has subsequently clarified this position, and asserts that royalties ceased being due when CyDex’s U.S. Patent No. 6,869,939 expired on May 4, 2022. On December 16, 2021, CyDex filed an Answer to CyDex’s Counterdemand. On June 30, 2021, the parties’ heldBaxter’s Amended Demand. The parties conducted a Preliminary Hearingthree-day arbitration hearing between May 24 and May 26, 2022, and subsequently submitted two sets of post-hearing briefs. The arbitrator’s decision is expected before the arbitrator. end of 2022.
From time to time, we may also become subject to other legal proceedings or claims arising in the ordinary course of our business. We currently believe that none of the claims or actions pending against us is likely to have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. Given the unpredictability inherent in litigation, however, we cannot predict the outcome of these matters.
8. Leases
We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to ten years, some of which include options to extend the leases for up to five years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are immaterial.
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and adjusted for lease incentives and other items as prescribed by ASC Topic 842, Leases. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
The arbitrationdepreciable life of lease assets and leasehold improvements is in its early stages.limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Operating and Finance Lease Assets and Liabilities (in thousands):
| | | | | | | | | | | |
Assets | June 30, 2022 | | December 31, 2021 |
Operating lease assets | $ | 24,711 | | | $ | 16,542 | |
Finance lease assets | 15,032 | | | 16,207 | |
Total lease assets | $ | 39,743 | | | $ | 32,749 | |
| | | |
Liabilities | | | |
Current operating lease liabilities | $ | 2,501 | | | $ | 2,053 | |
Current finance lease liabilities | 50 | | | 46 | |
| 2,551 | | | 2,099 | |
Long-term operating lease liabilities | 27,088 | | | 15,494 | |
Long-term finance lease liabilities | 27 | | | 58 | |
Total lease liabilities | $ | 29,666 | | | $ | 17,651 | |
| | | |
| | | |
Maturity of Operating and Finance Lease Liabilities as of June 30, 2022 (in thousands):
| | | | | | |
Maturity Dates | Operating Leases | |
Remaining six months ending December 31, 2022 | $ | 2,459 | | |
2023 | 4,634 | | |
2024 | 3,873 | | |
2025 | 3,811 | | |
2026 | 4,024 | | |
2027 | 4,128 | | |
Thereafter | 14,760 | | |
Total lease payments | 37,689 | | |
Less estimated tenant improvement allowance: | (1,358) | | |
Less imputed interest | (6,742) | | |
Present value of lease liabilities | $ | 29,589 | | |
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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. 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, product development, and product development.the potential separation of the OmniAb Business. 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. In addition, ongoing or future arbitration, 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.
We use our trademarks, trade names and services marks in this report as well as trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this report appear 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 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 ownedwholly-owned subsidiaries.
Overview
We are a biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. We employ research technologies such as antibody discovery technologies, 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 130140 pharmaceutical and biotechnology companies. Over 300400 programs are in various stages of commercialization, development or research and are 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 1,4001,600 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 on goal," are those for which our partners pay all of the development and commercialization costs. For our internal programs, we generally plan to advance drug candidates through early-stage drug development or clinical proof-of-concept and then seek partners to continue development and potential commercialization.
Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development.
Our revenue consists of three primary elements: royalties from commercialized products, sale of Captisol material, and contract revenue from license, milestone and other service payments. In addition to discovering and developing our own
proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.
Impact of COVID-19 PandemicUpdate on the OmniAb Separation Process
Please see ImpactIn November 2021, we announced plans to explore multiple paths for OmniAb to become a standalone public company. On March 23, 2022, we entered into the Merger Agreement, pursuant to which APAC will combine with OmniAb, and acquire the OmniAb Business, in a Reverse Morris Trust transaction. Immediately prior to the Merger and pursuant to the Separation Agreement, we will, among other things, transfer the OmniAb Business, including but not limited to the equity interests of COVID-19 Pandemic describedAb Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc. to OmniAb (the “Reorganization”) and, in Item 1. Condensed Consolidated Financial Statements - Note 1, Basisconnection therewith, will distribute (the “Distribution”) to Ligand stockholders 100% of Presentationthe common stock of OmniAb. Immediately following the Distribution, Merger Sub will merge with and Summaryinto OmniAb (the “Merger”), with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of Significant Accounting PoliciesAPAC.
Upon the closing of the transaction, Avista Capital Partners (“Avista”), APAC’s sponsor has agreed to invest up to $115 million in the combined company, and Ligand will contribute $15 million (less certain transaction and other expenses). For additionalThe combined company will have an initial pre-money equity valuation of $850 million. Ligand intends to distribute 100% of its equity in OmniAb to Ligand shareholders immediately prior to the business combination with APAC. The transaction is expected to be tax-free to Ligand and its shareholders for U.S. federal income tax purposes. The transaction is expected to close in the fourth quarter of 2022.
In April 2022, OmniAb filed with the SEC a registration statement on Form 10 (the “Form 10”) registering shares of OmniAb common stock and APAC filed with the SEC a registration statement on Form S-4 (the “Form S-4”) registering shares of APAC common stock, warrants and certain equity awards. The Form S-4 filed by APAC includes a proxy statement/prospectus in connection with the APAC shareholder vote required for the proposed transaction. The Form 10 filed by OmniAb includes portions of the Form S-4 filed by APAC which will serve as an information statement/prospectus in connection with the spin-off of OmniAb. Ligand’s shareholders and other interested persons are advised to read the preliminary and definitive registration statements, and documents incorporated by reference therein, as these materials contain important information about APAC, OmniAb and the proposed business combination. The proxy statement/prospectus contained in the Form S-4 will be mailed to APAC shareholders as of a record date to be established for voting on the various risks posedproposed business combination. In June 2022, OmniAb filed with the SEC a request to withdraw the Form 10 because APAC was in the process of responding to comments made by the COVID-19 pandemic, please read Item 1A. "Risk Factors" includedstaff of the Division of Corporation Finance (the “Staff”) with respect to the Form S-4. In the absence of this withdrawal request, pursuant to Section 12(g)(1) of the Securities Exchange Act of 1934, as amended, the Form 10 would have automatically become effective on June 27, 2022. Subsequently, the Staff issued additional comments on APAC’s Form S-4, and APAC filed amendments to the Form S-4 on June 13, 2022 and July 26, 2022 in this reportresponse to the Staff’s comments. OmniAb intends to file a replacement registration statement on Form 10 with the SEC in connection with a future pre-effective amendment to the Form S-4 by APAC.
The registration statements, proxy statement/prospectus/information statement and in our 2020 Annual Report.other documents are also available at www.sec.gov, or by request to Avista Public Acquisition Corp. II, 65 East 55th Street, 18th Floor, New York, NY 10022.
Portfolio Program Updates
OmniAb® Platform and Partner Updates
OmniAb is our industry-leading, AI- and BI- (Biological Intelligence) powered multi-species antibody platform for the discovery of mono and bispecific therapeutic human antibodies. As of June 30, 2021, 19 different2022, over 60 partners have access to OmniAb-derived antibodies have been studiedand more than 270 programs are being actively pursued or commercialized by our partners. As of June 30, 2022, the platform has generated 25 clinical- or commercial- stage OmniAb-derived antibodies. As of the date of the filing of this Quarterly Report on Form 10-Q, there are two approved drugs in approximately 77 active or completed clinical trials. We expectChina that were derived from our OmniAb platform, and one under review by both the FDA and the EMA with action expected in the coming weeks. In addition, a partner very recently entered the clinic with the first regulatory approvals for OmniAb-derived antibodies in 2021.antibody drug conjugate (ADC) that was discovered using our platform.
Arcus BiosciencesCStone and Pfizer announced initial efficacy and safety from oneChina’s NMPA approval of the cohortssugemalimab in ARC-6, a randomized Phase 1b/2 platform study evaluating the combination of etrumadenant (dual adenosine A2a/A2b receptor antagonist) plus zimberelimab (an OmniAb-derived, anti-PD1 antibody) and docetaxel in peoplepatients with taxane-naïve metastatic castration-resistant prostate cancer. Arcus also announced encouraging clinical results from 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-highunresectable stage III non-small cell lung cancer (NSCLC). The zimberelimab monotherapy arm showed activity similar to that of marketed anti-PD-1 antibodies studied by other companies in this setting.
Janssen provided whose disease has not progressed following concurrent or sequential platinum-based chemoradiotherapy. Sugemalimab, an update on their Phase 1 trial resultsOmniAb derived monoclonal antibody, became the first anti-PD-1/PD-L1 monoclonal antibody approved for teclistamab in heavily pretreated patients with multiple myeloma suggesting deep and durable responses, and also announced FDA Breakthrough Therapy Designation for teclistamab for the treatment of relapsed or refractory multiple myeloma. Teclistamab is an OmniAb-derived bispecific antibody targeting BCMA and CD3.
CStone Pharmaceuticals announced OmniAb-derived anti-PD-L1 antibody sugemalimab met its primary endpoint in the first-in-class registrational clinical trial for Stagestage III NSCLC and plans to submit a New Drug Application in China for this expanded indication.
Aptevo Therapeutics announced positive Phase 1 clinical data for APVO436 fromfollowing concurrent or sequential chemoradiotherapy. It's also 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 for the Phase 2 proof-of-concept trial of batoclimab, a novel anti-FcRn antibody, in Chinese patients with generalized myasthenia gravis. Harbor BioMed plans to initiate a Phase 3 study in this indication in the second half of 2021.
During the second quarter of 2021,we entered into OmniAb licensing agreements with GenScript Biotech and ImmuNext.
Pelican Platform Updates
The Pelican Expression Technology™ is our proprietary Pseudomonas fluorescens protein expression technology that 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. In 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 aonly anti-PD-L1
componentmonoclonal antibody approved for both stage III and stage IV NSCLC. In May, CStone announced the pre-planned, final progression-free survival (PFS) analysis results from the registrational GEMSTONE-301 study of sugemalimab as consolidation therapy in patients with unresectable stage III NSCLC. The data showed that sugemalimab maintained a statistically significant and clinically meaningful improvement in PFS. Furthermore, on August 7, 2022, EQRx, which holds the development and commercialization rights to sugemalimab outside Greater China, announced that the updated, PFS analysis of the Phase 3 GEMSTONE-301 trial showed that sugemalimab continued to demonstrate improvement in PFS compared with placebo. This updated final data was presented in a late-breaking oral presentation at the International Association for the Study of Lung Cancer 2022 World Conference on Lung Cancer, taking place between August 6-9, 2022.
Janssen announced the Committee for Medicinal Products for Human Use of the European Medicines Agency has recommended conditional marketing authorization for TECVAYLI® (teclistamab) as monotherapy for adult patients with relapsed and refractory multiple myeloma who have received at least three prior therapies. Teclistamab is an OmniAb-derived T-cell redirecting bispecific antibody. It targets both B-cell maturation antigen (BCMA), a marker found on multiple myeloma cells, and CD3, on T-cells. Teclistamab is currently under review by the FDA for potential approval in the U.S.
Immunovant announced recruitment of patients has begun in the pivotal Phase 3 clinical trial of OmniAb-derived batoclimab in myasthenia gravis. Immunovant also announced that it has achieved alignment with the U.S. FDA on plans to initiate two placebo-controlled Phase 3 trials to evaluate batoclimab in thyroid eye disease in the second half of 2022.
Merck KGaA announced the initiation of a multi-agent chemotherapeutic regimenPhase 2 trial for M6223, an OmniAb-derived monoclonal antibody targeting TIGIT, in urothelial cancer. The study will evaluate BAVENCIO® (avelumab), a human anti-programmed death ligand-1 (PD-L1) antibody, as monotherapy versus the combination with M6223 or other molecules in the first-line maintenance setting in patients with advanced urothelial carcinoma whose disease did not progress with first-line platinum-containing chemotherapy.
In Q2 2022, OmniAb entered into new platform licensing agreements with LifeArc, BioSynapse, Kaigene, and Recerise.
Ligand Core Business Portfolio Updates
Travere announced that the FDA accepted and granted priority review of its NDA under Subpart H for accelerated approval of sparsentan for the treatment of pediatric and adult patientsIgA nephropathy. The FDA assigned a Prescription Drug User Fee Act (PDUFA) target action date of November 17, 2022. Travere provided a regulatory update prior to their second quarter earnings call where they announced plans to submit a Conditional Marketing Authorization application with ALL or LBL who are hypersensitiveits partner Vifor Pharma for the treatment of IgA nephropathy in Europe with a review decision expected in the second half of 2023. Travere now plans to E. coli-derived asparaginase products. In July, Jazz launched Rylaze and announced thatpursue traditional approval of sparsentan for focal segmental glomerulosclerosis (FSGS) in 2023 pending completion of the National Comprehensive Cancer Network® (NCCN) added Rylaze to the Clinical Practice Guidelines in Oncology (NCCN Guidelines®) for ALL in pediatric and adult patients.Phase 3 DUPLEX study.
Merck receivedannounced the FDA approval of VAXNEUVANCE™for VAXNEUVANCE™, formerly V114,infants and children 6 weeks through 17 years of age. Subsequently, the CDC’s ACIP voted unanimously to provisionally recommend use of VAXNEUVANCE as an option for the prevention of pneumococcal diseasevaccination in adults.infants and children. VAXNEUVANCE is a 15-valent pneumococcal vaccine utilizing ourLigand’s CRM197 vaccine carrier protein produced using the Pelican Expression Technology platform. Additionally, Merck announced positive results from initiala Phase 1/2 study evaluating V116, their investigational 21-valent pneumococcal conjugate vaccine utilizing Ligand’s CRM197 vaccine carrier protein. Merck started a broad Phase 3 pediatric clinical trialsprogram for VAXNEUVANCEV116 in pneumococcal disease. CRM197, produced by the Pelican Expression Technology™, is also used by Merck in its investigational vaccine candidates, including V116.July 2022.
Other Business Updates
Jazz Pharmaceuticals presented positive data from a Phase 2/3 trial evaluating the intramuscular (IM) administration of Rylaze
BeiGene received approval® in China of Kyprolis (carfilzomib) in combination with dexamethasone for adult and pediatric patients with relapsed or refractory multiple myelomaacute lymphoblastic leukemia (ALL) and lymphoblastic lymphoma (LBL) who have receiveddeveloped hypersensitivity to an E. coli-derived asparaginase at least two prior therapies, including a proteasome inhibitor andthe 2022 ASCO Annual Meeting. The results confirmed patients achieved clinically meaningful nadir serum asparaginase activity throughout the course of Rylaze treatment with an immunomodulatory agent. This is the first approval of Kyprolis 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 funding. In addition, we are eligible to receive up to $274 million in research, development and commercial milestone payments, as well as royaltiesIM regimen administered on net sales should a drug from the collaboration be commercialized.
Monday/Wednesday/Friday.
Travere Therapeutics announced completion of enrollment in the pivotal Phase 3 PROTECT clinical trial to evaluate the long-term nephroprotective potential of sparsentan in IgA 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 B-SIMPLE4 pivotal Phase 3 B-SIMPLE5 trialstudy of SB206 a topical antiviral gel, for the treatment ofin patients with molluscum contagiosum. The clinical trialAt the end of 12 weeks, 32.4% of patients in the SB206 group 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 countas compared with 19.7% 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 bypatients in the third quarter of 2022.vehicle group.
Sermonix Pharmaceuticals announced complete enrollment in itspresented updated data at the 2022 ASCO Annual Meeting from the ELAINE-2 open-label, Phase 2 clinical trial studyingof lasofoxifene in combination with Eli Lilly’s FDA-approved CDK 4abemaciclib in women with locally advanced or metastatic ER+/HER2 breast cancer and 6 inhibitor abemacicliban ESR1 mutation after progression on prior therapies. The combination produced encouraging results, with a median PFS of 13.9 months, along with acceptable tolerability.
Verona Pharma announced it completed patient enrollment with more than 800 subjects randomized in the ENHANCE-1 trial of ensifentrine in chronic obstructive pulmonary disease, concluding enrollment in the Phase 3 ENHANCE program. Top-line data are expected from ENHANCE-2 in the third quarter of 2022 and from ENHANCE-1 around year-end 2022.
Aldeyra Therapeutics announced achievement of the primary endpoint in the Phase 3 TRANQUILITY-2 trial of reproxalap for the treatment of dry eye disease. Reproxalap was statistically superior for both primary endpoints of Schirmer Test (p=0.0001) and ≥10 mm Schirmer Test responder proportions (p<0.0001). Aldeyra subsequently announced achievement of the primary endpoints in a crossover trial showing reproxalap was statistical superior to treat ESR1-mutated metastatic breastvehicle for each of the two prespecified primary endpoints, ocular redness in a dry eye chamber (p=0.0004) and gynecological cancers. LasofoxifeneSchirmer test (p=0.0005). A Type B Pre-NDA meeting is an investigational, nonsteroidal selective estrogen receptor modulator. Sermonix expects initial data from the trialexpected to be availableheld with the FDA in the first halfthird quarter of 2022.2022, followed by a potential NDA submission.
Results of Operations
Revenue
Revenue
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(Dollars in thousands) | Q2 2021 | | Q2 2020 | | Change | | % Change | | YTD 2021 | | YTD 2020 | | Change | | % Change |
Royalties | $ | 8,616 | | | $ | 7,181 | | | $ | 1,435 | | | 20 | % | | $ | 15,728 | | | $ | 13,746 | | | $ | 1,982 | | | 14 | % |
Captisol | 62,509 | | | 24,468 | | | 38,041 | | | 155 | % | | 93,781 | | | 45,577 | | | 48,204 | | | 106 | % |
Contract revenue | 13,550 | | | 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 | % |
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(Dollars in thousands) | Q2 2022 | | Q2 2021 | | Change | | % Change | | YTD 2022 | | YTD 2021 | | Change | | % Change | | | | | | | | |
Royalties | $ | 17,959 | | | $ | 8,616 | | | $ | 9,343 | | | 108 | % | | $ | 31,654 | | | $ | 15,728 | | | $ | 15,926 | | | 101 | % | | | | | | | | |
Captisol - Core | 3,325 | | | 9,682 | | | (6,357) | | | (66) | % | | 9,551 | | | 10,935 | | | (1,384) | | | (13) | % | | | | | | | | |
Captisol - COVID | 26,220 | | | 52,827 | | | (26,607) | | | (50) | % | | 32,116 | | | 82,846 | | | (50,730) | | | (61) | % | | | | | | | | |
Contract revenue | 9,915 | | | 13,550 | | | (3,635) | | | (27) | % | | 29,791 | | | 30,316 | | | (525) | | | (2) | % | | | | | | | | |
Total revenue | $ | 57,419 | | | $ | 84,675 | | | $ | (27,256) | | | (32) | % | | $ | 103,112 | | | $ | 139,825 | | | $ | (36,713) | | | (26) | % | | | | | | | | |
Q2 2022 vs. Q2 2021
Total revenue decreased by $27.3 million, or (32)%, to $57.4 million in Q2 2022 compared to $84.7 million in Q2 2021 primarily due to the $26.6 million decrease in sales of COVID-related Captisol that is used in formulation with remdesivir. Royalties increased in Q2 2022 by $9.3 million, or 108%, compared to the same period in 2021, with the increase primarily due to Kyprolis and sales of products using the Pelican platform. Core Captisol sales decreased by $6.4 million, or (66)%, to $3.3 million in Q2 2022 primarily due to the timing of customer orders. Captisol sales related to COVID-19 were $26.2 million in Q2 2022, compared with $52.8 million for the same period in 2021. The difference in sales is due to reduced demand for the pandemic-related treatment. Contract revenue decreased $3.6 million, or (27)%, to $9.9 million in Q2 2022 primarily due to the achievement of two significant milestones tied to the Pelican platform in Q2 2021.
Revenues attributable to the Ligand core business segment and OmniAb business segment were $50.1 million and $7.3 million, and $78.9 million and $5.8 million, respectively, for Q2 2022 and Q1 2021.
YTD 2022 vs. YTD 2021
Total revenue decreased by $36.7 million, or (26)%, to $103.1 million in YTD 2022 compared to $139.8 million compared to YTD 2021 primarily due to the $50.7 million decrease in sales of COVID-related Captisol that is used in formulation with remdesivir. Royalties increased in YTD 2022 by $15.9 million compared to YTD 2021, with the increase primarily due to Kyprolis and sales of products using the Pelican platform. Core Captisol sales decreased by $1.4 million, or (13)%, to $9.6 million in YTD 2022 compared to YTD 2021 primarily due to the difference in sales is due to timing of customer orders. Captisol sales related to COVID-19 were $32.1 million for the six months ended June 30, 2022, compared with $82.8 million for the same period in 2021. The lower sales are due to reduced demand for the pandemic-related treatment. Contract revenue decreased slightly in YTD 2022 compared to YTD 2021.
Revenues attributable to the Ligand core business segment and OmniAb business segment were $86.6 million and $16.5 million, and $125.4 million and $14.4 million, respectively, for YTD 2022 and YTD 2021.
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%. Teriparatide injection has a tiered royalty between 25% and 40% on sales that have been adjusted for certain deductible items as defined in the respective license agreement. The Rylaze royalty rate is tiered between 3% and 5%. Contract revenue includes service revenue, license fees and development, regulatory and sales based milestone payments.
The following table represents royalty revenue by program:program (in millions):
| (in millions) | (in millions) | Q2 2021 Estimated Partner Product Sales | Effective Royalty Rate | Q2 2021 Royalty Revenue | | Q2 2020 Partner Product Sales | Effective Royalty Rate | Q2 2020 Royalty Revenue | (in millions) | Q2 2022 Estimated Partner Product Sales | Effective Royalty Rate | Q2 2022 Royalty Revenue | | Q2 2021 Estimated Partner Product Sales | Effective Royalty Rate | Q2 2021 Royalty Revenue |
Kyprolis | Kyprolis | $ | 266.5 | | 2.0 | % | $ | 5.4 | | | $ | 269.1 | | 2.0 | % | $ | 5.5 | | Kyprolis | $ | 328.1 | | 2.2 | % | $ | 7.1 | | | $ | 266.5 | | 2.0 | % | $ | 5.4 | |
Evomela | Evomela | 11.0 | | 20.0 | % | 2.2 | | | 6.0 | | 20.0 | % | 1.2 | | Evomela | 12.0 | | 20.0 | % | 2.4 | | | 11.0 | | 20.0 | % | 2.2 | |
Teriparatide injection(1) | | Teriparatide injection(1) | 16.5 | | 33.3 | % | 5.5 | | | 1.1 | | 25.0 | % | 0.3 | |
Rylaze | | Rylaze | 77.2 | | 3.0 | % | 2.3 | | | — | | — | % | — | |
Other | Other | 41.3 | | 2.4 | % | 1.0 | | | 40.8 | | 1.2 | % | 0.5 | | Other | 69.7 | | 0.9 | % | 0.6 | | | 40.2 | | 1.8 | % | 0.7 | |
Total | Total | $ | 318.8 | | | $ | 8.6 | | | $ | 315.9 | | | $ | 7.2 | | Total | $ | 503.5 | | | $ | 18.0 | | | $ | 318.8 | | | $ | 8.6 | |
| (in millions) | | (in millions) | YTD 2022 Estimated Partner Product Sales | Effective Royalty Rate | YTD 2022 Royalty Revenue | | YTD 2021 Estimated Partner Product Sales | Effective Royalty Rate | YTD 2021 Royalty Revenue |
Kyprolis | | Kyprolis | $ | 624.5 | | 1.9 | % | $ | 11.7 | | | $ | 527.1 | | 1.8 | % | $ | 9.7 | |
Evomela | | Evomela | 25.5 | | 20.0 | % | 5.1 | | | 22.2 | | 20.0 | % | 4.5 | |
Teriparatide injection(1) | | Teriparatide injection(1) | 25.6 | | 32.8 | % | 8.4 | | | 2.6 | | 10.3 | % | 0.3 | |
Rylaze | | Rylaze | 132.2 | | 3.0 | % | 4.0 | | | — | | — | % | — | |
Other | | Other | 140.5 | | 1.7 | % | 2.4 | | | 65.8 | | 1.8 | % | 1.2 | |
Total | | Total | $ | 948.3 | | | $ | 31.7 | | | $ | 617.7 | | | $ | 15.7 | |
(1) - Teriparatide injection sales have been adjusted for certain deductible items as defined in the respective license agreement.
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(in millions) | YTD 2021 Estimated Partner Product Sales | Effective Royalty Rate | YTD 2021 Royalty Revenue | | YTD 2020 Partner Product Sales | Effective Royalty Rate | YTD 2020 Royalty Revenue |
Kyprolis | $ | 527.1 | | 1.8 | % | $ | 9.7 | | | $ | 555.1 | | 1.8 | % | $ | 9.9 | |
Evomela | 22.2 | | 20.0 | % | 4.5 | | | 13.9 | | 20.0 | % | 2.8 | |
Other | 68.4 | | 2.2 | % | 1.5 | | | 86.6 | | 1.3 | % | 1.1 | |
Total | $ | 617.7 | | | $ | 15.7 | | | $ | 655.6 | | | $ | 13.7 | |
Operating Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Q2 2022 | | % of Revenue | | Q2 2021 | | % of Revenue | | YTD 2022 | | % of Revenue | | YTD 2021 | | % of Revenue | | | | | | | | |
Cost of Captisol | $ | 12,361 | | | | | $ | 30,593 | | | | | $ | 17,060 | | | | | $ | 38,746 | | | | | | | | | | | |
Amortization of intangibles | 11,824 | | | | | 11,779 | | | | | 23,637 | | | | | 23,565 | | | | | | | | | | | |
Research and development | 19,118 | | | | | 15,953 | | | | | 39,425 | | | | | 33,832 | | | | | | | | | | | |
General and administrative | 14,585 | | | | | 14,711 | | | | | 32,765 | | | | | 27,028 | | | | | | | | | | | |
Other operating income | — | | | | | (34,100) | | | | | — | | | | | (33,800) | | | | | | | | | | | |
Total operating costs and expenses | $ | 57,888 | | | 101% | | $ | 38,936 | | | 46% | | $ | 112,887 | | | 109% | | $ | 89,371 | | | 64% | | | | | | | | |
Q2 20212022 vs. Q2 20202021
Total revenue increased by $43.3 million, or 104%, to $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 $74.6 million in the same period last year primarily 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 primarily attributable to (1) the timing of partner milestone events and (2) the additional contract revenue of $8.0 million and $8.5 million from the acquisitions of Icagen in April 2020 and Pfenex in October 2020, respectively.
Operating Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Q2 2021 | | % of Revenue | | Q2 2020 | | % of Revenue | | YTD 2021 | | % of Revenue | | YTD 2020 | | % of Revenue |
Cost of Captisol | $ | 30,593 | | | | | $ | 7,644 | | | | | $ | 38,746 | | | | | $ | 12,327 | | | |
Amortization of intangibles | 11,779 | | | | | 3,875 | | | | | 23,565 | | | | | 7,410 | | | |
Research and development | 15,953 | | | | | 12,732 | | | | | 33,832 | | | | | 24,623 | | | |
General and administrative | 14,711 | | | | | 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% |
Q2 2021 vs. Q2 2020
Total operating costs and expenses duringincreased by $19.0 million, or 49%, to $57.9 million in Q2 2022 compared to $38.9 million in Q2 2021 increased by $4.6 million, or 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 of $(34.1) million recorded in the second quarter ofQ2 2021 to reduce the Pfenex CVR liability. See additional information onliability due to an expected lower probability of achieving the required milestone under the Pfenex CVR liability in Note 2, Fair Value Measurements.Agreement.
Cost of Captisol increasedCapitsol decreased by $18.2 million, (60)%, to $12.4 million in Q2 2022 compared to $30.6 million in Q2 2021, with the decrease primarily due to higher Captisollower total sales during Q2 2021 compared to Q2 2020. Cost of Captisol as a percentageCaptisol. All of Captisol revenue was 49% in Q2 2021 compared to 31% in Q2 2020, with the increase primarily duecost of Capitsol is attributable to the significant sales to the Gilead consortium partners in India who had sales prices lower than other customers during Q2 2021.Ligand core business segment.
Amortization of intangibles increasedremained steady in Q2 20212022 compared to the same period in 2020 primarily due2021 as there have been no significant changes to the amortizationgross balance of contractual relationshipsintangible assets over these periods. Amortization of intangibles were $8.3 million and technologies acquired from Pfenex in October 2020.$3.5 million for the Ligand core business segment and OmniAb business segment during Q2 2022, respectively, and $8.6 million and $3.2 million during Q2 2021, respectively.
At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. OurResearch and development expenses were $19.1 million for Q2 2022, compared with $16.0 million for the same period of 2021, with the increase primarily due to continued investment in the OmniAb business which including facilities and headcount-related expenditures. Excluding $0.8 million in unallocated corporate items, R&D expenses increased year over yearwere $7.5 million and $10.8 million for the Ligand core business segment and OmniAb business segment during Q2 2022, respectively. Excluding $0.9 million in unallocated corporate items, R&D expenses were $6.4 million and $8.6 million, for the Ligand core business segment and OmniAb business segment during Q2 2021, due to the $4.2 million costs associated with our Pfenex acquisition, which primarily consisted of salaries and lab costs.respectively.
General and administrative expenses increaseddecreased slightly in Q2 20212022 compared to Q2 2021. Excluding $7.8 million in unallocated corporate items, general and administrative expenses were $4.9 million and $1.9 million for the same periodLigand core business segment and OmniAb business segment during Q2 2022, respectively. Excluding $7.4 million in 2020 primarily due tounallocated corporate items, general and administrative expenses were $5.6 million and $1.8 million for the additional expenses from the Pfenex acquisition as well as increased share-based compensation expense.Ligand core business segment and OmniAb business segment during Q2 2021, respectively.
OtherThere was no other operating income infor Q2 2022, compared with $34.1 million for Q2 2021, includedwhich represented 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.Agreement.
YTD 20212022 vs. YTD 20202021
Total operating costs and expenses duringincreased by $23.5 million, or 26%, to $112.9 million in YTD 2022 compared to $89.4 million in YTD 2021 increased by $25.7 million, or 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 offsetthe a $34.1 million non-cash valuation adjustment of $(33.8) million recorded in YTD 2021 to reduce the Pfenex CVR liability. See additional disclosure onliability due to an expected lower probability of achieving the required milestone under the Pfenex CVR liability in Note 2, Fair Value Measurements.Agreement.
Cost of Captisol increasedCapitsol decreased by $21.7 million, (56)%, to $17.1 million in YTD 2022 compared to $38.7 million in YTD 2021, with the decrease primarily due to higher Captisollower total sales during YTD 2021 compared to YTD 2020. Cost of Captisol as a percentageCaptisol. All of Captisol revenue was 41% in YTD 2021 compared to 27% in YTD 2020, with the increase primarily duecost of Capitsol is attributable to the significant sales to the Gilead consortium partners in India who had sales prices lower than other customers during Q2 2021.Ligand core business segment.
Amortization of intangibles increasedremained steady in YTD 2022 compared to YTD 2021 as there have been no significant changes to the gross balance of intangible assets over these periods. Amortization of intangibles were $17.1 million and $6.5 million for the Ligand core business segment and OmniAb business segment in YTD 2022, respectively, and $17.4 million and $6.2 million 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.respectively.
At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. OurResearch and development expenses were $39.4 million in YTD 2022, compared with $33.8 million in YTD 2021, with the increase primarily due to continued investment in the OmniAb business which includes facilities and headcount-related expenditures. Excluding $1.7 million in unallocated corporate items, R&D expenses increased year over yearwere $15.7 million and $22.0 million for the Ligand core business segment and OmniAb business segment in YTD 2022, respectively. Excluding $1.7 million in unallocated corporate items, R&D expenses were $14.4 million and $17.7 million, for the Ligand core business segment and OmniAb business segment in YTD 2021, due to the $9.2 million costs associated with our Pfenex acquisition, which primarily consisted of salaries and lab costs.respectively.
General and administrative expenses increased by $5.7 million, or 21%, to $32.8 million in YTD 2022 compared to $27.0 million in YTD 2021, compared towith the same period in 2020increase primarily due to $4.8 million in transaction costs incurred during the additionalfirst quarter of 2022 in connection with the planned spin-off of OmniAb. Excluding $20.0 million in unallocated corporate items, general and administrative expenses fromwere $9.7 million and $3.1 million for the PfenexLigand core business segment and Icagen acquisitions as well as increased share-based compensation expense.OmniAb business segment in YTD 2022, respectively. Excluding $15.4 million in unallocated corporate items, general and administrative expenses were $8.7 million and $2.9 million for the Ligand core business segment and OmniAb business segment in YTD 2021, respectively.
OtherThere was no other operating income in YTD 2022, compared with $33.8 million in YTD 2021, primarily includedwhich represented 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.due to an expected lower probability of achieving the required milestone under the Pfenex CVR Agreement.
Other Income (Expense)
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(Dollars in thousands) | Q2 2021 | | Q2 2020 | | Change | | YTD 2021 | | YTD 2020 | | Change |
Gain (loss) from short-term investments | $ | (6,864) | | | $ | 23,460 | | | $ | (30,324) | | | $ | 6,197 | | | $ | (7,281) | | | $ | 13,478 | |
Interest income | 233 | | | 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 | |
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(Dollars in thousands) | Q2 2022 | | Q2 2021 | | Change | | YTD 2022 | | YTD 2021 | | Change | | | | | | |
Gain (loss) from short-term investments | $ | (1,909) | | | $ | (6,864) | | | $ | 4,955 | | | $ | (14,786) | | | $ | 6,197 | | | $ | (20,983) | | | | | | | |
Interest income | 298 | | | 233 | | | 65 | | | 432 | | | 529 | | | (97) | | | | | | | |
Interest expense | (438) | | | (4,883) | | | 4,445 | | | (1,227) | | | (10,714) | | | 9,487 | | | | | | | |
Other income (expense), net | 1,882 | | | (924) | | | 2,806 | | | 4,580 | | | (7,401) | | | 11,981 | | | | | | | |
Total other income (expense), net | $ | (167) | | | $ | (12,438) | | | $ | 12,271 | | | $ | (11,001) | | | $ | (11,389) | | | $ | 388 | | | | | | | |
Q2 20212022 vs. Q2 20202021
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 other equity security investments, contributing an unrealized loss of $1.5 million in Q2 2022 as compared to an unrealized loss of $6.8 million in Q2 2021.
Interest income consists primarily of interest earned on our short-term investments. The increase over the prior year was due to the increase in interest rate, partially offset by 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 in both Q2 2022 and Q2 2021. The decrease was primarily due to the adoption of ASU 2020-06 which significantly reduced the debt discount balance subject to amortization. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies for detail on ASU 2020-06 adoption. In addition, we carried a lower average debt outstanding balance in Q2 2022 as compared to Q2 2021. During Q2 2022, we repurchased $62.0 million in principal amount of the 2023 Notes. See Note 4, Convertible Senior Notes.
Other income (expense), net, in Q2 2022 increased by $2.8 million as compared to Q2 2021, primarily due to the $1.8 million gain on extinguishment of debt during Q2 2022 compared to a $2.3 million loss on extinguishment of debt offset by the $1.1 million gain for the fair value adjustment of Metabasis, Icagen and CyDex CVRs during Q2 2021. See Note 3, Fair Value Measurements and Note 4, Convertible Senior Notes.
YTD 2022 vs. YTD 2021
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 (another equity security investments, contributing an unrealized loss of $8.3$13.5 million in Q2 2021YTD 2022 as compared to an unrealized gain of $23.5$10.1 million in Q2 2020).YTD 2021.
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 months ended June 30, 2021. The decrease was primarily due to lower average debt outstanding balance during Q2 2021 as compared to Q2 2020. In Q2 2021, we repurchased $45.1 million in principal of the 2023 Notes for $44.6 million in 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 three months ended June 30, 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 periodyear 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 six months ended June 30,in both YTD 2022 and YTD 2021. The decrease was primarily due to the adoption of ASU 2020-06 which significantly reduced the debt discount balance subject to amortization. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies for detail on ASU 2020-06 adoption. In addition, we carried a lower average debt outstanding balance during YTD 20212022 as compared to YTD 2020.2021. During YTD 2021,2022, we repurchased $149.6$227.8 million in principal amount of the 2023 Notes for $153.7 million in cash, including accrued interest of $0.3 million.Notes. See Note 4, Convertible Senior Notes.
Other income (expense), net, in YTD 2022 increased by $12.0 million as compared to YTD 2021, includedprimarily due to a $3.3 million gain on extinguishment of debt and $1.3 million gain for the fair value adjustment of Metabasis, Icagen and CyDex CVRs during YTD 2022 compared to a $7.2 million loss on extinguishment of debt extinguishment in connection withand $0.3 million loss for the 2023 Notes repurchasefair value adjustment of Metabasis, Icagen and CyDex CVRs during the six months ended June 30,YTD 2021.
See
Note 3, Fair Value Measurements and Note 4, Convertible Senior Notes.
Income Tax Benefit (Expense) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Q2 2021 | | Q2 2020 | | Change | | YTD 2021 | | YTD 2020 | | Change |
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 rate | 7.7 | % | | 21.5 | % | | | | (25.0) | % | | 10.9 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Q2 2022 | | Q2 2021 | | Change | | YTD 2022 | | YTD 2021 | | Change | | | | | | |
Income (loss) before income taxes | $ | (636) | | | $ | 33,301 | | | $ | (33,937) | | | $ | (20,776) | | | $ | 39,065 | | | $ | (59,841) | | | | | | | |
Income tax benefit | (259) | | | (2,576) | | | 2,317 | | | 4,496 | | | 9,766 | | | (5,270) | | | | | | | |
Income (loss) from operations | $ | (895) | | | $ | 30,725 | | | $ | (31,620) | | | $ | (16,280) | | | $ | 48,831 | | | $ | (65,111) | | | | | | | |
Effective tax rate | (40.7) | % | | 7.7 | % | | | | 21.6 | % | | (25.0) | % | | | | | | | | |
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 six months ended June 30, 2022 and 2021 was (40.7)% and 7.7%, and 21.6% 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, 2022 was due primarily to the tax deductions related to foreign derived intangible income tax credit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation and non-deductible ISO related stock compensation expense during the period. 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 ofQ2 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 windfallsbenefits 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 21.5% and 10.9%, respectively. The variances from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2020 were primarily attributable to the mix of earnings in the jurisdictions with lower statutory rates than the U.S. offset by tax deductions related to stock award activities and tax deductions related to foreign derived intangible income tax credits.
Liquidity and Capital Resources
As of June 30, 2021,2022, our cash, cash equivalents, and short-term investments totaled $301.8$147.9 million, which decreased by $109.4$193.2 million from the end of last year due to factors described in the Cash Flow Summary below. 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
debt securities, investment-grade corporate debt securities, mutual funds and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as 6.7 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. During the six months ended June 30, 2021,2022, we repurchased $149.6$227.8 million in principal amount of the 2023 Notes for $153.7$223.7 million in cash, including accrued interest of $0.3$0.4 million. After the repurchases, $345.7$115.5 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 planplans to facilitate open-market repurchases, or otherwise, from time to time. The timing and amount of repurchase transactions will be determined by management based on the evaluation of market conditions, trading price of the 2023 Notes, legal requirements and other factors. The 2023 Notes were not convertible as of June 30, 2021.2022. 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.
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 June 30, 2021,2022, we had $14.8$9.2 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.
Leases and Off-Balance Sheet ArrangementsCash Flow Summary | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Q2 2022 | | Q2 2021 | | | | | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 63,889 | | | $ | 31,131 | | | | | | | |
Investing activities | $ | 151,732 | | | $ | 84,453 | | | | | | | |
Financing activities | $ | (229,863) | | | $ | (141,540) | | | | | | | |
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 underDuring 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 between 3.0% to 4.0%. We had no off-balance sheet arrangements atthree months ended June 30, 2021 and December 31, 2020.
Cash Flow Summary | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | YTD 2021 | | YTD 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) | | | | | | | |
2022, we repurchased $62.0 million in principal amount of the 2023 Notes for $60.0 million in cash, including accrued interest of $0.01 million. During the six months ended June 30, 2021,2022, we repurchased $149.6$227.8 million in principal of the 2023 Notes for $153.7$223.7 million in cash, including accrued interest of $0.3$0.4 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, used $73.3 million to repurchase our common stock, and paid $15.1 million in cash for the Icagen acquisition.
Contractual Obligations
There have been no material changes outside the ordinary course of business to the Contractual Obligations table set forth in our 2020 Annual Report, other than our operating lease obligation will increase by approximately $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 and Estimates
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 20202021 Annual Report, other than the adoption of the Accounting Standards Updates described in Item 1. Condensed consolidated Financial Statements - Note 1, Basis of Presentation and Summary of Significant Accounting Policies, related to allowance for credit losses.convertible debt.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no substantial changes to our market risks in the three and six months ended June 30, 2021,2022, when compared to the disclosures in Item 7A of our 20202021 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 June 30, 20212022 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 June 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information that updates the disclosures set forth under Part I. Item 3. Legal Proceedings in our 20202021 Annual Report, refer to Note 7, Commitment and Contingencies: Legal Proceedings, to the Condensed Consolidated Financial Statements contained in Part I. Item 1. of this report.
Item 1A. Risk Factors
ThereOther than as set forth below, we do not believe that there have been noany material changes to the risk factors includeddisclosed in Part I.I, Item 1A. Risk Factors1A of our 2021 Annual Report. The risk factors described in our 20202021 Annual Report other thanand below are not the only risks we face. Factors we currently do not know, factors that we currently consider immaterial or factors that are not specific to us, such as set forth below:general economic conditions, may also materially adversely affect our business or our consolidated operating results, financial condition or cash flows.
Future revenue from salesThe Merger is subject to the satisfaction of Captisol material to our license partnerscertain conditions, which may not be lower than expected.satisfied on a timely basis, if at all.
Revenues from salesThe consummation of Captisol materialthe Merger is subject to our collaborative partners,customary closing conditions for transactions involving special purpose acquisition companies, including, Amgen, Gilead and among others:
•the Gilead consortium, represent a significant portionexpiration or termination of our current revenues. Any setback that may occur with respect to Captisol could significantly impair our operating results and/or reduce the market pricewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act of our stock. Setbacks for Captisol could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses1976, as amended;
•receipt of required consents 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 ancertain governmental authorities;
inhaled dosage form•no agreement between Ligand or APAC and any governmental authority pursuant to which Ligand or APAC has agreed not to consummate the Merger shall have been effected;
•no governmental authority of remdesivircompetent jurisdiction shall have enacted, issued or granted any law (whether temporary, preliminary or permanent), in each case that uses less Captisol thanis in effect and which has the current formulationeffect of restraining, enjoining or prohibiting the consummation of the transaction;
•APAC shall have at least $5,000,001 of net tangible assets as of the Closing;
•the APAC common stock issuable pursuant to the Merger shall have been approved for listing on Nasdaq, subject to official notice of issuance;
•Ligand, OmniAb, APAC and expects result from an ongoing proof-of-concept studyMerger Sub shall each have performed and complied in all material respects with the obligations, covenants and agreements required by the Merger Agreement to be performed or complied with by it at or prior to filing, or a later this year.date as agreed to by the parties;
•customary bring down conditions related to the accuracy of the parties’ respective representations, warranties and pre-closing covenants in the Merger Agreement;
•the consummation of the Distribution, Reorganization and other transactions contemplated by the Separation Agreement shall have occurred;
•each of APAC’s and OmniAb’s registration statements to be filed with the United States Securities and Exchange Commission shall have become effective;
•APAC’s shareholder approval; and
•the receipt by Ligand and APAC of certain tax opinions.
Additionally, APAC’s obligation to consummate the Business Combination is also subject to there having been no “Material Adverse Effect” on OmniAb since the date of the Merger Agreement.
Additionally, the obligations of OmniAb to consummate or cause to be consummated the Merger is subject to the satisfaction of the following additional conditions, any one (1) or more of which may be waived in writing by the OmniAb, among other things:
•the completion of the transactions contemplated by the Merger Agreement; and
•the resignation of all directors and all executive officers of APAC.
There can be no assurance that such closing conditions will be satisfied or waived, or that the Merger will be consummated. Further, we cannot assure you that the approval of APAC’s stockholders will be obtained. We, OmniAb and APAC may be subject to shareholder lawsuits, or other actions filed in connection with or in opposition to the Merger, which could prevent or delay the consummation of the Merger.
If productsthe Distribution, together with certain related transactions, fails to qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”), or product candidates incorporating Captisol material werethe Merger fails to cause any unexpected adverse events,qualify as a reorganization under Section 368(a) of the perception of Captisol safetyCode, Ligand and its stockholders could incur significant tax liabilities, and APAC and OmniAb could be seriously harmed.required to indemnify Ligand for taxes that could be material pursuant to indemnification obligations under the tax matters agreement to be entered into in connection with the closing of the Merger (the “Tax Matters Agreement”).
Ligand expects to receive a tax opinion from Latham & Watkins LLP, tax counsel to Ligand, which shall provide that the Distribution will qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code and that the Merger will not cause Section 355(e) of the Code to apply to the Distribution. In addition, the obligations of Ligand and OmniAb to complete the Merger are conditioned upon, among other things, Ligand’s receipt of such tax opinion. The obligation of APAC to complete the Merger is conditioned upon, among other things, receipt of an opinion of Weil, Gotshal & Manges LLP, tax counsel to APAC, that the Merger will be treated as a reorganization under Section 368(a) of the Code. The opinions will be based on, among other things, certain facts, assumptions, representations and undertakings from Ligand, OmniAb and APAC, including those regarding the past and future conduct of the companies’ respective businesses and other matters. If this were to occur, weany of these facts, assumptions, representations, or undertakings are incorrect or not satisfied, Ligand may not be able to sell Captisol unlessrely on the opinions, and until we are ableLigand and its stockholders could be subject to demonstrate thatsignificant U.S. federal income tax liabilities. In addition, the adverse event was unrelated to Captisol, which we mayopinions will not be able to do. Further,binding on the FDAIRS or the courts. Notwithstanding the opinions, the IRS 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 delaydetermine on audit that 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 their facilities in Ireland and 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 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, 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 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 from our platform. In addition, only a subset of our collaboration partners’ product candidates have been tested in late stage clinical trials. If one of our OmniAb collaboration 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. OmniAb collaboration partners may terminate their programs without penalty. In addition, our OmniAb platform is covered by 167 patents worldwide (including 32 patents within the U.S. and 7 patents in the European Union)and are subject to the same risks as our patent portfolio discussed elsewhere in this report and our 2020 Annual Report, including the risk that our patents may infringe on third party patent rights or that our patents may be invalidated. As of a result of these factors, the future
revenue generated from this platform mayDistribution or Merger does not qualify as a reorganization if it determines that any of the facts, assumptions, representations or undertakings on which the opinions are based are not correct or have been violated or that the Distribution or Merger should be materially lower than what we currently anticipate. Further, we facetaxable for other reasons, including as a result of a significant competition from other companies selling human antibody-generating rodents, especially mice which compete with our OmniMouse platform, includingchange in stock or asset ownership after the VelocImmune mouse, the AlivaMab mouse, the Alloy 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.Distribution.
Third party intellectual property mayIf the Distribution, together with certain related transactions, is ultimately determined not to qualify as a reorganization, the Distribution could be treated as a taxable disposition of shares of OmniAb stock by Ligand and as a taxable dividend or capital gain to Ligand’s stockholders for U.S. federal income tax purposes. If the Merger is ultimately determined not to qualify as a reorganization, the Merger could be treated as a taxable disposition of OmniAb stock by Ligand stockholders. In either such case, Ligand and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.
Under the Tax Matters Agreement that APAC and OmniAb will enter into with Ligand, APAC and OmniAb will generally be required to indemnify Ligand against taxes incurred by Ligand that arise as a result of certain actions or omissions by APAC or OmniAb that prevent usthe Distribution, together with certain related transactions, from qualifying as a reorganization under Sections 355 and 368(a)(1)(D) of the Code. Further, even if APAC and OmniAb are not responsible for tax liabilities of Ligand under the Tax Matters Agreement, OmniAb nonetheless could be liable under applicable U.S. federal tax law for such liabilities if Ligand were to fail to pay them. If APAC or our partners from developing our potential products; our and our partners’ intellectual property may not prevent competition; andOmniAb is required to pay any intellectual property issuesliabilities under the circumstances set forth in the Tax Matters Agreement or pursuant to applicable tax law, the amounts may be expensive and time consuming to resolve.significant.
The manufacture, use or saleanticipated benefits of our potential products or our licensees' products or potential productsthe Separation and Merger may infringe the patent rights of others. If others obtain patents with conflicting claims, we maynot be required to obtain licenses to those patents or to develop or obtain alternative technology. achieved.
We may not be able to obtain any such licenses on acceptable terms, or at all. Any failureachieve the full strategic and financial benefits expected to obtain such licenses could delay or prevent usresult from pursuing the development or commercialization of ourSeparation and Merger, including the potential products.that the Separation and Merger Combination will:
Generally, our success will depend•allow each business to pursue its own operational and strategic priorities and more quickly respond to trends, developments and opportunities in its respective markets;
•create two separate and distinct management teams focused on our abilityeach business’s unique strategic priorities, target markets and corporate development opportunities;
•give each business opportunity and flexibility by pursuing its own investment, capital allocation and growth strategies consistent with its long-term objectives;
•allow investors to separately value each business based on the unique merits, performance and future prospects of each business, providing investors with two distinct investment opportunities;
•enhance the ability of our partnerseach business to obtainattract and maintain patentsretain qualified management and other intellectual property rightsto better align incentive-based compensation with the performance of each separate business; and
•give each of OmniAb and Ligand its own equity currency for our and their potential products. Our patent position is uncertain and involves 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.use in connection with acquisitions.
We permit our partners to list our patents that cover their branded products inmay not achieve the Orange Book. If a third party files an NDA or ANDAanticipated benefits of the Separation and Merger for a generic drug product that relies in whole or in part on studies contained invariety of reasons. Further, such benefits, if ultimately achieved, may be delayed. In addition, the Separation and Merger could materially and adversely affect our partner’s NDA for their branded product, the third party will have the optionbusiness, financial condition and results of operations.
The Separation and Distribution may expose Ligand and OmniAb to certify to the FDA that, in the opinionpotential liabilities arising out 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 ownerstate and the owner of the patents thatfederal fraudulent conveyance laws and legal dividend requirements.
The Separation and Distribution are subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (i) the paragraph IV patent certification notice onceentity transfers assets and does not receive fair consideration or reasonably equivalent value in return; and (ii) the third-party’s NDAentity: (a) is insolvent at the time of the transfer or ANDA is accepted for filingrendered insolvent by the FDA. A lawsuit may then be initiatedtransfer; (b) has unreasonably small capital with which to defend the patents identified in the notice. The filingcarry on its business; or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a patent infringement lawsuit within 45 dayscreditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by OmniAb or Ligand or any of our respective subsidiaries) may bring an action alleging that the Separation or Distribution or any of the receipt of notice ofrelated transactions constituted 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.constructive fraudulent conveyance. If a patent infringement lawsuit is not initiated withincourt accepts these allegations, it could impose a number of remedies, including without limitation, voiding OmniAb’s claims against Ligand, requiring the required 45-day period, the third-party’s NDA or ANDA will not be subjectfuture OmniAb stockholders 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 ofreturn to Ligand some or all of the relevant patent claims. We may fromshares of OmniAb common stock issued in the Distribution, or providing Ligand with a claim for money damages against OmniAb in an amount equal to the difference between the consideration received by Ligand and OmniAb fair market value at the 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 ourDistribution.
partners, without payment to us or our partners, or limit the duration
The measure of insolvency for purposes of the patent protectionfraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, an entity would be considered insolvent if (i) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities); (ii) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (iii) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (iv) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that OmniAb or Ligand or any of our and our partners’ technology and products.subsidiaries were solvent at the time of or after giving effect to the Distribution.
LitigationThe Distribution of OmniAb common stock is also subject to review under state corporate distribution statutes. Under the DGCL, a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or other proceedings(ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Although Ligand intends to enforcemake the Distribution of OmniAb common stock entirely from surplus, we cannot assure you that a court will not later determine that some or defend intellectual property rights are often very complex in nature,all of the Distribution to Ligand stockholders was unlawful.
The announcement of the proposed Separation and Merger could disrupt OmniAb’s relationships with its customers, suppliers, business partners and others, as well as its operating results and business generally.
Risks relating to the impact of the announcement of the Separation and Merger on OmniAb’s business include the following:
•its employees may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that couldexperience uncertainty about their future roles, which might adversely impact ouraffect OmniAb’s ability to preventretain and hire key personnel and other employees;
•customers, suppliers, business partners and other parties with which OmniAb maintains business relationships may experience uncertainty about its future and seek alternative relationships with third parties, from competingseek to alter their business relationships with our partner’s products. Any adverse outcomeOmniAb or fail to extend an existing relationship with OmniAb; and
•OmniAb has expended and will continue to expend significant costs, fees and expenses for professional services and transaction costs in connection with the proposed Separation and Merger.
If any of such litigation or other proceedingsthe aforementioned risks were to materialize, they could result in one or more or our patents being held invalid or unenforceable,lead to significant costs which could adversely affect our ability to successfully execute our business strategy and negativelymay impact our financial condition andthe combined company’s 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-consumingoperations and distractingcash available to our management, which could have a material adverse effect on ourfund its business.
In addition, periodic maintenance fees, renewal fees, annuity feesWe will incur transaction costs in connection with the Separation 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.Merger.
Any conflictsOmniAb has both incurred and expects to incur significant, non-recurring costs in connection with consummating the Separation and Merger and operating as a public company following the consummation of the Separation and Merger. OmniAb may also incur additional costs to retain key employees. Although certain transaction expenses incurred in connection with the patent rights of others could significantly reduceMerger Agreement, including all legal, accounting, consulting, investment banking and other fees, expenses and costs, will be paid by APAC following 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 anyclosing of the foregoing problems could be time-consuming and expensive and could adversely affect our financial position, liquidity and resultsMerger, OmniAb expects some increased operational costs as well.We will also bear all of operations.
The occurrence of a catastrophic disaster could disrupt our business, damage our facilities beyond insurance limits or increase our costs and expenses.
We are 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 cost of obtaining 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 disruptedOmniAb’s expenses if the operations of these manufacturers were affected by a natural or man-made disaster or other business interruption. In addition, we rely on our partners to generate most of our revenues through royalties, Captisol sales and development activities and any disruptions to their business as a result of such disasters could negatively impact our revenues.
Merger is not consummated.
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
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
Exhibit Number | Description of Exhibit | Form | File Number | Date of Filing | Exhibit Number | Filed Herewith |
| Agreement and Plan of Merger, dated as of March, 23, 2022, by and among Avista Public Acquisition Corp. II, Ligand Pharmaceuticals Incorporated, OmniAb, Inc. and Orwell Merger Sub Inc. | 8-K | 001-33093 | March 24, 2022 | 2.1 | |
| Separation and Distribution Agreement, dated as of March 23, 2022, by and among Avista Public Acquisition Corp. II, Ligand Pharmaceuticals Incorporated and OmniAb, Inc. | 8-K | 001-33093 | March 24, 2022 | 2.2 | |
| Sponsor Insider Agreement, dated March 23, 2022, by and among OmniAb, Inc., Avista Public Acquisition Corp. II and the other parties signatory thereto | 8-K | 001-33093 | March 24, 2022 | 2.3 | |
| Amended and Restated Forward Purchase Agreement, dated March 23, 2022, by and among Avista Public Acquisition Corp. II, Avista Acquisition LP II and OmniAb, Inc. | 8-K | 001-33093 | March 24, 2022 | 2.4 | |
| Amended and Restated Certificate of Incorporation of the Company | S-4 | 333-58823 | July 9, 1998 | 3.1 | |
| Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 14, 2000 | 10-K | 0-20720 | March 29, 2001 | 3.5 | |
| Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 30, 2004 | 10-Q | 0-20720 | August 5, 2004 | 3.6 | |
| Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated November 17, 2010 | 8-K | 001-33093 | November 19, 2010 | 3.1 | |
| Certificate of Amendment of the Amended and Restated Certification of Incorporation of the Company, dated June 19, 2018 | S-8 | 333-233130 | August 8, 2019 | 3.6 | |
| Fourth Amended and Restated Bylaws of the Company | 8-K | 001-33093 | October 30, 2020 | 3.1 | |
| Specimen stock certificate for shares of the common stock of the Company | 10-K | 001-33093 | March 1, 2018 | 4.1 | |
| Indenture, dated as of May 22, 2018, between the Company and Wilmington Trust, National Association, as trustee, including the form of 0.75% Convertible Senior Notes due 2023 | 8-K | 001-33093 | May 22, 2018 | 4.1 | |
| 2002 Stock Incentive Plan (As Amended and Restated Effective June 10, 2022) | DEF14A | 001-33093 | April 22, 2022 | Appendix A | |
| 2022 Employment Inducement Plan | | | | | X |
| Form of Stock Option Agreement under the Company’s 2022 Employment Inducement Plan | | | | | X |
| Form of Restricted Stock Unit Award Agreement under the Company’s 2022 Employment Inducement Plan | | | | | X |
| Form of Performance-Based Restricted Stock Unit Award Agreement under the Company’s 2022 Employment Inducement Plan | | | | | X |
| 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. | | | | | X |
| 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. | | | | | X |
| | | | | | |
Exhibit Number | Description | | | | | | | | | | | | |
| 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 2002.32.1** | |
| 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.* | | | | | X |
101 | The following financial information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021,2022, 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.* | | | | | X |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021,2022, formatted in Inline XBRL and contained in Exhibit 101. | | | | | X |
#Indicates management contract or compensatory plan.
* Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. Ligand Pharmaceuticals Incorporated agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
Filed herewith.
** These certifications are deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
Date: | August 3, 20219, 2022 | | By: | /s/ Matthew Korenberg |
| | | | Matthew Korenberg |
| | | | Executive Vice President, Finance and Chief Financial Officer |
| | | | Duly Authorized Officer and Principal Financial Officer |