Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
or
o
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.)
 
 
11119 North Torrey Pines Road, Suite 200
La Jolla, CA
92037
(Zip Code)
(Address of principal executive offices)
 
(858) 550-7500
(Registrant's Telephone Number, Including Area Code)
________________________________________________________________________________________
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer
o
 
Accelerated Filer
x
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 5, 2014, the registrant had 20,780,756 shares of common stock outstanding.


Table of Contents


LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

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





Table of Contents

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
 
June 30,
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
14,537

 
$
11,639

Short-term investments
7,490

 
4,340

Accounts receivable
3,133

 
2,222

Inventory
817

 
1,392

Capitalized IPO expenses, Viking Therapeutics, Inc.
1,094

 

Other current assets
1,123

 
959

Current portion of co-promote termination payments receivable
391

 
4,329

Total current assets
28,585

 
24,881

Restricted cash and investments
1,261

 
1,341

Property and equipment, net
619

 
867

Intangible assets, net
51,911

 
53,099

Goodwill
12,238

 
12,238

Commercial license rights
4,567

 
4,571

Long-term portion of co-promote termination payments receivable
413

 
7,417

Other assets
253

 
299

Total assets
$
99,847

 
$
104,713

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (including $1.4 million related to a VIE, Viking Therapeutics, Inc.)
$
5,059

 
$
3,951

Accrued liabilities
3,241

 
5,337

Current portion of contingent liabilities
2,877

 
1,712

Current portion of deferred income taxes
1,574

 
1,574

Current portion of note payable
2,698

 
9,109

Current portion of co-promote termination liability
391

 
4,329

Current portion of lease exit obligations
2,689

 
2,811

Current portion of deferred revenue
92

 
116

Total current liabilities
18,621

 
28,939

Long-term portion of co-promote termination liability
413

 
7,417

Long-term portion of deferred revenue, net
2,085

 
2,085

Long-term portion of lease exit obligations
1,587

 
3,071

Deferred income taxes
1,104

 
1,098

Long-term portion of contingent liabilities
12,223

 
11,795

Other long-term liabilities
728

 
695

Total liabilities
36,761

 
55,100

Commitments and Contingencies

 

Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 33,333,333 shares authorized; 20,778,526 and 20,468,521 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
21

 
21

Additional paid-in capital
726,758

 
718,017

Accumulated other comprehensive income
5,041

 
2,914

Accumulated deficit
(667,650
)
 
(671,339
)
Total stockholders' equity attributable to parent
64,170

 
49,613

Noncontrolling interests
(1,084
)
 
$

Total liabilities and stockholders' equity
$
99,847

 
$
104,713


See accompanying notes.

3

Table of Contents

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Royalties
$
5,241

 
$
4,916

 
$
13,091

 
$
10,742

Material sales
3,476

 
3,993

 
9,191

 
5,532

Collaborative research and development and other revenues
1,891

 
671

 
4,284

 
4,957

Total revenues
10,608

 
9,580

 
26,566

 
21,231

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,186

 
1,214

 
3,637

 
1,877

Research and development
2,689

 
2,022

 
5,821

 
4,487

General and administrative
5,239

 
4,306

 
10,310

 
8,808

Lease exit and termination costs
136

 
44

 
340

 
132

Write-off of in-process research and development

 
480

 

 
480

Total operating costs and expenses
9,250

 
8,066

 
20,108

 
15,784

Income from operations
1,358

 
1,514

 
6,458

 
5,447

Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net
(181
)
 
(453
)
 
(429
)
 
(1,361
)
(Increase) decrease in contingent liabilities
(1,312
)
 
2,741

 
(3,260
)
 
900

Other, net
1,376

 
2

 
621

 
188

Total other (expense) income, net
(117
)
 
2,290

 
(3,068
)
 
(273
)
Income before income taxes
1,241

 
3,804

 
3,390

 
5,174

Income tax benefit (expense)
47

 
(110
)
 
(6
)
 
(176
)
Income from continuing operations
1,288

 
3,694

 
3,384

 
4,998

Discontinued operations:
 
 
 
 
 
 
 
Gain on sale of Avinza Product Line before income taxes

 
2,397

 

 
2,588

Income from discontinued operations

 
2,397

 

 
2,588

Net income:
1,288

 
6,091

 
3,384

 
7,586

Less: Net loss attributable to noncontrolling interests
(304
)
 

 
(304
)
 

Net income attributable to Ligand common shareholders
$
1,592

 
$
6,091

 
$
3,688

 
$
7,586

 
 
 
 
 
 
 
 
Per share amounts attributable to Ligand common shareholders:
 
 
 
 
 
 
 
Basic per share amounts:
 
 
 
 
 
 
 
Income from continuing operations
$
0.08

 
$
0.18

 
$
0.18

 
$
0.25

Income from discontinued operations

 
0.12

 

 
0.13

Net income
$
0.08

 
$
0.30

 
$
0.18

 
$
0.38

 
 
 
 
 
 
 
 
Diluted per share amounts:
 
 
 
 
 
 
 
Income from continuing operations
$
0.07

 
$
0.18

 
$
0.17

 
$
0.24

Income from discontinued operations

 
0.12

 

 
0.13

Net income
$
0.07

 
$
0.30

 
$
0.17

 
$
0.37

 
 
 
 
 
 
 
 
Weighted-average number of common shares-basic
20,738,299

 
20,258,618

 
20,668,110

 
20,223,634

Weighted-average number of common shares-diluted
21,780,034

 
20,427,360

 
21,776,125

 
20,277,763


See accompanying notes.

4

Table of Contents

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income attributable to Ligand common shareholders
$
1,592

 
$
6,091

 
$
3,688

 
$
7,586

Unrealized net (loss) gain on available-for-sale securities, net of tax of $0
(5,127
)
 
229

 
3,095

 
1,395

Less: Reclassification of net realized gains included in net income
(774
)
 

 
(968
)
 

Comprehensive income (loss) attributable to Ligand common shareholders
$
(4,309
)
 
$
6,320

 
$
5,815

 
$
8,981


See accompanying notes.


5

Table of Contents

LIGAND PHARMACEUTICAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Six months ended
 
June 30,
 
2014
 
2013
Operating activities
 
 
 
Net income including noncontrolling interests
$
3,384

 
$
7,586

Less: gain from discontinued operations

 
2,588

Income from continuing operations
3,384

 
4,998

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
Non-cash change in estimated fair value of contingent liabilities
3,261

 
(900
)
Write-off of in-process research and development

 
480

Realized gain on sale of short-term investment
(968
)
 

Gain on write-off of assets
(16
)
 

Depreciation and amortization
1,337

 
1,339

Stock-based compensation
5,093

 
2,616

Non-cash upfront fee
(1,211
)
 

Deferred income taxes
6

 
176

Accretion of note payable
169

 
225

Other

 
(13
)
Changes in operating assets and liabilities:
 
 
 
     Accounts receivable
(911
)
 
3,890

     Inventory
575

 
429

     Other current assets
(136
)
 
(382
)
     Other long-term assets
(231
)
 
123

     Accounts payable and accrued liabilities
(3,743
)
 
(3,006
)
     Deferred revenue
(24
)
 
(318
)
Net cash provided by operating activities of continuing operations
6,585

 
9,657

Net cash used in operating activities of discontinued operations

 
(642
)
Net cash provided by operating activities
6,585

 
9,015

Investing activities
 
 
 
Purchase of commercial license rights

 
(3,571
)
Payments to CVR holders and former license holders
(1,668
)
 

Proceeds from sale of property and equipment
125

 
3

Proceeds from sale of short-term investments
1,156

 

Other, net
(1
)
 
(158
)
Net cash used in investing activities
(388
)
 
(3,726
)
Financing activities
 
 
 
Repayment of debt
(6,947
)
 
(12,933
)
Net proceeds from stock option exercises
3,648

 
1,186

Net cash used in financing activities
(3,299
)
 
(11,747
)
Net increase (decrease) in cash and cash equivalents
2,898

 
(6,458
)
Cash and cash equivalents at beginning of period
11,639

 
12,381

Cash and cash equivalents at end of period
$
14,537

 
$
5,923

Supplemental disclosure of cash flow information
 
 
 
Interest paid
$
212

 
$
1,245

Taxes paid
$
3

 
$

Supplemental schedule of non-cash activity
 
 
 
Liability for commercial license rights
$

 
$
1,000

Accrued inventory purchases
$

 
$
997

Unrealized gain on AFS investments
$
3,095

 
$
1,395

See accompanying notes.

6

Table of Contents

LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company" or "Ligand") is a biopharmaceutical company that develops and acquires royalty and other revenue generating assets and couples them with a lean corporate cost structure. The Company diversifies its portfolio of assets across numerous technology types, therapeutic areas, drug targets, and industry partners. The Company added Captisol® to its technology portfolio in January 2011. Captisol is a formulation technology that has enabled six FDA approved products, including Onyx's Kyprolis® and Baxter International's Nexterone®, and is currently being developed in a number of clinical-stage partner programs. The Company's therapies address the unmet medical needs of patients for a broad spectrum of diseases including hepatitis, multiple myeloma, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, asthma, Focal Segmental Glomerulosclerosis ("FSGS") and osteoporosis. Ligand has established multiple alliances with the world’s leading pharmaceutical companies including GlaxoSmithKline, Onyx Pharmaceuticals (a subsidiary of Amgen, Inc.), Merck, Pfizer, Baxter International, Lundbeck Inc. and Spectrum Pharmaceuticals, Inc. The Company’s principal market is the United States. The Company sold its Oncology Product Line ("Oncology") and Avinza Product Line ("Avinza") on October 25, 2006 and February 26, 2007, respectively. The operating results for Oncology and Avinza have been presented in the accompanying condensed consolidated financial statements as "Discontinued Operations."
 
The Company has incurred significant losses since its inception. As of June 30, 2014, the Company’s accumulated deficit was approximately $667.7 million and the Company had working capital of approximately $10.0 million. Management believes that cash flows from operations will improve due to Captisol® sales, an increase in royalty revenues driven primarily from continued increases in Promacta® and Kyprolis® sales, and also from anticipated new license and milestone revenues. In the event revenues and operating cash flows are not meeting expectations, management plans to reduce discretionary expenses. It is possible, however, that the Company may be required to seek additional financing. There can be no assurance that additional financing will be available on terms acceptable to management, or at all. Management believes its currently available cash, cash equivalents and short-term investments, as well as its current and future royalty, license and milestone revenues and Captisol material sales will be sufficient to satisfy its anticipated operating and capital requirements through at least the next 12 months. The Company’s future operating and capital requirements will depend on many factors, including, but not limited to: the pace of scientific progress in its research and development programs; the potential success of these programs; the scope and results of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the amount of royalties on sales of the commercial products of its partners; the efforts of its collaborative partners; obligations under its operating lease agreements; costs associated with future acquisitions; and the capital requirements of any companies the Company may acquire in the future. The ability of the Company to achieve its operational targets is dependent upon the Company’s ability to further implement its business goals and generate sufficient operating cash flow.

Principles of Consolidation
    
The accompanying condensed consolidated financial statements include Ligand and its wholly owned subsidiaries, Ligand JVR, Allergan Ligand Retinoid Therapeutics, Seragen, Inc., Pharmacopeia, Inc. ("Pharmacopeia"), Neurogen Corporation ("Neurogen"), CyDex Pharmaceuticals, Inc. ("CyDex"), Metabasis Therapeutics, Inc. ("Metabasis") and Nexus VI, Inc. Also included is Viking Therapeutics, Inc. ("Viking"), a variable interest entity ("VIE") for which the Company is deemed under applicable accounting guidance to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The Company’s accompanying unaudited condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. The Company’s condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company and

7

Table of Contents

its subsidiaries, have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the consolidated financial statements and notes therein included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, contingent assets and liabilities, definite and indefinite lived intangible assets, goodwill, co-promote termination payments receivable and co-promote termination liabilities, uncertain tax positions, deferred revenue, lease exit liability and income tax net operating loss carryforwards during the reporting period. The Company’s critical accounting policies are those that are both most important to the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the condensed consolidated financial statements, actual results may materially vary from these estimates.

Income Per Share

Basic income per share is calculated by dividing net income by the weighted-average number of common shares and vested restricted stock units outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and vested restricted stock units outstanding and the weighted-average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units. Common stock equivalents are only included in the diluted income per share calculation when their effect is dilutive. The total number of potential common shares excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive was 0.4 million and 1.1 million, as of June 30, 2014 and 2013, respectively.


8

Table of Contents

The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
EPS attributable to Ligand common shareholders:
 
 
 
 
 
 
 
Net income from continuing operations
$
1,592

 
$
3,694

 
3,688

 
$
4,998

Net income from discontinued operations

 
2,397

 

 
2,588

Net income
$
1,592

 
$
6,091

 
$
3,688

 
$
7,586

 
 
 
 
 
 
 
 
Shares used to compute basic income per share
20,738,299

 
20,258,618

 
20,668,110

 
20,223,634

Dilutive potential common shares:
 
 
 
 
 
 
 
Restricted stock
29,029

 
46,391

 
44,815

 
35,864

     Stock options
1,012,706

 
122,351

 
1,063,200

 
18,265

Shares used to compute diluted income per share
21,780,034

 
20,427,360

 
21,776,125

 
20,277,763

 
 
 
 
 
 
 
 
Basic per share amounts:
 
 
 
 
 
 
 
Income from continuing operations
$
0.08

 
$
0.18

 
$
0.18

 
$
0.25

Income from discontinued operations

 
0.12

 

 
0.13

Net income
$
0.08

 
$
0.30

 
$
0.18

 
$
0.38

 
 
 
 
 
 
 
 
Diluted per share amounts:
 
 
 
 
 
 
 
Income from continuing operations
$
0.07

 
$
0.18

 
$
0.17

 
$
0.24

Income from discontinued operations

 
0.12

 

 
0.13

Net income
$
0.07

 
$
0.30

 
$
0.17

 
$
0.37



9

Table of Contents

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid securities with maturities at the date of acquisition of three months or less. Securities received by the Company as a result of a milestone payment from licensees are considered short-term investments and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included in the statement of comprehensive income. The Company determines the cost of investments based on the specific identification method.
Restricted Cash and Investments
    
Restricted cash and investments consist of certificates of deposit held with a financial institution as collateral under a facility lease and third-party service provider arrangements.

The following table summarizes the various investment categories at June 30, 2014 and December 31, 2013 (in thousands):

 
Cost
 
Gross unrealized
gains
 
Gross unrealized
losses
 
Estimated
fair value
June 30, 2014
 
 
 
 
 
 
 
Short-term investments
$
2,449

 
$
5,079

 
$
(38
)
 
$
7,490

Certificates of deposit-restricted
1,261

 

 

 
1,261

 
$
3,710

 
$
5,079

 
$
(38
)
 
$
8,751

December 31, 2013
 
 
 
 
 
 
 
Short-term investments
$
1,426

 
$
2,914

 
$

 
$
4,340

Certificates of deposit-restricted
1,341

 

 

 
1,341

 
$
2,767

 
$
2,914

 
$

 
$
5,681


Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, investments and accounts receivable.

The Company invests its excess cash principally in U.S. government debt securities, investment-grade corporate debt securities and certificates of deposit. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company did not experience any significant losses on its cash equivalents, short-term investments or restricted investments for the periods ending June 30, 2014 and December 31, 2013.

As of June 30, 2014 and December 31, 2013, cash deposits held at financial institutions in excess of FDIC insured amounts of $250,000 were approximately $13.9 million and $11.1 million, respectively.

Accounts receivable from one customer was 92% of total accounts receivable at June 30, 2014, the majority of which has been received. Accounts receivable from two customers was 75% of total accounts receivable at December 31, 2013

The Company currently obtains Captisol from a single supplier.  If this supplier were not able to supply the requested amounts of Captisol and the existing inventory was depleted, the Company would be unable to continue to derive revenues from the sale of Captisol until it obtained an alternative source, which might take a considerable length of time. The Company maintains inventory of Captisol, which has a five year shelf life, at three geographically spread storage locations in the United States and Europe.  If disasters were to strike one or all three of these locations, it could lead to supply interruptions.

Inventory

Inventory is stated at the lower of cost or market value. The Company determines cost using the first-in, first-out method. The Company analyzes its inventory levels periodically and writes down inventory to its 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, 2014 and 2013.

10

Table of Contents


Property and Equipment

Property and equipment is stated at cost and consists of the following (in thousands):

 
June 30,
 
December 31,
 
2014
 
2013
Lab and office equipment
$
2,509

 
$
3,737

Leasehold improvements
273

 
387

Computer equipment and software
631

 
616

 
3,413

 
4,740

Less accumulated depreciation and amortization
(2,794
)
 
(3,873
)
     Total property and equipment, net
$
619

 
$
867


Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Depreciation expense recognized for each of the three and six months ended June 30, 2014 and the three months ended June 30, 2013 was $0.1 million. Depreciation expense for the six months ended June 30, 2013 was $0.2 million. Depreciation expense is included in operating expenses.

Other Current Assets

Other current assets consist of the following (in thousands):

 
June 30,
 
December 31,
 
2014
 
2013
Prepaid expenses
$
745

 
$
786

Other receivables
378

 
173

     Total current assets
$
1,123

 
$
959


Goodwill and Other Identifiable Intangible Assets

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

 
June 30,
 
December 31,
 
2014
 
2013
Indefinite lived intangible assets
 
 
 
     Acquired in-process research and development
$
12,556

 
$
12,556

     Goodwill
12,238

 
12,238

Definite lived intangible assets
 
 
 
     Complete technology
15,267

 
15,267

          Less: Accumulated amortization
(2,617
)
 
(2,235
)
     Trade name
2,642

 
2,642

          Less: Accumulated amortization
(454
)
 
(387
)
     Customer relationships
29,600

 
29,600

          Less: Accumulated amortization
(5,083
)
 
(4,344
)
Total goodwill and other identifiable intangible assets, net
$
64,149

 
$
65,337


The Company accounts for goodwill and other intangible assets in accordance with Accounting Standards Codification ("ASC") Topic 350 - Intangibles - Goodwill and Other which, among other things, establishes standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and certain non-

11

Table of Contents

amortizing intangibles to be evaluated for impairment on an annual basis. The Company uses the income approach and the market approach, each weighted at 50%, when performing its goodwill impairment analysis. For the income approach, the Company considers the present value of future cash flows and the carrying value of its assets and liabilities, including goodwill. The market approach is based on an analysis of revenue multiples of peer public companies. If the carrying value of the assets and liabilities, including goodwill, were to exceed the Company’s estimation of the fair value, the Company would record an impairment charge in an amount equal to the excess of the carrying value of goodwill over the implied fair value of the goodwill. The Company performs an evaluation of goodwill and other intangibles as of December 31 of each year, absent any indicators of earlier impairment, to ensure that impairment charges, if applicable, are reflected in the Company's financial results before December 31 of each year. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill and other intangible asset balances are included in the identifiable assets of the business segment to which they have been assigned. Any goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the respective business segments' operating income.

Amortization of definite-lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of 20 years. Amortization expense of $0.6 million and $1.2 million was recognized for each of the three and six months ended June 30, 2014 and 2013, respectively. Estimated amortization expense for the years ending December 31, 2014 through 2018 is $2.4 million per year.
Acquired In-Process Research and Development
    
Intangible assets related to acquired in-process research and development ("IPR&D") are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered to be indefinite-lived, they will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed definite-lived and would then be amortized based on their respective estimated useful lives at that point in time. For the three and six months ended June 30, 2014 there was no impairment of IPR&D. For the three and six months ended June 30, 2013, the Company recorded a non-cash impairment charge of $0.5 million for the write-off of IPR&D for Captisol-enabled Clopidogrel (MDCO-157). The asset was impaired upon notification from the Medicines Company that they intended to terminate the license agreement and return the rights of the compound to the Company. MDCO-157 is an intravenous option of the anti-platelet medication designed for situations where the administration of oral platelet inhibitors is not feasible or desirable.

Impairment of Long-Lived Assets
    
Management reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value for the Company’s long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved. As of June 30, 2014, management does not believe there have been any events or circumstances indicating that the carrying amount of its long-lived assets may not be recoverable.

Commercial license rights
    
Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired in accordance with the Royalty Stream and Milestone Payments Purchase Agreement entered into with Selexis SA ("Selexis") in April 2013.  The portfolio consists of over 15 Selexis commercial license agreement programs with various pharmaceutical-company counterparties.  The purchase price was $4.6 million, inclusive of acquisition costs. The Company paid $3.6 million upon closing and paid an additional $1.0 million in April 2014. Individual commercial license rights acquired under the agreement are carried at allocated cost and approximate fair value. The carrying value of the license rights will be reduced on a pro-rata basis as revenue is realized over the term of the agreement. Declines in the fair value of individual license rights below their carrying value that are deemed to be other than temporary are reflected in earnings in the period such determination is made. As of June 30, 2014, management does not believe there have been any events or circumstances indicating that the carrying amount of its commercial license rights may not be recoverable.

12

Table of Contents


Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 
June 30,
 
December 31,
 
2014
 
2013
Compensation
$
1,123

 
$
1,929

Professional fees
279

 
697

Other
1,839

 
2,711

     Total accrued liabilities
$
3,241

 
$
5,337


Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

 
June 30,
 
December 31,
 
2014
 
2013
Deposits
$
385

 
$
345

Deferred rent
343

 
350

     Total other long-term liabilities
$
728

 
$
695

Contingent Liabilities
    
In connection with the Company’s acquisition of CyDex in January 2011, the Company recorded a $17.6 million contingent liability, inclusive of the $4.3 million payment made in January 2012, for amounts potentially due to holders of the CyDex contingent value rights ("CVRs") and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales. Any change in fair value is recorded in the Company’s consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid under the CVR agreements may be materially different than the carrying amount of the liability. The fair value of the liability at June 30, 2014 and December 31, 2013 was $10.4 million and $9.3 million, respectively. The Company recorded a fair-value adjustment to increase the liability for CyDex-related contingent liabilities by $3.2 million and $2.7 million for the three and six months ended June 30, 2014, respectively, and an adjustment to decrease the liability by $5.2 million and $3.3 million for the three and six months ended June 30, 2013, respectively. There was a revenue-sharing payment of $1.6 million made during the six months ended June 30, 2014, and no revenue sharing payments were made during the three months ended June 30, 2014 and three and six months ended June 30, 2013.
    
In connection with the Company’s acquisition of Metabasis in January 2010, the Company issued to Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs will entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by the Company from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement. Changes in the fair values are reported in the statement of operations as income (decreases) or expense (increases). 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. The fair value of the liability was estimated to be $4.7 million and $4.2 million as of June 30, 2014 and December 31, 2013, respectively. The Company recorded a decrease in the liability for Metabasis-related CVRs of $1.9 million and an increase in the liability of $0.5 million for the three and six months ended June 30, 2014, respectively. The Company recorded an increase in the liability of $2.4 million for each of the three and six months ended June 30, 2013.

Fair Value of Financial Instruments
Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset

13

Table of Contents

or liability. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Quoted prices in active markets;
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly; and
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.
The Company’s short-term investments include investments in equity securities which were received by the Company as a result of event-based and upfront payments from licensees. Additionally, there is a liability related to the investment in equity securities for amounts owed to former license holders. The Metabasis CVR liability is marked-to-market at each reporting period based upon the quoted market prices of the underlying CVR. The fair value of the CyDex contingent liabilities are determined at each reporting period based upon an income valuation model. The co-promote termination payments receivable represents a non-interest-bearing receivable for future payments to be made by Pfizer related to Avinza product sales and is recorded at its fair value. The receivable and liability will remain equal, and are adjusted each quarter for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales.
The Company evaluates its financial instruments at each reporting period to determine if any transfers between the various three-level hierarchy have occurred and appropriately reclassifies its financial instruments to the appropriate level within the hierarchy.
Treasury Stock
The Company may on occasion repurchase its common stock on the open market or in private transactions. When such stock is repurchased it is not constructively or formally retired and may be reissued if certain regulatory requirements are met; however, the Company may from time to time choose to retire the shares of common stock held in its treasury. The purchase price of the common stock repurchased is charged to treasury stock. During the year ended December 31, 2013, the Company retired 1,118,222 shares of its common stock held in treasury.
Revenue Recognition

Royalties on sales of products commercialized by the Company’s partners are recognized in the quarter reported by the respective partner. Generally, the Company receives royalty reports from its licensees approximately one quarter in arrears due to the fact that its agreements require partners to report product sales between 30 and 60 days after the end of the quarter. The Company recognizes royalty revenues when it can reliably estimate such amounts and collectability is reasonably assured. Under this accounting policy, the royalty revenues reported are not based upon estimates and such royalty revenues are typically reported to the Company by its partners in the same period in which payment is received.
Revenue from material sales of Captisol is recognized upon transfer of title, which normally passes upon shipment to the customer. The Company’s credit and exchange policy includes provisions for the return of product between 30 to 90 days, depending on the specific terms of the individual agreement, when that product (1) does not meet specifications, (2) is damaged in shipment (in limited circumstances where title does not transfer until delivery), or (3) is exchanged for an alternative grade of Captisol.
Nonrefundable, upfront license fees are recognized as revenue upon delivery of the license, if the license is determined to have standalone value that is not dependent on any future performance by the Company under the applicable collaboration agreement. Nonrefundable contingent event-based payments are recognized as revenue when the contingent event is met, which is usually the earlier of when payments are received or collections are assured, provided that it does not require future performance by the Company. The Company occasionally has sub-license obligations related to arrangements for which it receives license fees, milestones and royalties. The Company evaluates the determination of gross versus net reporting based on each individual agreement.
Sales-based contingent payments from partners are accounted for similarly to royalties, with revenue recognized upon achievement of the sales targets assuming all other revenue recognition criteria for milestones are met. Revenue from development and regulatory milestones is recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive, its achievability was not reasonably assured at the inception of the agreement, and the Company has no further performance obligations relating to that event, and (ii) collectability is reasonably assured. If these criteria are not met, the milestone payment is recognized over the remaining period of the Company’s performance obligations under the arrangement.
The Company analyzes its revenue arrangements and other agreements to determine whether there are multiple elements that should be separated and accounted for individually or as a single unit of accounting. For multiple element

14

Table of Contents

contracts, arrangement consideration is allocated at the inception of the arrangement to all deliverables on the basis of relative selling price, using a hierarchy to determine selling price. Management first considers vendor-specific objective evidence ("VSOE"), then third-party evidence ("TPE") and if neither VSOE nor TPE exist, the Company uses its best estimate of selling price.
Many of the Company's revenue arrangements involve the bundling of a license with the option to purchase manufactured product. Licenses are granted to pharmaceutical companies for the use of Captisol in the development of pharmaceutical compounds. The licenses may be granted for the use of the Captisol product for all phases of clinical trials and through commercial availability of the host drug or may be limited to certain phases of the clinical trial process. Management believes that its licenses have stand-alone value at the outset of an arrangement because the customer obtains the right to use Captisol in its formulations without any additional input by the Company.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based on the best estimate of the amount of probable losses in the Company’s existing accounts receivable. Accounts receivable that are outstanding longer than their contractual payment terms, ranging from 30 to 90 days, are considered past due. When determining the allowance for doubtful accounts, several factors are taken into consideration, including historical write-off experience and review of specific customer accounts for collectability. Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for recovery is considered remote. There was no allowance for doubtful accounts included in the balance sheets at June 30, 2014 and December 31, 2013.

Accounting for Stock-Based Compensation

Stock-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. Compensation cost for consultant awards is recognized over each separate tranche’s vesting period. The following table summarizes stock-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,
 
2014
 
2013
 
2014
 
2013
Stock-based compensation expense as a component of:
 
 
 
 
 
 
 
Research and development expenses
$
956

 
$
448

 
$
1,645

 
$
834

General and administrative expenses
2,071

 
1,044

 
3,448

 
1,782

 
$
3,027

 
$
1,492

 
$
5,093

 
$
2,616


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,
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
1.9%
 
1.4%
 
1.9%
 
1.3%
Dividend yield
 
 
 
Expected volatility
67%
 
69%
 
69%
 
69%
Expected term
6.4
 
6.3
 
6.4
 
6.3
Forfeiture rate
8.6%
 
8.4%
 
8.6%-9.7%
 
8.4%-9.8%

The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant. The expected term of the employee and non-employee director options is the estimated weighted-average period until exercise or cancellation of vested options (forfeited unvested options are not considered) based on historical experience. The expected term for consultant awards is the remaining period to contractual expiration. Volatility is a measure of the expected amount of variability in the stock price over the expected life of an option expressed as a standard deviation. In making this assumption, the Company used the

15

Table of Contents

historical volatility of the Company’s stock price over a period equal to the expected term. The forfeiture rate is based on historical data at the time of the grant.
Preclinical Study and Clinical Trial Accruals
    
Substantial portions of the Company’s preclinical studies and all of the Company's clinical trials have been performed by third-party laboratories, contract research organizations, or other vendors (collectively "CROs"). Some CROs bill monthly for services performed, while others bill based upon milestone achievement. The Company accrues for each of the agreements it has with CROs on a monthly basis. For preclinical studies, accruals are estimated based upon the percentage of work completed and the contract milestones achieved. For clinical studies, accruals are estimated based upon a percentage of work completed, the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to it by the CROs, correspondence with the CROs and clinical site visits. The Company's estimates are dependent upon the timelines and accuracy of the data provided by its CROs regarding the status of each program and total program spending. The Company periodically evaluates its estimates to determine if adjustments are necessary or appropriate based on information it receives concerning changing circumstances, and conditions or events that may affect such estimates. No material adjustments to preclinical study and clinical trial accrued expenses have been recognized to date.

Sale of Royalty Rights
    
The Company previously sold to third parties the rights to future royalties of certain of its products. As part of the underlying royalty agreements, the partners have the right to offset a portion of any future royalty payments owed to the Company to the extent of previous milestone payments. Accordingly, the Company deferred a portion of the revenue associated with each tranche of royalty right sold, equal to the pro-rata share of the potential royalty offset. Such amounts associated with the offset rights against future royalty payments will be recognized as revenue upon receipt of future royalties from the respective partners. As of June 30, 2014 there was no deferred revenue remaining related to the sale of royalty rights. As of December 31, 2013, the Company had deferred $0.1 million of revenue related to the sale of royalty rights.
Product Returns
    
In connection with the sale of the Avinza and Oncology product lines, the Company retained the obligation for returns of product that were shipped to wholesalers prior to the close of the transactions. The accruals for product returns, which were recorded as part of the accounting for the sales transactions, are based on historical experience. Any subsequent changes to the Company’s estimate of product returns are accounted for as a component of discontinued operations.

Milestone Payments
In May 2014, the Company entered into a licensing agreement and research collaboration with Omthera Pharmaceuticals. The research collaboration will target the development of novel products that utilize the proprietary Ligand-developed LTP TECHNOLOGY™ to improve lipid-lowering activity of certain omega-3 fatty acids. The Company is eligible to receive development, regulatory, and event-based payments, of which the Company determined a $1.0 million payment upon completion of a proof of concept under the development program represents a milestone under the milestone method of accounting as (1) it is an event that can only be achieved in part on the Company's past performance, (2) there is substantive uncertainty at the date the arrangement was entered into that the event will be achieved and (3) it results in additional payment being due to us. None of the other event-based payments represents a milestone under the milestone method of accounting. No event based payment or milestone was achieved during the periods presented.

Cost of Goods Sold

The Company determines cost using the first-in, first-out method. Cost of goods sold include all costs of purchase and other costs incurred in bringing the inventories to their present location and condition, including costs to store and distribute.

16

Table of Contents

Research and Development
    
Collaborative research and development expense consists of labor, material, equipment and allocated facility costs of the Company’s scientific staff who are working pursuant to the Company’s collaborative agreements. From time to time, collaborative research and development expense includes costs related to research efforts in excess of those required under certain collaborative agreements. Management has the discretion to set the scope of such excess efforts and may increase or decrease the level of such efforts depending on the Company’s strategic priorities.
Proprietary research and development expense consists of intellectual property in-licensing costs, labor, materials, contracted services, and allocated facility costs that are incurred in connection with internally funded drug discovery and development programs.

Income Taxes

                Income taxes are accounted for under the liability method.  This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the consolidated financial statements.  A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit or if future deductibility is uncertain.  As of June 30, 2014, the Company had provided a full valuation allowance against its deferred tax assets as recoverability was uncertain.  Developing the provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets.  The Company's judgments and tax strategies are subject to audit by various taxing authorities.  While management believes the Company has provided adequately for its income tax liabilities in its consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the Company's consolidated financial condition and results of operations. 

The Company's ending deferred tax liability represents a future tax obligation for current tax amortization claimed on acquired IPR&D.  As the Company cannot estimate when the IPR&D assets will be amortizable for financial reporting purposes, the deferred tax liability associated with the IPR&D assets cannot be used to support the realization of the Company's deferred tax assets.  As a result, the Company is required to increase its valuation allowance and record a charge to deferred taxes.  

Discontinued Operations-Oncology Product Line
    
In September 2006, the Company and Eisai Inc. and Eisai Co., Ltd. (collectively "Eisai"), entered into a purchase agreement, ("the Oncology Purchase Agreement"), pursuant to which Eisai agreed to acquire all of the Company's worldwide rights in and to its oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and to assume certain liabilities as set forth in the Oncology Purchase Agreement. The Oncology product line included the Company's four marketed oncology drugs: Ontak, Targretin capsules, Targretin gel and Panretin gel.
    
Discontinued Operations-Avinza Product Line
    
In September 2006, the Company and King Pharmaceuticals, now a subsidiary of Pfizer, entered into a purchase agreement ("the Avinza Purchase Agreement"), pursuant to which Pfizer acquired all of the rights in and to Avinza in the United States, its territories and Canada, including, among other things, all Avinza inventory, records and related intellectual property, and to assume certain liabilities as set forth in the Avinza Purchase Agreement.

Pursuant to the terms of the Avinza Purchase Agreement, the Company retained the liability for returns of product from wholesalers that had been sold by the Company prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of Avinza, the Company recorded a reserve for Avinza product returns.

During the three and six months ended June 30, 2014 the Company did not recognize any gain or loss on the sale of the Avinza product line. The Company recognized a pre-tax gain of $2.4 million and $2.6 million for the three and six months ended June 30, 2013, due to subsequent changes in certain estimates and liabilities recorded as of the sale date.
Segment Reporting
    
Under ASC 280, Segment Reporting ("ASC 280"), operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity’s chief operating decision maker,

17

Table of Contents

in deciding how to allocate resources and in assessing performance. The Company has evaluated this codification and has identified two reportable segments: the development and commercialization of drugs using Captisol technology by CyDex and the biopharmaceutical company with a business model that is based upon the concept of developing or acquiring royalty revenue generating assets and coupling them with a lean corporate cost structure.
Comprehensive Income
    
Comprehensive income represents net income adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net income. The unrealized gains or losses are reported on the consolidated statements of comprehensive income.

Consolidation of Variable Interest Entities

The Company identifies an entity as a VIE if either: (1) the entity does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the entity's equity investors lack the essential characteristics of a controlling financial interest. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in any VIE and therefore is the primary beneficiary. If the Company is the primary beneficiary of a VIE, it must consolidate the VIE under applicable accounting guidance. The Company determined it holds a variable interest in Viking Therapeutics, Inc. ("Viking") based on management's assessment that it does not have sufficient resources to carry out its principal activities without the support of the Company. The Company's variable interests in Viking are a loan provided by the Company to Viking and a license agreement executed concurrently. As of June 30, 2014, total assets include $2.0 million and total liabilities include $3.1 million related to Viking. Viking's consolidated assets are owned by Viking, and Viking's consolidated liabilities are without recourse against Ligand.
New Accounting Pronouncements
    
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. Implementing ASU 2013-02 did not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this ASU are effective for the Company for fiscal years, and interim periods within those years, beginning after January 1, 2014. The Company's adoption of this standard did not materially affect the consolidated financial statements.

In July, 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU 2013-11 is effective for the Company for interim and annual periods beginning after December 15, 2013. The Company's adoption of this standard did not materially affect the consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and modifies the related disclosure requirements. Under the new guidance, only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be reported as discontinued operations. ASU 2014-08 also removes the requirement that an entity not have any significant continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a discontinued operation. The guidance is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted for any disposal transaction not previously reported. Management does not believe the adoption of this guidance will have a material impact on the Company's consolidated financial statements.

In May, 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The revenue standard’s

18

Table of Contents

core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Management is currently evaluating the effect the adoption of this standard will have on its financial statements.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update will be effective for the Company as of January 1, 2016. Earlier adoption is permitted. Entities may apply the amendments in this update either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. Management is currently assessing the impact of this update, and believes that its adoption on January 1, 2016 will not have a material impact on its consolidated financial statements.


2. Financial Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income, equity securities, co-promote termination payments receivable and the related liability, and contingent liabilities.
The fair value of the Company’s investments which were classified as short-term investments as of June 30, 2014 and December 31, 2013 is determined using quoted market prices in active markets. These securities were received by the Company in December 2012 and June 2014 as a result of an event-based payment and an upfront license payment, respectively, under licensees. Additionally, the liability for CVRs for Metabasis are determined using quoted market prices in active markets. The co-promote termination payments receivable represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding future Avinza product sales. The receivable and liability will remain equal, and are adjusted each reporting period for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales. The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach using a Monte Carlo analysis. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders and CVR holders. Changes in these assumptions can materially affect the fair value estimate.


19

Table of Contents

The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 (in thousands):

Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Current portion of co-promote termination payments receivable
$
391

 
$

 
$

 
$
391

Available-for-sale securities
7,490

 
7,490

 

 

Restricted cash and investments
1,261

 

 
1,261

 

Long-term portion of co-promote termination payments receivable
413

 

 

 
413

     Total assets
$
9,555

 
$
7,490

 
$
1,261

 
$
804

Liabilities:
 
 
 
 
 
 
 
Current portion of contingent liabilities-CyDex
$
2,877

 
$

 
$

 
$
2,877

Current portion of co-promote termination liability
391

 

 

 
391

Long-term portion of contingent liabilities-Metabasis
4,724

 
4,724

 

 

Long-term portion of contingent liabilities-CyDex
7,498

 

 

 
7,498

Liability for short-term investments owed to former licensees
1,078

 
1,078

 

 

Long-term portion of co-promote termination liability
413

 

 

 
413

     Total liabilities
$
16,981

 
$
5,802

 
$

 
$
11,179


The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Current portion of co-promote termination payments receivable
$
4,329

 
$

 
$

 
$
4,329

Available-for-sale securities
4,340

 
4,340

 

 

Restricted cash and investments
1,341

 

 
1,341

 

Long-term portion of co-promote termination payments receivable
7,417

 

 

 
7,417

     Total assets
$
17,427

 
$
4,340

 
$
1,341

 
$
11,746

Liabilities:
 
 
 
 
 
 
 
Current portion of contingent liabilities-CyDex
$
1,712

 
$

 
$

 
$
1,712

Current portion of co-promote termination liability
4,329

 

 

 
4,329

Long-term portion of contingent liabilities-Metabasis
4,196

 
4,196

 

 

Long-term portion of contingent liabilities-CyDex
7,599

 

 

 
7,599

Liability for short-term investments owed to former licensees
651

 
651

 

 

Long-term portion of co-promote termination liability
7,417

 

 

 
7,417

     Total liabilities
$
25,904

 
$
4,847

 
$

 
$
21,057




20

Table of Contents


The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:

 
June 30, 2014
 
December 31, 2013
Range of annual revenue subject to revenue sharing (1)
$13.1 million-$18.9 million
 
$4.2 million-$19.8 million
Revenue volatility
25%
 
25%
Average of probability of commercialization
79.3%
 
67.6%
Sales beta
0.60
 
0.60
Credit rating
BBB
 
BBB
Equity risk premium
6%
 
6%
(1)
Revenue subject to revenue sharing represent management’s estimate of the range of total annual revenue subject to revenue sharing (i.e. annual revenues in excess of $15 million) through December 31, 2016, which is the term of the CVR agreement.

A reconciliation of the level 3 financial instruments as of June 30, 2014 is as follows (in thousands):

Assets:
 
Fair value of level 3 financial instrument assets as of December 31, 2013
$
11,746

Assumed payments made by Pfizer or assignee
(631
)
Fair value adjustments to co-promote termination liability
(10,311
)
Fair value of level 3 financial instrument assets as of June 30, 2014
$
804

 
 
Liabilities:
 
Fair value of level 3 financial instrument liabilities as of December 31, 2013
$
21,057

Assumed payments made by Pfizer or assignee
(631
)
Payments to CVR and other former license holders
(1,668
)
Fair value adjustments to contingent liabilities
2,732

Fair value adjustments to co-promote termination liability
(10,311
)
Fair value of level 3 financial instrument liabilities as of June 30, 2014
$
11,179


3. Variable Interest Entities

The Company determined it holds a variable interest in Viking based on management's assessment that it does not have sufficient resources to carry out its principal activities without the support of the Company. The Company's variable interests in Viking are a loan provided by the Company to Viking and a license agreement executed concurrently. Additionally, the Company has a shared services and sublease agreement with Viking. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE and therefore required to consolidate the investment. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of its partner, voting rights, involvement in day-to-day operating decisions, representation on Viking's executive committee, and level of economics between the Company and Viking.

In May 2014, the Company entered into a Master License Agreement ("License Agreement") to license the rights to five programs to Viking, an unrelated clinical-stage biopharmaceutical company focused on the development of novel therapies for metabolic and endocrine disorders. As part of this transaction, the Company extended a $2.5 million convertible loan facility to Viking that can be used to pay Viking’s operating and financing-related expenses. Under the terms of the convertible loan facility, the principal amount outstanding accrues interest at a fixed rate equal to the lesser of 5% and the maximum interest rate permitted by law. The loan is due and payable in May 2016, unless the loans are converted into equity prior to such time. Upon the earlier to occur of an Initial Public Offering ("IPO") or qualified financing event, the Company may elect to be repaid in equity equal to 200% of the accrued principal and interest or require Viking to pay in cash an amount equal to 200% of the accrued principal and interest. The Company funded $1.3 million towards the convertible loan facility for both the three and six months ended June 30, 2014.

21

Table of Contents


The debt conversion feature embedded in the loan is accounted for under ASC Topic 815 Derivatives and Hedging. The valuation of the bifurcated debt conversion feature was performed using Level 3 inputs, requiring Viking to make assumptions about the probability of the occurrence of an IPO or qualified financing and the loan being converted based on the applicable conversion terms.

As partial consideration for the grant of the rights and licenses under the License Agreement, in the event Viking consummates an IPO or other qualified financing event with a minimum raise of $45.0 million, Viking will issue to the Company a certain amount of equity. At the closing of an IPO a number of shares of common stock having an aggregate value of $29.0 million will be issued to the Company, subject to adjustment in certain circumstances. In the event Viking consummates a private financing prior to an IPO, the Company has the option to receive a number of shares of the same class and type of securities issued in the private financing having an aggregate value of $29.0 million, subject to adjustment in certain circumstances. The Company has the right to terminate the License Agreement on or before April 30, 2015 if Viking has neither completed an IPO or received aggregate net proceeds of at least $20.0 million in one or more private financings. The Company also has the right to terminate the License Agreement in the event of insolvency or bankruptcy of Viking. On July 1, 2014, Viking filed an initial Form S-1 with the Securities and Exchange Commission for an IPO. As of the date of this report, the filed Form S-1 has not been declared effective. As of June 30, 2014, no amounts have been recorded for the potential receipt of equity related to a financing transaction in accordance with authoritative guidance.

The following table represents the consolidated assets and liabilities, which are owned by and are obligations of Viking and are with no recourse to the Company, as of June 30, 2014 (in thousands):

 
June 30, 2014
Cash and cash equivalents
$
891

Other current assets
28

Capitalized IPO expenses
1,094

     Total current assets
$
2,013

 
 
Other assets
1

     Total assets
$
2,014

 
 
Accounts payable
$
1,416

Accrued liabilities
52

Current portion of notes payable
345

     Total current liabilities
$
1,813

 
 
Long-term portion of notes payable
1,285

     Total liabilities
$
3,098


The Company has recorded 100% of the losses incurred since May 21, 2014, the effective date of the transaction, as net loss attributable to noncontrolling interest due to the fact that it is considered a primary beneficiary with no equity interest in the VIE. The advances under the loan agreement are included as notes payable by Viking and are eliminated in consolidation.


4. Avinza Co-Promotion

In 2003, the Company and Organon Pharmaceuticals USA Inc. (Organon) entered into an agreement for the co-promotion of Avinza. Subsequently in 2006, the Company signed an agreement with Organon that terminated the Avinza co-promotion agreement between the two companies and returned Avinza co-promotion rights to the Company. In consideration of the early termination, the Company agreed to make quarterly royalty payments to Organon equal to 6.5% of Avinza net sales through December 31, 2012 and thereafter equal to 6.0% of Avinza net sales through patent expiration, currently anticipated to be November 2017.


22

Table of Contents

In January 2006, the Company and King Pharmaceuticals, now a subsidiary of Pfizer, entered into an agreement pursuant to which Pfizer acquired all of the Company’s rights in and to Avinza. Pfizer also assumed the Company’s co-promote termination obligation to make royalty payments to Organon based on net sales of Avinza. In connection with Pfizer's assumption of this obligation, Organon did not consent to the legal assignment of the co-promote termination obligation to Pfizer. Accordingly, the Company remains liable to Organon in the event of Pfizer's default of the obligation. Therefore, the Company recorded an asset as of February 26, 2007 to recognize Pfizer's assumption of the obligation, while continuing to carry the co-promote termination liability in the Company's consolidated financial statements to recognize the Company’s legal obligation as primary obligor to Organon. This asset represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The receivable and liability will remain equal, and are adjusted each reporting period for changes in the fair value of the obligation including for any changes in the estimate of future net Avinza product sales. This receivable will be assessed on a quarterly basis or when a triggering event occurs for impairment (e.g. in the event Pfizer defaults on the assumed obligation to pay Organon).

On a quarterly basis, management reviews the carrying value of the co-promote termination liability. In February 2014, Actavis launched a generic form of Avinza which resulted in a significant decrease in estimates of future net sales used to value the co-promote termination asset and liability. Due to assumptions and judgments inherent in determining the estimates of future net Avinza sales through November 2017, the actual amount of net Avinza sales used to determine the current fair value of the Company’s co-promote termination asset and liability may be materially different from current estimates.

A summary of the co-promote termination liability as of June 30, 2014 is as follows (in thousands):

Net present value of payments based on estimated future net Avinza product sales as of December 31, 2013
$
11,746

Assumed payments made by Pfizer or assignee
(631
)
Fair value adjustments
(10,311
)
Total co-promote termination liability as of June 30, 2014
804

Less: current portion of co-promote termination liability as of June 30, 2014
391

Long-term portion of co-promote termination liability as of June 30, 2014
$
413



23

Table of Contents

5. Lease Obligations

The Company leases office and laboratory facilities in California, Kansas and New Jersey. These leases expire between 2014 and 2019, some of which are subject to annual rent increases which range from 3.0% to 3.5%. The Company currently subleases office and laboratory space in California and New Jersey. The following table provides a summary of operating lease obligations and payments expected to be received from sublease agreements as of June 30, 2014 (in thousands):

Operating lease obligations:
 
Lease
Termination
Date
 
Less than 1
year
 
1-3 years
 
3-5 years
 
More than
5 years
 
Total
Corporate headquarters-
San Diego, CA
 
July 2019
 
$
673

 
$
1,399

 
$
1,474

 
$

 
$
3,546

Bioscience and Technology Business Center-
Lawrence, KS
 
December 2017
 
55

 
108

 
27

 

 
190

Vacated office and research facility-San Diego, CA
 
July 2015
 
2,273

 
190

 

 

 
2,463

Vacated office and research facility-
Cranbury, NJ
 
August 2016
 
2,563

 
3,050

 

 

 
5,613

Total operating lease obligations
 
 
 
$
5,564

 
$
4,747

 
$
1,501

 
$

 
$
11,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Sublease payments expected to be received:
 
 
 
Less than 1
year
 
1-3 years
 
3-5 years
 
More than
5 years
 
Total
Office and research facility-
San Diego, CA
 
July 2015
 
$
919

 
$
78

 
$

 
$

 
$
997

Office and research facility-
Cranbury, NJ
 
August 2014 and 2016
 
480

 
566

 

 

 
1,046

Net operating lease obligations
 
 
 
$
4,165

 
$
4,103

 
$
1,501

 
$

 
$
9,769


In 2010, the Company ceased use of its facility located in New Jersey. As a result, the Company recorded lease exit costs of $9.7 million for costs related to the difference between the remaining lease obligations of the abandoned operating leases, which run through August 2016, and management's estimate of potential future sublease income, discounted to present value. In addition, the Company wrote-off property and equipment with a net book value of approximately $5.4 million related to the facility closure.

As of June 30, 2014 and December 31, 2013, the Company had lease exit obligations of $4.3 million and $5.9 million, respectively. For the three and six months ended June 30, 2014, the Company made cash payments, net of sublease payments received of $0.9 million and $1.8 million, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of $0.1 million and $0.2 million for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, the Company made cash payments, net of sublease payments received of $0.9 million and $1.9 million, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of $44,000 and $0.1 million for the three and six months ended June 30, 2013, respectively.
Total rent expense under all office leases for each of the three and six months ended June 30, 2014 and 2013 was $0.2 million and $0.4 million, respectively. The Company recognizes rent expense on a straight-line basis. Deferred rent at June 30, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively, and is included in other long-term liabilities.

6. Segment Reporting
The Company evaluates performance based on the operating income (loss) of the respective business segments. The segment results may not represent actual results that would be expected if they were independent, stand-alone businesses. Segment information is as follows (in thousands):

24

Table of Contents

Balance Sheet Data:
As of June 30, 2014
 
Ligand
 
CyDex
 
Total
Total assets
$
32,577

 
$
67,270

 
$
99,847

 
 
 
 
 
 
 
As of December 31, 2013
 
Ligand
 
CyDex
 
Total
Total assets
$
38,408

 
$
66,305

 
$
104,713

 
 
 
 
 
 
Operating Data:
For the three months ended June 30, 2014
 
Ligand
 
CyDex
 
Total
Net revenues from external customers
$
5,692

 
$
4,916

 
$
10,608

Depreciation and amortization expense
68

 
601

 
669

Operating (loss) income
(867
)
 
2,225

 
1,358

Interest expense, net
181

 

 
181

Income tax expense from continuing operations
45

 
2

 
47

 
 
 
 
 
 
 
For the three months ended June 30, 2013
 
Ligand
 
CyDex
 
Total
Net revenues from external customers
3,820

 
5,760

 
$
9,580

Depreciation and amortization expense
59

 
610

 
$
669

Write-off of in-process research and development

 
480

 
$
480

Operating (loss) income
(1,200
)
 
2,714

 
$
1,514

Interest expense, net
453

 

 
$
453

Income tax expense (benefit) from continuing operations
(145
)
 
35

 
$
(110
)
Gain on sale of Avinza Product Line before income taxes
2,397

 

 
$
2,397

 
 
 
 
 
 
 
For the six months ended June 30, 2014
 
Ligand
 
CyDex
 
Total
Net revenues from external customers
12,483

 
$
14,083

 
$
26,566

Depreciation and amortization expense
134

 
1,203

 
1,337

Operating (loss) income
(938
)
 
7,396

 
6,458

Interest expense, net
429

 

 
429

Income tax expense from continuing operations
6

 

 
6

 
 
 
 
 
 
 
For the six months ended June 30, 2013
 
Ligand
 
CyDex
 
Total
Net revenues from external customers
$
10,057

 
$
11,174

 
$
21,231

Depreciation and amortization expense
117

 
1,222

 
1,339

Write-off of in-process research and development

 
480

 
480

Operating income
198

 
5,249

 
5,447

Interest expense, net
1,361

 

 
1,361

Income tax expense (benefit) from continuing operations
(205
)
 
29

 
(176
)
Gain on sale of Avinza Product Line before income taxes
2,588

 

 
2,588



25

Table of Contents

7. Financing Arrangements

The Company has a secured term loan credit facility ("secured debt"). Under the terms of the secured debt, the Company made interest-only payments through February 2013. Subsequent to the interest-only payments, the note amortized with principal and interest payments through the remaining term of the loan. Additionally, the Company made an additional final payment equal to 6% of the total amount borrowed which was due at maturity and was accreted over the life of the loan. The maturity date of the loan was August 1, 2014, and the Company fully repaid the loan as of July 31, 2014.

In March 2013, the Company prepaid $7.0 million of the secured term loan credit facility. Additionally, the Company paid a prepayment fee of 1% of the prepayment amount, or $0.1 million and a prorated final-payment fee of 6% of the final payment, or $0.4 million.

The carrying values and the fixed contractual coupon rates of the Company's financing arrangements as of June 30, 2014 and December 31, 2013 were as follows (in thousands):

 
June 30, 2014
 
December 31, 2013
Convertible notes payable, Viking Therapeutics, Inc.
$
345

 
$

Current portion notes payable, 8.64%, due August 1, 2014
1,716

 
6,642

Current portion notes payable, 8.9012%, due August 1, 2014
637

 
2,467

Total current portion of notes payable
$
2,698

 
$
9,109


8. Stockholders’ Equity

The Company grants options and awards to employees, non-employee consultants, and non-employee directors. Only new shares of common stock are issued upon the exercise of stock options. Non-employee directors are accounted for as employees. Options and restricted stock granted to certain directors vest in equal monthly installments over the one-year period following the date of grant. Options granted to employees vest 1/8 on the six month anniversary of the date of grant, and 1/48 each month thereafter for 42 months. Option awards generally expire ten years from the date of grant.

Stock Option Activity

The following is a summary of the Company’s stock option plan activity and related information:

 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-Average
Remaining
Contractual Term in
Years
 
Aggregate
Intrinsic Value
(In thousands)
Balance as of December 31, 2013
1,746,709

 
$
16.79

 
7.6
 
$
62,705

Granted
366,184

 
73.81

 
 
 
 
Exercised
(233,929
)
 
15.72

 
 
 
 
Forfeited
(49,967
)
 
16.69

 
 
 
 
Cancelled
(3,814
)
 
84.38

 
 
 
 
Balance as of June 30, 2014
1,825,183

 
28.23

 
7.7
 
$
66,386

Exercisable as of June 30, 2014
945,222

 
16.30

 
6.8
 
$
43,474

Options vested and expected to vest as of June 30, 2014
1,825,183

 
28.23

 
7.7
 
$
66,386


The weighted-average grant date fair value of all stock options granted during the six months ended June 30, 2014 was $47.44 per share. The total intrinsic value of all options exercised during the six months ended June 30, 2014 and 2013 was approximately $13.7 million and $0.8 million, respectively. As of June 30, 2014, there was $17.5 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2.5 years.


26

Table of Contents

Net cash received from options exercised during the six months ended June 30, 2014 and 2013 was approximately $3.6 million and $1.1 million, respectively. There is no current tax benefit related to options exercised because of net operating losses for which a full valuation allowance has been established.

As of June 30, 2014, 1.1 million shares were available for future option grants or direct issuance under the Company's 2002 Stock Incentive Plan, as amended.

Restricted Stock Activity

Restricted stock activity for the six months ended June 30, 2014 was as follows:

 
Shares
 
Weighted-
Average Grant
Date Fair Value
Nonvested at December 31, 2013
115,386

 
$
21.93

Granted
41,671

 
72.50

Vested
(74,079
)
 
25.24

Cancelled
(3,972
)
 
18.42

Nonvested at June 30, 2014
79,006

 
$
45.68


Restricted stock awards generally vest over three years. As of June 30, 2014, there was $2.7 million of total unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan, as amended and restated (the "Amended ESPP") allows participants to purchase up to 1,250 shares of Ligand common stock during each offering period, but in no event may a participant purchase more than 1,250 shares of common stock during any calendar year. The length of each offering period is six months, and employees are eligible to participate in the first offering period beginning after their hire date.

The Amended ESPP allows employees to purchase Ligand common stock at the end of each six month period at a price equal to 85% of the lesser of fair market value on either the start date of the period or the last trading day of the period (the "Lookback Provision"). The 15% discount and the Lookback Provision make the Amended ESPP compensatory.  There were 2,230 and 5,016 shares of common stock issued under the amended ESPP during the six months ended June 30, 2014 and 2013, respectively. The Company recorded compensation expense related to the ESPP of $30,627 and $26,000 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, 77,285 shares were available for future purchases under the Amended ESPP.

Public Offerings

During the three and six months ended June 30, 2014 and 2013, the Company did not issue any common shares pursuant to its at-the-market equity issuance plan.
Corporate Share Repurchases
On May 8, 2013, the Company's Board of Directors authorized the Company to repurchase up to $5.0 million of its common stock for a period of up to one year. The Company did not repurchase any common shares pursuant to the repurchase program.
On July 17, 2014, the Company's Board of Directors authorized the Company to repurchase up to $10.0 million of its common stock from time to time in privately negotiated and open market transactions for a period of up to one year, subject to the Company's evaluation of market conditions, applicable legal requirements and other factors.


27

Table of Contents


9. Litigation

The Company records 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, the Company records the minimum estimated liability related to the claim in accordance with ASC Topic 450-Contingencies. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. Revisions in the Company's estimates of potential liability could materially impact its results of operations.

Securities Litigation
On June 8, 2012, a federal securities class action and shareholder derivative lawsuit was filed in the Eastern District of Pennsylvania against Genaera Corporation and its officers, directors, major shareholders and trustee ("Genaera Defendants") for allegedly breaching their fiduciary duties to Genaera shareholders.  The lawsuit also names the Company and its Chief Executive Officer John Higgins as additional defendants for allegedly aiding and abetting the Genaera Defendants' various breaches of fiduciary duties based on the Company's purchase of a licensing interest in a development-stage pharmaceutical drug program from the Genaera Liquidating Trust in May 2010 and the Company's subsequent sale of half of its interest in the transaction to Biotechnology Value Fund, Inc.
Following an amendment to the complaint and a round of motions to dismiss, the court dismissed the amended complaint with prejudice on August 12, 2013.  Plaintiff appealed that dismissal on September 10, 2013.  Briefing is now complete, and the parties are awaiting the scheduling of oral argument before the Third Circuit, which management anticipates will take place in the next few months.  Management believes it is very likely to prevail on appeal, and, for that reason, believes the litigation presents a remote likelihood of material loss.
 
Other Litigation
On June 19, 2014, a complaint seeking attorneys’ fees in connection with claims related to executive compensation matters described in the Company’s June 6, 2013 supplemental proxy materials was filed in California Superior Court.  Management believes the fees demanded by plaintiffs’ counsel are excessive and intends to defend itself vigorously in the litigation.  Due to the complex nature of the legal and factual issues involved, however, the outcome of this matter is not presently determinable.

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, our Promacta, Kyprolis, and other product royalty revenues, product returns, and product development. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Promacta, 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, or litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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

References to “Ligand Pharmaceuticals Incorporated,” “Ligand,” the “Company,” “we” or ”our” include our wholly owned subsidiaries: Ligand JVR, Allergan Ligand Retinoid Therapeutics, Seragen, Inc., Pharmacopeia, Inc., or Pharmacopeia, Neurogen Corporation, or Nuerogen, CyDex Pharmaceuticals, Inc., or CyDex, Metabasis Therapeutics, Inc., or Metabasis, and Nexus VI, Inc.

28

Table of Contents


Overview
    
We are a biotechnology company that develops and acquires revenue generating assets and coupling them with a lean corporate cost structure. Our goal is to create a sustainably profitable business and generate meaningful value for our stockholders. Since a portion of our business model is based on the goal of partnering with other pharmaceutical companies to commercialize and market our assets, a significant amount of our revenue is based largely on payments made to us by partners for royalties, milestones, event-based payments, and license fees. We recognized the important role of the drug reformulation segment in the pharmaceutical industry and in 2011 added Captisol® to our technology portfolio. Captisol is a formulation technology that has enabled seven FDA approved products, including Onyx's Kyprolis® and Baxter International's Nexterone® and is currently being developed in a number of clinical-stage partner programs. In comparison to our peers, we believe we have assembled one of the largest and most diversified asset portfolios in the industry with the potential to generate significant revenue in the future. The therapies in our development portfolio address the unmet medical needs of patients for a broad spectrum of diseases including hepatitis, multiple myeloma, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, epilepsy, FSGS and osteoporosis. We have established multiple alliances with the world’s leading pharmaceutical companies including GlaxoSmithKline, Onyx Pharmaceuticals (a subsidiary of Amgen, Inc.), Merck, Pfizer, Baxter International, Lundbeck Inc., Eli Lilly and Co., and Spectrum Pharmaceuticals, Inc.

Highlights from the first six months of 2014 include:

We received a $1.0 million commercial sales-based contingent payment from Onyx. The payment was triggered by the achievement of over $250 million of annual product sales of Kyprolis in 2013.
We received a $1.0 million event-based payment as a result of the recent FDA approval of Merck’s NOXAFIL® which is a new Captisol-enabled formulation of NOXAFIL for intravenous (IV) use. We will also generate revenue from Captisol material sales to Merck for this product under a commercial supply agreement.
Our partner Lundbeck LLC announced that the FDA accepted for review a New Drug Application ("NDA") for its investigational therapy intravenous carbamazepine, an intravenous formulation of the anti-epileptic drug carbamazepine. With acceptance of the NDA filing, we earned a $0.2 million event-based payment.
We completed the dosing of the last patient in its Glucagon Receptor Agonist Phase 1 Single Ascending Dose (SAD) clinical trial.
We received an event-based payment of $0.2 million in connection with an amendment to our license agreement with Sage Therapeutics, Inc. for the additional of a new subfield.
We received a $0.1 million project development fee as a result of entering into a licensing agreement and research collaboration with Omthera Pharmaceuticals. The research collaboration will target the development of novel products that utilize the proprietary Ligand-developed LTP TECHNOLOGY™ to improve lipid-lowering activity of certain omega-3 fatty acids. Under the terms of the agreement, we will be eligible to receive payments of up to $44.5 million upon the achievement of specific events, as well as tiered royalties ranging from mid to high single digits of net sales.
We entered into a master license agreement with Viking covering the following five programs: FBPase inhibitor program for type 2 diabetes, a Selective Androgen Receptor Modulator (SARM) program for muscle wasting, a Thyroid Hormone Receptor-ß (TRß) Agonist program for dyslipidemia, an Erythropoietin Receptor (EPOR) Agonist program for anemia, and an Enterocyte-Directed Diacylglycerol Acyltransferase-1 (DGAT-1) Inhibitor program for dyslipidemia. The FBPase Inhibitor program was the subject of an option originally granted to Viking in 2012. As part of the transaction, we agreed to extend a $2.5 million convertible loan facility to Viking that will be used to pay Viking's operating and financing-related expenses.
We received 125,000 upfront shares of common stock in its partner TG Therapeutics, Inc., as a result of entering into a license agreement. The shares were initially valued at $1.2 million.


Results of Operations

Three and six months ended June 30, 2014 and 2013
Total revenues for the three and six months ended June 30, 2014 were $10.6 million and $26.6 million, respectively, compared to $9.6 million and $21.2 million, respectively, for the same periods in 2013. We reported income from continuing

29

Table of Contents

operations of $1.3 million and $3.4 million for the three and six months ended June 30, 2014, respectively, compared to $3.7 million and $5.0 million, respectively, for the same periods in 2013.

Royalty Revenue
Royalty revenues were $5.2 million and $13.1 million for the three and six months ended June 30, 2014, respectively, compared to $4.9 million and $10.7 million, respectively, for the same periods in 2013. The increase in royalty revenue is primarily due to an increase in Promacta and Kyprolis royalties, partially offset by a decline in Avinza royalties as a result of generic competition entering the market in February 2014.

Material Sales
We recorded material sales of $3.5 million and $9.2 million for the three and six months ended June 30, 2014, respectively, compared to $4.0 million and $5.5 million, respectively, for the same periods in 2013. The decrease in material sales for the three months ended June 30, 2014 and the increase in material sales for the six months ended June 30, 2014 is due to timing of customer purchases.

Collaborative Research and Development and Other Revenues
We recorded collaborative research and development and other revenues of $1.9 million and $4.3 million for the three and six months ended June 30, 2014, respectively, compared to $0.7 million and $5.0 million, respectively, for the same periods in 2013. The increase of $1.2 million for the three months ended June 30, 2014 is primarily due to an upfront license payment of $1.2 million received in the second quarter of 2014. The decrease of $0.7 million for the six months ended June 30, 2014 is due to timing of event-based payments and upfront license fees earned.

Cost of Sales
Cost of sales were $1.2 million and $3.6 million for the three and six months ended June 30, 2014, respectively, compared to $1.2 million and $1.9 million, respectively, for the same periods in 2013. The increase of $1.7 million for the six months ended June 30, 2014 is primarily due to an increase in material sales.

Research and Development Expenses
Research and development expenses were $2.7 million and $5.8 million for the three and six months ended June 30, 2014, respectively, compared to $2.0 million and $4.5 million, respectively, for the same periods in 2013. The increase of $0.7 million and $1.3 million for the three and six months ended June 30, 2014, respectively, is primarily due to an increase in stock-based compensation expense.

As summarized in the table below, we are developing several proprietary products for a variety of indications. Our programs are not limited to the following, but are representative of a range of future licensing opportunities to expand our partnered asset portfolio.

Program
 
Disease/Indication
 
Development
Phase
 
 
 
 
 
Glucagon Receptor Antagonist
 
Diabetes
 
Phase I
HepDirect™
 
Liver Diseases
 
Preclinical
Oral Human Granulocyte Colony Stimulating Factor
 
Neutropenia
 
Preclinical
LTP Technology Platform
 
Metabolic and Cardiovascular Disease
 
Preclinical
Captisol-enabled Lamotrigine
 
Epilepsy
 
Preclinical

We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of complex research, our inability to predict the results of clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMA, our inability to predict the decisions of our collaborative partners, our ability to fund research and development programs, competition from other entities of which we may become aware in future periods, predictions of market potential from products that may be derived from our research and development efforts, and our ability to recruit and retain personnel or third-party research organizations with the necessary knowledge and skills to perform certain research. Refer to “Item 1A. Risk Factors” for additional discussion of the uncertainties surrounding our research and development initiatives.

30

Table of Contents


General and Administrative Expenses
General and administrative expenses were $5.2 million and $10.3 million for the three and six months ended June 30, 2014, respectively, compared to $4.3 million and $8.8 million, respectively, for the same periods in 2013. The increase of $0.9 million and $1.5 million for three and six months ended June 30, 2014, respectively, is primarily due to an increase in stock-based compensation expense.

Lease Exit and Termination Costs
In September 2010, we ceased use of our facility located in Cranbury, New Jersey. As a result, during the three months ended September 30, 2010, we recorded lease exit costs of $9.7 million for costs related to the difference between the remaining lease obligations of the abandoned operating leases, which run through August 2016, and management’s estimate of potential future sublease income, discounted to present value. Actual future sublease income may differ materially from our estimate, which would result in us recording additional expense or reductions in expense. In addition, we wrote-off approximately $5.4 million of property and equipment related to the facility closure and recorded approximately $1.8 million of severance related costs. Lease exit and termination costs were $0.1 million and $0.3 million for the three and six months ended June 30, 2014, respectively, compared to $44,000 and $0.1 million, respectively for the same periods in 2013. The increase for the three and six months ended June 30, 2014 is primarily due to changes in sublease assumptions.

Interest Expense, net
Interest expense was $0.2 million and $0.4 million for the three and six months ended June 30, 2014, respectively, compared to $0.5 million and $1.4 million, respectively, for the same periods in 2013. The decrease in interest expense of $0.3 million and $1.0 million for the three and six months ended June 30, 2014, respectively, is due to a lower principal balance due to the $7.0 million payoff in March 2013 as well as principal amortization.

(Increase) decrease in Contingent Liabilities
We recorded an increase in contingent liabilities of $1.3 million and $3.3 million for the three and six months ended June 30, 2014, respectively, compared to a decrease of $2.7 million and $0.9 million for the same periods in 2013. The increase for the three months ended June 30, 2014 primarily relates to an increase in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition of $3.2 million and is partially offset by a decrease of $1.9 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The increase for the six months ended June 30, 2014 primarily relates to an increase of $2.7 million in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition and an increase of $0.5 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The decrease for the three months ended June 30, 2013 relates to a decrease of $5.2 million in the liability for amounts potentially due to holders of CVRs and former license holders associated with our CyDex acquisition primarily due to a decrease in amounts potentially due to CyDex CVR holders and former license holders related to Captisol-enabled Clopidogrel. The Medicines Company notified us of the termination of development of Captisol-enabled IV clopidogrel and the return of the rights to the compound to us. The decrease was partially offset by an increase of $2.4 million in amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The decrease for the six months ended June 30, 2013 is primarily due to a decrease of $3.3 million in amounts potentially due to CyDex CVR holders and former license holders related to Captisol-enabled Clopidogrel, and is partially offset by an increase of $2.4 million in Metabasis CVRs.

Income Tax Expense
We recorded an income tax benefit from continuing operations of $47,000 and income tax expense of $6,000 for the three and six months ended June 30, 2014, respectively, compared to income tax expense from continuing operations of $0.1 million and $0.2 million, respectively for the three and six months ended June 30, 2013. Our estimated annual effective rate of 2.09% is primarily attributable to deferred taxes associated with the amortization of acquired IPR&D assets for tax purposes. 

Discontinued Operations

Avinza Product Line
In September 2006, we and King Pharmaceuticals, now a subsidiary of Pfizer, entered into a purchase agreement, or the Avinza Purchase Agreement, pursuant to which Pfizer acquired all of our rights in and to Avinza in the United States, its territories and Canada, including, among other things, all Avinza inventory, records and related intellectual property, and assume certain liabilities as set forth in the Avinza Purchase Agreement.

31

Table of Contents


Pursuant to the terms of the Avinza Purchase Agreement, we retained the liability for returns of product from wholesalers that had been sold by us prior to the close of this transaction. Accordingly, as part of the accounting for the gain on the sale of Avinza, we recorded a reserve for Avinza product returns.

During the three and six months ended June 30, 2014, there were no pre-tax gains or losses recognized on the sale of the Avinza product line due to subsequent changes in certain estimates and liabilities recorded as of the sale date. During the three and six months ended June 30, 2013, we recognized pre-tax gains of $2.4 million and $2.6 million, respectively, as a result of subsequent changes in certain estimates and liabilities recorded as of the sale date.

Liquidity and Capital Resources

We have financed our operations through offerings of our equity securities, borrowings from long-term debt, issuance of convertible notes, product sales and the subsequent sales of our commercial assets, royalties, collaborative research and development and other revenues, and capital and operating lease transactions.

We have incurred significant losses since inception. At June 30, 2014, our accumulated deficit was $667.7 million and we had working capital of $10.0 million. We believe that cash flows from operations will improve due to Captisol sales, an increase in royalty revenues driven primarily from continued increases in Promacta and Kyprolis sales, recent product approvals and regulatory developments, as well as revenues from new licenses and event-based payments. In the event revenues and operating cash flows do not meet expectations, management plans to reduce discretionary expenses. However, it is possible that we may be required to seek additional financing. There can be no assurance that additional financing will be available on terms acceptable to management, or at all. We believe our available cash, cash equivalents and short-term investments as well as our current and future royalty, license and milestone revenues will be sufficient to satisfy our anticipated operating and capital requirements through at least the next 12 months. We expect to build cash in future months as we continue to generate significant cash flows from operations and have fully repaid our loan with Oxford Financial Group as of July 31, 2014. Our future operating and capital requirements will depend on many factors, including, but not limited to: the pace of scientific progress in our research and development programs; the potential success of these programs; the scope and results of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the amount of royalties on sales of the commercial products of our partners; the efforts of our collaborative partners; obligations under our operating lease agreements; and the capital requirements of any companies we acquire, including Pharmacopeia, Neurogen, Metabasis and CyDex. We believe that the actions presently being taken will generate sufficient operating cash flow for us to continue as a going concern. While we believe in the viability of our strategy to generate sufficient operating cash flow and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to achieve our operational targets is dependent upon our ability to further implement our business plan and generate sufficient operating cash flow.

In January 2011, we entered into a $20.0 million secured term loan credit facility with Oxford Financial Group. The loan was amended in January 2012 to increase the secured credit facility to $27.5 million. The original $20.0 million borrowed under the facility bore interest at a fixed rate of 8.6%. The additional $7.5 million bore interest at a fixed rate of 8.9%. Under the terms of the secured debt, we made interest-only payments through February 2013. Subsequent to the interest-only payments, the note amortized with principal and interest payments through the remaining term of the loan. We were required to make an additional final payment equal to 6% of the total amount borrowed at maturity, which was accreted over the life of the loan. The maturity date of the term loan was August 1, 2014, and we fully repaid the loan as of July 31, 2014.

In March 2013, we prepaid $7.0 million of the secured term loan credit facility. Additionally, we paid a prepayment fee of 1% of the prepayment amount, or $0.1 million, and a prorated final-payment fee of 6% of the final payment, or $0.4 million. As of June 30, 2014, the remaining principal balance of the note was $2.4 million.

In October 2013, we filed a universal shelf registration statement with the Securities and Exchange Commission, or the SEC, that was automatically declared effective due to our status as a well-known seasoned issuer. This registration statement provides additional financial flexibility for us to sell shares of common stock or other equity or debt securities as needed at any time, including through our at-the-market equity issuance program. During the three and six months ended June 30, 2014, we did not issue any common shares through this at-the-market equity issuance program.

32

Table of Contents


Operating Activities

Operating activities generated cash of $6.6 million for the six months ended June 30, 2014, compared to $9.0 million for the same period in 2013.

The cash generated for the six months ended June 30, 2014 reflects net income of $3.4 million, adjusted by $7.7 million of non-cash items to reconcile net income to net cash generated from operations. These reconciling items primarily reflect an increase in the estimated fair value of contingent liabilities of $3.3 million, depreciation and amortization of $1.3 million, stock-based compensation of $5.1 million, and accretion of notes payable of $0.2 million, partially offset by a non-cash upfront fee received of $1.2 million and a realized gain on investments of $1.0 million. The cash generated during the six months ended June 30, 2014 is further impacted by changes in operating assets and liabilities due primarily to an increase in accounts receivable of $0.9 million, a decrease in other current assets of $0.1 million, a decrease in other long-term assets of $0.2 million and a decrease in accounts payable and accrued liabilities of $3.7 million, partially offset by an increase in inventory of $0.6 million.

The cash generated for the six months ended June 30, 2013 reflects net income of $7.6 million, adjusted by $2.6 million of gain from discontinued operations and $3.9 million of non-cash items to reconcile the net income to net cash generated in operations. These reconciling items primarily reflect depreciation and amortization of $1.3 million, stock-based compensation of $2.6 million, the non-cash change in the estimated fair value of contingent liabilities of $0.9 million, the change in deferred income taxes of $0.2 million and accretion of note payable of $0.2 million. The cash generated during the six months ended June 30, 2013 is further impacted by changes in operating assets and liabilities due primarily to a decrease in accounts receivable of $3.9 million, a decrease in inventory of $0.4 million, and a decrease in other long term assets of $0.1 million, partially offset by increases in other current assets of $0.4 million and decreases in accounts payable and accrued liabilities of $2.6 million, other liabilities of $0.4 million, and a decrease in deferred revenue of $0.3 million. Cash used in operating activities of discontinued operations was $0.6 million for the six months ended June 30, 2013.

Investing Activities

Investing activities used cash of $0.4 million for the six months ended June 30, 2014, compared to $3.7 million for the same period in 2013.

Cash used by investing activities during the six months ended June 30, 2014 primarily reflects payments to CVR holders of $1.7 million, partially offset by proceeds from short-term investments of $1.2 million and proceeds from the sale of equipment of $0.1 million.

Cash used by investing activities during the six months ended June 30, 2013 primarily reflects the purchase of
commercial license rights of $3.6 million.

Financing Activities

Financing activities used cash of $3.3 million for the six months ended June 30, 2014, compared to $11.7 million for the same period in 2013.

Cash used by financing activities for the six months ended June 30, 2014 primarily reflects $6.9 million of repayment of debt, partially offset by proceeds from stock option exercises and our employee stock purchase plan of $3.6 million.
    
Cash used by financing activities for the six months ended June 30, 2013 primarily reflects $12.9 million of repayment
of debt, partially offset by proceeds from stock option exercises and the employee stock purchase plan of $1.2 million.

Other

In connection with the acquisition of Metabasis in January 2010, Metabasis security holders received CVRs under four CVR agreements. The CVRs entitle the holders to cash payments upon the sale or licensing of certain assets and upon the achievement of specified milestones. The fair value of the liability at June 30, 2014 was $4.7 million, and as of December 31, 2013 was $4.2 million.


33

Table of Contents

In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. In 2011, $0.9 million was paid to the CyDex shareholders upon completion of a licensing agreement with the Medicines Company for the Captisol-enabled Intravenous formulation of Clopidogrel. An additional $2.0 million was paid to the CyDex shareholders upon acceptance by the FDA of Onyx’s NDA, $4.3 million was paid in January 2012 under the terms of the agreement, and an additional $3.5 million was paid upon approval by the FDA of Kyprolis for the potential treatment of patients with relapsed and refractory multiple myeloma. We recorded a cash payment of $0.1 million for the Topiramate orphan drug designation milestone to former license holders. We may be required to make additional payments upon achievement of certain clinical and regulatory milestones to the CyDex shareholders and former license holders. In addition, we will pay CyDex shareholders, for each respective year from 2014 through 2016, 20% of all CyDex-related revenue, but only to the extent that, and beginning only when, CyDex-related revenue for such year exceed $15.0 million; plus an additional 10% of all CyDex-related revenue recognized during such year, but only to the extent that, and beginning only when aggregate CyDex-related revenue for such year exceeds $35.0 million. We have paid $2.8 million to the CyDex shareholders for revenue sharing payments under the terms of the CVR agreement. The estimated fair value of the contingent liabilities recorded as part of the CyDex acquisition at June 30, 2014 was $10.4 million.

Leases and Off-Balance Sheet Arrangements

We lease our office and research facilities under operating lease arrangements with varying terms through November 2021. Some of our agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases ranging from 3.0% to 3.5%. We also sublease a portion of our facilities through August 2016. The sublease agreement provides for a 3% increase in annual rents. We had no off-balance sheet arrangements at June 30, 2014 and December 31, 2013.

Contractual Obligations and Off-Balance Sheet Arrangements

As of June 30, 2014, future minimum payments due under our contractual obligations were as follows (in thousands):

 
Payments Due by Period
 
Total
 
Less than 1 year
 
2-3 years
 
4-5 years
 
More than 5
years
Obligations for uncertain tax positions (1)
$

 
$

 
$

 
$

 
$

Co-promote termination obligations (2)
$
804

 
$
391

 
$
351

 
$
62

 
$

Purchase obligations (3)
$
8,495

 
$
8,495

 
$

 
$

 
$

Contingent liabilities (4)
$

 
$

 
$

 
$

 
$

Note and interest payment obligations
$
2,354

 
$
2,354

 
$

 
$

 
$

Operating lease obligations (5)
$
11,812

 
$
5,564

 
$
4,747

 
$
1,501

 
$


(1)
Expected payments related to obligations for uncertain tax positions cannot be reasonably estimated.
(2)
Co-promote termination obligations represent our legal obligation as primary obligor to Organon due to the fact that Organon did not consent to the legal assignment of the co-promote termination obligation to Pfizer. The liability is offset by an asset which represents a non-interest bearing receivable for future payments to be made by Pfizer.
(3)
Purchase obligations represent our commitments under our supply agreement with Hovione, LLC for Captisol purchases.
(4)
Contingent liabilities to former shareholders and licenseholders are subjective and affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones and affect amounts owed to former license holders and CVR holders. Only payments due as a result of achievement of revenue thresholds or development and regulatory milestones are included in the table above.