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Business

On November 1, 2022, we completed the separation (the “Separation”) of our antibody discovery business and certain related assets and liabilities (the “OmniAb Business”) through a spin-off of OmniAb to Ligand’s shareholders of record as of October 26, 2022 on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of a separate public company, OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II (“New OmniAb”)), in a Reverse Morris Trust transaction pursuant to the Agreement and Plan of Merger, dated as of March 23, 2022 (the “Merger Agreement”), and the Separation and Distribution Agreement, dated as of March 23, 2022 (the “Separation Agreement”) (the Merger Agreement and Separation Agreement, collectively with the other related transaction documents, the “Transaction Agreements”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc.

After the spin-off of our OmniAb antibody discovery business, Ligand is a revenue-generating biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. We operate in one business segment: development and licensing of biopharmaceutical assets.

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 2022 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

Discontinued Operations

The Company determined that the spin-off of the OmniAb Business in November 2022 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). Accordingly, the accompanying condensed consolidated financial statements have been updated to present the results of all discontinued operations reported as a separate component of loss in the condensed consolidated statements of operations and comprehensive loss (see Note 2, Spin-off of OmniAb). All disclosures have been adjusted to reflect continuing operations.

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 2022 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.

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

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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 March 31, 2023 and 2022, the amount recognized as revenue that was previously deferred was $0.1 million, and $0.3 million, respectively.

Disaggregation of Revenue

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

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			Three months ended
			March 31,
			2023						2022
Royalties
Kyprolis			$	6,228					$	4,622
Evomela			2,550						2,701
Teriparatide injection			3,500						2,911
Rylaze			2,609						1,649
Other			2,267						1,549
			$	17,154					$	13,432
Captisol
Captisol - Core			$	10,622					$	6,226
Captisol - COVID(1)			—						5,896
			$	10,622					$	12,122
Contract revenue
License Fees			114						2,081
Milestone			15,300						5,993
Other			789						2,888
			$	16,203					$	10,962
Total			$	43,979					$	36,516

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

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Short-term Investments

Our short-term investments consist of the following at March 31, 2023 and December 31, 2022 (in thousands):

March 31, 2023			Amortized cost									Gross unrealized gains									Gross unrealized losses									Estimated fair value
Bank deposits			$	19,691								$	3								$	(26)								$	19,668
Corporate bonds			9,592									63									(37)									9,618
Agency bonds			979									2									—									981
Commercial paper			13,461									2									(9)									13,454
Municipal bonds			1,005									—									(5)									1,000
Corporate equity securities			5,775									—									(4,120)									1,655
Bond fund			82,678									—									(807)									81,871
US government securities			6,243									2									(47)									6,198
Warrants			—									133									—									133
			$	139,424								$	205								$	(5,051)								$	134,578
Viking common stock																														59,359
Total short-term investments																														$	193,937
December 31, 2022
Bank deposits			$	5,012								$	2								$	(34)								$	4,980
Corporate bonds			6,701									13									(58)									6,656
Commercial paper			7,211									3									—									7,214
Corporate equity securities			5,807									262									(4,239)									1,830
Bond fund			81,815									—									(1050)									80,765
U.S. government securities			2,232									—									(70)									2,162
Warrants			—									135									—									135
			$	108,778								$	415								$	(5,451)								$	103,742
Viking common stock																														63,122
Total short-term investments																														$	166,864

During the three months ended March 31, 2023, we sold 3.2 million shares of Viking common stock and recognized realized gain of $20.5 million in total.

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 months ended March 31, 2023.

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

			March 31, 2023
			Amortized Cost						Fair Value
Within one year			$	123,794					$	123,681
After one year through five years			10,903						10,962
Total			$	134,697					$	134,643

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 68 investments which were in an unrealized loss position with a total of $0.1 million unrealized losses as of March 31, 2023. 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, 2023.

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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, 2023, we considered the current and expected future economic and market conditions and concluded an increase of $0.1 million of allowance for credit losses as of March 31, 2023.

Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using 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 recorded against inventory for the three months ended March 31, 2023 and 2022. As of March 31, 2023 inventory consists of Captisol prepayments of $5.4 million, and as of December 31, 2022 inventory consists of Captisol prepayments of $5.9 million.

Goodwill and Other Identifiable Intangible Assets

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

			March 31,						December 31,
			2023						2022
Indefinite-lived intangible assets
Goodwill			$	105,673					$	105,673
Definite lived intangible assets
Complete technology			55,211						55,211
Less: accumulated amortization			(23,450)						(22,560)
Trade name			2,642						2,642
Less: accumulated amortization			(1,610)						(1,577)
Customer relationships			29,600						29,600
Less: accumulated amortization			(18,043)						(17,670)
Contractual relationships			362,000						362,000
Less: accumulated amortization			(72,434)						(65,191)
Total goodwill and other identifiable intangible assets, net			$	439,589					$	448,128

Commercial License Rights

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

						March 31, 2023																		December 31, 2022
						Gross						Adjustments(1)						Net						Gross						Adjustments(2)						Net
Aziyo and CorMatrix						$	17,696					$	(9,122)					$	8,574					$	17,696					$	(9,538)					$	8,158
Selexis and Dianomi						10,602						(8,745)						1,857						10,602						(8,578)						2,024
Total						$	28,298					$	(17,867)					$	10,431					$	28,298					$	(18,116)					$	10,182

(1) Amounts represent accumulated amortization to principal of $11.4 million and credit loss adjustments of $6.5 million as of March 31, 2023.

(2) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of December 31, 2022.

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 2022 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

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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, 2023, we further considered the current and expected future economic and market conditions and concluded no further adjustment was needed on the allowance for credit losses as of March 31, 2023.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

			March 31,						December 31,
			2023						2022
Compensation			$	1,729					$	6,201
Professional fees			834						662
Amounts owed to former licensees			45						3,989
Royalties owed to third parties			7,700						12
Supplier			678						634
Other			3,991						4,183
Total accrued liabilities			$	14,977					$	15,681

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. 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,
			2023						2022(a)
SBC - Research and development expenses			$	1,707					$	2,196
SBC - General and administrative expenses			4,224						4,913
			$	5,931					$	7,109

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

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,
			2023						2022
Risk-free interest rate			4.1%						1.6%
Dividend yield			—						—
Expected volatility			53%						50%
Expected term (years)			5.3						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

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Basic net income (loss) per share is calculated by dividing net (loss) income 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. Diluted net loss per share is computed based on the sum of the weighted average number of 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 maximum conversion price. 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.

In accordance with ASC 260, Earnings per Share, if a company had a discontinuing operation, the company uses income from continuing operations, adjusted for preferred dividends and similar adjustments, as its control number to determine whether potential common shares are dilutive. 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,
			2023						2022
Weighted average shares outstanding:			17,063						16,824
Dilutive potential common shares:
Restricted stock			86						—
Stock options			341						—
2023 convertible senior notes			484						—
Shares used to compute diluted income per share			17,974						16,824
Potentially dilutive shares excluded from calculation due to anti-dilutive effect			4,359						6,001

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On March 23, 2022, we entered into the Separation Agreement to separate our OmniAb Business and the Merger Agreement, pursuant to which APAC would combine with OmniAb, and acquire Ligand's OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). In connection with the execution of the Merger Agreement, we made organizational changes to better align our organizational structure with our strategy and operations, and management reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operated the following two reportable segments: (1) OmniAb Business and (2) Ligand core business. The OmniAb Business segment was focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb Business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines.

After the closing date of the Transactions on November 1, 2022, the historical financial results of OmniAb have been reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution. Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. Immediately following the Distribution, Merger Sub merged with and into OmniAb, with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of New OmniAb. The entire transaction was completed on November 1, 2022, and following the Merger, New OmniAb is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.” After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after November 1, 2022.

Discontinued operations

In connection with the Merger, the Company determined its antibody discovery business qualified for discontinued operations accounting treatment in accordance with ASC 205-20. We recognized a $1.7 million tax provision adjustment related to deferred taxes during the three months ended March 31, 2023 that was attributable to the discontinued operations. The following table summarizes revenue and expenses of the discontinued operations for the three months ended March 31, 2022 (in thousands):

			Three months ended
			March 31, 2022
Revenues:
Royalties			$	263
Contract revenue			8,914
Total revenues			9,177
Operating costs and expenses:
Amortization of intangibles			3,233
Research and development			11,128
General and administrative			6,255
Total operating costs and expenses			20,616
Loss from operations			(11,439)
Other income (expense):
Other income, net			443
Total other expense, net			443
Loss before income tax			(10,996)
Income tax benefit			8,540
Net loss			$	(2,456)

The following table summarizes the significant non-cash items, capital expenditures of the discontinued operations, and financing activities that are included in the consolidated statements of cash flows for the three months ended March 31, 2022 (in thousands):

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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, 2023																								December 31, 2022
						Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3						Total
Assets:
Short-term investments, excluding Viking(1)						$	7,853					$	126,592					$	133					$	134,578					$	3,992					$	99,615					$	135					$	103,742
Investment in Viking common stock						59,359						—						—						59,359						63,122						—						—						63,122
Total assets						$	67,212					$	126,592					$	133					$	193,937					$	67,114					$	99,615					$	135					$	166,864
Liabilities:
CyDex contingent liabilities						$	—					$	—					$	86					$	86					$	—					$	—					$	84					$	84
Metabasis contingent liabilities(2)						—						2,757						—						2,757						—						3,429						—						3,429
Amounts owed to former licensor						44						—						—						44						44						—						—						44
Total liabilities						$	44					$	2,757					$	86					$	2,887					$	44					$	3,429					$	84					$	3,557

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.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 $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. During the three months ended March 31, 2023, we adjusted the balance of the Metabasis CVR liability by reducing $0.7 million to mark to market.

A reconciliation of the level 3 financial instruments as of March 31, 2023 is as follows (in thousands):

Fair value of level 3 financial instruments as of December 31, 2022			$	84
Fair value adjustments to contingent liabilities			2
Fair value of level 3 financial instruments as of March 31, 2023			$	86

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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 was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the three months ended March 31, 2023 and March 31, 2022.

0.75% Convertible Senior Notes due 2023

In May 2018, we issued $750.0 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on a conversion rate as discussed below.

Holders of the 2023 Notes were entitled to convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day was greater than 130% of the conversion price on such trading day;

(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or

(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes (the“Indenture”).

In addition, on or after November 15, 2022 and prior to the close of business on May 11, 2023 (the second scheduled trading day preceding May 15, 2023, which is the maturity date), holders of the 2023 Notes are entitled to covert the notes without regard to the conditions described above applicable to conversions prior to November 15, 2022.

In advance of the Distribution of the shares of common stock of OmniAb to Ligand’s shareholders on November 1, 2022, a notice of convertibility was delivered to the holders of the 2023 Notes. No holders exercised their right to convert their 2023 Notes during the applicable period for conversion. After we completed the Separation of the OmniAb Business, on November 15, 2022, the conversion rate was adjusted to 4.8390 shares of common stock per $1,000 principal amount of the 2023 Notes which represents a conversion price of approximately $206.65 per share. The maximum conversion rate of the 2023 Notes was adjusted to 6.2907 per $1,000 principal amount of the 2023 Notes which represents a conversion price of approximately $158.97. The conversion rate for the 2023 Notes was adjusted in accordance with the requirements of the Indenture based on calculations determined with reference to a valuation period of the first 10 consecutive trading days after, and including, the ex-dividend date of the spin-off (as determined in the Indenture). The conversion rate and maximum conversion rate are subject to further adjustment under the circumstances and pursuant to the terms set forth in the Indenture.

The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the current conversion price of $206.65. In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees, and is being amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes, and the effective interest rate as of March 31, 2023 is 0.5%. During the three months ended March 31, 2023 we recognized a total of $0.2 million in interest expense which includes $0.1 million in contractual interest expense and $0.1 million in amortized issuance costs.

It is our intent and policy to settle conversions through combination settlement, which essentially 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.

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During the three months ended March 31, 2022, we repurchased $165.8 million in principal amount of the 2023 Notes for $163.7 million in cash, including accrued interest of $0.4 million. We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $1.5 million reflected in other income (expense), net, in our consolidated statement of operations for the three months ended March 31, 2022, and a $0.9 million reduction in debt discount. There was no repurchase of 2023 Notes during the three months ended March 31, 2023.

Convertible Bond Hedge and Warrant Transactions

In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $206.65 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

In January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

During the year ended December 31, 2021, in connection with the repurchases of $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,559,254.

In August 2022, in connection with the repurchases of $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million made during the six months ended June 30, 2022, we entered into Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes.

The following table summarizes information about the 2023 Notes (in thousands):

			March 31, 2023						December 31, 2022
Principal amount of the 2023 Notes outstanding			$	76,854					$	76,854
Unamortized discount (including unamortized debt issuance cost)			(64)						(159)
Total notes payable			$	76,790					$	76,695
Fair value of the 2023 Notes outstanding (Level 2)			$	76,107					$	74,789

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We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 9, Stockholders’ Equity, of the Notes to Consolidated Financial Statements in our 2022 Annual Report.

The following is a summary of our stock option and restricted stock activity and related information:

			Stock Options												Restricted Stock Awards
			Shares						Weighted-Average Exercise Price						Shares						Weighted-Average Grant Date Fair Value
Balance as of December 31, 2022			2,991,473						$	61.31					348,453						$	75.60
Granted			409,591						$