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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________


Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
or
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-20190630_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
CA92121
(Address of principal executive offices)(Zip Code)
(858) 550-7500
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol:
Name of each exchange on which registered:
Common Stock , par value $0.001 per share
LGND
The Nasdaq Global Market

________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)



Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of August 7, 2019, the registrant had 19,011,474 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
Ab InitioAb Initio Biotherapeutics, Inc.
AmgenAmgen, Inc.
ANDAAbbreviated New Drug Application
ASCAccounting Standards Codification
ASUAccounting Standards Update
AziyoAziyo Med, LLC
BayerBayer HealthCare LLC
CECaptisol-enabled
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.
CumulusCumulus Oncology 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
GenMabGenMab A/S
GigaGen GigaGen, Inc.
GPCR
G-protein coupled receptor
GRAGlucagon receptor antagonist
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
Melinta Therapeutics
Melinta Therapeutics, Inc.
MetabasisMetabasis Therapeutics, Inc.
MetavantMetavant Sciences
MillenniumMillennium Pharmaceuticals, Inc.
NDANew Drug Application
NovanNovan, Inc.
NovartisNovartis AG
OTTIOther-than-temporary impairment
PEGSProtein Engineering Summit
PhoreMost LimitedPhoreMost
Q2 2018The Company's fiscal quarter ended June 30, 2018
Q2 2019The Company's fiscal quarter ended June 30, 2019
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
VDPVernalis Design Platform
Verona Pharma
Verona Pharma plc
VikingViking Therapeutics, Inc.
WuXiWuXi Biologics Ireland Limited
xCella BiosciencesxCella Biosciences, Inc.
YTDYear-to-date

4


PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except par value)
June 30, 2019December 31, 2018
ASSETS
Current assets:
   Cash and cash equivalents$273,047 $117,164 
   Short-term investments1,059,002 601,217 
   Investment in Viking60,376 55,448 
   Accounts receivable, net20,259 55,850 
   Inventory9,638 7,124 
   Derivative asset14,313 22,576 
   Other current assets5,672 11,161 
      Total current assets1,442,307 870,540 
Deferred income taxes, net 46,521 
Intangible assets, net212,609 219,793 
Goodwill88,000 86,646 
Commercial license and other economic rights, net40,008 31,460 
Property and equipment, net6,268 5,372 
Operating lease right-of-use assets10,964  
Other assets1,680 471 
      Total assets$1,801,836 $1,260,803 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable $2,888 $4,183 
   Accrued liabilities11,540 19,200 
Income tax payable47,455  
   Current contingent liabilities4,763 5,717 
   Deferred revenue939 3,286 
   2019 convertible senior notes, net27,087 26,433 
   Derivative liability14,313 23,430 
      Total current liabilities108,985 82,249 
2023 convertible senior notes, net624,209 609,864 
Long-term contingent liabilities8,314 6,825 
Deferred income taxes, net694  
Long-term operating lease liabilities10,489  
Other long-term liabilities7,692 951 
      Total liabilities760,383 699,889 
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; none issued and outstanding at June 30, 2019 and December 31, 2018  
   Common stock, $0.001 par value; 60,000 shares authorized; 19,390 and 20,766 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively19 21 
   Additional paid-in capital619,255 791,114 
   Accumulated other comprehensive loss(542)(1,024)
   Retained earnings (accumulated deficit)422,721 (229,197)
      Total stockholders' equity1,041,453 560,914 
      Total liabilities and stockholders' equity$1,801,836 $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 endedSix months ended
June 30,June 30,
2019201820192018
Revenues:
   Royalties$6,626 $31,396 $26,164 $52,216 
   Material sales8,549 7,612 17,508 12,003 
   License fees, milestones and other revenues9,812 51,035 24,799 81,981 
Total revenues24,987 90,043 68,471 146,200 
Operating costs and expenses:
   Cost of material sales 2,405 1,134 6,263 1,922 
   Amortization of intangibles3,505 3,305 7,008 6,584 
   Research and development12,213 6,135 23,502 13,540 
   General and administrative10,994 9,294 22,082 16,938 
Total operating costs and expenses29,117 19,868 58,855 38,984 
Gain from sale of Promacta license  812,797  
Income (loss) from operations(4,130)70,175 822,413 107,216 
Other income (expense):
   Gain (loss) from Viking(12,365)39,963 4,928 61,808 
   Interest income9,285 2,762 15,194 3,637 
   Interest expense(9,012)(13,454)(17,918)(16,933)
   Other income (expense), net(1,806)(3,867)68 (4,835)
Total other income (loss), net(13,898)25,404 2,272 43,677 
Income (loss) before income taxes(18,028)95,579 824,685 150,893 
Income tax benefit (expense)3,609 (22,419)(172,767)(32,452)
Net income (loss)$(14,419)$73,160 $651,918 $118,441 
     Basic net income (loss) per share$(0.74)$3.45 $32.60 $5.58 
     Shares used in basic per share calculations19,558 21,212 20,000 21,209 
     Diluted net income (loss) per share$(0.74)$2.99 $31.34 $4.81 
     Shares used in diluted per share calculations19,558 24,438 20,799 24,618 


See accompanying notes to unaudited condensed consolidated financial statements.

6




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

Three months endedSix months ended
June 30,June 30,
2019201820192018
Net income (loss):$(14,419)$73,160 $651,918 $118,441 
Unrealized net gain (loss) on available-for-sale securities, net of tax503 135 733 (14)
Foreign currency translation(542) (251) 
Comprehensive income (loss)$(14,458)$73,295 $652,400 $118,427 

See accompanying notes to unaudited condensed consolidated financial statements.

7


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retain earnings (Accumulated deficit)Total stockholders' equity
SharesAmount
Balance at January 1, 201920,765 $21 $791,114 $(1,024)$(229,197)$560,914 
Issuance of common stock under employee stock compensation plans, net135 — (991)— — (991)
Share-based compensation— — 5,347 — — 5,347 
Repurchase of common stock(1,236)(1)(151,584)— — (151,585)
Unrealized net gain on available-for-sale securities, net of deferred tax— — — 230 — 230 
Foreign currency translation adjustment— — — 291 — 291 
Other tax adjustments— — (569)— — (569)
Net income— — — — 666,337 666,337 
Balance at March 31, 201919,664 $20 $643,317 $(503)$437,140 $1,079,974 
Issuance of common stock under employee stock compensation plans, net17 — 740 — — 740 
Share-based compensation— — 6,571 — — 6,571 
Repurchase of common stock(291)(1)(33,716)— — (33,717)
Unrealized net gain on available-for-sale securities, net of deferred tax— — — 503 — 503 
Foreign currency translation adjustment— — — (542)— (542)
Other tax adjustments— — 2,343 — — 2,343 
Net loss— — — — (14,419)(14,419)
Balance at June 30, 201919,390 $19 $619,255 $(542)$422,721 $1,041,453 


8


Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal stockholders' equity
SharesAmount
Balance at January 1, 201821,149 $21 $798,205 $2,486 $(400,924)$399,788 
Issuance of common stock under employee stock compensation plans, net166 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)(1)(1,894)— — (1,895)
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (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, 201821,302 $21 $808,765 $(286)$(327,400)$481,100 
Issuance of common stock under employee stock compensation plans, net60 — 3,296 — — 3,296 
Reclassification of equity component of currently redeemable convertible notes— — 16,078 — — 16,078 
Share-based compensation— — 4,812 — — 4,812 
Repurchase of common stock(267)— (50,832)— — (50,832)
Unrealized net loss on available-for-sale securities, net of deferred tax— — — (495)— (495)
Derivative associated with 2019 Notes and Bond Hedge— — (1,559)— — (1,559)
Loss on settlement of 2019 Notes— — 590 — — 590 
Tax effect on 2019 Notes transactions— — 67 — — 67 
Derivative associated with 2023 Notes and Bond Hedge— — (1,807)— — (1,807)
Warrant derivative in connection with 2023 Notes— — 97,805 — — 97,805 
Tax effect for 2023 Notes transactions— — (3,240)— — (3,240)
Other tax adjustments— — 208 630 — 838 
Net income— — — — 73,160 73,160 
Balance at June 30, 201821,095 $21 $874,183 $(151)$(254,240)$619,813 

See accompanying notes to unaudited condensed consolidated financial statements.
9


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended
June 30,
20192018
Cash flows from operating activities:
Net income$651,918 $118,441 
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 liabilities984 2,730 
Depreciation and amortization8,781 6,013 
Amortization of discount on investments, net(6,023)(1,150)
Amortization of debt discount and issuance fees14,999 15,455 
Amortization of other economic rights4,370  
Share-based compensation11,918 9,367 
Deferred income taxes55,661 32,263 
Gain from investment in Viking(4,928)(61,808)
Other(3,973)1,701 
Royalties recorded in retained earnings upon adoption of ASC 606 32,707 
Changes in operating assets and liabilities:
     Accounts receivable, net35,591 (16,405)
     Inventory(4,573)(4,395)
     Accounts payable and accrued liabilities (3,780)80 
     Income tax payable47,455  
     Other economic rights(12,000) 
     Other597 (594)
                Net cash provided by (used in) operating activities(15,800)134,405 
Cash flows from investing activities:
Proceeds from sale of Promacta license812,797  
Purchase of short-term investments(1,281,274)(745,783)
Proceeds from sale of short-term investments43,724 12,791 
Proceeds from maturity of short-term investments791,006 110,175 
Other(5,673)2,498 
               Net cash provided by (used in) investing activities360,580 (620,319)
Cash flows from financing activities:
Repayment of debt (21,785)
Gross proceeds from issuance of 2023 Notes 750,000 
Payment of debt issuance costs (16,900)
Proceeds from issuance of warrants 90,000 
Purchase of convertible bond hedge (140,250)
Net proceeds from stock option exercises and ESPP2,643 11,849 
Taxes paid related to net share settlement of equity awards(2,893)(3,434)
Share repurchase(189,917)(52,727)
               Net cash provided by (used in) financing activities(190,167)616,753 
Effect of exchange rate changes on cash7  
Net increase in cash, cash equivalents and restricted cash154,620 130,839 
Cash, cash equivalents and restricted cash at beginning of period119,780 20,620 
Cash, cash equivalents and restricted cash at end of period$274,400 $151,459 

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Supplemental disclosure of cash flow information:
Interest paid$2,915 $919 
Taxes paid$69,703 $285 
Restricted cash in other current assets$1,353 $ 
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$54 $66 
Accrued inventory purchases$ $752 
Unrealized gain on AFS investments$938 $ 
Excess of conversion value over the principal amount of 2019 Notes paid in shares$ $(31,571)
Value of shares reacquired under convertible bond hedge transaction entered into with 2019 Notes$ $31,571 
See accompanying notes to unaudited condensed consolidated financial statements.
11


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.

Prior Period Immaterial Error

In connection with the preparation of our condensed consolidated statement of cash flows for the six months ended June 30, 2019, an immaterial error was identified in our condensed consolidated statement of cash flows for the three months ended March 31, 2019 by including a $4.6 million accrued liability for the share repurchase as of December 31, 2018 that was paid during the first quarter of 2019 in the cash flows for operating activities instead of financing activities. Our condensed consolidated statement of cash flows for the three months ended March 31, 2019 understated cash flows provided by operating activities by $4.6 million and understated cash flows used in financing activities by $4.6 million. We evaluated the materiality of the error considering both quantitative and qualitative factors as required by authoritative guidance and determined the related impact was not material to our previously issued condensed consolidated financial statements. The immaterial error has been corrected in our condensed consolidated statement of cash flows for the six months ended June 30, 2019. The immaterial error did not impact our condensed consolidated balance sheet as of March 31, 2019, nor did it impact our condensed consolidated statements of operations, comprehensive income or equity for the three months ended March 31, 2019.

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
12


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

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 do not expect the adoption of this standard to have a material impact 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
13


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 is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. 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 and six months ended June 30, 2019, the amount recognized as revenue that was previously deferred was $2.7 million and $4.1 million, respectively. During the three and six months ended June 30, 2018, 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 endedSix months ended
June 30,June 30,
2019201820192018
Royalties
Promacta$ $24,806 $14,193 $40,379 
Kyprolis4,882 4,730 8,715 8,125 
Evomela1,144 1,160 2,055 2,760 
Other600 700 1,201 952 
$6,626 $31,396 $26,164 $52,216 
Material Sales
Captisol$8,549 $7,612 $17,508 $12,003 
License fees, milestones and other
License Fees$1,990 $47,981 $2,840 $74,936 
Milestone4,175 1,919 16,107 4,744 
Other3,647 1,135 5,852 2,301 
$9,812 $51,035 $24,799 $81,981 
Total$24,987 $90,043 $68,471 $146,200 

14


Short-term Investments
Our investments consist of the following at June 30, 2019 and December 31, 2018 (in thousands):
June 30, 2019December 31, 2018
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Short-term investments
     Bank deposits$582,991 $462 $(13)$583,440 $311,066 $26 $(29)$311,063 
     Corporate bonds46,360 160  46,520 53,223 1 (45)53,179 
     Commercial paper423,578 246 (19)423,805 225,731 8 (76)225,663 
     U.S. Government bonds    7,982  (9)7,973 
     Municipal bonds    2,017  (4)2,013 
     Corporate equity securities(1)
4,525 772 (216)5,081 135 1,191  1,326 
     Warrants 156  156     
$1,057,454 $1,796 $(248)$1,059,002 $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 or the specific identification method.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):
June 30,December 31,
20192018
     Goodwill$88,000 $86,646 
Definite lived intangible assets
     Complete technology235,413 235,413 
          Less: accumulated amortization(1)
(41,448)(35,070)
     Trade name2,642 2,642 
          Less: accumulated amortization(1,114)(1,048)
     Customer relationships29,600 29,600 
          Less: accumulated amortization(12,484)(11,744)
Total goodwill and other identifiable intangible assets, net$300,609 $306,439 
(1) accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
15


Commercial License and Other Economic Rights

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

June 30,December 31,
20192018
Aziyo and CorMatrix$17,696 $17,696 
Novan12,000  
Palvella10,000 10,000 
Selexis8,602 8,602 
Dianomi2,000  
50,298 36,298 
Less: accumulated amortization attributed to principal or research and development(10,290)(4,838)
   Total commercial license and other economic rights, net$40,008 $31,460 

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, Dianomi in January 2019 and Novan in May 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 June 30, 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 account for it 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.

In May 2019, we entered into a development funding and royalties agreement with Novan, pursuant to which we will receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization of SB206. Pursuant to the agreement, we will receive up to $20.0 million of milestone payments upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition to the milestone payments, Novan will pay us tiered royalties from 7.0% to 10.0% based on aggregate annual net sales of SB206 or any other Novan Molluscum Product in North America. We determined the economic rights related to Novan should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20 and will reduce our asset as the funds are expended by Novan. We will evaluate the remaining asset basis for impairment on an ongoing basis.

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

16


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. As of June 30, 2019 and December 31, 2018, we recorded our common stock of Viking at fair value of $50.1 million and $46.2 million, respectively, in "investment in Viking" in our consolidated balance sheets. 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 sheet at fair value of $10.3 million at June 30, 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):
June 30,December 31,
20192018
Compensation$2,856 $4,045 
Professional fees738 942 
Amounts owed to former licensees411 428 
Royalties owed to third parties872 1,025 
Payments due to broker for share repurchases  4,613 
Return reserve3,346 3,590 
Restructuring 7 1,093 
Current operating lease liabilities989  
Other2,321 3,464 
     Total accrued liabilities
$11,540 $19,200 

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):