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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019  
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From ______ to ______ .
Commission File Number: 001-33093
lgnd-20190331_g1.jpg
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
77-0160744
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3911 Sorrento Valley Boulevard, Suite 110 San Diego, 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 x No o
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 x No o
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
x
Accelerated Filer
o
Non-Accelerated Filer
o
Smaller Reporting Company
o
Emerging Growth Company
o



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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 7, 2019, the registrant had 19,598,405 shares of common stock outstanding.




LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION



2


GLOSSARY OF TERMS AND ABBREVIATIONS
AbbreviationDefinition
2018 Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019
2019 Notes$245.0 million aggregate principal amount of convertible senior unsecured notes due 2019
2023 Notes$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
AmgenAmgen, Inc.
AML
Acute myeloid leukemia
ANDAAbbreviated New Drug Application
Apricus Biosciences
Apricus Biosciences, Inc.
Aptevo Therapeutics
Aptevo Therapeutics Inc.
ASCAccounting Standards Codification
ASUAccounting Standards Update
AziyoAziyo Med, LLC
CEOChief Executive Officer
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
COPD
Chronic obstructive pulmonary disease
CorMatrixCorMatrix Cardiovascular, Inc.
CVRContingent value right
CrystalCrystal Bioscience, Inc.
CStone Pharmaceuticals
CStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDexCyDex Pharmaceuticals, Inc.
Daiichi SankyoDaiichi Sankyo Company, LTD
Dianomi TherapeuticsDianomi Therapeutics, Inc.
ESPPEmployee Stock Purchase Plan, as amended and restated
FASBFinancial Accounting Standards Board
FDAFood and Drug Administration
GAAPGenerally accepted accounting principles in the United States
GenagonGenagon Therapeutics AB
GRAGlucagon receptor antagonist
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
Melinta Therapeutics
Melinta Therapeutics, Inc.
MetabasisMetabasis Therapeutics, Inc.
MetavantMetavant Sciences
MCMMineral Coated Microparticle
NDANew Drug Application
NOLsNet Operating Losses
NovanNovan, Inc.
NovartisNovartis AG
Orange BookPublication identifying drug products approved by the FDA based on safety and effectiveness
OTTIOther-than-temporary impairment
PEGSProtein Engineering Summit
Q1 2018The Company's fiscal quarter ended March 31, 2018
Q1 2019The Company's fiscal quarter ended March 31, 2019
RetrophinRetrophin Inc.
reVision Therapeutics reVision Therapeutics, Inc.
RoivantRoivant Sciences GMBH
Sage Therapeutics
Sage Therapeutics, Inc.
SECSecurities and Exchange Commission
Seelos Therapeutics
Seelos Therapeutics, Inc.
SelexisSelexis, SA
Sermonix Pharmaceuticals
Sermonix Pharmaceuticals, LLC
sNDA
Supplemental New Drug Application
3


SQ InnovationSQ Innovation, Inc.
TakedaTakeda Pharmaceutical Company
TevaTeva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
VernalisVernalis plc
Verona Pharma
Verona Pharma plc
VikingViking Therapeutics, Inc.
xCella BiosciencesxCella Biosciences, Inc.

4


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, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$105,113 $117,164 
Short-term investments1,323,575 601,217 
Investment in Viking72,741 55,448 
Accounts receivable, net26,615 55,850 
Inventory11,905 7,124 
Derivative asset18,718 22,576 
Other current assets9,228 11,161 
Total current assets1,567,895 870,540 
Deferred income taxes, net 46,521 
Intangible assets, net216,290 219,793 
Goodwill86,809 86,646 
Commercial license and other economic rights, net31,023 31,460 
Property and equipment, net5,575 5,372 
Other assets6,396 471 
Total assets$1,913,988 $1,260,803 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,061 $4,183 
Accrued liabilities14,771 19,200 
Income tax payable113,997  
Current contingent liabilities4,666 5,717 
Deferred revenue2,808 3,286 
2019 convertible senior notes, net26,756 26,433 
Derivative liability18,718 23,430 
Total current liabilities186,777 82,249 
2023 convertible senior notes, net616,987 609,864 
Long-term contingent liabilities8,955 6,825 
Deferred income taxes, net9,614  
Other long-term liabilities11,681 951 
Total liabilities834,014 699,889 
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; none issued and outstanding at March 31, 2019 and December 31, 2018  
Common stock, $0.001 par value; 60,000 shares authorized; 19,664 and 20,766 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively20 21 
Additional paid-in capital643,317 791,114 
Accumulated other comprehensive loss(503)(1,024)
Retained earnings (accumulated deficit)437,140 (229,197)
Total stockholders' equity1,079,974 560,914 
Total liabilities and stockholders' equity$1,913,988 $1,260,803 

See accompanying notes to unaudited condensed consolidated financial statements.




5



LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months ended
March 31,
20192018
Revenues:
Royalties$19,538 $20,820 
Material sales8,959 4,391 
License fees, milestones and other revenues14,987 30,946 
Total revenues43,484 56,157 
Operating costs and expenses:
Cost of material sales 3,858 788 
Amortization of intangibles3,503 3,278 
Research and development11,289 7,407 
General and administrative11,088 7,643 
Total operating costs and expenses29,738 19,116 
Gain from sale of Promacta license812,797  
Income from operations826,543 37,041 
Other income (expense):
Gain from Viking17,293 21,097 
Interest income5,909 875 
Interest expense(8,906)(3,480)
Other expense, net1,874 (221)
Total other income, net16,170 18,271 
Income before income taxes842,713 55,312 
Income tax expense(176,376)(10,033)
Net income$666,337 $45,279 
Basic net income per share$32.59 $2.13 
Shares used in basic per share calculations20,447 21,209 
Diluted net income per share$31.32 $1.83 
Shares used in diluted per share calculations21,277 24,800 


See accompanying notes to unaudited condensed consolidated financial statements.

6




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

Three months ended
March 31,
20192018
Net income:$666,337 $45,279 
Unrealized net gain (loss) on available-for-sale securities, net of tax230 (149)
Foreign currency translation291  
Comprehensive income$666,858 $45,130 

See accompanying notes to unaudited condensed consolidated financial statements.

7


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share data)

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retain earnings (Accumulated deficit)Total stockholders' equity
SharesAmount
Balance at January 1, 201920,765,533 $21 $791,114 $(1,024)$(229,197)$560,914 
Issuance of common stock under employee stock compensation plans, net134,748 — (991)— — (991)
Share-based compensation— — 5,347 — — 5,347 
Repurchase of common stock(1,236,352)(1)(151,584)— — (151,585)
Other comprehensive income— — — 230 — 230 
Foreign currency translation adjustment— — — 291 — 291 
Other tax adjustments— — (569)— — (569)
Net income— — — — 666,337 666,337 
Balance at March 31, 201919,663,929 $20 $643,317 $(503)$437,140 $1,079,974 


Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal stockholders' equity
SharesAmount
Balance at January 1, 201821,148,665 $21 $798,205 $2,486 $(400,924)$399,788 
Issuance of common stock under employee stock compensation plans, net166,315 1 5,118 — — 5,119 
Reclassification of equity component of currently redeemable convertible notes— — 2,781 — — 2,781 
Share-based compensation— — 4,555 — — 4,555 
Repurchase of common stock(13,000)(1)(1,894)— — (1,895)
Other comprehensive income— — — (110)— (110)
Cumulative-effect adjustment from adoption of ASU 2016-01— — — (2,662)2,662  
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax— — — — 25,583 25,583 
Net income— — — — 45,279 45,279 
Balance at March 31, 201821,301,980 $21 $808,765 $(286)$(327,400)$481,100 

See accompanying notes to unaudited condensed consolidated financial statements.
8


LIGAND PHARMACEUTICAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three months ended
March 31,
20192018
Cash flows from operating activities:
Net income$666,337 $45,279 
Adjustments to reconcile net income to net cash provided by operating activities:
Gain from sale of Promacta license(812,797) 
Non-cash change in estimated fair value of contingent liabilities1,403 960 
Depreciation and amortization5,086 3,002 
Amortization of premium (discount) on investments, net(1,818) 
Amortization of debt discount and issuance fees7,446 3,018 
Share-based compensation5,347 4,555 
Deferred income taxes62,263 9,862 
Gain from investment in Viking(17,293)(21,931)
Other(5,130) 
Royalties recorded in retained earnings upon adoption of ASC 606 32,707 
Changes in operating assets and liabilities:
Accounts receivable, net29,235 (11,512)
Inventory(2,823)(4,978)
Accounts payable and accrued liabilities (1,876)321 
Income tax payable113,997  
Other(4,119)(522)
Net cash provided by operating activities45,258 60,761 
Cash flows from investing activities:
Proceeds from sale of Promacta license812,797  
Purchase of short-term investments(1,047,767)(98,957)
Proceeds from sale of short-term investments341 12,291 
Proceeds from maturity of short-term investments332,647 54,325 
Other(3,241)(1,240)
Net cash provided by (used in) investing activities94,777 (33,581)
Cash flows from financing activities:
Net proceeds from stock option exercises and ESPP1,904 8,916 
Taxes paid related to net share settlement of equity awards(2,895)(3,797)
Share repurchase(151,585)(1,895)
Net cash provided by (used in) financing activities(152,576)3,224 
Effect of exchange rate changes on cash130  
Net (decrease) increase in cash, cash equivalents and restricted cash(12,411)30,404 
Cash, cash equivalents and restricted cash at beginning of period119,780 20,620 
Cash, cash equivalents and restricted cash at end of period$107,369 $51,024 

Supplemental disclosure of cash flow information:
Interest paid$102 $919 
Taxes paid$60 $171 
Restricted cash in other current assets$2,256 $ 
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$301 $ 
Accrued inventory purchases$1,959 $1,180 
Unrealized gain on AFS investments$294 $ 
See accompanying notes to unaudited condensed consolidated financial statements.
9


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 2018 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 consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, our investment in Viking warrants was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018.

Significant Accounting Policies

We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2018 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.

Accounting Standards Recently Adopted

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In 2018, the FASB issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, Leases (Topic 840), including its disclosure requirements, in the comparative periods presented. We adopted this standard on January 1, 2019 by applying this optional transition method. For leases with a term of 12 months or less, we elected to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases. In addition, we elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We did not elect to use the hindsight practical expedient to determine the lease term or evaluate impairment for existing leases. We continue to report our financial position as of December 31, 2018 under Topic 840 in our audited consolidated balance sheet. The adoption of this standards update resulted in the recognition of right-of-use assets of approximately $5.2 million and lease liabilities of approximately $5.9 million on our unaudited condensed consolidated balance as of January 1, 2019, with no material impact to our consolidated statement of operations. See Note 8, Leases, for further information regarding the impact of the adoption of ASU 2016-02 on our financial statements.

Accounting Standards Not Yet Adopted

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Financial Instruments - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. ASU 2016-13 is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period for entities that have adopted ASC 606. The standard should be applied retrospectively to the period when we initially adopted ASC 606. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements.

We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.

Revenue

Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, license fees and development, regulatory and sales based milestone payments, and other service revenue.

Royalties, License Fees and Milestones

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 no sooner than the underlying sale. 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.

Our contracts with customers often will include future contingent milestone based payments. 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.

Material Sales

We recognize revenue when control of Captisol material or intellectual property license rights 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
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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. 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.

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. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales.

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, 2019, the amount recognized as revenue that was previously deferred was not material.

Disaggregation of Revenue

The following table represents disaggregation of Royalties, Material Sales and License fees, milestone and other (in thousands):

Three months ended
March 31,
20192018
Royalties
Promacta$14,193 $15,573 
Kyprolis3,833 3,262 
Evomela911 1,600 
Other601 385 
$19,538 $20,820 
Material Sales
Captisol$8,959 $4,391 
License fees, milestones and other
License Fees$850 $26,955 
Milestone11,932 2,825 
Other2,205 1,166 
$14,987 $30,946 
Total$43,484 $56,157 

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Short-term Investments
Our investments consist of the following at March 31, 2019 and December 31, 2018 (in thousands):
March 31, 2019December 31, 2018
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Short-term investments
Bank deposits$673,988 $184 $(20)$674,152 $311,066 $26 $(29)$311,063 
Corporate bonds74,875 56 (1)74,930 53,223 1 (45)53,179 
Commercial paper563,585 60 (112)563,533 225,731 8 (76)225,663 
U.S. Government bonds3,013  (3)3,010 7,982  (9)7,973 
Municipal bonds    2,017  (4)2,013 
Corporate equity securities(1)
4,525 2,915  7,440 135 1,191  1,326 
Warrants 510  510     
$1,319,986 $3,725 $(136)$1,323,575 $600,154 $1,226 $(163)$601,217 
(1) The amortized cost for corporate equity securities represents the original purchase cost of the equity securities.

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.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):
March 31,December 31,
20192018
Goodwill$86,809 $86,646 
Definite lived intangible assets
Complete technology235,413 235,413 
Less: accumulated amortization(38,169)(35,070)
Trade name2,642 2,642 
Less: accumulated amortization(1,081)(1,048)
Customer relationships29,600 29,600 
Less: accumulated amortization(12,115)(11,744)
Total goodwill and other identifiable intangible assets, net$303,099 $306,439 

Commercial License and Other Economic Rights

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

March 31,December 31,
20192018
Aziyo and CorMatrix$17,696 $17,696 
Palvella10,000 10,000 
Selexis8,602 8,602 
Dianomi2,000  
38,298 36,298 
Less: accumulated amortization attributed to principal or research and development(7,275)(4,838)
Total commercial license and other economic rights, net$31,023 $31,460 

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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, Palvella in December 2018 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.
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 in accordance with ASC 310, Receivables, 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 Aziyo as of March 31, 2019 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.
In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we may receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on any aggregate annual worldwide net sales of any PTX-022 products, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We paid Palvella an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for the development or commercialization of PTX-022. We determined the economic rights related to Palvella should be characterized as a funded research and development arrangement, thus we will account for in accordance with ASC 730-20, Research and Development Arrangements, and will reduce our asset as the funds are expended by Palvella. We will evaluate the remaining asset basis for impairment on an ongoing basis. As it is anticipated, prior to the receipt of any payments from Palvella that the cost basis will be reduced to zero, we will recognize milestones and royalties as revenue when earned.

See further detail described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2018 Annual Report.

Viking

Our equity ownership interest in Viking decreased in the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in “investment in Viking” in our condensed consolidated balance sheets at fair value of $12.7 million at March 31, 2019. Our investment in Viking warrants in the amount of $9.3 million was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018 to conform to the current period presentation.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):
March 31,December 31,
20192018
Compensation$2,384 $4,045 
Professional fees1,022 942 
Amounts owed to former licensees427 428 
Royalties owed to third parties1,084 1,025 
Payments due to broker for share repurchases  4,613 
Return reserve2,813 3,590 
Restructuring 287 1,093 
Current lease liabilities1,187  
Other5,567 3,464 
 Total accrued liabilities
$14,771 $19,200 

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Share-Based Compensation

Share-based compensation expense for awards to employees and non-employee directors 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,
20192018
Share-based compensation expense as a component of:
Research and development expenses$2,127 $1,767 
General and administrative expenses3,220 2,788 
$5,347 $4,555 

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,
20192018
Risk-free interest rate2.5 2.7 
Dividend yield    
Expected volatility44 33 
Expected term5.15.7

Derivatives

On May 22, 2018, we amended our 2019 Notes making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount will be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our condensed consolidated statements of operations.

The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of the derivative assets and the inputs and assumptions used in the Binomial model to calculate the fair value of the derivative liability associated with the 2019 Notes:

As of March 31, 2019
Common stock price$125.71 
Exercise price, conversion premium and bond hedge$75.05 
Risk-free interest rate2.46 
Volatility35 
Dividend yield  
Annual coupon rate0.75 
Remaining contractual term (in years)0.38

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Income Per Share

Basic income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted 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 2019 Notes and 2023 Notes, stock options and restricted stock. 2019 Notes and 2023 Notes have a dilutive impact when the average market price of the Company’s 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. In addition, after May 22, 2018, the 2019 Notes can only be settled in cash and therefore there will have no further impact on income per share of these notes. 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.

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,
20192018
Weighted average shares outstanding:20,447 21,209 
Dilutive potential common shares:
Restricted stock45 64 
Stock options785 1,119 
2019 Convertible Senior Notes 1,719 
Warrants 689 
Shares used to compute diluted income per share21,277 24,800 
Potentially dilutive shares excluded from calculation due to anti-dilutive effect7,015 148 

2. Sale of Promacta License

On March 5, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RPI Finance Trust (“RPI”), doing business as “Royalty Pharma”, who is not an affiliate. Under the Asset Purchase Agreement, we sold, transferred, assigned and conveyed to RPI, and RPI purchased, acquired and accepted from us, all of our rights, title and interest in and to the Purchased Assets, which include among other things the intellectual property and related know-how generated by us in connection with the license agreement (collectively, the “Purchased Assets”), dated December 29, 1994, by and between Novartis (as successor in interest to SmithKline Beecham Corporation) and Ligand, which allowed us to receive a royalty on net sales of Promacta. We concluded the sale does not quality as a sale of a business, but as a sale of a non-financial asset. At the closing on March 6, 2019, RPI paid us $827.0 million in cash and we do not have any remaining performance obligations related to Novartis or RPI for Promacta. The carrying value of our Promacta asset as of March 6, 2019 was zero. Of the total cash proceeds from the sale, $14.2 million was recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.


3. 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):
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March 31, 2019December 31, 2018
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Short-term investments(1)
$67,458 $1,315,625 $ $1,383,083 $47,517 $599,891 $ $647,408 
Investment in warrants(2)
12,723  510 13,233 9,257   9,257 
Total assets$80,181 $1,315,625 $510 $1,396,316 $56,774 $599,891 $ $656,665 
Liabilities:
Crystal contingent liabilities(3)
$ $ $4,976 $4,976 $ $ $6,477 $6,477 
CyDex contingent liabilities  464 464   514 514 
Metabasis contingent liabilities(4)
  8,181 8,181  5,551  5,551 
Amounts owed to former licensor147   147 199   199 
Total liabilities$147 $ $13,621 $13,768 $199 $5,551 $6,991 $12,741 

1.Investments in equity securities, which we received from Viking and another licensee as upfront and event-based payments, 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 debt securities with maturities greater than 90 days 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. 
2.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, 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 Viking in our condensed consolidated statement of operations. In addition, we have investment in warrants resulting from Seelos 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 intrinsic value estimated by management as of March 31, 2019.
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. At March 31, 2019, most of the development and regulatory milestones were estimated to be highly probable of being achieved between 2018 and 2019. 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 the Company 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. 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.”

For the three months ended March 31, 2019, we reduced the contingent liabilities associated with Crystal by $1.5 million based on management's estimates of timing and probability of achievement of certain milestones and revenue thresholds. We made a  $1.0 million payment to the former shareholders of Crystal during the first quarter of 2018.

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, 2019 and March 31, 2018.

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4. Convertible Senior Notes

0.75% Convertible Senior Notes due 2019

In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83% and are convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of 2019 Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes bear cash interest at a rate of 0.75% per year, payable semi-annually.

Holders of the 2019 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, 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 is 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.

On May 22, 2018, we entered into a supplemental indenture whereby we made an irrevocable election to settle the entire 2019 Notes in cash. As such, we must deliver cash to settle the principal and any premium due upon conversion. As a result of the requirement to deliver cash to settle any premium due upon conversion we now account for the conversion option as a derivative liability at fair value. In accordance with ASC 815, Derivatives and Hedging, the derivative was adjusted to its fair value as of March 31, 2019 to $18.7 million with the resulting $4.7 million decrease reflected in other expense, net, in our condensed consolidated statements of operations for the three months ended March 31, 2019.
 
Convertible Bond Hedge and Warrant Transactions

In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes.

The convertible bond hedges have an exercise price of $75.05 per share and are exercisable when and if the 2019 Notes are converted. If upon conversion of the 2019 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 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 2019 Notes. Holders of the 2019 Notes and warrants will not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.

As a result of the irrevocable cash election, conversion notices received relating to the 2019 Notes after May 22, 2018 must be fully settled in cash and amounts paid in excess of the principal amount will be offset by an equal receipt of cash under the convertible bond hedge. We account for the bond hedge as a derivative asset and marked it to market as of March 31, 2019 at $18.7 million with the resulting $3.9 million increase reflected in other expense, net, in our condensed consolidated statements of operations for the three months ended March 31, 2019.

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Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire approximately 3,264,643 shares of common stock with an exercise price of approximately $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. 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. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. 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. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital. In November 2018, we repurchased a total of 525,000 warrants. As a result, 2,739,643 warrants remained outstanding as of both March 31, 2019 and December 31, 2018.  

0.75% Convertible Senior Notes due 2023

In May 2018, we issued $750.0 million aggregate principal amount of 0.75% convertible senior notes. 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 an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.

Holders of the 2023 Notes may 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 is 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 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 conversion price of $248.48. As of March 31, 2019, the “if-converted value” did not exceed the principal amount of the 2023 Notes. 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. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. 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.

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 its 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 $248.48 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.

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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.

The following table summarizes information about the equity and liability components of the 2019 Notes and 2023 Notes (in thousands): 
March 31, 2019December 31, 2018
Principal amount of 2019 Notes outstanding$27,323 $27,326 
Unamortized discount (including unamortized debt issuance cost)(567)(893)
Total current portion of notes payable$26,756 $26,433 
Principal amount of 2023 Notes outstanding$750,000 $750,000 
Unamortized discount (including unamortized debt issuance cost)(133,013)(140,136)
Total long-term portion of notes payable$616,987 $609,864 
Fair value of convertible senior notes outstanding (Level 2)$687,180 $713,533 

5. Income Tax

Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three months ended March 31, 2019 and March 31, 2018 was 20.9% and 18.1%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2019 was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items. The variance from the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2018 was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items in the quarter as well as the release of a valuation allowance relating to our investment in Viking.

6. Stockholders’ Equity

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 8, Stockholders' Equity, of Notes to Consolidated Financial Statements in our 2018 Annual Report.

The following is a summary of our stock option and restricted stock activity and related information:
Stock OptionsRestricted Stock Awards
SharesWeighted-Average Exercise PriceSharesWeighted-Average Grant Date Fair Value
Balance as of December 31, 20181,736,304 $66.71 132,273 $130.63 
Granted283,387 118.04 60,857 115.83 
Options exercised/RSUs vested(92,036)21.26 (66,078)106.42