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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, 2020
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-20200930_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 3, 2020, the registrant had 16,091,319 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
2019 Annual ReportAnnual 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 InitioAb Initio Biotherapeutics, Inc.
AmgenAmgen, Inc.
ANDAAbbreviated New Drug Application
ASCAccounting Standards Codification
ASUAccounting Standards Update
AziyoAziyo Med, LLC
CECaptisol-enabled
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
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
GileadGilead Sciences, Inc.
GRAGlucagon receptor antagonist
IcagenIcagen, Inc.
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
MetabasisMetabasis Therapeutics, Inc.
NDANew Drug Application
PfenexPfenex Inc.
PfizerPfizer Inc.
Q3 2019The Company's fiscal quarter ended September 30, 2019
Q3 2020The Company's fiscal quarter ended September 30, 2020
RoivantRoivant Sciences GmbH
Roivant License AgreementLicense Agreement, dated March 5, 2018, between Ligand and Roivant
RetrophinRetrophin, Inc.
SBCShare-based compensation expense
SECSecurities and Exchange Commission
SelexisSelexis, SA
sNDASupplemental New Drug Application
TaurusTaurus Biosciences, LLC
TevaTeva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
VernalisVernalis plc
VikingViking Therapeutics, Inc.
xCella
xCella Biosciences, Inc.
YTDYear-to-date

3



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, 2020December 31, 2019
ASSETS
Current assets:
   Cash and cash equivalents$456,916 $71,543 
   Short-term investments338,154 998,324 
   Accounts receivable, net32,907 30,387 
   Inventory13,430 7,296 
   Income taxes receivable 11,361 
   Other current assets3,191 4,734 
   Assets held for sale13,143  
      Total current assets857,741 1,123,645 
Deferred income taxes, net27,026 25,608 
Intangible assets, net224,582 210,448 
Goodwill102,136 95,229 
Commercial license and other economic rights, net10,834 20,090 
Property and equipment, net7,157 7,185 
Operating lease right-of-use assets4,269 10,353 
Other assets13,704 2,357 
      Total assets$1,247,449 $1,494,915 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable $10,169 $2,420 
   Accrued liabilities14,498 9,836 
   Income taxes payable674  
   Current contingent liabilities1,194 2,607 
   Deferred revenue5,404 2,139 
   Liabilities related to assets held for sale10,361  
      Total current liabilities42,300 17,002 
2023 convertible senior notes, net454,973 638,959 
Long-term contingent liabilities9,604 6,335 
Deferred income taxes, net13,508 32,937 
Long-term operating lease liabilities3,920 9,970 
Other long-term liabilities25,320 22,480 
      Total liabilities549,625 727,683 
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at September 30, 2020 and December 31, 2019
  
   Common stock, $0.001 par value; 60,000 shares authorized; 16,091 and 16,823 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
16 17 
   Additional paid-in capital313,057 367,326 
   Accumulated other comprehensive loss(1,441)(216)
   Retained earnings 386,192 400,105 
      Total stockholders' equity697,824 767,232 
      Total liabilities and stockholders' equity$1,247,449 $1,494,915 

See accompanying notes to unaudited condensed consolidated financial statements.



4






LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months endedNine months ended
September 30,September 30,
2020201920202019
Revenues:
   Royalties$9,005 $9,767 $22,751 $35,931 
   Captisol23,389 6,849 68,966 24,357 
   Contract revenue9,454 8,192 24,712 32,991 
Total revenues41,848 24,808 116,429 93,279 
Operating costs and expenses:
   Cost of Captisol6,353 3,147 18,680 9,410 
   Amortization of intangibles3,875 3,552 11,285 10,560 
   Research and development12,853 13,742 37,476 37,244 
   General and administrative15,020 9,525 34,353 31,607 
Total operating costs and expenses38,101 29,966 101,794 88,821 
Gain from sale of Promacta license   812,797 
Income (loss) from operations3,747 (5,158)14,635 817,255 
Other income (expense):
   Loss from short-term investments(9,862)(13,297)(17,143)(8,524)
   Interest income991 7,396 7,690 22,590 
   Interest expense(6,269)(8,993)(21,030)(26,911)
   Other income (expense), net(219)181 1,940 404 
Total other income (loss), net(15,359)(14,713)(28,543)(12,441)
Income (loss) before income taxes(11,612)(19,871)(13,908)804,814 
Income tax benefit (expense)4,911 4,620 5,162 (168,147)
Net income (loss)$(6,701)$(15,251)$(8,746)$636,667 
     Basic net income (loss) per share$(0.42)$(0.81)$(0.54)$32.51 
     Shares used in basic per share calculations16,082 18,770 16,222 19,586 
     Diluted net income (loss) per share$(0.42)$(0.81)$(0.54)$31.29 
     Shares used in diluted per share calculations16,082 18,770 16,222 20,349 


See accompanying notes to unaudited condensed consolidated financial statements.
5






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

Three months endedNine months ended
September 30,September 30,
2020201920202019
Net income (loss):$(6,701)$(15,251)$(8,746)$636,667 
Unrealized net gain (loss) on available-for-sale securities, net of tax(54)(187)(84)546 
Foreign currency translation923 (764)(1,141)(1,015)
Comprehensive income (loss)$(5,832)$(16,202)$(9,971)$636,198 

See accompanying notes to unaudited condensed consolidated financial statements.

6



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

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained earningsTotal stockholders' equity
SharesAmount
Balance at January 1, 202016,823 $17 $367,326 $(216)$400,105 $767,232 
Issuance of common stock under employee stock compensation plans, net105 — (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, 202016,050 $16 $295,940 $(4,867)$370,807 $661,896 
Issuance of common stock under employee stock compensation plans, net21 — 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, 202016,071 $16 $304,404 $(2,310)$392,893 $695,003 
Issuance of common stock under employee stock compensation plans, net20 — 910 — — 910 
Share-based compensation— — 7,740 — — 7,740 
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (54)— (54)
Foreign currency translation adjustment— — — 923 — 923 
Other— — 3 — — 3 
Net loss— — — — (6,701)$(6,701)
Balance at September 30, 202016,091 $16 $313,057 $(1,441)$386,192 $697,824 




7



Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained 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 

See accompanying notes to unaudited condensed consolidated financial statements.
8



LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
September 30,
20202019
Cash flows from operating activities:
Net income (loss)$(8,746)$636,667 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain from sale of Promacta license (812,797)
Change in estimated fair value of contingent liabilities(397)762 
Depreciation and amortization of intangible assets12,645 11,648 
Amortization of premium (discount) on investments, net1,507 (7,477)
Amortization of debt discount and issuance fees17,743 22,562 
Amortization of commercial license and other economic rights2,505 10,047 
Gain on debt extinguishment(659) 
Share-based compensation20,752 18,215 
Deferred income taxes(19,311)57,766 
Loss from short-term investments17,143 8,524 
Other(1,525)(4,253)
Changes in operating assets and liabilities, net of acquisition:
     Accounts receivable, net(5,080)33,892 
     Inventory(4,914)(1,500)
     Accounts payable and accrued liabilities 9,894 (3,302)
     Income tax receivable and payable12,026 16,571 
     Other economic rights (12,000)
     Other466 2,678 
                Net cash provided by (used in ) operating activities54,049 (21,997)
Cash flows from investing activities:
Proceeds from sale of Promacta license 812,797 
Purchase of short-term investments(337,016)(1,682,586)
Proceeds from sale of short-term investments389,296 144,182 
Proceeds from maturity of short-term investments589,155 1,274,851 
Cash paid for acquisition, net of cash acquired(26,857)(11,840)
Cash paid for equity method investment(500)(1,000)
Other(228)(6,307)
               Net cash provided by investing activities613,850 530,097 
Cash flows from financing activities:
Repurchase of 2023 Notes(203,210) 
Repayment of 2019 Notes (27,323)
Proceeds from convertible bond hedge settlement 12,401 
Payments to convertible bond holders for bond conversion (12,401)
Net proceeds from stock option exercises and ESPP2,459 2,856 
Taxes paid related to net share settlement of equity awards(1,429)(2,906)
Share repurchase(73,287)(371,106)
Payments to CVR Holders(2,325)(3,000)
Other(5,224) 
               Net cash used in financing activities(283,016)(401,479)
Effect of exchange rate changes on cash(50)(88)
Net increase in cash, cash equivalents and restricted cash384,833 106,533 
Cash, cash equivalents and restricted cash at beginning of period72,273 119,780 
Cash, cash equivalents and restricted cash at end of period$457,106 $226,313 

9



Supplemental disclosure of cash flow information:
Interest paid$2,531 $3,015 
Taxes paid$2,130 $93,817 
Restricted cash in other current assets$190 $1,011 
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$381 $ 
Accrued inventory purchases$1,390 $ 
Accrued financing lease payment$2,500 $ 
Unrealized gain (loss) on AFS investments$(109)$699 
See accompanying notes to unaudited condensed consolidated financial statements.
10



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 second quarter of 2020, we began to include our investment in Viking in “short-term investments” in the condensed consolidated balance sheet, and present “gain (loss) from short-term investments” in the condensed consolidated statements of operations 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 nine months ended September 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 have taken actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have restricted in-person access to our executive offices, our administrative employees are mostly working remotely, and we have limited the number of 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.

11



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 FDA-approved treatment for COVID-19 for the treatment of patients with COVID-19 requiring hospitalization and, as a result, we have extended our Captisol supply agreement with Gilead until September 2030 and 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 or further restricting 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
12




In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The new guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. This standard removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This standard is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.

We 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, and contract revenue for services, license fees and development, regulatory and sales based milestone payments.

Royalties

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.

Contract Revenue

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

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

Captisol Sales

We recognize 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
13



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 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, 2020, the amount recognized as revenue that was previously deferred was $5.8 million and $8.3 million, respectively. 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. We expect to satisfy the performance obligations related to long-term deferred revenue within the next 3 years.

Disaggregation of Revenue

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

Three months endedNine months ended
September 30,September 30,
2020201920202019
Royalties
Kyprolis$6,923 $7,602 $16,809 $16,317 
Evomela1,802 1,515 4,577 3,570 
Other280 650 1,365 1,851 
Promacta   14,193 
$9,005 $9,767 $22,751 $35,931 
Captisol$23,389 $6,849 $68,966 $24,357 
Contract
Service Revenue$7,341 $4,548 $15,280 $12,990 
License Fees158 243 1,793 3,083 
Milestone960 2,674 4,766 15,425 
Other995 727 2,873 1,493 
$9,454 $8,192 $24,712 $32,991 
Total$41,848 $24,808 $116,429 $93,279 

14



Short-term Investments
Our investments, excluding investment in Viking, consist of the following at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020December 31, 2019
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Short-term investments
     Bank deposits$68,226 $101 $ $68,327 $411,690 $188 $(3)$411,875 
     Corporate bonds27,125 102  27,227 63,818 161  63,979 
     Commercial paper47,943 60  48,003 210,525 43 (16)210,552 
     Corporate equity securities4,484 415 (2,624)2,275 4,506 416 (1,850)3,072 
     Mutual fund151,513 204  151,717 250,635  (249)250,386 
     Warrants 155  155  125  125 
$299,291 $1,037 $(2,624)$297,704 $941,174 $933 $(2,118)$939,989 

In addition, as of September 30, 2020 and December 31, 2019, we recorded shares of Viking common stock we own at fair value of $33.9 million and $48.4 million, respectively, in “Short-term investments” in our consolidated balance sheets. We also own warrants to purchase up to 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in “Short-term investments” in our consolidated balance sheet at fair value of $6.6 million and $9.9 million at September 30, 2020 and December 31, 2019, respectively.

Gain (loss) from short-term investments on our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.

For available-for-sale debt securities with unrealized losses, the new credit losses standard (Topic 326) now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to be the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The provisions of the new credit losses standard did not have a material impact on our available-for-sale debt securities during the three and nine months ended September 30, 2020.

The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):

September 30, 2020
Amortized CostFair Value
Within one year$121,452 $121,610 
After one year through five years21,842 21,947 
After five years  
Total$143,294 $143,557 

The following table summarizes our available-for-sale debt securities in an unrealized loss position (in thousands):

15



Less than 12 months12 months or greaterTotal
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
September 30, 2020
Bank deposits$ $5,011 $ $ $ $5,011 
Corporate bonds(0.4)3,007   (0.4)3,007 
Total$(0.4)$8,018 $ $ $(0.4)$8,018 
December 31, 2019
Bank deposits$(3)$58,584 $ $ $(3)$58,584 
Commercial paper(16)79,363   (16)79,363 
Total$(19)$137,947 $ $ $(19)$137,947 

Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 2 positions which were in an unrealized loss position as of September 30, 2020. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the three and nine months ended September 30, 2020.

Accounts Receivable and Allowance for Credit Losses

Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three and nine months ended September 30, 2020, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the surrounding novel coronavirus (COVID-19) pandemic on our business and recorded an adjustment of $(0.1) million and $0.2 million, of allowance for credit losses, respectively, as of September 30, 2020.

Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):
September 30,December 31,
20202019
     Goodwill$102,136 $95,229 
Definite lived intangible assets
     Complete technology257,317 242,813 
          Less: accumulated amortization(1)
(59,869)(50,203)
     Trade name2,642 2,642 
          Less: accumulated amortization(1,279)(1,180)
     Customer relationships40,700 29,600 
          Less: accumulated amortization(14,929)(13,224)
Total goodwill and other identifiable intangible assets, net$326,718 $305,677 
(1) Accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
16



Commercial License and Other Economic Rights

Commercial license and other economic rights consist of the following (in thousands):
September 30, 2020December 31, 2019
Gross
Adjustments(1)
NetGross
Adjustments(2)
Net
Aziyo and CorMatrix$17,696 $(9,644)$