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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________


Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From ______ to ______ .
Commission File Number: 001-33093
lgnd-20190930_g1.jpg
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
CA92121
(Address of principal executive offices)(Zip Code)
(858) 550-7500
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol:
Name of each exchange on which registered:
Common Stock , par value $0.001 per share
LGND
The Nasdaq Global Market

________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)



Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of November 6, 2019, the registrant had 17,563,389 shares of common stock outstanding.




LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

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



2


GLOSSARY OF TERMS AND ABBREVIATIONS
AbbreviationDefinition
2018 Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019
2019 Notes$245.0 million aggregate principal amount of convertible senior unsecured notes due 2019
2023 Notes$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
Ab InitioAb Initio Biotherapeutics, Inc.
AbvivoAbvivo, LLC
AmgenAmgen, Inc.
ANDAAbbreviated New Drug Application
ASCAccounting Standards Codification
ASUAccounting Standards Update
AziyoAziyo Med, LLC
BeiGeneBeiGene Switzerland GmbH
BendaRxBendaRx Corp.
CECaptisol-enabled
CEOChief Executive Officer
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
COPDChronic obstructive pulmonary disease
CorMatrixCorMatrix Cardiovascular, Inc.
CVRContingent value right
CrystalCrystal Bioscience, Inc.
CStone PharmaceuticalsCStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDexCyDex Pharmaceuticals, Inc.
Dianomi TherapeuticsDianomi Therapeutics, Inc.
ESPPEmployee Stock Purchase Plan, as amended and restated
FASBFinancial Accounting Standards Board
FDAFood and Drug Administration
GAAPGenerally accepted accounting principles in the United States
GigaGen GigaGen, Inc.
GPCR
G-protein coupled receptor
GRAGlucagon receptor antagonist
HikmaHikma Pharmaceuticals PLC
IPR&DIn-process Research and Development
Kira PharmaKira Pharmaceuticals Ltd.
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
Marinus PharmaceuticalsMarinus Pharmaceuticals, Inc.
MetabasisMetabasis Therapeutics, Inc.
MetavantMetavant Sciences
MillenniumMillennium Pharmaceuticals, Inc.
NDANew Drug Application
NovanNovan, Inc.
NovartisNovartis AG
Nucorion PharmaceuticalsNucorion Pharmaceuticals, Inc.
OptheaOpthea Limited
OTTIOther-than-temporary impairment
PFSProgression-free Survival
PfizerPfizer Inc.
Q3 2018The Company's fiscal quarter ended September 30, 2018
Q3 2019The Company's fiscal quarter ended September 30, 2019
Quadriga BioQuadriga Biosciences, Inc.
RetrophinRetrophin, Inc.
RoivantRoivant Sciences GMBH
3


Sage TherapeuticsSage Therapeutics, Inc.
SECSecurities and Exchange Commission
Seelos TherapeuticsSeelos Therapeutics, Inc.
SelexisSelexis, SA
Sermonix PharmaceuticalsSermonix Pharmaceuticals, LLC
sNDASupplemental New Drug Application
SQ InnovationSQ Innovation, Inc.
TakedaTakeda Pharmaceutical Company
Talem TherapeuticsTalem Therapeutics LLC
TevaTeva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
VernalisVernalis plc
VDPVernalis Design Platform
Verona PharmaVerona Pharma plc
VikingViking Therapeutics, Inc.
WuXiWuXi Biologics Ireland Limited
YTDYear-to-date

4


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

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except par value)
September 30, 2019December 31, 2018
ASSETS
Current assets:
   Cash and cash equivalents$225,302  $117,164  
   Short-term investments874,383  601,217  
   Investment in Viking49,856  55,448  
   Accounts receivable, net21,958  55,850  
   Inventory6,565  7,124  
   Derivative asset  22,576  
   Other current assets5,039  11,161  
      Total current assets1,183,103  870,540  
Deferred income taxes, net  46,521  
Intangible assets, net216,268  219,793  
Goodwill93,513  86,646  
Commercial license and other economic rights, net35,413  31,460  
Property and equipment, net6,411  5,372  
Operating lease right-of-use assets10,280    
Other assets2,488  471  
      Total assets$1,547,476  $1,260,803  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable $2,040  $4,183  
   Accrued liabilities13,060  19,200  
Income tax payable16,571    
   Current contingent liabilities1,794  5,717  
   Deferred revenue2,230  3,286  
   2019 convertible senior notes, net  26,433  
   Derivative liability  23,430  
      Total current liabilities35,695  82,249  
2023 convertible senior notes, net631,533  609,864  
Long-term contingent liabilities7,995  6,825  
Deferred income taxes, net3,761    
Long-term operating lease liabilities9,932    
Other long-term liabilities7,979  951  
      Total liabilities696,895  699,889  
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; none issued and outstanding at September 30, 2019 and December 31, 2018    
   Common stock, $0.001 par value; 60,000 shares authorized; 17,563 and 20,766 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively17  21  
   Additional paid-in capital444,587  791,114  
   Accumulated other comprehensive loss(1,493) (1,024) 
   Retained earnings (accumulated deficit)407,470  (229,197) 
      Total stockholders' equity850,581  560,914  
      Total liabilities and stockholders' equity$1,547,476  $1,260,803  

See accompanying notes to unaudited condensed consolidated financial statements.


5





LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months endedNine months ended
September 30,September 30,
2019201820192018
Revenues:
   Royalties$9,767  $36,127  $35,931  $88,343  
   Material sales6,849  7,027  24,357  19,030  
   License fees, milestones and other revenues8,192  2,509  32,991  84,490  
Total revenues24,808  45,663  93,279  191,863  
Operating costs and expenses:
   Cost of material sales 3,147  1,460  9,410  3,382  
   Amortization of intangibles3,552  5,725  10,560  12,309  
   Research and development13,742  5,483  37,244  19,023  
   General and administrative9,525  9,633  31,607  26,571  
Total operating costs and expenses29,966  22,301  88,821  61,285  
Gain from sale of Promacta license    812,797    
Income (loss) from operations(5,158) 23,362  817,255  130,578  
Other income (expense):
   Gain (loss) from Viking(10,520) 62,398  (5,592) 124,206  
   Interest income7,396  5,474  22,590  9,111  
   Interest expense(8,993) (11,200) (26,911) (28,133) 
   Other expense, net(2,596) (808) (2,528) (5,643) 
Total other income (loss), net(14,713) 55,864  (12,441) 99,541  
Income (loss) before income taxes(19,871) 79,226  804,814  230,119  
Income tax benefit (expense)4,620  (11,864) (168,147) (44,316) 
Net income (loss)$(15,251) $67,362  $636,667  $185,803  
     Basic net income (loss) per share$(0.81) $3.19  $32.51  $8.77  
     Shares used in basic per share calculations18,770  21,148  19,586  21,189  
     Diluted net income (loss) per share$(0.81) $2.80  $31.29  $7.61  
     Shares used in diluted per share calculations18,770  24,052  20,349  24,430  


See accompanying notes to unaudited condensed consolidated financial statements.

6




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

Three months endedNine months ended
September 30,September 30,
2019201820192018
Net income (loss):$(15,251) $67,362  $636,667  $185,803  
Unrealized net gain (loss) on available-for-sale securities, net of tax(187) 87  546  73  
Foreign currency translation(764)   (1,015)   
Comprehensive income (loss)$(16,202) $67,449  $636,198  $185,876  

See accompanying notes to unaudited condensed consolidated financial statements.

7


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

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retain earnings (Accumulated deficit)Total stockholders' equity
SharesAmount
Balance at January 1, 201920,765  $21  $791,114  $(1,024) $(229,197) $560,914  
Issuance of common stock under employee stock compensation plans, net135  —  (991) —  —  (991) 
Share-based compensation—  —  5,347  —  —  5,347  
Repurchase of common stock(1,236) (1) (151,584) —  —  (151,585) 
Unrealized net gain on available-for-sale securities, net of deferred tax—  —  —  230  —  230  
Foreign currency translation adjustment—  —  —  291  —  291  
Other tax adjustments—  —  (569) —  —  (569) 
Net income—  —  —  —  666,337  666,337  
Balance at March 31, 201919,664  $20  $643,317  $(503) $437,140  $1,079,974  
Issuance of common stock under employee stock compensation plans, net17  —  740  —  —  740  
Share-based compensation—  —  6,571  —  —  6,571  
Repurchase of common stock(291) (1) (33,716) —  —  (33,717) 
Unrealized net gain on available-for-sale securities, net of deferred tax—  —  —  503  —  503  
Foreign currency translation adjustment—  —  —  (542) —  (542) 
Other tax adjustments—  —  2,343  —  —  2,343  
Net loss—  —  —  —  (14,419) (14,419) 
Balance at June 30, 201919,390  $19  $619,255  $(542) $422,721  $1,041,453  
Issuance of common stock under employee stock compensation plans, net7  —  199  —  —  199  
Share-based compensation—  —  6,297  —  —  6,297  
Repurchase of common stock(1,834) (2) (181,186) —  —  (181,188) 
Unrealized net loss on available-for-sale securities, net of deferred tax—  —  —  (187) —  (187) 
Foreign currency translation adjustment—  —  —  (764) —  (764) 
Other tax adjustments—  —  22  —  —  22  
Net loss—  —  —  —  (15,251) (15,251) 
Balance at September 30, 201917,563  $17  $444,587  $(1,493) $407,470  $850,581  


8


Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal stockholders' equity
SharesAmount
Balance at January 1, 201821,149  $21  $798,205  $2,486  $(400,924) $399,788  
Issuance of common stock under employee stock compensation plans, net166  1  5,118  —  —  5,119  
Reclassification of equity component of currently redeemable convertible notes—  —  2,781  —  —  2,781  
Share-based compensation—  —  4,555  —  —  4,555  
Repurchase of common stock(13) (1) (1,894) —  —  (1,895) 
Unrealized net loss on available-for-sale securities, net of deferred tax—  —  —  (110) —  (110) 
Cumulative-effect adjustment from adoption of ASU 2016-01—  —  —  (2,662) 2,662    
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax—  —  —  —  25,583  25,583  
Net income—  —  —  —  45,279  45,279  
Balance at March 31, 201821,302  $21  $808,765  $(286) $(327,400) $481,100  
Issuance of common stock under employee stock compensation plans, net60  —  3,296  —  —  3,296  
Reclassification of equity component of currently redeemable convertible notes—  —  16,078  —  —  16,078  
Share-based compensation—  —  4,812  —  —  4,812  
Repurchase of common stock(267) —  (50,832) —  —  (50,832) 
Unrealized net loss on available-for-sale securities, net of deferred tax—  —  —  (495) —  (495) 
Derivative associated with 2019 Notes and Bond Hedge—  —  (1,559) —  —  (1,559) 
Loss on settlement of 2019 Notes—  —  590  —  —  590  
Tax effect on 2019 Notes transactions—  —  67  —  —  67  
Derivative associated with 2023 Notes and Bond Hedge—  —  (1,807) —  —  (1,807) 
Warrant derivative in connection with 2023 Notes—  —  97,805  —  —  97,805  
Tax effect for 2023 Notes transactions—  —  (3,240) —  —  (3,240) 
Other tax adjustments—  —  208  630  —  838  
Net income—  —  —  —  73,160  73,160  
Balance at June 30, 201821,095  $21  $874,183  $(151) $(254,240) $619,813  
Issuance of common stock under employee stock compensation plans, net131  —  6,788  —  —  6,788  
Share-based compensation—  —  5,470  —  —  5,470  
Other comprehensive income—  —  —  87  —  87  
Other tax adjustments—  —  (2,964) —  2,964    
Net income—  —  —  —  67,362  67,362  
Balance at September 30, 201821,226  21  883,477  (64) (183,914) 699,520  

See accompanying notes to unaudited condensed consolidated financial statements.
9


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
September 30,
20192018
Cash flows from operating activities:
Net income$636,667  $185,803  
Adjustments to reconcile net income to net cash provided by operating activities:
Gain from sale of Promacta license(812,797)   
Non-cash change in estimated fair value of contingent liabilities762  3,637  
Depreciation and amortization12,560  11,421  
Amortization of discount on investments, net(7,477) (3,780) 
Amortization of debt discount and issuance fees22,562  25,155  
Amortization of other economic rights9,135    
Share-based compensation18,215  14,837  
Deferred income taxes57,766  44,149  
Loss (gain) from investment in Viking5,592  (121,679) 
Other(1,249) (976) 
Royalties recorded in retained earnings upon adoption of ASC 606  32,707  
Changes in operating assets and liabilities, net of effects from acquisition:
     Accounts receivable, net33,892  (21,380) 
     Inventory(1,500) (3,763) 
     Accounts payable and accrued liabilities (3,374) (42) 
     Income tax payable16,571    
     Other economic rights(12,000)   
     Other2,678  (4,602) 
                Net cash provided by (used in) operating activities(21,997) 161,487  
Cash flows from investing activities:
Proceeds from sale of Promacta license812,797    
Purchase of short-term investments(1,682,586) (1,158,290) 
Proceeds from sale of short-term investments144,182  75,993  
Proceeds from maturity of short-term investments1,274,851  381,690  
Cash paid for acquisition, net of cash acquired(11,840)   
Cash paid for equity method investment(1,000)   
Other(6,307) 2,036  
               Net cash provided by (used in) investing activities530,097  (698,571) 
Cash flows from financing activities:
Repayment of debt(27,323) (21,785) 
Gross proceeds from issuance of 2023 Notes  750,000  
Payment of debt issuance costs  (16,900) 
Proceeds from issuance of warrants  90,000  
Purchase of convertible bond hedge  (140,250) 
Proceeds from convertible bond hedge settlement12,401  52,129  
Payments to convert holders for bond conversion(12,401)   
Net proceeds from stock option exercises and ESPP2,856  18,860  
Taxes paid related to net share settlement of equity awards(2,906) (3,657) 
Share repurchase(371,106) (52,727) 
Payments to CVR Holders(3,000)   
               Net cash provided by (used in) financing activities(401,479) 675,670  
Effect of exchange rate changes on cash(88)   
Net increase in cash, cash equivalents and restricted cash106,533  138,586  
Cash, cash equivalents and restricted cash at beginning of period119,780  20,620  
Cash, cash equivalents and restricted cash at end of period$226,313  $159,206  

10


Supplemental disclosure of cash flow information:
Interest paid$3,015  $1,513  
Taxes paid$93,817  $341  
Restricted cash in other current assets$1,011  $  
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$  $4  
Unrealized gain on AFS investments$699  $  
Excess of conversion value over the principal amount of 2019 Notes paid in shares$  $(31,571) 
Value of shares reacquired under convertible bond hedge transaction entered into with 2019 Notes$  $31,571  
See accompanying notes to unaudited condensed consolidated financial statements.
11


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

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

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

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

Reclassifications

Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, our investment in Viking warrants was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018.

Prior Period Immaterial Error

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

Significant Accounting Policies

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

Use of Estimates

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

Accounting Standards Recently Adopted

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In 2018, the FASB issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, Leases (Topic 840), including its disclosure
12


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

Accounting Standards Not Yet Adopted

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

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

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period for entities that have adopted ASC 606. The standard should be applied retrospectively to the period when we initially adopted ASC 606. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

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

Revenue

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

Royalties, License Fees and Milestones

13


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

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

Material Sales

We recognize revenue when control of Captisol material is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.

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

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

Disaggregation of Revenue

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

14


Three months endedNine months ended