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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q/A
Amendment No. 1
________________________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016
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.)
 
 
3911 Sorrento Valley Boulevard, Suite 110 San Diego, CA
92121
(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
x
 
Accelerated Filer
o
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 November 1, 2016, the registrant had 20,900,189 shares of common stock outstanding.


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EXPLANATORY NOTE

Ligand Pharmaceuticals Incorporated (“the Company”) is filing this Amendment on Form 10-Q/A (“Amended Form 10-Q”) to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (the “Original Form 10-Q”), which was originally filed with the Securities and Exchange Commission (“SEC”) on August 4, 2016 (the “Original Filing Date”), to restate the Company’s consolidated financial statements for the quarter ended June 30, 2016.
    
The Company is filing this Amended Form 10-Q to amend Item 1 (Financial Statements), Item 1A (Risk Factors), Item 4 (Controls and Procedures) of Part I and Item 6 (Exhibits) of Part II to correct errors relating to the Company's net operating loss (NOL) carryforward benefits in the United States which resulted in an overstatement of deferred tax assets (DTA) at June 30, 2016 and December 31, 2015.  In connection with three acquisitions that were completed prior to February 2010, the Company recognized DTAs for a portion of the NOLs, which included capitalized research and development expenses, obtained from the acquired businesses. From the time of the acquisitions until September 2015, there was a full valuation allowance against all of the Company’s NOLs, including those obtained from the entities acquired. In September 2015, the Company concluded that it was more likely than not that a substantial portion of it deferred tax assets would be realized through future taxable income. As a result, the Company released the majority of its DTA valuation allowance in full, including $27.5 million related to NOLs recognized as part of the businesses acquired prior to February of 2010.

During the quarter ended September 30, 2016, the Company concluded that for accounting purposes the approximately $27.5 million of DTAs that were obtained upon acquiring the businesses prior to February of 2010 did not meet the more likely-than-not criterion for recognition in 2015 and that the related valuation allowance should not have been reversed. In reviewing its prior-year accounting as part of the 2016 third quarter close process, the Company re-evaluated its accounting for income taxes with the assistance of additional third-party tax professionals and determined that the Company's income tax benefit and net income for the year ended December 31, 2015 were overstated by $27.5 million each as were the Company's DTAs at June 30, 2016.

The Company also recorded adjustments to the consolidated financial statements as part of this restatement relating to the classification of our 2019 Convertible Senior Notes. As of December 31, 2015, the Company's last reported sale price exceeded the 130% threshold described in Note 6 - "Financing Arrangements" and accordingly the 2019 Convertible Senior Notes have been reclassified as a current liability as of December 31, 2015. As a result, the related unamortized discount of $39.6 million previously classified within stockholder’s equity was reclassified as temporary equity component of currently redeemable convertible notes on our Consolidated Balance Sheet.

    In connection with the restatement, we also corrected an immaterial error related to stock-based compensation in the amount of $0.4 million for the three and six month period ended June 30, 2016.

The following adjustments have been made to the June 30, 2016 and December 31, 2015 amounts that were included in the Original Form 10-Q and are reflected in the balances included in this Amended Form 10-Q herein:
    
Decrease in deferred tax assets by $27.5 million as of June 30, 2016 and December 31, 2015
Increase in accumulated deficit by $27.5 million as of June 30, 2016 and December 31, 2015    
Increase to current 2019 convertible senior notes, net and decrease to non-current 2019 convertible senior notes, net by $202.0 million as of December 31, 2015
Increase in temporary equity component of currently redeemable convertible notes by $34.7 million and $39.6 million as of June 30, 2016 and December 31, 2015, respectively
Decrease to additional paid-in capital by $34.7 million and $39.6 million as of June 30, 2016 and December 31, 2015, respectively.
Increase in research and development expense by $0.4 million for the three and six month periods ended June 30, 2016.
Increase in accumulated deficit by $0.4 million as of June 30, 2016.

The above mentioned errors and adjustments had no impact on the Company's cash flows for the six-months ended June 30, 2016.

This Amended Form 10-Q has not modified or updated the information in the Original Form 10-Q, except as necessary to reflect the effects of the restatement, which took into consideration subsequent information about conditions that existed at June 30, 2016. This Amended Form 10-Q continues to speak as of the dates described herein, and the disclosures contained in the Original Form 10-Q do not reflect any events that occurred subsequent to the Original Filing Date.

Information not affected by the restatement is unchanged and reflects the disclosures made as of the Original Filing Date. In particular, forward-looking statements included in this Amended Form 10-Q that have not been affected by the restatement represent management’s views as of the Original Filing Date. Such forward-looking statements should not be assumed to be accurate as of any future date. Accordingly, this Amended Form 10-Q should be read in conjunction with our subsequent filings with the SEC, as information in such filings may update or supersede certain information contained in this Amended Form 10-Q.






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LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2016 (restated) and December 31, 2015 (restated)
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 (restated)and 2015 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 (restated) and 2015 (Unaudited)
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 




















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GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation
Definition
2019 Convertible Senior Notes
$245.0 million aggregate principal amount of convertible senior unsecured notes due 2019
Amgen
Amgen, Inc.
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Company
Ligand Pharmaceuticals Incorporated, including subsidiaries
CorMatrix
CorMatrix Cardiovascular, Inc.
CVR
Contingent value right
CyDex
CyDex Pharmaceuticals, Inc.
Amended ESPP
Employee Stock Purchase Plan, as amended and restated
Eisai
Eisai Incorporated
EMA
European Medicines Agency
FASB
Financial Accounting Standards Board
FDA
Food and Drug Administration
FSGS
Focal segmental glomerulosclerosis
GAAP
Generally accepted accounting principles in the United States
IPO
Initial public offering
IPR&D
In-Process Research and Development
Ligand
Ligand Pharmaceuticals Incorporated, including subsidiaries
LSA
Loan and Security Agreement
Metabasis
Metabasis Therapeutics, Inc.
MLA
Master License Agreement
NOLs
Net Operating Losses
OMT
OMT, Inc. or Open Monoclonal Technology, Inc.
Par
Par Pharmaceuticals, Inc.
Pfizer
Pfizer Inc.
Retrophin
Retrophin Inc.
SEC
Securities and Exchange Commission
Selexis
Selexis, SA
TPE
Third-party evidence
VIE
Variable interest entity
Viking
Viking Therapeutics
Viking IPO
Viking's initial public offering
VSOE
Vendor-specific objective evidence


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PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
 
June 30, 2016 (unaudited) (restated)
 
December 31, 2015 (restated)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
61,350

 
$
97,428

Short-term investments
45,603

 
102,791

Accounts receivable
9,966

 
6,170

Note receivable from Viking Therapeutics
3,207

 
4,782

Inventory
3,835

 
1,633

Other current assets
2,602

 
1,908

Total current assets
126,563

 
214,712

Deferred income taxes
133,595

 
189,083

Investment in Viking Therapeutics
18,733

 
29,728

Intangible assets, net
210,142

 
48,347

Goodwill
72,360

 
12,238

Commercial license rights, net
26,141

 
8,554

Property and equipment, net

1,181

 
372

Other assets
603

 
27

Total assets
$
589,318

 
$
503,061

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,336

 
$
4,083

Accrued liabilities
4,951

 
5,397

Current contingent liabilities
5,337

 
10,414

Current lease exit obligations
239

 
934

2019 convertible senior notes, net
207,363

 
201,985

Other current liabilities
121

 
8

Total current liabilities
220,347

 
222,821

2019 convertible senior notes, net

 

Long-term contingent liabilities
4,138

 
3,033

Other long-term liabilities
398

 
297

Total liabilities
224,883

 
226,151

Commitments and Contingencies


 

Equity component of currently redeemable convertible notes (Note 6)
34,673

 
39,628

Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 33,333,333 shares authorized; 20,853,127 and 19,949,012 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
21

 
20

Additional paid-in capital
755,049

 
661,850

Accumulated other comprehensive income
3,745

 
4,903

Accumulated deficit
(429,053
)
 
(429,491
)
Total stockholders' equity attributable to Ligand Pharmaceuticals
329,762

 
237,282

Total liabilities and stockholders' equity
$
589,318

 
$
503,061

(a) See restatement discussion in footnote 1
See accompanying notes.

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LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016 restated
 
2015
 
2016 restated
 
2015
Revenues:
 
 
 
 
 
 
 
Royalties
$
9,754

 
$
6,606

 
$
24,144

 
$
16,893

Material sales
3,886

 
10,681

 
9,227

 
14,410

License fees, milestones and other revenues
5,881

 
1,131

 
15,798

 
1,717

Total revenues
19,521

 
18,418

 
49,169

 
33,020

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (1)
720

 
2,600

 
1,675

 
3,673

Amortization of intangibles
2,681

 
594

 
5,206

 
1,188

Research and development
4,914

 
3,416

 
8,915

 
6,784

General and administrative
6,863

 
7,225

 
13,691

 
13,219

Lease exit and termination costs
374

 
218

 
618

 
441

Total operating costs and expenses
15,552

 
14,053

 
30,105

 
25,305

Income from operations
3,969

 
4,365

 
19,064

 
7,715

Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net
(3,051
)
 
(2,969
)
 
(6,055
)
 
(5,945
)
Increase in contingent liabilities
(332
)
 
(7,274
)
 
(1,638
)
 
(7,277
)
Gain on deconsolidation of Viking Therapeutics

 
28,190

 

 
28,190

Loss from Viking Therapeutics
(11,138
)
 
(870
)
 
(12,743
)
 
(870
)
Other income, net
501

 
850

 
892

 
404

Total other (expense) income, net
(14,020
)
 
17,927

 
(19,544
)
 
14,502

Income (loss) before income taxes
(10,051
)
 
22,292

 
(480
)
 
22,217

Income tax benefit (expense)
3,881

 
(265
)
 
187

 
(279
)
(Loss) income from operations
(6,170
)
 
22,027

 
(293
)
 
21,938

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

 

 
1,139

 

Income tax expense on discontinued operations

 

 
(408
)
 

Income from discontinued operations

 

 
731

 

Net (loss) income including noncontrolling interests:
(6,170
)
 
22,027

 
438

 
21,938

Less: Net loss attributable to noncontrolling interests

 
(1,537
)
 

 
(2,380
)
Net (loss) income
$
(6,170
)
 
$
23,564

 
$
438

 
$
24,318

Per share amounts attributable to Ligand common shareholders:
 
 
 
 
 
 
 
Basic earnings (loss) per share data(2)
 
 
 
 
 
 
 
     (Loss) income from continuing operations
$
(0.30
)
 
$
1.19

 
$
(0.01
)
 
$
1.24

     Income from discontinued operations

 

 
0.04

 

Net (loss) income
$
(0.30
)
 
$
1.19

 
$
0.02

 
$
1.24

 
 
 
 
 
 
 
 
Diluted earnings per share data(2)


 


 


 


     (Loss) income from continuing operations
$
(0.30
)
 
$
1.11

 
$
(0.01
)
 
$
1.16

     Income from discontinued operations

 

 
0.04

 

Net (loss) income
$
(0.30
)
 
$
1.11

 
$
0.02

 
$
1.16

 
 
 
 
 
 
 
 
Shares used for computation (in thousands)
 
 
 
 
 
 
 
     Basic
20,832

 
19,725

 
20,765

 
19,668

     Diluted
20,832

 
21,276

 
20,765

 
20,953

(1) Excludes amortization of intangibles.

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(2) The sum of net income per share amounts may not equal the totals due to rounding

See accompanying notes.

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016 restated
 
2015
 
2016 restated
 
2015
Net (loss) income:
$
(6,170
)
 
$
23,564

 
$
438

 
$
24,318

Unrealized net gain (loss) on available-for-sale securities, net of tax
539

 
3,230

 
(559
)
 
7,844

Less: Reclassification of net realized gains included in net (loss) income, net of tax
(364
)
 
(1,300
)
 
(600
)
 
(1,533
)
Comprehensive income (loss)
$
(5,995
)
 
$
25,494

 
$
(721
)
 
$
30,629


See accompanying notes.


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LIGAND PHARMACEUTICAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six months ended
 
June 30,
 
2016 restated
 
2015
Operating activities
 
 
 
Net income including noncontrolling interests
$
438

 
$
21,938

Less: gain from discontinued operations
731

 

Income from continuing operations

(293
)
 
21,938

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
1,638

 
7,277

Realized gain on sale of short-term investment
(602
)
 
(502
)
Gain on write-off of assets
133

 

Depreciation and amortization
5,388

 
1,296

Amortization of discount on investments, net
331

 
(34
)
Amortization of debt discount and issuance fees
5,378

 
5,058

Stock-based compensation
8,766

 
6,675

Deferred income taxes
187

 
268

Accretion of note payable

 
16

Gain on deconsolidation of Viking Therapeutics

 
(28,190
)
Change in fair value of the Viking convertible debt receivable and warrants

(310
)
 

Loss from Viking Therapeutics

12,743

 
870

Changes in operating assets and liabilities:
 
 
 
     Accounts receivable
(3,791
)
 
7,102

     Inventory
(2,202
)
 
(533
)
     Other current assets
(629
)
 
(462
)
     Other long-term assets
(42
)
 
(598
)
     Accounts payable and accrued liabilities
(3,323
)
 
(3,107
)
     Restricted investments

 
661

     Deferred revenue
113

 
(110
)
Net cash provided by operating activities
23,485

 
17,625

Investing activities
 
 
 
Purchase of commercial license rights
(17,691
)
 
(4,030
)
Payments to CVR holders and other contingency payments
(5,635
)
 
(3,663
)
Purchases of property and equipment
(1,021
)
 
(27
)
Cash paid for acquisition, net of cash acquired

(92,504
)
 

Purchase of short-term investments
(49,892
)
 
(60,432
)
Purchase of Viking common stock and warrants
(700
)
 
(9,000
)
Proceeds from sale of property and equipment

 
1

Proceeds received from repayment of Viking note receivable
300

 

Reduction of cash due to deconsolidation of Viking

 
(247
)
Proceeds from sale of short-term investments
22,077

 
2,378

Proceeds from maturity of short-term investments

83,523

 

Net cash used in investing activities
(61,543
)
 
(75,020
)
Financing activities
 
 
 
Net proceeds from stock option exercises and ESPP
2,482

 
5,430

Purchase of common stock for RSU vesting

(502
)
 

Net cash provided by financing activities
1,980

 
5,430

Net decrease in cash and cash equivalents
(36,078
)
 
(51,965
)
Cash and cash equivalents at beginning of period
97,428

 
160,203

Cash and cash equivalents at end of period
$
61,350

 
$
108,238


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Supplemental disclosure of cash flow information
 
 
 
Interest paid
$
919

 
$
903

Taxes paid
36

 
13

Supplemental schedule of non-cash activity
 
 
 
Stock issued for acquisition, net of issuance cost

(77,615
)
 

Stock and warrant received for repayment of Viking notes receiveable
1,200

 

Unrealized gain (loss) on AFS investments
(1,198
)
 
7,844

See accompanying notes

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

1. Significant Accounting Principles

Business    
    
Ligand is a 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. We operate in one business segment: development and licensing of biopharmaceutical assets.
 
Principles of Consolidation
    
The accompanying consolidated financial statements include Ligand and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The Company’s accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. 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 its subsidiaries, have been included. Interim financial results are not necessarily indicative of the results that may be expected for the full year. 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, 2015 filed on November 14, 2016.

Restatement
    
The Company has restated its financial statements for the year ended December 31, 2015 to correct errors relating to the Company's net operating loss (NOL) carryforward benefits in the United States which resulted in an overstatement of deferred tax assets (DTA) at December 31, 2015 and June 30, 2016.  In connection with three acquisitions that were completed prior to February 2010, the Company recognized DTAs for a portion of the NOLs, which included capitalized research and development expenses, obtained from the acquired businesses. From the time of the acquisitions until September 2015, there was a valuation allowance against all of the Company’s NOLs, including those obtained from the entities acquired. In September 2015, the Company concluded that it was more likely than not that a substantial portion of its deferred tax assets would be realized through future taxable income. As a result, the Company released the majority of its DTA valuation allowance in full, including $27.5 million related to NOLs recognized as part of the businesses acquired prior to February of 2010.

During the quarter ended September 30, 2016, the Company concluded that for accounting purposes the approximately $27.5 million of DTAs that were obtained upon acquiring the businesses prior to February of 2010 did not meet the more likely-than-not criterion for recognition in 2015 and that the related valuation allowance should not have been reversed. As a result, the Company's income tax benefit and net income for the year ended December 31, 2015 were overstated by $27.5 million each as were the Company's DTAs at June 30, 2016.

Based on the materiality guidelines contained in SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements, the Company believes that the income tax adjustment is material to its financial statements for periods subsequent to and including the year ended December 31, 2015. Accordingly, the Company determined that it would restate prior period financial statements and amend its previously filed affected filings, including its June 30, 2016 report on Form 10-Q and December 31, 2015 report on 10-K.

The Company also recorded adjustments as part of this restatement related to the classification of our 2019 Convertible Senior Notes. As of December 31, 2015, the Company's last reported sale price exceeded the 130% threshold described in Note 6 - "Financing Arrangements" and accordingly the 2019 Convertible Senior Notes have been reclassified as a current liability as of December 31, 2015. As a result, the related unamortized discount of $39.6 million previously classified within stockholders'

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equity was reclassified as temporary equity component of currently redeemable convertible notes on our Condensed Consolidated Balance Sheet.

We also corrected an immaterial error related to stock-based compensation in the amount of $0.4 million for the three and six month period ended June 30, 2016.  As a result, research and development expenses for the three and six months ended is $4.9 million and $8.9 million, respectively.  This correction decreased earnings per share by $0.02.

The effects of these prior period corrections are as follows:

 
As of December 31, 2015
 
As Reported
 
Adjustments
 
As Restated
Deferred income taxes
$
216,564

 
$
(27,481
)
 
$
189,083

Total assets(1)
530,542

 
(27,481
)
 
503,061

2019 convertible senior notes, net - current

 
201,985

 
201,985

Total current liabilities
20,836

 
201,985

 
222,821

2019 convertible senior notes, net - long term(1)
201,985

 
(201,985
)
 

Equity component of currently redeemable convertible notes (Note 6)


 
39,628

 
39,628

Additional paid-in capital
701,478

 
(39,628
)
 
661,850

Accumulated deficit
(402,010
)
 
(27,481
)
 
(429,491
)
Total stockholders' equity
304,391

 
(67,109
)
 
237,282

Total liabilities and stockholders' equity(1)
530,542

 
(27,481
)
 
503,061

(1) $3.4 million of unamortized issuance cost was reclassified to debt discount in the concurrently filed 10-K/A form that it is filed after the Company's retrospective adoption of ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs in Q1 2016.

 
As of June 30, 2016
 
As Reported
 
Adjustments
 
As Restated
Deferred income taxes
$
161,076

 
(27,481
)
 
$
133,595

Total assets
616,799

 
(27,481
)
 
589,318

Accumulated deficit
(401,165
)
 
(27,888
)
 
(429,053
)
Equity component of currently redeemable convertible notes

 
34,673

 
34,673

Additional paid in capital
789,315

 
(34,266
)
 
755,049

Total stockholders' equity
391,916

 
(62,154
)
 
329,762

Total liabilities and stockholders' equity
616,799

 
(27,481
)
 
589,318


Use of Estimates

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

Reclassifications

Certain reclassifications have been made to the previously issued balance sheet and statement of operations for the three and six months ended June 30, 2015 for comparability purposes. These reclassifications had no effect on the reported net income, stockholders' equity, and operating cash flows as previously reported.


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Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing net income by the weighted-average number of common shares and common stock equivalents of all dilutive securities calculated using the treasury stock method and the if-converted method. The total number of potentially dilutive securities including stock options and warrants excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive was 5.3 million for the period ended June 30, 2015. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of otherwise dilutive potential common shares is anti-dilutive and therefore excluded.

    


The following table presents the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts) as restated for the impact of the $0.4 million adjustment to net income (loss) per share:

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net (loss) income from continuing operations
$
(6,170
)
 
$
23,564

 
$
(293
)
 
$
24,318

Net income from discontinued operations

 

 
731

 

Net (loss) income
$
(6,170
)
 
$
23,564

 
$
438

 
$
24,318

 
 
 
 
 
 
 
 
Shares used to compute basic income per share
20,831,809

 
19,725,410

 
20,765,053

 
19,668,183

Dilutive potential common shares:
 
 
 
 
 
 
 
Restricted stock

 
42,836

 

 
52,187

     Stock options

 
1,044,926

 

 
1,001,147

     2019 convertible senior notes

 
463,232

 

 
231,617

Shares used to compute diluted income per share
20,831,809

 
21,276,404

 
20,765,053

 
20,953,134

 
 
 
 
 
 
 
 
Basic per share amounts(2):
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.30
)
 
$
1.19

 
$
(0.01
)
 
$
1.24

Income from discontinued operations

 

 
0.04

 

Basic net (loss) income per share
$
(0.30
)
 
$
1.19

 
$
0.02

 
$
1.24

 
 
 
 
 
 
 
 
Diluted per share amounts(2):
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.30
)
 
$
1.11

 
$
(0.01
)
 
$
1.16

Income from discontinued operations

 

 
0.04

 

Diluted net (loss) income per share
$
(0.30
)
 
$
1.11

 
$
0.02

 
$
1.16

(2) The sum of net income per share amounts may not equal the totals due to rounding

Cash Equivalents
Cash equivalents consist of all investments with maturities of three months or less from the date of acquisition.
Short-term Investments
Short-term investments primarily consist of investments in debt securities that have effective maturities greater than three months and less than twelve months from the date of acquisition. The Company classifies its short-term investments as "available-for-sale". Such investments are carried at fair value, with unrealized gains and losses included in the statement of comprehensive income (loss). The Company determines the cost of investments based on the specific identification method.

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The following table summarizes the various investment categories at June 30, 2016 and December 31, 2015 (in thousands):

 
Amortized cost
 
Gross unrealized
gains
 
Gross unrealized
losses
 
Estimated
fair value
June 30, 2016
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 


     Bank deposits
$
10,000

 
$
28

 
$

 
$
10,028

     Corporate bonds
23,210

 
174

 
(1
)
 
23,383

     Commercial paper
6,665

 
3

 

 
6,668

     Asset backed securities
695

 

 

 
695

     Corporate equity securities
1,700

 
3,129

 

 
4,829

 
$
42,270

 
$
3,334

 
$
(1
)
 
$
45,603

December 31, 2015
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
     Bank deposits
$
43,043

 
$

 
$
(4
)
 
$
43,039

     Corporate bonds
41,238

 

 
(35
)
 
41,203

     Commercial paper
1,747

 

 

 
1,747

     Asset backed securities
10,020

 

 
(5
)
 
10,015

     Corporate equity securities
1,843

 
4,944

 

 
6,787

 
$
97,891

 
$
4,944

 
$
(44
)
 
$
102,791



Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or market value. The Company determines cost using the first-in, first-out method. Inventory levels are analyzed periodically and written down 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, 2016 and 2015.

Goodwill and Other Identifiable Intangible Assets

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

 
June 30,
 
December 31,
 
2016
 
2015
Indefinite lived intangible assets
 
 
 
     Acquired IPR&D
$
12,556

 
$
12,556

     Goodwill
72,360

 
12,238

Definite lived intangible assets
 
 
 
     Complete technology
182,267

 
15,267

          Less: Accumulated amortization
(8,161
)
 
(3,762
)
     Trade name
2,642

 
2,642

          Less: Accumulated amortization
(718
)
 
(652
)
     Customer relationships
29,600

 
29,600

          Less: Accumulated amortization
(8,044
)
 
(7,304
)
Total goodwill and other identifiable intangible assets, net
$
282,502

 
$
60,585


As Discussed in Note 2-Business Combination, on January 8, 2016, the Company completed its acquisition of OMT. As a result of the transaction, the Company recorded $167.0 million of intangibles with definite lives and goodwill of $60.1 million. Amortization of definite-lived intangible assets is computed using the straight-line method over the estimated useful

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life of the asset of 20 years. Amortization expense of $2.7 million and $5.2 million was recognized for the three and six months ended June 30, 2016, respectively. Amortization expense of $0.6 million and $1.2 million was recognized for the three and six months ended June 30, 2015, respectively.

The Company tests the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require that the Company estimate the fair value of the reporting unit annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment is required. The Company performed its annual assessment for goodwill impairment for the year ended December 31, 2015, noting no impairment.

Commercial License Rights

Commercial License Rights consist of the following (in thousands):

 
June 30,
 
December 31,
 
2016
 
2015
CorMatrix
$
17,692

 
$

Selexis
8,602

 
8,602

 
26,294

 
8,602

Less: accumulated amortization
(153
)
 
(48
)
     Total commercial rights, net
$
26,141

 
$
8,554


Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015 and CorMatrix in May 2016. Individual commercial license rights acquired 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, 2016, 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.

Relationships between the CorMatrix Parties
 
As previously disclosed in Ligand’s filings, Jason Aryeh is a director of both Ligand and CorMatrix. Mr. Aryeh beneficially owns equity of CorMatrix representing approximately .56% of CorMatrix’s outstanding equity. Mr. Aryeh recused himself from all of the board’s consideration of the Purchase Agreement, including any financial analysis, the terms of the Purchase Agreement and the vote to approve the Purchase Agreement and the related transactions.

Property and Equipment

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

 
June 30,
 
December 31,
 
2016
 
2015
Lab and office equipment
$
1,063

 
$
2,248

Leasehold improvements
929

 
273

Computer equipment and software
692

 
632

 
2,684

 
3,153

Less accumulated depreciation and amortization
(1,503
)
 
(2,781
)
     Total property and equipment, net
$
1,181

 
$
372


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 the shorter of the estimated useful lives or the related lease term. Depreciation expense of $0.1 million was recognized for each of the six months ended June 30, 2016 and 2015, which is included in operating expenses.


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Other Current Assets

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

 
June 30,
 
December 31,
 
2016
 
2015
Prepaid expenses
$
2,122

 
$
1,177

Other receivables
480

 
731

     Total other current assets
$
2,602

 
$
1,908

 
    
Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 
June 30,
 
December 31,
 
2016
 
2015
Compensation
$
1,463

 
$
1,711

Professional fees
828

 
726

Amounts owed to former licensees
852

 
915

Royalties owed to third parties
1,037

 
823

Other
771

 
1,222

     Total accrued liabilities
$
4,951

 
$
5,397


Other Long-Term Liabilities

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

 
June 30,
 
December 31,
 
2016
 
2015
Deposits
$
42

 
$
268

Deferred rent
326

 

Other
30

 
29

     Total other long-term liabilities
$
398

 
$
297

Contingent Liabilities
    
In connection with the Company’s acquisition of CyDex in January 2011, the Company recorded a contingent liability, for amounts potentially due to holders of the CyDex 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 statement 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, 2016 and December 31, 2015 was $7.0 million and $9.5 million, respectively. The Company recorded a fair-value adjustment to increase the liability by $0.2 million and $0.5 million for the three and six months ended June 30, 2016, respectively. The Company recorded a fair-value adjustment to increase the liability by $1.0 million and $2.2 million for the three and six months ended June 30, 2015, respectively. The Company paid CyDex CVR holders $3.0 million and $3.2 million during the six months ended June 30, 2016 and 2015, respectively.

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 potential 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

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triggering events. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement. Any change in fair value is recorded in the Company’s consolidated statement of operations. 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 $2.5 million and $4.0 million as of June 30, 2016 and December 31, 2015, respectively. The Company recorded an increase in the liability for Metabasis-related CVRs of $0.1 million and $1.2 million for the three and six months ended June 30, 2016. The Company recorded an increase of $6.4 million and $5.3 million for the three and six months ended June 30, 2015, respectively. The Company paid Metabasis CVR holders $2.6 million for the six months ended June 30, 2016. No payments were made to Metabasis CVR holders for the six months ended June 30, 2015.

Revenue Recognition

Royalties on sales of products commercialized by the Company’s partners are recognized in the quarter reported to Ligand 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, provided all other revenue recognition criteria have been met. All product returns are subject to the Company's credit and exchange policy, approval by the Company and a 20% restocking fee. To date, product returns by customers have not been material to net material sales in any related period. The Company records revenue net of product returns, if any, and sales tax collected and remitted to government authorities during the period.

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 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 VSOE, then TPE and if neither VSOE nor TPE exist, the Company uses its best estimate of selling price.
Many of the Company's revenue arrangements for Captisol involve a license agreement with the supply of manufactured Captisol product. Licenses may be granted to pharmaceutical companies for the use of Captisol product in the development of pharmaceutical compounds. The supply of the Captisol product may be 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 the Company's 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.
Other 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 (1) 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 (2) 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.    
Revenue from research funding under our collaboration agreements is earned and recognized on a percentage-of completion basis as research hours are incurred in accordance with the provisions of each agreement.


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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. 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,
 
2016
 
2015
 
2016
 
2015
Stock-based compensation expense as a component of:
 
 
 
 
 
 
 
Research and development expenses
$
2,089

 
$
1,253

 
$
3,674

 
$
2,174

General and administrative expenses
2,558

 
2,507

 
5,092

 
4,501

 
$
4,647

 
$
3,760

 
$
8,766

 
$
6,675


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,
 
2016
 
2015
 
2016
 
2015
Risk-free interest rate
1.7%
 
1.7%
 
1.5%
 
1.8%
Dividend yield
 
 
 
Expected volatility
49%
 
58%
 
50%
 
58%
Expected term
6.7
 
6.6
 
6.6
 
6.6
Forfeiture rate
5.0%
 
8.5%
 
5.0%
 
8.5%


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. The Company provides a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before it is able to realize their benefit. The Company calculates the valuation allowance in accordance with the authoritative guidance relating to income taxes under ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence that is available regarding the reliability of these deferred tax assets, when measuring the need for a valuation allowance.   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. 





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Table of Contents

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 assessment 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 consolidates the VIE under applicable accounting guidance. If the Company is no longer the primary of a VIE or the entity is no longer considered as a VIE as facts and circumstances change, it deconsolidates the entity under the applicable accounting guidance. In May 2015, the Company deconsolidated Viking, a previously reported VIE, and elected to record its investment in Viking under the equity method of accounting as Viking is no longer considered a VIE and the Company does not have voting control or other elements of control that would require consolidation. The investment is subsequently adjusted for the Company’s share of Viking's operating results and if applicable, cash contributions and distributions, which is reported on a separate line in our condensed consolidated statement of operations called “Loss from Viking Therapeutics”. On the condensed consolidated balance sheet, the Company reports its investment in Viking on a separate line in the non-current assets section called “Investment in Viking Therapeutics”. See Note 4, Investment in Viking Therapeutics, for additional details.
 

Convertible Debt

In August 2014, the Company completed a $245.0 million offering of 2019 Convertible Senior Notes, which bears interest at 0.75%. The Company accounts for the 2019 Convertible Senior Notes by separating the liability and equity components of the instrument in a manner that reflects the Company's nonconvertible debt borrowing rate. As a result, the Company assigned a value to the debt component of the 2019 Convertible Senior Notes equal to the estimated fair value of similar debt instruments without the conversion feature, which resulted in the Company recording the debt instrument at a discount. The Company is amortizing the debt discount over the life of the 2019 Convertible Senior Notes as additional non-cash interest expense utilizing the effective interest method.
Recent Accounting Pronouncements
    

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance establishes a five-step model to achieve that core principle and also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted after December 15, 2016.

In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations, and ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients, which clarifies guidance on assessing collectibility, presenting sales taxes and other similar taxes collected from customers, measuring noncash consideration, and certain transition matters. The Company is currently evaluating the effect the adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12 will have on the Company's financial statements.


In April 2015, FASB issued ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This update was issued to simplify the presentation for debt issuance costs. Upon adoption, such costs shall be presented on our consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability and not as a deferred charge presented in Other assets on our consolidated balance sheets. This amendment will be effective for interim and annual periods beginning on January 1, 2016, and is required to be retrospectively adopted. Management adopted the change in the presentation on our consolidated balance sheets accordingly (see Note 6 for details).


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In January 2016, the FASB issued ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. The new standard is effective for interim and annual periods beginning on January 1, 2018. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.

In February 2016, the FASB issued a new accounting standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about their leasing arrangements. The new standard is effective for interim and annual periods beginning on January 1, 2019. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 31, 2016.  Early adoption is permitted. We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for us on January 1, 2020. Early adoption will be available on January 1, 2019. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements.




2. Business Combination

On January 8, 2016, the Company acquired substantially all of the assets and liabilities of OMT. OMT is a biotechnology company engaged in the genetic engineering of animals for the generation of human therapeutic antibodies through its OmniAb® technology, which currently offers three transgenic animal platforms for license, including OmniRat®, OmniMouse® and OmniFlic®. The transaction, which was accounted for as a business combination, initially added 16 partnerships to the Company's portfolio and provides the Company with opportunities for further licensing and collaborations in the area.

The aggregate acquisition consideration was $173.4 million, consisting of (in thousands):

Cash consideration
$
96,006

Total share consideration:
 
     Actual number of shares issued
790

     Multiplied by: Ligand closing share price on January 8, 2016
$
97.92

Total share consideration
77,373

Total consideration
$
173,379


The acquisition consideration is subject to certain customary post-closing adjustments up to 15 months from January 8, 2016, in accordance with the terms and subject to the conditions contained in the Merger Agreement between the Company and OMT.
    The acquisition consideration was preliminarily allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

     Cash and cash equivalents
$
3,504

     Accounts receivable
5

     Income tax receivable
140

     Prepaid expenses and other current assets
2

     Deferred tax liabilities, net
(56,114
)
     Intangible asset with finite life - core technology
167,000

     Liabilities assumed
(1,279
)
     Goodwill
60,121

Total consideration
$
173,379


The fair value of the core technology, or OMT's OmniAb technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniAb technology. These projected cash flows were discounted to present value using a discount rate of 15.5%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.

The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed and recorded $60.1 million as goodwill, which is not deductible for tax purposes and is primarily attributable to OMT’s potential revenue growth from combining the OMT and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.

The purchase price allocations were prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any measurement period adjustments to the OMT purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.

The following table presents supplemental pro forma information for the three and six months ended June 30, 2016 and June 30, 2015, as if the acquisition of OMT had occurred on January 1, 2015 (in thousands except for EPS):

 
Three months ended
Six months ended
 
June 30,
June 30,
 
2016
 
2015
2016
 
2015
Revenue
$
19,521

 
$
19,818

$
51,645

 
$
36,971

Net (loss) income
$
(6,170
)
 
$
19,483

$
2,758

 
$
18,166

 
 
 
 
 
 
 
Basic (loss) income per share:
$
(0.30
)
 
$
0.99

$
0.13

 
$
0.92

Diluted (loss) income per share:
$
(0.30
)
 
$
0.92

$
0.13

 
$
0.87


The unaudited pro forma consolidated results include pro forma adjustments that assume the acquisition occurred on January 1, 2015. The primary adjustments include: (i) the $0.3 million and $0.6 million for the three and six months ended June 30, 2015, respectively, for share based compensation expenses related to the stock awards issued to the retained OMT employees after the acquisition, (ii) additional intangible amortization expense of  $2.1 million and $4.2 million was included in the three and six months ended June 30, 2015, respectively and (iii) a platform license fee of $3.0 million paid by OMT during the three and six months ended June 30, 2015. The license agreement was terminated upon acquisition by Ligand. The adjustments also include $2.5 million license revenue recognized by OMT from January 1, 2016 to the acquisition date. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on January 1, 2015. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition.



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3. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described below with level 1 having the highest level input that is significant to the measurement 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 following table provides a summary of the carrying value of assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2016 (in thousands). There were no transfers between Level 1 and Level 2 securities during the six months ended June 30, 2016:

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:
 
 
 
 
 
 
 
Short-term investments (2)
$
44,908

 
$
4,829

 
$
40,079

 
$

Note receivable Viking (3)
3,207

 

 

 
3,207

Investment in warrants (4)
532

 
532

 

 

     Total assets
$
48,647

 
$
5,361

 
$
40,079

 
$
3,207

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities-CyDex (5)
$
5,337

 
$

 
$

 
$
5,337

Long-term contingent liabilities-CyDex (5)
1,634

 

 

 
1,634

Long-term contingent liabilities-Metabasis (6)
2,504

 

 
2,504

 

Liability for amounts owed to former licensees(7)
611

 
611

 

 

     Total liabilities
$
10,086

 
$
611

 
$
2,504

 
$
6,971


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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, 2015 (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:
 
 
 
 
 
 
 
Cash equivalents (1)
$
3,015

 
$

 
$
3,015

 
$

Short-term investments (2)
92,775

 
6,786

 
85,989

 

Viking note receivable (3)
4,782

 

 

 
4,782

     Total assets
$
100,572

 
$
6,786

 
$
89,004

 
$
4,782

Liabilities:
 
 
 
 
 
 
 
Current contingent liabilities-CyDex (5)
$
7,812

 
$

 
$

 
$
7,812

Current contingent liabilities-Metabasis (6)
2,602

 

 
2,602

 

Long-term contingent liabilities-Metabasis (6)
1,355

 

 
1,355

 

Long-term contingent liabilities-CyDex (5)
1,678

 

 

 
1,678

Liability for amounts owed to former licensees (7)
794

 
794

 

 

     Total liabilities
$
14,241

 
$
794

 
$
3,957

 
$
9,490


(1)
Highly liquid investments with maturities less than 90 days from the purchase date are recorded as cash equivalents that are classified as Level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. 
(2)
Investments in equity securities, which the Company received as a result of event-based and upfront payments from licensees, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable securities with maturities greater than 90 days are classified as level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. 
(3)
The fair value of the convertible note receivable from Viking was determined using a probability weighted option pricing model using a lattice methodology. The fair value is subjective and is affected by certain significant input to the valuation model such as the estimated volatility of the common stock, which was estimated to be 75% at June 30, 2016. Changes in these assumptions may materially affect the fair value estimate.
(4)
Investment in warrants, which the Company received as a result of Viking’s partial repayment of the Viking note receivable and the Company’s purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities.
(5)
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.
(6)
The liability for CVRs for Metabasis are determined using quoted market prices in an inactive market for the underlying CVR.
(7)
The liability for amounts owed to former licensees are determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to former licensees.

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

 
June 30, 2016
 
December 31, 2015
Range of annual revenue subject to revenue sharing (1)
$24.2 million
 
$22.5 million
Revenue volatility
25%
 
25%
Average probability of commercialization
82%
 
73%
Sales beta
0.30
 
0.40
Credit rating
BB
 
BB
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, 2016 is as follows (in thousands):

Assets:
 
Fair value of level 3 financial instrument assets as of December 31, 2015
$
4,782

Viking note receivable fair market value adjustment
(215
)
Cash payment received as partial repayment of note receivable
(300
)
Fair market value of stock received as partial repayment of note receivable
(1,060
)
Fair value of level 3 financial instrument assets as of June 30, 2016
$
3,207

 
 
Liabilities:
 
Fair value of level 3 financial instrument liabilities as of December 31, 2015
$
9,490

Payments to CVR and other former license holders
(2,992
)
Fair value adjustments to contingent liabilities
473

Fair value of level 3 financial instrument liabilities as of June 30, 2016
$
6,971



Other Fair Value Measurements

2019 Convertible Senior Notes

In August 2014, the Company issued $245.0 million aggregate principal amount of its 2019 Convertible Senior Notes. The Company uses a quoted market rate in an inactive market, which is classified as a Level 2 input, to estimate the current fair value of its 2019 Convertible Senior Notes. The estimated fair value of the 2019 Senior Convertible Notes was $408.5 million as of June 30, 2016. The carrying value of the notes does not reflect the market rate. See Note 6 Financing Arrangements for additional information.

Viking Therapeutics

The Company records its investment in Viking under the equity method of accounting. The investment is subsequently adjusted for the Company’s share of Viking's operating results, and if applicable, cash contributions and distributions. See Note 4 Investment in Viking Therapeutics for additional information. The market value of the Company's investment in Viking was $7.9 million as of June 30, 2016. The carrying value of the investment in Viking does not reflect the market value.


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4. Investment in Viking Therapeutics

In 2014, the Company entered into a MLA with Viking to license the rights to five of the Company's programs to Viking. Under the terms of the MLA, no consideration was exchanged upon execution, but rather Viking agreed to issue shares of Viking common stock with an aggregate value of approximately $29.2 million upon consummation of Viking's IPO. As part of this transaction, the Company also extended a $2.5 million convertible loan to Viking under a LSA. As a result of these transactions, the Company determined it held a variable interest in Viking. The Company considered certain criteria in the accounting guidance for VIEs, and determined that Viking was a VIE and Ligand was the primary beneficiary of Viking. As a result, the Company consolidated Viking on its financial statements from May 2014 through May 2015, the effective date of Viking's IPO. The Company recorded 100% of the losses incurred as net loss attributable to noncontrolling interest because it was the primary beneficiary with no equity interest in the VIE.

In May 2015, Viking completed the Viking IPO and issued the Company approximately 3.7 million shares of Viking common stock with an aggregate value of $29.2 million based on the IPO price of $8.00 per share. In connection with the Viking IPO, the Company purchased 1.1 million shares of Viking common stock for an aggregate price of $9.0 million at the initial public offering price. Upon completion of Viking’s IPO, the Company determined that Viking was no longer a VIE and the Company did not have any other element of control that would require consolidation of Viking. In May 2015, the Company deconsolidated Viking and began to account for its equity investment in Viking under the equity method and records its proportional share of Viking gains and losses in Loss from Viking Therapeutics in the Company's consolidated statement of operations. The Company owned an aggregate of 32.7% of the outstanding common stock of Viking at June 30, 2016.

In January 2016, the Company entered into an amendment to the LSA with Viking to extend the maturity of the convertible loan to May 2017, reduce the interest rate from 5.0% to 2.5%, and extend the lock up period by one year such that the Company may not sell, transfer, or dispose of any Viking securities prior to January 23, 2017. Additionally, upon the consummation of a subsequent capital financing transaction, Viking will be required to repay $1.5 million of the Viking Note obligation to the Company, with at least $0.3 million to be paid in cash and the remaining amount to be paid in the form and at the price of the Viking equity securities sold in the financing transaction. Upon maturity or further payments, the Company may elect to receive equity of Viking common stock or cash equal to 200% of the principal amount plus accrued and unpaid interest. The Company has opted to account for the Viking convertible note receivable at fair value.

In April 2016, Viking closed its underwritten public offering of 7.5 million shares of common stock and warrants to purchase up to 7.5 million shares of its common stock at a price of $1.25 per share of its common stock and related warrants. The warrant has an exercise price of $1.50 per share, immediately exercisable and will expire on April 13, 2021. As part of this public offering, the Company purchased 560,000 shares of common stock and warrants to purchase 560,000 shares of Viking's common stock for a total purchase price of $0.7 million. The purchased shares of common stock and warrants are subject to the same terms as the shares issued in this offering. In addition, on April 13, 2016, pursuant to the terms of the amendment to the LSA that was entered in January 2016 between Ligand and Viking (see details in Note 4), Viking repaid $0.3 million of the convertible notes in cash, and issued the Company 960,000 shares of its common stock and warrants to purchase 960,000 shares of its common stock as repayment of $1.2 million of the convertible notes. The shares received as part of the repayment, like all Viking securities held by the Company, are subject to a lock-up period that ends on January 23, 2017 in accordance with the amended LSA. A gain of $0.5 million representing the fair market value of the warrants is included within other income for the quarter ended June 30, 2016. As of June 30, 2016, the aggregate fair market value of the note receivable was $3.2 million. The Company recorded a $0.2 million decrease in the fair value of the Viking convertible note for both the three and six months ended June 30, 2016. See Note 3, Fair Value Measurements for additional details.

The Company's ownership in Viking decreased to 32.7% after the public offering and the repayment of the convertible notes. Accordingly, the book value of the Company's equity method investment in Viking decreased by $10.0 million. The resulting net loss was recognized in Loss from Viking Therapeutics in the Company's consolidated statement of operations.


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5. Lease Obligations

The Company leases office and laboratory facilities in California, Kansas and New Jersey. These leases expire between 2016 and 2023, 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, 2016 (in thousands):

Operating lease obligations:
 
Lease
Termination
Date
 
Less than 1
year
1-2 years
3-4 years
Thereafter
Total
Corporate headquarters-San Diego, CA
 
April 2023
 
$
74

$
263

$
278

$
270

$
885

Vacated office and research facility-
La Jolla, CA
 
June 2019
 
708

1,474



2,182

Bioscience and Technology Business Center-
Lawrence, KS
 
December 2017
 
54

27



81

Vacated office and research facility-
Cranbury, NJ
 
August 2016
 
436




436

Total operating lease obligations
 
 
 
$
1,272

$
1,764

$
278

$
270

$
3,584

 
 
 
 
 
 
 
 
 
Sublease payments expected to be received:
 
 
 
 
 
 
 
 
Vacated office and research facility-
La Jolla, CA
 
June 2019
 
$
720

$
1,400

$

$

$
2,120

Office and research facility-
Cranbury, NJ
 
August 2016
 
35




35

Net operating lease obligations
 
 
 
$
517

$
364

$
278

$
270

$
1,429



As of June 30, 2016 and December 31, 2015, the Company had lease exit obligations of $0.2 million and $0.9 million, respectively. For the three and six months ended June 30, 2016, the Company made cash payments, net of sublease payments received of $0.6 million and $1.2 million, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of $0.3 million and $0.5 million for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2015, 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 $0.2 million and $0.4 million for the three and six months ended June 30, 2015, respectively.


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6. Financing Arrangements
    
0.75% Convertible Senior Notes Due 2019
    
In August 2014, the Company issued $245.0 million aggregate principal amount of its 2019 Convertible Senior Notes, resulting in net proceeds of $239.3 million. The 2019 Convertible Senior Notes are convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes bear cash interest at a rate of 0.75% per year, payable semi-annually.

Holders of the 2019 Convertible Senior Notes may convert the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:

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

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

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

As of June 30, 2016, the Company's last reported sale price has exceeded the 130% threshold described above and accordingly the Convertible Notes have been classified as a current liability as of June 30, 2016. As a result, the related unamortized discount of $34.7 million was classified as temporary equity component of currently redeemable convertible notes on our Condensed Consolidated Balance Sheet. The determination of whether or not the Convertible Notes are convertible as described above is made each quarter until maturity, conversion or repurchase. It is possible that the Convertible Notes may not be convertible in future periods, in which case the Convertible Notes would be classified as long-term debt, unless one of the other conversion events described above were to occur.

On or after May 15, 2019 until the close of business on the second scheduled trading day immediately preceding August 15, 2019, holders of the notes may convert all or a portion of their notes at any time, regardless of the foregoing circumstances. Upon conversion, Ligand must deliver cash to settle the principal and may deliver cash or shares of common stock, at the option of the Company, to settle any premium due upon conversion.

In accordance with accounting guidance for debt related to conversion and other options, the Company separately accounted for the debt and equity components of the 2019 Convertible Senior Notes by allocating the $245.0 million total proceeds between the debt component and the embedded conversion option, or equity component, due to Ligand's ability to settle the 2019 Convertible Senior Notes in cash for the principal portion and to settle any premium in cash or common stock, at the Company's election. The debt allocation was performed in a manner that reflected the Company's non-convertible borrowing rate for similar debt of 5.83% derived from independent valuation analysis. The initial debt value of $192.5 million accretes at 5.83% to reach $245.0 million at the maturity date. The equity component of the 2019 Convertible Senior Notes was recognized as a debt discount and represents the difference between the $245.0 million proceeds at issuance of the 2019 Convertible Senior Notes and the fair value of the debt allocation on their respective issuance dates. The debt discount is amortized to interest expense using the effective interest method over the expected life of a similar liability without an equity component. The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $75.05. As of June 30, 2016, the “if-converted value” exceeded the principal amount of the 2019 Convertible Senior Notes by $144.4 million.    

In connection with the issuance of the 2019 Convertible Senior Notes, the Company incurred $5.7 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portions of these costs allocated to the equity components totaling $1.2 million were recorded as a reduction to additional paid-in capital. The portions of these costs allocated to the liability components totaling $4.5 million are recorded net of the liability component on the balance sheet beginning in 2016 in accordance with ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt

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Issuance Costs.  The portions allocated to the liability components are amortized to interest expense using the effective interest method over the expected life of the 2019 Convertible Senior Notes.
 
The Company determined the expected life of the debt discount for the 2019 Convertible Senior Notes to be equal to the original five-year term of the notes. The carrying value of the equity component related to the 2019 Convertible Senior Notes as of June 30, 2016 and December 31, 2015, net of issuance costs, was $51.3 million.

Convertible Bond Hedge and Warrant Transactions

In August 2014, in connection with the issuance of the 2019 Convertible Senior Notes, to minimize the impact of potential dilution to the Company's common stock upon conversion of such notes, the Company entered into convertible bond hedges and sold warrants covering approximately 3,264,643 shares of its common stock. The convertible bond hedges have an exercise price of $75.05 per share and are exercisable when and if the 2019 Convertible Senior Notes are converted. If upon conversion of the 2019 Convertible Senior Notes, the price of the Company's common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by the Company and are not part of the terms of the 2019 Convertible Senior Notes. Holders of the 2019 Convertible Senior Notes and warrants will not have any rights with respect to the convertible bond hedges. The Company paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.

Concurrently with the convertible bond hedge transactions, the Company entered into warrant transactions whereby it sold warrants to acquire, approximately 3,264,643 shares of common stock with an exercise price of approximately $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The Company received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and the Company does not have the obligation and does not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

The carrying values and the fixed contractual coupon rates of the Company's financing arrangements as of June 30, 2016 and December 31, 2015 were as follows (in thousands):

 
June 30, 2016
 
December 31, 2015
2019 Convertible Senior Notes
 
 
 
     Principal amount outstanding
$
245,000

 
$
245,000

     Unamortized discount
(34,673
)
 
(39,628
)
          Net carrying amount
210,327

 
205,372

Less: Unamortized deferred financing costs
2,964

 
3,387

Total notes payable
$
207,363

 
$
201,985


7. Income Tax

The Company's income tax benefit from continuing operations for the three and six months ended June 30, 2016 was $3.9 million. The Company's income tax expense from discontinued operations for the six months ended June 30, 2016 was $0.4 million. The Company's income tax provision from continuing operations for both the three and six months ended June 30, 2015 was $0.3 million.

The Company estimates its annual effective income tax rate for continuing operations to be approximately 40.6% for 2016, compared to the 1.1% effective income tax rate for 2015. The estimated effective tax rate for 2016 is different from the federal statutory rate primarily as a result of significant permanent book-to-tax differences and state taxes. The permanent differences include non-taxable contingent consideration income (expense) recorded related to the change in market value of contingent liabilities. Any significant contingent consideration expense or income will result in a significantly higher or lower effective tax rate because contingent consideration expense is largely not deductible for tax purposes and contingent

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consideration income is not taxable. Other permanent differences between financial statement income and taxable income relate to items such as stock compensation, meals and entertainment charges, and compensation of officers. The primary difference in the estimated effective tax rate in 2016 compared to 2015 relates to the release of the Company’s valuation allowance in 2015. Our estimated annual effective tax rate for the six months ended June 30, 2015 is primarily attributable to an increase in our deferred tax liability associated with the tax amortization of acquired indefinite lived IPR&D intangible assets.
    
The Company maintains a valuation allowance in the amount of $8.9 million against certain U.S. state NOLs, federal NOLs arising from Pre-ASC 718 excess stock compensation benefits and federal research and development tax credits. Each reporting period, the Company evaluates the need for a valuation allowance on our deferred tax assets by jurisdiction and adjusts our estimates as more information becomes available. The Company will reassess the ability to realize the deferred tax assets on a quarterly basis. If it is more likely than not that it will not realize the recognized deferred tax assets, then all or a portion of the valuation allowance may need to be re-established, which would result in a charge to tax expense. Conversely if new events indicate that it is more likely than not that we will realize additional deferred tax assets, then all or a portion of the remaining valuation allowance may be released, which would result in a tax benefit.

As of June 30, 2016, the Company had unrecognized tax benefits of approximately $33.9 million related to uncertain tax positions that, if recognized, would result in adjustments to the related deferred tax assets and reduce our annual effective tax rate, subject to the remaining valuation allowance.

The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to income tax examination by tax authorities for years prior to 2012; however, its net operating loss and research credit carry-forwards arising prior to that year are subject to adjustment. It is the Company's policy to recognize interest expense and penalties related to income tax matters as a component of income tax expense.  As of June 30, 2016, there was no material accrued interest related to uncertain tax positions.

8. Stockholders’ Equity

The Company grants options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 8, Stockholders' Equity, of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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

 
Stock Options
 
Restricted Stock Award
 
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Balance as of December 31, 2015
1,683,341

 
$
34.23

 
130,749

 
$
60.36

Granted
254,989

 
90.51

 
233,955

 
94.76

Exercised
(77,243
)
 
30.73

 
(41,833
)
 
52.18

Forfeited
(24,282
)
 
61.99

 
(1,850
)
 
71.48

Balance as of June 30, 2016
1,836,805

 
$
41.83

 
321,021

 
$
73.13


Net cash received from options exercised during the six months ended June 30, 2016 and 2015 was approximately $2.4 million and $5.3 million, respectively. Tax deductions for stock options and restricted stock which have exceeded stock based compensation expense in previous years have not been recognized by the Company. The Company will monitor the utilization of the net operating losses and recognize the excess tax deduction when that deduction reduces taxes payable.

As of June 30, 2016, 948,729 shares were available for future option grants or direct issuance under the Company's 2002 Stock Incentive Plan, as amended.

Employee Stock Purchase Plan


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The Company's Amended ESPP allows participating employees 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. This plan is described in further detail in Note 8, Stockholders' Equity, of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

There were 1,241 shares of common stock issued under the amended ESPP during the six months ended June 30, 2016. There were no shares of common stock issued under the amended ESPP plan during the six months ended June 30, 2015. As of June 30, 2016, 71,126 shares were available for future purchases under the Amended ESPP.

Issuance of common stock

In conjunction with the acquisition of OMT, the Company issued 790,163 shares of its common stock based on a 20-day volume-weighted average price of $107.66 of its common stock calculated three days prior to closing.

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 FASB 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

In 2012, a federal securities class action and shareholder derivative lawsuit was filed in Pennsylvania alleging that the Company and its CEO assisted various breaches of fiduciary duties based on the Company’s purchase of a licensing interest in a development-stage pharmaceutical program from the Genaera Liquidating Trust in 2010 and the Company’s subsequent sale of half of its interest in the transaction to Biotechnology Value Fund, Inc.  Plaintiff filed a second amended complaint in February 2015, which the Company moved to dismiss in March 2015.  The district court granted the motion to dismiss on November 11, 2015.  The plaintiff has appealed that ruling to the Third Circuit.  The Company intends to continue to vigorously defend against the claims against the Company and its CEO.  The outcome of the matter is not presently determinable.

Paragraph IV Certification by Par Pharmaceuticals

On January 7, 2016, the Company received a paragraph IV certification from Par Sterile Products, LLC, a subsidiary of Par Pharmaceuticals, Inc., or Par, advising us that it had filed an ANDA with the FDA seeking approval to market a generic version of Merck’s NOXAFIL-IV product.  The paragraph IV certification states it is Par’s position that Merck’s U.S. Patent No. 9,023,790 related to NOXAFIL-IV and the Company's U.S. Patent No. 8,410,077 related to Captisol are invalid and/or will not be infringed by Par’s manufacture, use or sale of the product for which the ANDA was submitted.  On February 19, 2016, Merck filed an action against Par in the United States District Court for the District of New Jersey, asserting that Par’s manufacture, use or sale of the product for which the ANDA was submitted would infringe Merck’s U.S. Patent No. 9,023,790.  Subsequently, U.S. Patent No. 9,358,297 issued to Merck, Merck listed this patent in the Orange Book, Par amended its ANDA to include a certification that this patent was invalid, unenforceable and/or will not be infringed by Par’s ANDA product, and Par sent a supplemental Notice Letter to Merck.  On July 29, 2016, Merck filed an Amended Complaint adding an assertion that Par’s ANDA filing infringed U.S. Patent No. 9,358,297.  The case against Par is captioned Merck Sharpe & Dohme Corp. v. Par Sterile Products, LLC, Par Pharmaceuticals, Inc., Par Pharmaceutical Companies, Inc., and Par Pharmaceutical Holdings, Inc., No.16-cv-00948-PGS-DEA.


10. Subsequent Event

On July 28, 2016 the Company acquired less than 20% ownership interest in Nucorion, Inc., an early stage company leveraging Ligand's Liver Targeting Prodrug technology focused on developing anti-cancer and anti-viral agents initially directed to China, for $1.0 million in cash.

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

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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 Ligand Pharmaceuticals Incorporated and our wholly owned subsidiaries.

Overview
    
We are a biotechnology company with a business model based on developing or acquiring assets which generate royalty, milestone or other passive revenue for Ligand and using a lean corporate cost structure. By diversifying our portfolio of assets across numerous technology types, therapeutic areas, drug targets, and industry partners, we offer investors an opportunity for broad exposure to multiple pharmaceutical and biotechnology assets without the risk associated with developing only one or a limited number of drugs.  These therapies address the unmet medical needs of patients for a broad spectrum of diseases including thrombocytopenia, multiple myeloma, hepatitis, ventricular fibrilation, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, asthma, FSGS, menopausal symptoms and osteoporosis. Our partners include several of the world’s leading pharmaceutical companies such as Novartis, Amgen, Merck, Pfizer, Baxter, and Eli Lilly.

Significant Developments

Portfolio Program Progress

Promacta®/Revolade® 

Novartis announced Q2 2016 net sales of Promacta® (eltrombopag) of $158 million, a $27 million or 21% increase over Q1 2016. This is the largest quarter-over-quarter increase in net sales in the product’s history and comes one year after Novartis’s acquisition of the product from GSK in early 2015.
The European Commission approved Revolade® (eltrombopag), a Novartis product, for the treatment of pediatric (age 1 and above) chronic immune (idiopathic) thrombocytopenic purpura (ITP) patients who are refractory to other treatments (e.g., corticosteroids, immunoglobulins). The approval includes the use of tablets as well as a new oral suspension formulation of Revolade®, which is designed for younger children who may not be able to swallow tablets.

Kyprolis® (carfilzomib), an Amgen Product Utilizing Captisol

On July 3, 2016, Amgen announced that the European Commission approved an expanded indication for Kyprolis® (carfilzomib), to be used in combination with dexamethasone alone, for adult patients with multiple myeloma who have received at least one prior therapy.
On July 4, 2016, Ono Pharmaceuticals, holder of Kyprolis® (carfilzomib) marketing rights in Japan, announced approval in Japan for treatment of patients with relapsed or refractory multiple myeloma.
On May 26, 2016, Amgen announced that the Kyprolis Global Economic Model (K-GEM) was published in the Journal of Medical Economics showing that in the United States, Kyprolis® (carfilzomib) in combination with lenalidomide and dexamethasone is cost-effective compared with lenalidomide and dexamethasone alone in patients with relapsed or

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refractory multiple myeloma and demonstrated an incremental cost-effectiveness ratio of $107,250 per Quality-Adjusted Life Year.

Additional Pipeline and Partner Developments

Spectrum Pharmaceuticals announced that the FDA granted seven years of Orphan Drug Exclusivity for EVOMELA™ for use as a high-dose conditioning treatment prior to hematopoietic progenitor (stem) cell transplantation in patients with multiple myeloma.
Coherus BioSciences announced data demonstrating the equivalence of its etanercept biosimilar (CHS-0214) to Enbrel® (etanercept), the reference product, with respect to efficacy as measured by the primary endpoint, ACR20 at 24 weeks.
Sage Therapeutics presented data that expanded scientific, clinical and burden-of-illness data for SAGE-547 at the 68th American Academy of Neurology Annual Meeting. Data from the open-label Phase 1/2 trial of SAGE-547 in super-refractory status epilepticus (SRSE) demonstrated that the 77% key efficacy endpoint response rate was not related to age, gender, ethnicity, co-morbid medical condition or underlying antiepileptic or third-line agents. Additional data presented illustrated that SRSE has a high burden of illness with significant morbidity, lengthy hospitalizations and significant utilization of ICU and overall hospital resources.
Oncobiologics announced that its Phase 3 clinical plan for ONS-3010 (Humira® biosimilar) received the first of its European Union clinical trial authorization approvals, including in the United Kingdom, Germany and Spain, for the biosimilarity study portion of the Phase 3 clinical program.
Viking Therapeutics highlighted positive data from a Phase 1b trial of VK2809 (TR Beta) in subjects with mild hypercholesterolemia at the 65th Annual Scientific Session and Expo of the American College of Cardiology.
Viking Therapeutics announced positive top-line results from a proof-of-concept study of VK0214 in a mouse model of X-linked adrenoleukodystrophy (X-ALD), showing that VK0214 rapidly reduced plasma very long chain fatty acid levels by more than 25% in treated animals compared with vehicle controls (p < 0.01).
Merrimack Pharmaceuticals announced that the FDA granted seribantumab (MM-121) Fast Track designation for development in patients with heregulin-positive, locally advanced or metastatic non-small cell lung cancer (NSCLC) whose disease has progressed following immunotherapy.
Merrimack Pharmaceuticals announced initiation of a Phase 1 study of MM-151 in combination with ONIVYDE® plus fluorouracil (5-FU) and Leucovorin in patients with RAS wild-type metastatic colorectal cancer, as well as the initiation of a biomarker-selected, multi-arm Phase 1 study for MM-151/MM-121 in metastatic colorectal, NSCLC and head and neck cancer that uses a combination of genetic and nongenetic biomarkers to match patients to appropriate novel combinations of investigational drug regimens based on their cancer's molecular signature.
Millennium/Takeda highlighted Phase 1b data on pevonedistat + chemotherapy at the 2016 ASCO meeting.
Opthea announced that the Phase 1 dose-escalation study of OPT-302 met its primary objective demonstrating safety and tolerability as monotherapy and in combination with the current wet AMD standard of care Lucentis®. Opthea is currently recruiting patients for its Phase 2a dose-expansion trial and expects data by the end of 2016.
Upsher-Smith announced that it commenced the first clinical study of its CXCR4 antagonist USL311 in patients with advanced solid tumors, triggering a $500,000 milestone payment to Ligand.
Marinus Pharmaceuticals announced that the FDA granted Orphan Drug designation to ganaxalone IV for the treatment of status epilepticus and that the company dosed the first subject in its Phase 1 clinical trial for the program.
An OmniAb licensee broadened its access to the platform by adding OmniFlic. Prior to the option exercise, this licensee’s access to the OmniAb technology was limited to OmniRat.
Wuxi out-licensed China rights to an undisclosed IND-ready antibody it discovered with the OmniAb platform and its sub-licensee will be responsible for all future costs related to the program.
Eli Lilly added a drug candidate to its Captisol® platform license and supply agreement, first entered into in December of 2011.

New Licensing Deals

Ligand announced a license agreement for its LTP technology with Nucorion Pharmaceuticals, a venture-funded biotechnology company focused on developing anti-cancer and anti-viral agents initially directed to China, of which Ligand is a minority shareholder. Three initial programs fall under the license: NUC-202, a targeted anti-cancer analog for the treatment of hepatocellular carcinoma; NUC-404, a targeted nucleotide analog for the treatment of hepatitis B; and NUC-101, a targeted nucleotide analog for the treatment of hepatitis C. Ligand is eligible to receive milestones in addition to royalties ranging from 5% to 9% on future net sales of any approved program.
Ligand announced a worldwide license agreement with Gilead Sciences that allows Gilead to use the OmniAb platform to discover fully human mono- and bispecific antibodies. Ligand is eligible to receive annual access payments, milestone payments and royalties on future net sales of any antibodies discovered under the license.

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Ligand entered a worldwide license agreement with F-Star Biotechnology Limited that allows F-Star to use the OmniAb platform to discover fully human mono- and bispecific antibodies. Ligand is eligible to receive annual access payments, milestone payments and royalties on future net sales of any antibodies discovered under the license.

Internal Glucagon Receptor Antagonist (GRA) Program

Ligand scientists gave an oral presentation on GRA at ENDO 2016 and presented a poster at the Levine-Riggs Diabetes Research Symposium, which highlighted data from the Phase 1b trial demonstrating that GRA significantly reduced fasting and post-prandial glucose in subjects with type 2 diabetes. Ligand expects to initiate a Phase 2 trial for the program in Q3 2016.

Recent Acquisitions

In May 2016, Ligand acquired economic rights to multiple programs owned by CorMatrix. Ligand paid $17.5 million to receive a portion of revenue from CorMatrix’s existing marketed products and will have the right to receive future royalties from potential future products.


Results of Operations

Three and six months ended June 30, 2016 and 2015
Total revenues for the three and six months ended June 30, 2016 were $19.5 million and $49.2 million, respectively, compared to $18.4 million and $33.0 million, respectively for the same periods in 2015. We reported a net loss of $6.2 million and net income of $0.4 million for the three and six months ended June 30, 2016, respectively, compared to net income of $23.6 million and $24.3 million, respectively, for the same periods in 2015.

Royalty Revenue
Royalty revenues were $9.8 million and $24.1 million for the three and six months ended June 30, 2016, respectively, compared to $6.6 million and $16.9 million, respectively, for the same periods in 2015. The increase in royalty revenue is primarily due to an increase in Promacta and Kyprolis royalties.

Material Sales
We recorded material sales of $3.9 million and $9.2 million, respectively, for the three and six months ended June 30, 2016 compared to $10.7 million and $14.4 million, respectively, for the same periods in 2015. The decrease in material sales of for the three and six months ended June 30, 2016 is due to timing of customer purchases of Captisol for use in clinical trials and in commercialized products.

License fees, milestones and other revenue
We recorded license fees, milestones and other revenue of $5.9 million and $15.8 million for the three and six months ended June 30, 2016, respectively, compared to $1.1 million and $1.7 million for the same periods in 2015, respectively. The increase for the three and six months ended June 30, 2016 is primarily due to timing of significant milestones and upfront fees earned and revenues from OmniAb partners.

Cost of Sales
Cost of sales were $0.7 million and $1.7 million for the three and six months ended June 30, 2016, respectively, compared to $2.6 million and $3.7 million for the same periods in 2015, respectively. The decrease is primarily due to lower material sales as a result of timing of customer purchases and lower overall cost of goods.

Amortization of intangibles
Amortization of intangible assets was $2.7 million and $5.2 million for the three and six months ended June 30, 2016, respectively, compared to $0.6 million and $1.2 million for the same periods in 2015, respectively. The increase is due to the acquisition of OMT and the related amortization of definite lived intangible assets.


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Research and Development Expenses
Research and development expenses were $4.9 million and $8.9 million for the three and six months ended June 30, 2016, respectively, compared to $3.4 million and $6.8 million for the same periods in 2015, respectively. The increase for the three and six months ended June 30, 2016 is primarily due to stock based compensation expense and timing of internal development costs.

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.

General and Administrative Expenses
General and administrative expenses were $6.9 million and $13.7 million for the three and six months ended June 30, 2016, respectively, compared to $7.2 million and $13.2 million for the same periods in 2015, respectively. The increase for the six months ended June 30, 2016 is primarily due to an increase in stock-based compensation expense and an increase in headcount related expenses.

Lease Exit and Termination Costs
Lease exit and termination costs were $0.4 million and $0.6 million for the three and six months ended June 30, 2016, respectively, compared to $0.2 million and $0.4 million for the same periods in 2015, respectively.

Interest Expense, net
Interest expense, net was $3.1 million and $6.1 million for the three and six months ended June 30, 2016, respectively, compared to $3.0 million and $5.9 million for the same periods in 2015, respectively. The majority of interest expense and non-cash debt related costs are related to our 2019 Convertible Senior Notes.

Increase in Contingent Liabilities
We recorded an increase in contingent liabilities of $0.3 million and $1.6 million for the three and six months ended June 30, 2016, respectively, compared to an increase of $7.3 million and $7.3 million for the same periods in 2015, respectively. The increase for the three months ended June 30, 2016 primarily relates to an increase of $0.1 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition and is further impacted by an increase of $0.2 million in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition. The increase of $1.6 million for the six months ended June 30, 2016 is primarily due to an increase in amounts potentially due to holders of the CyDex CVRs of $0.4 million and an increase of $1.2 million in amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The increase for the three and six months ended June 30, 2015 primarily relates to an increase in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition of $1.0 million and an increase of $6.4 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition. 

Other Income, Net
We recorded a gain of $0.5 million representing the fair market value of the warrants received as a result of Viking's partial repayment of the Viking note receivable and the Company's purchase of Viking common stock and warrants in April 2016.

Income Tax Expense
We recorded an income tax benefit of $3.9 million and $0.2 million for the three and six months ended June 30, 2016, respectively compared to income tax expense of $0.3 million and $0.3 million for the same periods in 2015. The income tax benefit for the three and six months ended June 30, 2016 is based on the estimated annual effective tax rate of 40.6%. Income tax expense for the three and six months ended June 30, 2015 is primarily attributable to an increase in our deferred tax liability associated with the tax amortization of acquired indefinite lived IPR&D intangible assets.

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Discontinued Operations

Oncology Product Line

In 2006, we entered into a purchase agreement with Eisai pursuant to which Eisai agreed to acquire our Oncology product line which included four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. Certain liabilities were recorded associated with the disposal of the product line. During the six months ended June 30, 2016 we recognized a $1.1 million gain due to subsequent changes in certain estimates and liabilities previously recorded.

Income Taxes from Discontinued Operations

We recorded a provision for income taxes related to discontinued operations for the six months ended June 30, 2016 of $0.4 million related to the gain recognized.

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 revenue, and capital and operating lease transactions.

We had a net loss of $6.2 million for the quarter ended June 30, 2016. As of June 30, 2016, our cash, cash equivalents and marketable securities totaled $107.0 million, and we had a working capital deficit of $93.8 million. We believe that our currently available funds, cash generated from operations as well as existing sources of and access to financing will be sufficient to fund our anticipated operating, capital requirements and debt service requirement. We expect to build cash in future months as we continue to generate significant cash flow from royalty, license and milestone revenue and Captisol material sales primarily driven by continued increases in Promacta and Kyprolis sales, recent product approvals and regulatory developments, as well as revenue from anticipated new licenses and milestones. In addition, we anticipate that our liquidity needs can be met through other sources, including sales of marketable securities, borrowings through commercial paper and/or syndicated credit facilities and access to other domestic and foreign debt markets and equity markets.

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.

Investments

We invest our excess cash principally in U.S. government debt securities, investment-grade corporate debt securities and certificates of deposit. We have 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. Additionally, we own certain equity securities as a result of milestones and license fees received from licensees as well as warrants to purchase Viking common stock.

Borrowings and Other Liabilities

2019 Convertible Senior Notes

We have convertible debt outstanding as of June 30, 2016 related to our 2019 Convertible Senior Notes. In August 2014, we issued $245.0 million aggregate principal amount of convertible senior unsecured notes. The Notes are convertible into common stock upon satisfaction of certain conditions. Interest of 0.75% per year is payable semi-annually on August 15th and February 15th through the maturity of the notes in August 2019.

Repurchases of Common Stock
In September 2015, our Board of Directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years. There were no repurchases during the six-month period ended June 30, 2016.

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Contingent Liabilities

CyDex

In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. 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 through 2016, 20% of all CyDex-related revenue, but only to the extent that, and beginning only when, CyDex-related revenue for such year exceeds $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 $23.6 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, 2016 was $7.0 million, and as of December 31, 2015 was $9.5 million.

Metabasis

In connection with the acquisition of Metabasis in January 2010, we entered into four CVR agreements with Metabasis shareholders. 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, 2016 was $2.5 million, and as of December 31, 2015 was $4.0 million.
Leases and Off-Balance Sheet Arrangements

We lease our office and research facilities under operating lease arrangements with varying terms through November 2019. The 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 leases which expire between 2015 and 2023. The sublease agreements provide for a 3% increase in annual rents. We had no off-balance sheet arrangements at June 30, 2016 and December 31, 2015.

Cash Flows

Operating Activities

Net cash provided by operating activities in the first half of 2016 was $23.5 million compared to $17.6 million for the first half of 2015.

The net cash provided for the first half of 2016 reflects net income of $0.4 million, adjusted by $33.7 million of non-cash items to reconcile net income to net cash generated from operations. These reconciling items primarily reflect stock-based compensation of $8.8 million, amortization of debt discount and issuance fees of $5.4 million, depreciation and amortization of $5.4 million, loss from Viking Therapeutics of $12.7 million, realized gain on investments of $0.6 million, $1.6 million increase in the estimated fair value of contingent liabilities, fair value adjustment for Viking note receivable and warrants of $0.3 million and deferred income taxes of $0.2 million. The cash generated during the six months ended June 30, 2016 is further impacted by changes in operating assets and liabilities due primarily to an increase in accounts receivable of $3.8 million, a decrease in accounts payable and accrued liabilities of $3.3 million and an increase in inventory of $2.2 million. Partially offsetting, cash generated for the period was impacted by a decrease in other current assets of $0.6 million.

The net cash provided for the first half of 2015 reflects net income of $21.9 million, adjusted by $7.3 million of non-cash items to reconcile net income to net cash generated from operations. These reconciling items primarily reflect stock-based compensation of $6.7 million, amortization of debt discount and issuance fees of $5.1 million, depreciation and amortization of $1.3 million, gain on deconsolidation of Viking of $28.2 million, loss from VikingTherapeutics of $0.9 million, realized gain on investments of $0.5 million, and deferred income taxes of $0.3 million. The cash generated during the six months ended June 30, 2015 is further impacted by changes in operating assets and liabilities due primarily to a decrease in accounts receivable of $7.1 million and a decrease in restricted cash of $0.7 million. Partially offsetting, cash generated for the period was impacted by an increase in other current assets of $0.5 million, a decrease in accounts payable and accrued liabilities of $3.1 million, an increase in other long-term assets of $0.6 million, and an increase in inventory of $0.5 million.

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Investing Activities

Net cash used in investing activities in the first half of 2016 was $61.5 million compared to $75.0 million for the first half of 2015.

The net cash used for the first half of 2016 primarily reflects cash paid to acquire OMT (net of cash acquired) of $92.5 million, the purchase of short-term investments of $49.9 million, purchase of commercial license rights of $17.7 million, payments to CVR holders and other contingency payments of $5.6 million, purchase of Viking common stock and warrants of $0.7 million and purchase of property and equipment, primarily related to our new office headquarters of $1.0 million, partially offset by proceeds from sales and maturity of short-term investments of $22.1 million and $83.5 million respectively.

The net cash used for the first half of 2015 primarily reflects the purchase of short-term investments of $60.4 million, investment in Viking of $9.0 million, purchase of commercial license rights of $4.0 million, payments to CVR holders and other contingency payments of $3.7 million, and reduction in cash from deconsolidation of Viking of $0.2 million partially offset by proceeds from short-term investments of $2.4 million.

Financing Activities

Net cash provided by financing activities in the first half of 2016 was $2.0 million compared to $5.4 million for the first half of 2015.

The net cash provided for the first half of 2016 reflects $2.5 million of proceeds received from stock option exercises and our employee stock purchase plan, partially offset by $0.5 million purchase of common stock for net settlement of RSUs vested and released during the quarter.
    
The net cash provided for the first half of 2015 reflects $5.4 million of proceeds received from stock option exercises and our employee stock purchase plan.


Critical Accounting Policies

Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from interest rates and equity prices which could affect our results of operations, financial condition and cash flows. We manage our exposure to these market risks through our regular operating and financing activities.

Investment Portfolio Risk
At June 30, 2016, our investment portfolio included investments in available-for-sale equity securities of $45.6 million. These securities are subject to market risk and may decline in value based on market conditions.

Equity Price Risk

Our 2019 Convertible Senior Notes include conversion and settlement provisions that are based on the price of our common stock at conversion or maturity of the notes, as applicable. The minimum amount of cash we may be required to pay is $245.0 million, but will ultimately be determined by the price of our common stock. The fair values of our 2019 Convertible Senior Notes are dependent on the price and volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. In order to minimize the impact of potential dilution to our common stock upon the conversion of the 2019 Convertible Senior Notes, we entered into convertible bond hedges covering 3,264,643 shares of our common stock. Concurrently with entering into the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants with an exercise price of approximately $125.08 per share, subject to adjustment. Throughout the

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term of the 2019 Convertible Senior Notes, the notes may have a dilutive effect on our earnings per share to the extent the stock price exceeds the conversion price of the notes. Additionally, the warrants may have a dilutive effect on our earnings per share to the extent the stock price exceeds the strike price of the warrants.

Foreign currency risk

Through our licensing and business operations, we are exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenues and profit translated into U.S. dollars. Our collaborative partners sell our products worldwide in currencies other than the U.S. dollar. Because of this, our revenues from royalty payments are subject to risk from changes in exchange rates.

We purchase Captisol from Hovione, located in Lisbon, Portugal. Payments to Hovione are denominated and paid in U.S. dollars, however the unit price of Captisol contains an adjustment factor which is based on the sharing of foreign currency risk between the two parties. The effect of an immediate 10% change in foreign exchange rates would not have a material impact on our financial condition, results of operations or cash flows. We do not currently hedge our exposures to foreign currency fluctuations.

Interest rate risk
We are exposed to market risk involving rising interest rates. To the extent interest rates rise, our interest costs could increase. An increase in interest costs of 10% would not have a material impact on our financial condition, results of operations or cash flows.


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