lgnd-20210331

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 March 31, 2021


☐			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 May 3, 2021, the registrant had 16,652,080 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	5
	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	29
	ITEM 1A. Risk Factors	30
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
	ITEM 3. Defaults Upon Senior Securities	31
	ITEM 4. Mine Safety Disclosures	31
	ITEM 5. Other Information	31
	ITEM 6. Exhibits	32
	SIGNATURE	32


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
2020 Annual Report			Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 24, 2021
2023 Notes			$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
Ab Initio			Ab Initio Biotherapeutics, Inc.
Amgen			Amgen, Inc.
ANDA			Abbreviated New Drug Application
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Aziyo			Aziyo Med, LLC
CE			Captisol-enabled
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
FASB			Financial Accounting Standards Board
FDA			Food and Drug Administration
GAAP			Generally accepted accounting principles in the United States
Gilead			Gilead Sciences, Inc.
GRA			Glucagon receptor antagonist
Icagen			Icagen, Inc.
IND			Investigational New Drug
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
Metabasis			Metabasis Therapeutics, Inc.
NDA			New Drug Application
Pfenex			Pfenex Inc.
Pfizer			Pfizer Inc.
Q1 2020			The Company's fiscal quarter ended March 31, 2020
Q1 2021			The Company's fiscal quarter ended March 31, 2021
SBC			Share-based compensation expense
SEC			Securities and Exchange Commission
Selexis			Selexis, SA
sNDA			Supplemental New Drug Application
Taurus			Taurus Biosciences, LLC
Teva			Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
Travere			Travere Therapeutics, Inc.
Viking			Viking Therapeutics, Inc.
xCella			xCella Biosciences, 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)


	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	31,853	$	47,619
Short-term investments	307,354		363,567
Accounts receivable, net	54,436		56,847
Inventory	36,932		26,487
Income taxes receivable	1,145		2,217
Other current assets	5,708		3,822
Total current assets	437,428		500,559
Deferred income taxes, net	27,432		24,320
Intangible assets, net	583,785		595,330
Goodwill	190,515		189,662
Commercial license and other economic rights, net	10,451		10,979
Property and equipment, net	16,896		14,434
Operating lease right-of-use assets	7,611		6,892
Financing lease right-of-use assets	17,950		15,842
Other assets	3,053		4,267
Total assets	$	1,295,121	$	1,362,285
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	9,469	$	3,784
Accrued liabilities	12,110		18,530
Current contingent liabilities	41,509		39,884
Deferred revenue	25,107		29,435
Current operating lease liabilities	2,173		1,885
Current financing lease liabilities	5,437		6,593
Total current liabilities	95,805		100,111
2023 convertible senior notes, net	352,313		442,293
Long-term contingent liabilities	9,548		9,249
Deferred income taxes, net	56,812		64,598
Long-term operating lease liabilities	6,081		5,643
Other long-term liabilities	28,722		30,866
Total liabilities	549,281		652,760
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at March 31, 2021 and December 31, 2020	—		—
Common stock, $0.001 par value; 60,000 shares authorized; 16,652 and 16,080 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	17		16
Additional paid-in capital	336,621		318,358
Accumulated other comprehensive loss	(856)		(801)
Retained earnings	410,058		391,952
Total stockholders' equity	745,840		709,525
Total liabilities and stockholders' equity	$	1,295,121	$	1,362,285

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
	March 31,
	2021		2020
Revenues:
Royalties	$	7,112	$	6,565
Captisol	31,272		21,109
Contract revenue	16,766		5,487
Total revenues	55,150		33,161
Operating costs and expenses:
Cost of Captisol	8,153		4,683
Amortization of intangibles	11,786		3,535
Research and development	17,879		11,891
General and administrative	12,617		9,264
Total operating costs and expenses	50,435		29,373
Income from operations	4,715		3,788
Other income (expense):
Gain (loss) from short-term investments	13,061		(30,741)
Interest income	296		4,730
Interest expense	(5,831)		(8,548)
Other income (expense), net	(6,477)		356
Total other income (loss), net	1,049		(34,203)
Income (loss) before income taxes	5,764		(30,415)
Income tax benefit	12,342		6,284
Net income (loss)	$	18,106	$	(24,131)

Basic net income (loss) per share	$	1.10	$	(1.46)
Shares used in basic per share calculations	16,435		16,529

Diluted net income (loss) per share	$	1.05	$	(1.46)
Shares used in diluted per share calculations	17,248		16,529

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
	March 31,
	2021		2020
Net income (loss):	$	18,106	$	(24,131)
Unrealized net loss on available-for-sale securities, net of tax	(55)		(2,772)
Foreign currency translation	—		(1,879)

Comprehensive income (loss)	$	18,051	$	(28,782)

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 loss		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2021	16,080	$	16	$	318,358	$	(801)	$	391,952	$	709,525
Issuance of common stock under employee stock compensation plans, net	572	1		20,580		—		—		20,581
Share-based compensation	—	—		8,405		—		—		8,405
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(55)		—		(55)
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(9,086)		—		—		(9,086)
Warrant and bond hedge unwind transactions	—	—		396		—		—		396
Tax effect for 2023 Notes transactions				(2,032)						(2,032)
Net income	—	—		—		—		18,106		18,106
Balance at March 31, 2021	16,652	$	17	$	336,621	$	(856)	$	410,058	$	745,840


	Common Stock			Additional paid in capital		Accumulated other comprehensive loss		Retained earnings (Accumulated deficit)		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 gain 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

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	March 31,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	18,106	$	(24,131)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities	1,684		(372)
Depreciation and amortization of intangible assets	12,565		3,422
Amortization of premium (discount) on investments, net	150		830
Amortization of debt discount and issuance fees	4,916		7,203
Amortization of commercial license and other economic rights	528		2,958
Loss (gain) on debt extinguishment	4,840		(659)
Share-based compensation	8,405		5,653
Deferred income taxes	(12,408)		(10,419)
Loss (gain) from short-term investments	(13,090)		25,456
Other	238		5,668
Changes in operating assets and liabilities:
Accounts receivable, net	2,411		(8,398)
Inventory	(9,670)		1,251
Accounts payable and accrued liabilities	470		2,114
Income tax receivable and payable	1,072		4,081
Deferred revenue	(5,695)		2,215
Other	(3,768)		50
Net cash provided by operating activities	10,754		16,922

Cash flows from investing activities:
Purchase of short-term investments	(72,148)		(167,374)
Proceeds from sale of short-term investments	109,407		179,431
Proceeds from maturity of short-term investments	31,500		297,005


Other	(3,644)		(526)
Net cash provided by investing activities	65,115		308,536

Cash flows from financing activities:
Repurchase of 2023 Notes	(108,822)		(203,210)
Payments under financing lease obligations	(3,801)		—
Proceeds from convertible bond hedge settlement	16,855		—
Payments to convertible bond holders for warrant purchases	(16,459)		—
Net proceeds from stock option exercises and ESPP	26,493		421
Taxes paid related to net share settlement of equity awards	(5,901)		(1,429)
Share repurchase	—		(73,287)
Payments to CVR Holders	—		(1,800)

Net cash used in financing activities	(91,635)		(279,305)
Effect of exchange rate changes on cash	—		(169)
Net increase (decrease) in cash, cash equivalents and restricted cash	(15,766)		45,984
Cash, cash equivalents and restricted cash at beginning of period	47,963		72,273
Cash, cash equivalents and restricted cash at end of period	$	32,197	$	118,257


Supplemental disclosure of cash flow information:
Interest paid	$	241	$	597

Restricted cash in other current assets	$	344	$	730

Supplemental schedule of non-cash activity:



Accrued fixed asset purchases	$	87	$	63

Accrued inventory purchases	$	775	$	1,445

Unrealized loss on AFS investments	$	(55)	$	(3,541)

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 2020 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, “contract revenue” and “service revenue” presented in the condensed consolidated statement of operations for the three months ended March 31, 2020 have been combined into “contract revenue” in the condensed consolidated statement of operations to conform with the current period presentation. In addition, “gain (loss) from Viking” and a portion of “other expense, net” that related to other short-term investments presented in the condensed consolidated statement of operations for the three months ended March 31, 2020 have been combined into “gain (loss) from short-term investments” in the condensed consolidated statement of operations to conform with 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 the Notes to Consolidated Financial Statements in our 2020 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.

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. In addition, certain of our OmniAb 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 Not Yet Adopted

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, 2021, 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 intend to adopt this standard on January 1, 2022.

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 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 months ended March 31, 2021, the amount recognized as revenue that was deferred at December 31, 2020 was $7.3 million. During the three months ended March 31, 2020, the amount recognized as revenue that was deferred at December 31, 2019 was $1.0 million.

Disaggregation of Revenue

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


		Three months ended
		March 31,
		2021		2020
Royalties
	Kyprolis	$	4,287	$	4,405
	Evomela	2,333		1,576
	Other	492		584
		$	7,112	$	6,565

Captisol		$	31,272	$	21,109

Contract revenue
	Service Revenue	$	5,462	$	3,357
	License Fees	1,043		975
	Milestone	8,417		334
	Other	1,844		821
		$	16,766	$	5,487

Total		$	55,150	$	33,161

Short-term Investments

Our short-term investments consist of the following at March 31, 2021 and December 31, 2020 (in thousands):


	March 31, 2021						December 31, 2020
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

Bank deposits	$	51,232	$	25	$	(4)		$	51,253	$	84,120	$	35	$	(1)	$	84,154
Corporate bonds	25,853		72		(8)			25,917		30,512		99		(1)		30,610
Agency bonds	4,501		—		(4)			4,497		4,499		2		—		4,501
Commercial paper	19,815		9		—			19,824		45,459		27		(1)		45,485
Corporate equity securities	4,456		3,736		—			8,192		4,466		360		(1,388)		3,438
Mutual fund	151,830		53		—			151,883		151,512		386		—		151,898
Treasury bill	—		—		—			—		3,999		—		—		3,999
Warrants	—		1,422		—			1,422		—		393		—		393
	$	257,687	$	5,317	$	(16)		$	262,988	$	324,567	$	1,302	$	(1,391)	$	324,478
Viking common stock								44,366								32,763
Viking warrants								—								6,326
Total short-term investments								$	307,354							$	363,567

During the three months ended March 31, 2021, we sold 0.3 million shares of Viking and recognized a realized gain of $2.2 million.

During the three months ended March 31, 2021, we exercised all outstanding Viking warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. As of March 31, 2021, we have zero Viking warrants outstanding.

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

Allowances are recorded for available-for-sale debt securities with unrealized losses. This limits of the amount of credit losses that can be recognized for available-for-sale debt securities to 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 credit losses standard did not have a material impact on our available-for-sale debt securities during the three months ended March 31, 2021.

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


	March 31, 2021
	Amortized Cost		Fair Value
Within one year	$	77,913	$	77,981
After one year through five years	23,488		23,509
Total	$	101,401	$	101,490

Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 11 positions which were in an unrealized loss position as of March 31, 2021. 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 and it is not more-likely-than-not 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 months ended March 31, 2021.

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 months ended March 31, 2021, 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 $0.02 million of allowance for credit losses as of March 31, 2021.

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):


	March 31,		December 31,
	2021		2020
Indefinite-lived intangible assets
Goodwill	$	190,515	$	189,662
Definite lived intangible assets
Complete technology	277,980		277,740
Less: accumulated amortization	(67,441)		(63,600)
Trade name	2,642		2,642
Less: accumulated amortization	(1,345)		(1,312)
Customer relationships	40,700		40,700
Less: accumulated amortization	(16,264)		(15,597)
Contractual relationships	362,000		362,000
Less: accumulated amortization	(14,487)		(7,243)
Total goodwill and other identifiable intangible assets, net	$	774,300	$	784,992

Commercial License and Other Economic Rights

Commercial license and other economic rights consist of the following (in thousands):


	March 31, 2021						December 31, 2020
	Gross		Adjustments(1)		Net		Gross		Adjustments(2)		Net
Aziyo and CorMatrix	$	17,696	$	(9,530)	$	8,166	$	17,696	$	(9,588)	$	8,108
Selexis and Dianomi	10,602		(8,317)		2,285		10,602		(7,731)		2,871
Total	$	28,298	$	(17,847)	$	10,451	$	28,298	$	(17,319)	$	10,979

(1) Amounts represent accumulated amortization to principal of $11.9 million and credit loss adjustments of $6.0 million as of March 31, 2021.

(2) Amounts represent accumulated amortization to principal of $11.3 million and credit loss adjustments of $6.0 million as of December 31, 2020.

Commercial license and other economics rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, and Dianomi in January 2019. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and developments as further discussed below and in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2020 Annual Report.

In May 2017, we entered into a Royalty Agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. We account for the Aziyo commercial license right as a financial asset, and in accordance with ASC 310, Receivables, we amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the Royalty Agreement with Aziyo as of March 31, 2021 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.

The payments received during the three months ended March 31, 2021 were accordingly allocated between revenue and the amortization of the commercial license rights.

Prior to 2020, we accounted for commercial license rights related to developmental pipeline products such as Selexis and Dianomi on a non-accrual basis. Starting in 2020, given the expected cash flow from the Selexis program, we started to account for the Selexis commercial license right as a financial asset in accordance with ASC 310, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the royalty agreement with Selexis as of March 31, 2021 is 21%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received during the three months ended March 31, 2021 were accordingly allocated between revenue and the amortization of the commercial license rights.

We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the credit losses standard (ASU 2016-13) on January 1, 2020. We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the three months ended March 31, 2021, we further considered the current and expected future economic and market conditions surrounding novel coronavirus (COVID-19) pandemic and concluded no further adjustment was needed on the allowance for credit losses as of March 31, 2021.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	March 31,		December 31,
	2021		2020
Compensation	$	3,347	$	8,810
Professional fees	958		977
Amounts owed to former licensees	468		421
Royalties owed to third parties	102		693
Return reserve	682		687
Acquisition related liabilities	1,500		1,500
Subcontractor	1,034		733
Supplier	788		604
Accrued interest	1,086		464
Other	2,145		3,641
Total accrued liabilities	$	12,110	$	18,530

Share-Based Compensation

Share-based compensation expense for awards to employees and non-employee directors is a non-cash expense and is recognized on a straight-line basis over the vesting period until the last tranche vests. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):


	Three months ended
	March 31,
	2021		2020
SBC - Research and development expenses	$	3,939	$	2,397
SBC - General and administrative expenses	4,466		3,256
	$	8,405	$	5,653

The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:


	Three months ended
	March 31,
	2021	2020
Risk-free interest rate	0.5%	1.4%
Dividend yield	—	—
Expected volatility	63%	47%
Expected term	5.0	4.7

A limited amount of performance-based restricted stock units (PSUs) contain a market condition based on our relative total shareholder return ranked on a percentile basis against the NASDAQ Biotechnology Index over a three-year performance period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation cost for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the performance conditions.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. The 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards. See Note 4, Convertible Senior Notes and Note 6, Stockholders’ Equity.

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):


	Three months ended
	March 31,
	2021	2020
Weighted average shares outstanding:	16,435	16,529
Dilutive potential common shares:
Restricted stock	112	—
Stock options	701	—
Shares used to compute diluted income per share	17,248	16,529
Potentially dilutive shares excluded from calculation due to anti-dilutive effect	4,277	10,144

2. Fair Value Measurements

Assets and Liabilities Measured on a Recurring Basis

The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):


	March 31, 2021								December 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Short-term investments, excluding Viking(1)	$	8,193	$	253,373	$	1,422	$	262,988	$	3,438	$	320,647	$	393	$	324,478
Investment in Viking common stock	44,366		—		—		44,366		32,763		—		—		32,763
Investment in Viking warrants(2)	—		—		—		—		6,326		—		—		6,326
Total assets	$	52,559	$	253,373	$	1,422	$	307,354	$	42,527	$	320,647	$	393	$	363,567
Liabilities:
Crystal contingent liabilities(3)	$	—	$	—	$	800	$	800	$	—	$	—	$	800	$	800
CyDex contingent liabilities	—		—		496		496		—		—		508		508
Metabasis contingent liabilities(4)	—		4,182		—		4,182		—		3,821		—		3,821
Icagen contingent liabilities(5)	—		—		7,439		7,439		—		—		6,404		6,404
Pfenex contingent liabilities(6)	—		—		37,900		37,900		—		—		37,600		37,600
xCella contingent liabilities(7)	—		—		240		240		—		—		—		—
Amounts owed to former licensor	73		—		—		73		60		—		—		60
Total liabilities	$	73	$	4,182	$	46,875	$	51,130	$	60	$	3,821	$	45,312	$	49,193

1.Excluding our investment in Viking, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black Scholes value estimated by management on the last day of the period.

2.Investment in Viking warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in "Gain (loss) from short-term investments" in our condensed consolidated statement of operations. During the three months ended March 31, 2021, we exercised all of the outstanding Viking warrants.

3.The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. Changes in these estimates may materially affect the fair value.

4.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10 million payment upon initiation of a Phase 3 clinical trial.

5.The fair value of Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on certain revenue milestones as defined in the asset purchase agreement with Icagen. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. Changes in these estimates may materially affect the fair value.

6.The fair value of Pfenex contingent liabilities was determined using a probability-adjusted income approach. These cash flows were then discounted to present value using a discount rate based on the market participants' cost of debt reflective of the Company.

7.The fair value of xCella contingent liabilities is determined when it is probable that the earnout liability will occur and the amount can be reasonably estimated. Management concluded that no earnout liability would be recognized at the acquisition date in September 2020. In the three months ended March 31, 2021, management recorded an earnout liability to be allocated to the cost of the acquired assets due to contingencies being met as part of the acquisition agreement.

A reconciliation of the level 3 financial instruments as of March 31, 2021 is as follows (in thousands):


Fair value of level 3 financial instruments as of December 31, 2020	$	45,312
Fair value adjustments to contingent liabilities	1,323
Contingent liabilities from xCella asset acquisition	240
Fair value of level 3 financial instruments as of March 31, 2021	$	46,875

Assets Measured on a Non-Recurring Basis

We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.

We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.

There were no triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the three months ended March 31, 2021.

3. Acquisitions

Pfenex Acquisition

On October 1, 2020, we acquired Pfenex, which develops next-generation and novel protein therapeutics to improve existing therapies and create new therapies for biological targets linked to critical, unmet diseases using a protein expression technology platform.

The preliminary purchase price of $465.1 million included $429.6 million cash consideration paid upon acquisition, and a contingent CVR payment of up to $77.8 million in cash based on a certain specified milestone with an estimated initial fair value of $37.0 million. The CVR will only be paid in full if the milestone is achieved by December 31, 2021. The amount of the CVR included in the purchase price was reduced by $1.5 million that was determined to be post-combination expense. The fair value of the CVR liability was determined using a probability-adjusted income approach. These cash flows were then discounted to present value using a discount rate based on market participants' cost of debt reflective of the Company, which was 7.1%. The liability is periodically assessed based on events and circumstances related to the underlying milestone, and any change in fair value is recorded in our consolidated statements of operations.

In connection with the acquisition, a portion of Pfenex's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remaining amount was considered our post-combination expense. We paid $17.3 million in cash for equity compensation, which is attributable to pre-combination services and is reflected as a component of the total purchase price paid of $429.6 million. In addition, the fair value of equity compensation attributable to the post-combination service period was $8.7 million. These amounts were associated with the accelerated vesting of stock options previously granted to Pfenex employees and were fully paid in cash, which was recognized as general and administrative expenses during the fourth quarter of 2020.

The following table sets forth an allocation of the preliminary purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):


Cash	$	51,407
Restricted cash	200
Accounts and unbilled receivables	1,359
Property and equipment, net	7,823
Right-of-use asset	3,070
Other assets	1,338
Intangibles acquired	385,000
Goodwill(1)	91,837
Accounts payable	(6,814)
Accrued liabilities	(8,455)
Deferred revenue	(3,908)
Lease liabilities	(3,070)
Other liabilities	(1,382)
Deferred tax liabilities, net	(53,296)
	$	465,109

(1) Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Pfenex and expected synergies. None of the goodwill is expected to be deductible for tax purposes.

Acquired intangibles include $362 million of contractual relationships and $23 million of core technology. The fair values of the contractual relationships were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated contractual relationship period. The fair value of the contractual relationships is being amortized on a straight-line basis over the weighted average estimated useful life of 12.9 years. The fair values of the acquired technologies were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated useful lives. These projected cash flows were discounted to present value using discount rate, which varies from 12% to 15%. The total acquired intangibles are being amortized on a straight-line basis over the weighted average estimated useful life of 13.0 years.

The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, and purchased intangibles are provisional. The accounting for these amounts falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

The following summary presents our unaudited pro forma consolidated results of operations for the quarter ended March 31, 2020 as if the Pfenex acquisition had occurred on January 1, 2020, which gives effect to certain transaction accounting adjustments, including amortization of acquired intangibles and share based compensation expense for retained Pfenex employees. The pro form