lgnd-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________________


☒			Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020


☐			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
(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 Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 4, 2020, the registrant had 16,078,143 shares of common stock outstanding.

LIGAND PHARMACEUTICALS INCORPORATED

QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. Condensed Consolidated Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Stockholders' Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	29
	ITEM 4. Controls and Procedures	29
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	30
	ITEM 1A. Risk Factors	30
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
	ITEM 3. Defaults Upon Senior Securities	32
	ITEM 4. Mine Safety Disclosures	32
	ITEM 5. Other Information	32
	ITEM 6. Exhibits	34
	SIGNATURE	34


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
2019 Annual Report			Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 27, 2020
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 Initio			Ab Initio Biotherapeutics, Inc.
Acrotech Biopharma			Acrotech Biopharma, LLC
Amgen			Amgen, Inc.
ANDA			Abbreviated New Drug Application
ASC			Accounting Standards Codification
ASCO			American Society of Clinical Oncology
ASU			Accounting Standards Update
Aziyo			Aziyo Med, LLC
CE			Captisol-enabled
cGMP			current Good Manufacturing Practices
Company			Ligand Pharmaceuticals Incorporated, including subsidiaries
CorMatrix			CorMatrix Cardiovascular, Inc.
CVR			Contingent value right
Crystal			Crystal Bioscience, Inc.
CStone Pharmaceuticals			CStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDex			CyDex Pharmaceuticals, Inc.
Dianomi Therapeutics			Dianomi Therapeutics, Inc.
ESPP			Employee Stock Purchase Plan, as amended and restated
EUA			Emergency Use Authorization
FASB			Financial Accounting Standards Board
FDA			Food and Drug Administration
GAAP			Generally accepted accounting principles in the United States
Gloria Biosciences			Gloria Biosciences, Co.
Glucagon CVR			The contingent value right issued pursuant to the Glucagan CVR Agreement, dated January 10, 2010 by and between the Company, Meatabasis and the other parties named therein
Gilead			Gilead Sciences, Inc.
GRA			Glucagon receptor antagonist
Icagen			Icagen, Inc.
IPR&D			In-process Research and Development
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
Metabasis			Metabasis Therapeutics, Inc.
NDA			New Drug Application
Pfizer			Pfizer Inc.
Q2 2019			The Company's fiscal quarter ended June 30, 2019
Q2 2020			The Company's fiscal quarter ended June 30, 2020
Roivant			Roivant Sciences GmbH
Roivant License Agreement			License Agreement, dated March 5, 2018, between Ligand and Roivant
Retrophin			Retrophin, Inc.
SBC			Share-based compensation expense
SEC			Securities and Exchange Commission
Selexis			Selexis, SA
sNDA			Supplemental New Drug Application
Teva			Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
Vernalis			Vernalis plc
Viking			Viking Therapeutics, Inc.
YTD			Year-to-date

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)


	June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	115,156	$	71,543
Short-term investments	694,724		998,324
Accounts receivable, net	41,874		30,387
Inventory	3,702		7,296
Income taxes receivable	2,679		11,361
Other current assets	5,489		4,734
Total current assets	863,624		1,123,645
Deferred income taxes, net	26,411		25,608
Intangible assets, net	215,295		210,448
Goodwill	103,369		95,229
Commercial license and other economic rights, net	10,606		20,090
Property and equipment, net	7,883		7,185
Operating lease right-of-use assets	9,689		10,353
Other assets	6,059		2,357
Total assets	$	1,242,936	$	1,494,915
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	6,103	$	2,420
Accrued liabilities	12,828		9,836
Current contingent liabilities	1,416		2,607
Deferred revenue	8,917		2,139
Total current liabilities	29,264		17,002
2023 convertible senior notes, net	449,672		638,959
Long-term contingent liabilities	10,005		6,335
Deferred income taxes, net	23,340		32,937
Long-term operating lease liabilities	9,181		9,970
Other long-term liabilities	26,471		22,480
Total liabilities	547,933		727,683
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at June 30, 2020 and December 31, 2019	—		—
Common stock, $0.001 par value; 60,000 shares authorized; 16,071 and 16,823 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	16		17
Additional paid-in capital	304,404		367,326
Accumulated other comprehensive loss	(2,310)		(216)
Retained earnings	392,893		400,105
Total stockholders' equity	695,003		767,232
Total liabilities and stockholders' equity	$	1,242,936	$	1,494,915

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2020		2019		2020		2019
Revenues:
Royalties	$	7,181	$	6,626	$	13,746	$	26,164
Captisol	24,468		8,549		45,577		17,508
Service revenue	4,582		4,559		7,939		8,442
Contract revenue	5,189		5,253		7,319		16,357
Total revenues	41,420		24,987		74,581		68,471
Operating costs and expenses:
Cost of Captisol	7,644		2,405		12,327		6,263
Amortization of intangibles	3,875		3,505		7,410		7,008
Research and development	12,732		12,213		24,623		23,502
General and administrative	10,069		10,994		19,333		22,082
Total operating costs and expenses	34,320		29,117		63,693		58,855
Gain from sale of Promacta license	—		—		—		812,797
Income from operations	7,100		(4,130)		10,888		822,413
Other income (expense):
Gain (loss) from short-term investments	23,460		(15,061)		(7,281)		4,488
Interest income	1,969		9,285		6,699		15,194
Interest expense	(6,213)		(9,012)		(14,761)		(17,918)
Other income, net	1,803		890		2,159		508
Total other income (loss), net	21,019		(13,898)		(13,184)		2,272
Income (loss) before income taxes	28,119		(18,028)		(2,296)		824,685
Income tax benefit (expense)	(6,033)		3,609		251		(172,767)
Net income (loss)	$	22,086	$	(14,419)	$	(2,045)	$	651,918

Basic net income (loss) per share	$	1.38	$	(0.74)	$	(0.13)	$	32.60
Shares used in basic per share calculations	16,055		19,558		16,292		20,000

Diluted net income (loss) per share	$	1.32	$	(0.74)	$	(0.13)	$	31.34
Shares used in diluted per share calculations	16,694		19,558		16,292		20,799

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2020		2019		2020		2019
Net income (loss):	$	22,086	$	(14,419)	$	(2,045)	$	651,918
Unrealized net gain (loss) on available-for-sale securities, net of tax	2,742		503		(30)		733
Foreign currency translation	(185)		(542)		(2,064)		(251)

Comprehensive income (loss)	$	24,643	$	(14,458)	$	(4,139)	$	652,400

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)


	Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2020	16,823	$	17	$	367,326	$	(216)	$	400,105	$	767,232
Issuance of common stock under employee stock compensation plans, net	105	—		(1,008)		—		—		(1,008)
Share-based compensation	—	—		5,653		—		—		5,653
Repurchase of common stock	(878)	(1)		(73,286)		—		—		(73,287)
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(2,772)		—		(2,772)
Foreign currency translation adjustment	—	—		—		(1,879)		—		(1,879)
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(2,745)		—		—		(2,745)
Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax	—	—		—		—		(5,167)		(5,167)
Net loss	—	—		—		—		(24,131)		(24,131)
Balance at March 31, 2020	16,050	$	16	$	295,940	$	(4,867)	$	370,807	$	661,896
Issuance of common stock under employee stock compensation plans, net	21	—		1,128		—		—		1,128
Share-based compensation	—	—		7,359		—		—		7,359
Unrealized net gain on available-for-sale securities, net of deferred tax	—	—		—		2,742		—		2,742
Foreign currency translation adjustment	—	—		—		(185)		—		(185)
Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(23)		—		—		(23)
Net income	—	—		—		—		22,086		22,086
Balance at June 30, 2020	16,071	$	16	$	304,404	$	(2,310)	$	392,893	$	695,003


	Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Retained earnings (Accumulated deficit)		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2019	20,765	$	21	$	791,114	$	(1,024)	$	(229,197)	$	560,914
Issuance of common stock under employee stock compensation plans, net	135	—		(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, 2019	19,664	$	20	$	643,317	$	(503)	$	437,140	$	1,079,974
Issuance of common stock under employee stock compensation plans, net	17	—		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, 2019	19,390	$	19	$	619,255	$	(542)	$	422,721	$	1,041,453

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six months ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net income (loss)	$	(2,045)	$	651,918
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain from sale of Promacta license	—		(812,797)
Change in estimated fair value of contingent liabilities	(371)		984
Depreciation and amortization of intangible assets	7,869		7,699
Amortization of premium (discount) on investments, net	1,198		(6,023)
Amortization of debt discount and issuance fees	12,442		14,999
Amortization of commercial license and other economic rights	2,733		5,452
Gain on debt extinguishment	(659)		—
Share-based compensation	13,012		11,918
Deferred income taxes	(8,890)		55,661
Loss (gain) from short-term investments	7,281		(4,488)
Other	(1,499)		(4,429)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net	(11,466)		35,591
Inventory	6,977		(4,573)
Accounts payable and accrued liabilities	2,909		(3,764)
Income tax receivable	8,673		47,455
Other economic rights	—		(12,000)
Other	3,140		597
Net cash provided by (used in ) operating activities	41,304		(15,800)

Cash flows from investing activities:
Proceeds from sale of Promacta license	—		812,797
Purchase of short-term investments	(336,726)		(1,281,274)
Proceeds from sale of short-term investments	179,431		43,724
Proceeds from maturity of short-term investments	452,405		791,006
Cash paid for acquisition	(15,140)		—
Other	1,809		(5,673)
Net cash provided by investing activities	281,779		360,580

Cash flows from financing activities:
Repurchase of 2023 Notes	(203,210)		—
Net proceeds from stock option exercises and ESPP	1,550		2,643
Taxes paid related to net share settlement of equity awards	(1,429)		(2,893)
Share repurchase	(73,287)		(189,917)
Payments to CVR Holders	(1,800)		—
Other	(1,134)		—
Net cash used in financing activities	(279,310)		(190,167)
Effect of exchange rate changes on cash	(160)		7
Net increase in cash, cash equivalents and restricted cash	43,613		154,620
Cash, cash equivalents and restricted cash at beginning of period	72,273		119,780
Cash, cash equivalents and restricted cash at end of period	$	115,886	$	274,400


Supplemental disclosure of cash flow information:
Interest paid	$	2,531	$	2,915
Taxes paid	$	—	$	69,703
Restricted cash in other current assets	$	730	$	1,353

Supplemental schedule of non-cash activity:



Accrued fixed asset purchases	$	292	$	54

Accrued inventory purchases	$	3,553	$	—
Unrealized gain (loss) on AFS investments	$	(38)	$	938

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 2019 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, effective the first quarter of 2020, we began to present service revenue and contract revenue separately, which were combined in license fees, milestones and other revenues in prior years. As a result, service revenue and contract revenue in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 have been reclassified to conform to the current period presentation. In addition, effective the second quarter of 2020, we began to include our investment in Viking in “short-term investments” in the condensed consolidated balance sheet as of June 30, 2020, and present “gain (loss) from short-term investments” in the condensed consolidated statements of operations for the three and six months ended June 30, 2020 to include both the gain (loss) from investment in Viking and other short-term investments, which was previously included in “other income, net”. As a result, the audited consolidated balance sheet as of December 31, 2019 and the condensed consolidated statements of operations for the three and six months ended June 30, 2019 have been reclassified to conform to the current period presentation.

Significant Accounting Policies

We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2019 Annual Report.

Use of Estimates

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

Impact of COVID-19 Pandemic

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees and partners, patients, communities and business operations, as well as the U.S. and global economy and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have restricted in-person access to our executive offices, our administrative employees are mostly working remotely, and we have limited the number of staff in our research and development laboratories and other facilities. The continued spread of the COVID-19 pandemic and the measures taken by the governments of countries have affected, and could continue to affect, our business and the business of our partners, including future disruptions to our supply chain and the manufacture or shipment of drug substance and finished drug product for Captisol, delays by us or our partners in the initiation or enrollment of patients in clinical trials, discontinuations by patients enrolled in clinical trials, difficulties launching or commercializing products and other related activities, which could delay ongoing clinical trials, increase development costs,

reduce royalty revenues and have a material adverse effect on our business, financial condition and results of operations. Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues.

Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead for Veklury^® (remdesivir), the first new treatment for COVID-19 available under an EUA and is also being evaluated in multiple ongoing clinical trials and, as a result, we have worked to increase our manufacturing of Captisol to meet this increased demand. We believe our existing production capacity, together with our planned expansion, will provide adequate supply of Captisol and do not expect any significant risk or disruption to our supply chain for the foreseeable future. In addition, certain of our OmniAb and Vernalis partners have initiated antibody discovery programs for the potential treatment of COVID-19.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, the businesses of our partners, our results of operations and our financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, including the timing and extent of governments reopening activities, and the economic impact on local, regional, national and international markets.

Accounting Standards Recently Adopted

Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. This standard includes our financial instruments, such as accounts receivable, investments that are generally of high credit quality, and commercial license rights. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new guidance requires us to identify, analyze, document and support new methodologies for quantifying expected credit loss estimates for our financial instruments, using information such as historical experience and current economic conditions, plus the use of reasonable supportable forecast information. We adopted ASU 2016-13 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance sheet of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment, net of tax, recorded on January 1, 2020, is approximately $5.2 million on our unaudited condensed consolidated balance sheet as of January 1, 2020. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under previously applicable accounting standards. See additional disclosure on credit losses under “Short-term Investments”, “Accounts Receivable and Allowance for Credit Losses” and “Commercial License and Other Economic Rights” discussed below.

Goodwill Impairment Testing - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Income Taxes - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The standard is expected to reduce cost and complexity related to accounting for income taxes. The new guidance eliminates certain exceptions and clarifies and amends existing guidance to promote consistent application among reporting entities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. We adopted this standard on a prospective basis on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

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

Revenue

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

Royalties, Service Revenue, and Contract Revenue

We receive royalty revenue on sales by our partners of products covered by patents that we own. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded when the underlying sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

We recognize service revenue for contracted R&D services performed for our customers over time. We measure our progress using an input method based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.

Our contract revenue includes license fees and 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.

Captisol 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. We have elected to recognize the cost for freight and shipping when or after control over Captisol material has transferred to the customer as an expense in cost of Captisol. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.

Deferred Revenue

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed 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 six months ended June 30, 2020, the amount recognized as revenue that was previously deferred was $2.0 million and $2.4 million, respectively. During the three and six months ended June 30, 2019, the amount recognized as revenue that was previously deferred was $2.7 million and $4.1 million, respectively.

Disaggregation of Revenue

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


		Three months ended												Six months ended
		June 30,												June 30,
		2020				2019				2020				2019
Royalties
	Kyprolis	$	5,481			$	4,882			$	9,886			$	8,715
	Evomela	1,199				1,144				2,775				2,055
	Other	501				600				1,085				1,201
	Promacta	—				—				—				14,193
		$	7,181			$	6,626			$	13,746			$	26,164

Captisol		$	24,468			$	8,549			$	45,577			$	17,508

Service Revenue				$	4,582			$	4,559			$	7,939			$	8,442

Contract Revenue
	License Fees	$	660			$	1,990			$	1,635			$	2,840
	Milestone	3,472				2,497				3,806				12,751
	Other	1,057				766				1,878				766
		$	5,189			$	5,253			$	7,319			$	16,357

Total				$	41,420			$	24,987			$	74,581			$	68,471

Short-term Investments

Our investments, excluding investment in Viking, consist of the following at June 30, 2020 and December 31, 2019 (in thousands):


	June 30, 2020														December 31, 2019
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

Short-term investments
Bank deposits	$	269,114	$	221	$	(56)	$	269,279	$	411,690	$	188	$	(3)	$	411,875
Corporate bonds	55,380		125		(94)		55,411		63,818		161		—		63,979
Commercial paper	163,590		134		—		163,724		210,525		43		(16)		210,552
Corporate equity securities	4,506		634		(