lgnd-20220930

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, 2022


☐			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)

5980 Horton Street, Suite 405

Emeryville, CA 94608

(Former Name or Former Address, if Changed Since Last Report)

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 November 4, 2022, the registrant had 16,893,579 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	9
	Notes to Condensed Consolidated Financial Statements	10
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	33
	ITEM 4. Controls and Procedures	33
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	34
	ITEM 1A. Risk Factors	34
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
	ITEM 3. Defaults Upon Senior Securities	36
	ITEM 4. Mine Safety Disclosures	36
	ITEM 5. Other Information	36
	ITEM 6. Exhibits	38
	SIGNATURE	38


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
2021 Annual Report			Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022
2023 Notes			$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
APAC			Avista Public Acquisition Corp. II (after its domestication in Delaware, known as OmniAb, Inc.)
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Company			Ligand Pharmaceuticals Incorporated, including subsidiaries
CVR			Contingent value right
Crystal			Crystal Bioscience, Inc.
CyDex			CyDex Pharmaceuticals, Inc.
EMA			European Medicines Agency
ESPP			Employee Stock Purchase Plan, as amended and restated
FASB			Financial Accounting Standards Board
GAAP			Generally accepted accounting principles in the United States
Icagen			Icagen, LLC
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
Merger Agreement			Agreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub
Merger Sub			Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC
Metabasis			Metabasis Therapeutics, Inc.
NDA			New Drug Application
OmniAb			OmniAb Operations, Inc. (formerly known as OmniAb, Inc.)
OmniAb Business			Ligand's antibody discovery business
Pfenex			Pfenex Inc.
Q3 2021			The Company's fiscal quarter ended September 30, 2021
Q3 2022			The Company's fiscal quarter ended September 30, 2022
SBC			Share-based compensation expense
SEC			Securities and Exchange Commission
Separation Agreement			Separation and Distribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb
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)


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	4,116	$	19,522
Short-term investments	117,291		321,586
Accounts receivable, net	65,168		85,453
Inventory	22,326		27,326
Income taxes receivable	785		6,193
Other current assets	10,746		4,671
Total current assets	220,432		464,751
Deferred income taxes, net	35,500		34,482
Intangible assets, net	517,025		551,040
Goodwill	181,206		181,206
Commercial license rights, net	10,193		10,110
Property and equipment, net	33,418		20,511
Operating lease right-of-use assets	32,108		16,542
Financing lease right-of-use assets	14,444		16,207
Other assets	6,279		2,741
Total assets	$	1,050,605	$	1,297,590
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	15,887	$	8,403
Accrued liabilities	19,338		17,579
Income taxes payable	9,703		—
Current contingent liabilities	1,773		2,588
Deferred revenue	9,547		10,996
Current operating lease liabilities	2,345		2,053
Current financing lease liabilities	48		46
2023 convertible senior notes, net	76,600		—
Total current liabilities	135,241		41,665
2023 convertible senior notes, net	—		320,717
Long-term contingent liabilities	6,855		8,483
Deferred income taxes, net	29,832		59,095
Long-term operating lease liabilities	34,893		15,494
Long-term deferred revenue	5,537		9,270
Other long-term liabilities	21,949		21,707
Total liabilities	234,307		476,431
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at September 30, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value; 60,000 shares authorized; 16,894 and 16,767 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	17		17
Additional paid-in capital	348,994		372,969
Accumulated other comprehensive loss	(1,060)		(917)
Retained earnings	468,347		449,090
Total stockholders' equity	816,298		821,159
Total liabilities and stockholders' equity	$	1,050,605	$	1,297,590

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				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues:
Royalties	$	19,837	$	15,648	$	51,491	$	31,376
Captisol	35,949		35,093		77,616		128,875
Contract revenue	10,302		14,094		40,093		44,409
Total revenues	66,088		64,835		169,200		204,660
Operating costs and expenses:
Cost of Captisol	14,153		11,446		31,213		50,192
Amortization of intangibles	11,818		11,827		35,455		35,391
Research and development	22,036		16,938		61,461		50,769
General and administrative	17,445		12,718		50,210		39,747
Other operating income	—		(3,800)		—		(37,600)
Total operating costs and expenses	65,452		49,129		178,339		138,499
Income (loss) from operations	636		15,706		(9,139)		66,161
Other income (expense):
Gain (loss) from short-term investments	(923)		1,937		(15,709)		8,135
Interest income	591		169		1,023		698
Interest expense	(332)		(4,439)		(1,559)		(15,154)
Other income (expense), net	885		1,886		5,465		(5,516)
Total other expense, net	221		(447)		(10,780)		(11,837)
Income (loss) before income taxes	857		15,259		(19,919)		54,324
Income tax benefit (expense)	(453)		(1,536)		4,043		8,230
Net income (loss)	$	404	$	13,723	$	(15,876)	$	62,554

Basic net income (loss) per share	$	0.02	$	0.82	$	(0.94)	$	3.77
Shares used in basic per share calculations	16,888		16,688		16,860		16,595

Diluted net income (loss) per share	$	0.02	$	0.80	$	(0.94)	$	3.64
Shares used in diluted per share calculations	17,132		17,142		16,860		17,187

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				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income (loss)	$	404	$	13,723	$	(15,876)	$	62,554
Unrealized net gain (loss) on available-for-sale securities, net of tax	6		(14)		(143)		(74)
Comprehensive income (loss)	$	410	$	13,709	$	(16,019)	$	62,480

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 December 31, 2021	16,767	$	17	$	372,969	$	(917)	$	449,090	$	821,159
ASU 2020-06 adoption, net of tax (Note 1)	—	—		(51,130)		—		35,133		(15,997)
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	94	—		(5,515)		—		—		(5,515)
Share-based compensation	—	—		9,044		—		—		9,044
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(114)		—		(114)

Net loss	—	—		—		—		(15,385)		(15,385)
Balance at March 31, 2022	16,861	$	17	$	325,368	$	(1,031)	$	468,838	$	793,192
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	21	—		604		—		—		604
Share-based compensation	—	—		9,499		—		—		9,499
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(35)		—		(35)

Net loss	—	—		—		—		(895)		(895)
Balance at June 30, 2022	16,882	$	17	$	335,471	$	(1,066)	$	467,943	$	802,365
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	12	—		724		—		—		724
Share-based compensation	—	—		12,597		—		—		12,597
Unrealized net gain on available-for-sale securities, net of deferred tax	—	—		—		6		—		6
Warrant and bond hedge unwind transactions	—	—		202		—		—		202

Net income	—	—		—		—		404		404
Balance at September 30, 2022	16,894	$	17	$	348,994	$	(1,060)	$	468,347	$	816,298


	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 of shares withheld for payroll taxes	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)
Warrant and bond hedge unwind transactions	—	—		396		—		—		396
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(11,118)		—		—		(11,118)

Net income	—	—		—		—		18,106		18,106
Balance at March 31, 2021	16,652	$	17	$	336,621	$	(856)	$	410,058	$	745,840
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	24	—		1,103		—		—		1,103
Share-based compensation	—	—		10,216		—		—		10,216
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(5)		—		(5)

Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(1,362)		—		—		(1,362)
Net income	—	—		—		—		30,725		30,725
Balance at June 30, 2021	16,676	$	17	$	346,578	$	(861)	$	440,783	$	786,517
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	31	—		1,898		—		—		1,898
Share-based compensation	—	—		9,754		—		—		9,754
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(14)		—		(14)
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		92		—		—		92
Warrant and bond hedge unwind transactions	—	—		96		—		—		96
Net income	—	—		—		—		13,723		13,723
Balance at September 30, 2021	16,707	$	17	$	358,418	$	(875)	$	454,506	$	812,066

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine months ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(15,876)	$	62,554
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities	(1,378)		(39,377)
Depreciation and amortization of intangible assets	40,399		37,902
Amortization of premium on investments, net	75		145
Amortization of debt discount and issuance fees	639		12,863
Amortization of commercial license rights	(163)		96
Loss (gain) on debt extinguishment	(4,192)		7,303
Share-based compensation	31,140		28,375
Deferred income taxes	(25,570)		(8,229)
Loss (gain) from short-term investments	15,709		(8,135)
Lease amortization expense	4,535		3,349
Other	(45)		658
Changes in operating assets and liabilities:
Accounts receivable, net	20,550		(8,838)
Inventory	10,702		(3,103)
Accounts payable and accrued liabilities	(405)		(3,635)
Income tax receivable and payable	15,111		(4,167)
Deferred revenue	(5,182)		(20,696)

Other assets and liabilities	(1,671)		(5,909)
Net cash provided by operating activities	84,378		51,156

Cash flows from investing activities:
Purchase of short-term investments	(39,052)		(116,898)
Proceeds from sale of short-term investments	202,552		152,465
Proceeds from maturity of short-term investments	24,830		37,100
Cash paid for equity method investment	(750)		—
Purchase of property and equipment	(15,792)		(6,566)
Payments to CVR Holders	(960)		—
Other	80		135
Net cash provided by investing activities	170,908		66,236

Cash flows from financing activities:
Repurchase of 2023 Notes	(260,949)		(155,760)
Payments under financing lease obligations	(42)		(9,188)
Proceeds from convertible bond hedge settlement	202		18,938
Payments to convertible bond holders for warrant purchases	—		(18,446)
Net proceeds from stock option exercises and ESPP	1,831		29,484
Taxes paid related to net share settlement of equity awards	(6,018)		(5,903)
Payments to CVR Holders	(1,545)		(1,050)
Payments for OmniAb transaction costs	(4,171)		—
Net cash used in financing activities	(270,692)		(141,925)
Net decrease in cash, cash equivalents and restricted cash	(15,406)		(24,533)
Cash, cash equivalents and restricted cash at beginning of period	19,522		47,963
Cash, cash equivalents and restricted cash at end of period	$	4,116	$	23,430


Supplemental disclosure of cash flow information:
Interest paid	$	1,139	$	1,740
Taxes paid	$	6,630	$	3,720


Supplemental schedule of non-cash activity:



Accrued fixed asset purchases	$	3,626	$	557
Accrued inventory purchases	$	7,676	$	4,968

Unrealized loss on AFS investments	$	(143)	$	(74)

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 2021 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

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 2021 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.

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, “long-term deferred revenue” has been added to the condensed consolidated balance sheet, separated from “other long-term liabilities” in our prior period presentation.

Accounting Standards Updates, Recently 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 (“ASU 2020-06”). The guidance simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Consequently, a convertible debt instrument, such as the Company’s 2023 Notes, will be accounted for as a single liability measured at its amortized cost, if no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

We adopted this guidance effective January 1, 2022 under the modified retrospective approach and the comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption and our 2023 Notes are no longer bifurcated into separate liability and equity components. The principal amount of the 2023 Notes is classified as a single liability measured at amortized cost in the condensed consolidated balance sheet for the period ended September 30, 2022. Upon adoption of ASU 2020-06 on January 1 2022, we recorded an adjustment to the 2023 Notes liability component, deferred tax liabilities, additional paid-in-capital and retained earnings. This adjustment was calculated based on the carrying amount of the 2023 Notes as if it had always been treated as a single liability measured at amortized cost. Furthermore, we recorded an adjustment to the debt issuance costs contra liability and equity (additional paid-in-capital) components under the same premise, as if debt issuance costs had always been treated as a contra liability only. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2023 Notes by $20.4 million, reduced deferred tax liabilities by $4.4 million, reduced additional paid-in capital by $51.1 million and increased retained earnings by $35.1 million. The net balance of the 2023 Notes at January 1, 2022 was $341.1 million which included an unamortized discount of $2.2 million.

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.

We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Royalties

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under contractual agreements. 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 royalty to be recorded no sooner than 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, which have not been material, are adjusted in the period in which they become known, typically the following quarter.

Captisol Sales

Revenue from Captisol sales is recognized when control of Captisol material is transferred or intellectual property license rights are granted to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products or rights. 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. For Captisol material or intellectual property license rights, we consider our performance obligation satisfied once we have transferred control of the product or granted the intellectual property rights, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost of freight and shipping when control over Captisol material has transferred to the customer as an expense in Cost of Captisol. 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.

Contract Revenue

Our contracts with customers often include variable consideration in the form of contingent milestone payments. We include contingent milestone payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone payment is based on sales, 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 milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services.

For R&D services we recognize revenue over time and we measure our progress using an input method. The input methods we use are 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 it will take us to complete the activities, or the costs we may 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 numerous estimates and use significant 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.

Some customer contracts are sublicenses which require that we make payments to an upstream licensor related to license fees, milestones and royalties which we receive from customers. In such cases, we evaluate the determination of gross revenue as a principal versus net revenue as an agent reporting based on each individual agreement.

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.

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 any contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the three months ended September 30, 2022 and 2021, the amount recognized as revenue that was previously deferred was $4.1 million, and $7.7 million, respectively. During the nine months ended September 30, 2022 and 2021, the amount recognized as revenue that was previously deferred was $8.8 million, and $22.8 million, respectively.

Disaggregation of Revenue

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Royalties
Kyprolis	$	9,123	$	8,821	$	20,872	$	18,548
Evomela	3,123		2,665		8,218		7,191
Teriparatide injection	4,071		2,567		12,484		2,831
Rylaze	2,099		600		6,065		600
Other	1,421		995		3,852		2,206
	$	19,837	$	15,648	$	51,491	$	31,376

Captisol
Captisol - Core	$	3,582	$	5,374	$	13,133	$	16,310
Captisol - COVID(1)	32,367		29,719		64,483		112,565
	$	35,949	$	35,093	$	77,616	$	128,875

Contract revenue
Service Revenue	$	4,975	$	4,828	$	15,574	$	17,650
License Fees	460		200		5,154		2,293
Milestone	3,658		7,419		14,022		19,436
Other	1,209		1,647		5,343		5,030
	$	10,302	$	14,094	$	40,093	$	44,409
Total	$	66,088	$	64,835	$	169,200	$	204,660

(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.

Short-term Investments

Our short-term investments consist of the following at September 30, 2022 and December 31, 2021 (in thousands):


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
September 30, 2022
Bank deposits	$	2,506	$	—	$	(53)	$	2,453
Corporate bonds	4,887		—		(107)		4,780


Corporate equity securities	5,807		312		(3,615)		2,504
Mutual fund	88,115		—		(1,203)		86,912
US government securities	2,229		—		(84)		2,145
Warrants	—		232		—		232
	$	103,544	$	544	$	(5,062)	$	99,026
Viking common stock							18,265
Total short-term investments							$	117,291

December 31, 2021
Bank deposits	$	63,389	$	13	$	(21)	$	63,381
Corporate bonds	29,308		17		(38)		29,287

Commercial paper	36,008		2		(12)		35,998
Corporate equity securities	5,807		402		(2,027)		4,182
Mutual fund	152,136		—		(249)		151,887
U.S. government securities	5,577		—		(23)		5,554
Warrants	—		408		—		408
	$	292,225	$	842	$	(2,370)	$	290,697
Viking common stock							30,889
Total short-term investments							$	321,586

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 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 and nine months ended September 30, 2022.

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


	September 30, 2022
	Amortized Cost		Fair Value
Within one year	$	8,659	$	8,458
After one year through five years	982		939
Total	$	9,641	$	9,397

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 8 positions which were in an unrealized loss position as of September 30, 2022. 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 and nine months ended September 30, 2022.

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, 2022, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our business and recorded an adjustment of $(0.1) million and $(0.3) million of allowance for credit losses, respectively, as of September 30, 2022.

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.

We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write-downs related to obsolete inventory recorded for the three and nine months ended September 30, 2022 and 2021. As of September 30, 2022 inventory consists of Captisol prepayments of $7.4 million, and as of December 31, 2021 inventory consists of Captisol prepayments of $24.6 million.

Goodwill and Other Identifiable Intangible Assets

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


	September 30,		December 31,
	2022		2021
Indefinite-lived intangible assets
Goodwill	$	181,206	$	181,206
Definite lived intangible assets
Complete technology	282,057		280,617
Less: accumulated amortization	(90,611)		(78,991)
Trade name	2,642		2,642
Less: accumulated amortization	(1,544)		(1,444)
Customer relationships	40,700		40,700
Less: accumulated amortization	(20,272)		(18,267)
Contractual relationships	362,000		362,000
Less: accumulated amortization	(57,947)		(36,217)
Total goodwill and other identifiable intangible assets, net	$	698,231	$	732,246

Prior to 2022, we only had one reporting unit and reportable segment. In connection with the announcement in March 2022 of our intention to separate the OmniAb business pursuant to a distribution to Ligand’s stockholders of Ligand’s shares in OmniAb followed by a merger with APAC, management concluded that we had two reporting units and reportable segments - the OmniAb business and the Ligand core business. See Note 2, Segment Information, for additional information. We performed a fair value analysis utilizing a combination of income approach and market approach to determine the fair value of each segment in order to appropriately allocate the goodwill between the segments as of the announcement date. The following table presents our allocation of goodwill balance by segment (in thousands):


	Fair Value
Goodwill
Ligand core business	$	105,673
OmniAb business	75,533
	$	181,206

Commercial License Rights

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


	September 30, 2022						December 31, 2021
	Gross		Adjustments(1)		Net		Gross		Adjustments(2)		Net
Aziyo and CorMatrix	$	17,696	$	(9,455)	$	8,241	$	17,696	$	(9,461)	$	8,235
Selexis and Dianomi	10,602		(8,650)		1,952		10,602		(8,727)		1,875
Total	$	28,298	$	(18,105)	$	10,193	$	28,298	$	(18,188)	$	10,110

(1) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of September 30, 2022.

(2) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of December 31, 2021.

Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis, S.A. (Selexis) in April 2013 and April 2015, CorMatrix Cardiovascular, Inc. (CorMatrix) in May 2016, which was later acquired by Aziyo in 2017, and Dianomi Therapeutics, Inc. in January 2019. Commercial license rights acquired are accounted for as financial assets in accordance with ASC 310, Receivables, as further discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2021 Annual Report.

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 and nine months ended September 30, 2022, we further considered the current