Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement

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Fair Value Measurement
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurement Fair Value Measurement
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. We establish a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions
The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018 and 2017 (in thousands):

Fair Value Measurements at Reporting Date Using
December 31, 2018
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total (Level 1) (Level 2) (Level 3)
Assets:
Short-term investments (1)
$ 647,408  $ 47,517  $ 599,891  $ — 
Investment in warrants (3)
9,257  9,257  —  — 
Total assets $ 656,665  $ 56,774  $ 599,891  $ — 
Liabilities:
Contingent liabilities - Crystal (4)
$ 6,477  $ —  $ —  6,477 
Contingent liabilities - Cydex (5)
514  —  —  514 
Contingent liabilities - Metabasis (6)
5,551  —  5,551  — 
Liability for amounts owed to a former licensor (7)
199  199  —  — 
Total liabilities $ 12,741  $ 199  $ 5,551  $ 6,991 

Fair Value Measurements at Reporting Date Using
December 31, 2017
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total (Level 1) (Level 2) (Level 3)
Assets:
Short-term investments (1)
$ 181,041  1,896  $ 179,145  $ — 
Note receivable Viking (2)
3,877  —  —  3,877 
Investment in warrants (3)
3,846  3,846  —  — 
Total assets $ 188,764  $ 5,742  $ 179,145  $ 3,877 
Liabilities:
Contingent liabilities - Crystal (4)
$ 8,401  $ —  $ —  $ 8,401 
Contingent liabilities - Cydex (5)
1,589  —  —  1,589 
Contingent liabilities - Metabasis (6)
3,971  —  3,971  — 
Liability for amounts owed to a former licensor (7)
284  284  —  — 
Total liabilities $ 14,245  $ 284  $ 3,971  $ 9,990 


(1) Amounts Investments in equity securities (including investments in Viking), are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable securities with maturities greater than 90 days are classified as 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.

(2) The fair value of the Convertible Note receivable from Viking at December 31, 2017 approximated the book value since the contractual maturity date was within five months from the end of 2017, and there was no plan to extend the maturity date. The fair value at December 31, 2017 was determined using a probability weighted option pricing model. The fair value is subjective and is affected by certain significant input to the valuation model such as the estimated volatility of the common stock, which was estimated to be 75% at December 31, 2017. Changes in these assumptions may materially affect the fair value estimate. For the years ended December 31, 2018, December 31, 2017, and December 31, 2016, we reported an increase in the fair value of 0.0 million, an increase in the fair value of $0.9 million, and a decrease in the fair value of $0.2 million, respectively in "Other, net" of the consolidated statement of operations. See further discussion in “Note (2), Investment in Viking.”  

(3) Investment in 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, is classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. See further discussion in “Note (2), Investment in Viking.

(4) 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. At
December 31, 2018, most of the development and regulatory milestones were estimated to be highly probable of being achieved in 2019. Changes in these estimates may materially affect the fair value.

(5) The fair value of CyDex contingent liabilities was determined based on the income approach. To the extent the estimated future income may vary significantly given the long-term nature of the estimate, we utilize a Monte Carlo model. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders.

(6) 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. Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.” We may be entitled to up to $529.0 million in milestone payments and royalties.

(7) The liability for amounts owed to a former licensor is determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to a former licensor.





A reconciliation of the level 3 financial instruments as of December 31, 2018 is as follows (in thousands):

Assets:
Fair value of level 3 financial instruments as of December 31, 2017 $ 3,877 
Cash payment received as repayment of note receivable

(3,877)
Fair value of level 3 financial instrument assets as of December 31, 2018 $ — 
Liabilities
Fair value of level 3 financial instruments as of December 31, 2017 $ 9,990 
Payments to CVR holders and other contingency payments (1,025)
Fair value adjustments to contingent liabilities (1,974)
Fair value of level 3 financial instruments as of December 31, 2018 $ 6,991 

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, long-lived assets, and equity investments.

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.

Other than certain indefinite-lived intangible asset, there were no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the three years ended December 31, 2018, 2017 and 2016.

Fair Value of Financial Instruments

In August 2014 and May 2018, we issued the 2019 Notes and 2023 Notes, respectively. We use quoted market rates in an inactive market, which are classified as a Level 2 input, to estimate the current fair value of our 2019 and 2023 Notes. The carrying value of the notes does not reflect the market rate. See “Note (6), Convertible Senior Notes” for additional information related to the fair value.