Document

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


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From ______ to ______ .

Commission File Number: 001-33093

LIGAND PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware			77-0160744
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3911 Sorrento Valley Boulevard, Suite 110
San Diego
CA			92121
(Address of principal executive offices)			(Zip Code)

(858) 550-7500

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading symbol:	Name of each exchange on which registered:
Common Stock , par value $0.001 per share	LGND	The Nasdaq Global Market

________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of 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
	ITEM 1. Condensed Consolidated Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Income (L oss)	7
	Condensed Consolidated Statements of Stockholders' Equity	8
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	12
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	32
	ITEM 4. Controls and Procedures	32
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	33
	ITEM 1A. Risk Factors	33
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
	ITEM 3. Defaults Upon Senior Securities	34
	ITEM 4. Mine Safety Disclosures	34
	ITEM 5. Other Information	35
	ITEM 6. Exhibits	36
	SIGNATURE	36


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
2018 Annual Report			Annual 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 Initio			Ab Initio Biotherapeutics, Inc.
Amgen			Amgen, Inc.
ANDA			Abbreviated New Drug Application
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Aziyo			Aziyo Med, LLC
Bayer			Bayer HealthCare LLC
CE			Captisol-enabled
CEO			Chief Executive Officer
Company			Ligand Pharmaceuticals Incorporated, including subsidiaries
COPD			Chronic obstructive pulmonary disease
CorMatrix			CorMatrix Cardiovascular, Inc.
CVR			Contingent value right
Crystal			Crystal Bioscience, Inc.
CStone Pharmaceuticals			CStone Pharmaceuticals (Suzhou) Co., Ltd.
Cumulus			Cumulus Oncology Ltd
CyDex			CyDex Pharmaceuticals, Inc.
Daiichi Sankyo			Daiichi Sankyo Company, LTD
Dianomi Therapeutics			Dianomi Therapeutics, Inc.
ESPP			Employee Stock Purchase Plan, as amended and restated
FASB			Financial Accounting Standards Board
FDA			Food and Drug Administration
GAAP			Generally accepted accounting principles in the United States
GenMab			GenMab A/S
GigaGen			GigaGen, Inc.
GPCR			G-protein coupled receptor
GRA			Glucagon receptor antagonist
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
Melinta Therapeutics			Melinta Therapeutics, Inc.
Metabasis			Metabasis Therapeutics, Inc.
Metavant			Metavant Sciences
Millennium			Millennium Pharmaceuticals, Inc.
NDA			New Drug Application
Novan			Novan, Inc.
Novartis			Novartis AG
OTTI			Other-than-temporary impairment
PEGS			Protein Engineering Summit
PhoreMost Limited			PhoreMost
Q2 2018			The Company's fiscal quarter ended June 30, 2018
Q2 2019			The Company's fiscal quarter ended June 30, 2019
Roivant			Roivant Sciences GMBH
Sage Therapeutics			Sage Therapeutics, Inc.
SEC			Securities and Exchange Commission
Seelos Therapeutics			Seelos Therapeutics, Inc.
Selexis			Selexis, SA
Sermonix Pharmaceuticals			Sermonix Pharmaceuticals, LLC
sNDA			Supplemental New Drug Application


SQ Innovation			SQ Innovation, Inc.
Takeda			Takeda Pharmaceutical Company
Teva			Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
Vernalis			Vernalis plc
VDP			Vernalis Design Platform
Verona Pharma			Verona Pharma plc
Viking			Viking Therapeutics, Inc.
WuXi			WuXi Biologics Ireland Limited
xCella Biosciences			xCella Biosciences, Inc.
YTD			Year-to-date

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)


	June 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	273,047	$	117,164
Short-term investments	1,059,002		601,217
Investment in Viking	60,376		55,448
Accounts receivable, net	20,259		55,850
Inventory	9,638		7,124
Derivative asset	14,313		22,576
Other current assets	5,672		11,161
Total current assets	1,442,307		870,540
Deferred income taxes, net	—		46,521
Intangible assets, net	212,609		219,793
Goodwill	88,000		86,646
Commercial license and other economic rights, net	40,008		31,460
Property and equipment, net	6,268		5,372
Operating lease right-of-use assets	10,964		—
Other assets	1,680		471
Total assets	$	1,801,836	$	1,260,803
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,888	$	4,183
Accrued liabilities	11,540		19,200
Income tax payable	47,455		—
Current contingent liabilities	4,763		5,717
Deferred revenue	939		3,286
2019 convertible senior notes, net	27,087		26,433
Derivative liability	14,313		23,430
Total current liabilities	108,985		82,249
2023 convertible senior notes, net	624,209		609,864
Long-term contingent liabilities	8,314		6,825
Deferred income taxes, net	694		—
Long-term operating lease liabilities	10,489		—
Other long-term liabilities	7,692		951
Total liabilities	760,383		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, respectively	19		21
Additional paid-in capital	619,255		791,114
Accumulated other comprehensive loss	(542)		(1,024)
Retained earnings (accumulated deficit)	422,721		(229,197)
Total stockholders' equity	1,041,453		560,914
Total liabilities and stockholders' equity	$	1,801,836	$	1,260,803

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2019		2018		2019		2018
Revenues:
Royalties	$	6,626	$	31,396	$	26,164	$	52,216
Material sales	8,549		7,612		17,508		12,003
License fees, milestones and other revenues	9,812		51,035		24,799		81,981
Total revenues	24,987		90,043		68,471		146,200
Operating costs and expenses:
Cost of material sales	2,405		1,134		6,263		1,922
Amortization of intangibles	3,505		3,305		7,008		6,584
Research and development	12,213		6,135		23,502		13,540
General and administrative	10,994		9,294		22,082		16,938
Total operating costs and expenses	29,117		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 income	9,285		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 calculations	19,558		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 calculations	19,558		24,438		20,799		24,618

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2019		2018		2019		2018
Net income (loss):	$	(14,419)	$	73,160	$	651,918	$	118,441
Unrealized net gain (loss) on available-for-sale securities, net of tax	503		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.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)


	Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Retain earnings (Accumulated deficit)		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2019	20,765	$	21	$	791,114	$	(1,024)	$	(229,197)	$	560,914
Issuance of common stock under employee stock compensation plans, net	135	—		(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, 2019	19,664	$	20	$	643,317	$	(503)	$	437,140	$	1,079,974
Issuance of common stock under employee stock compensation plans, net	17	—		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, 2019	19,390	$	19	$	619,255	$	(542)	$	422,721	$	1,041,453


	Common Stock					Additional paid in capital		Accumulated other comprehensive income (loss)		Accumulated deficit		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2018	21,149	$	21	$	798,205	$	2,486	$	(400,924)	$	399,788
Issuance of common stock under employee stock compensation plans, net	166	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, 2018	21,302	$	21	$	808,765	$	(286)	$	(327,400)	$	481,100
Issuance of common stock under employee stock compensation plans, net	60	—		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, 2018	21,095	$	21	$	874,183	$	(151)	$	(254,240)	$	619,813

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six months ended
	June 30,
	2019		2018
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 liabilities	984		2,730
Depreciation and amortization	8,781		6,013
Amortization of discount on investments, net	(6,023)		(1,150)
Amortization of debt discount and issuance fees	14,999		15,455
Amortization of other economic rights	4,370		—
Share-based compensation	11,918		9,367
Deferred income taxes	55,661		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, net	35,591		(16,405)
Inventory	(4,573)		(4,395)
Accounts payable and accrued liabilities	(3,780)		80
Income tax payable	47,455		—
Other economic rights	(12,000)		—
Other	597		(594)
Net cash provided by (used in) operating activities	(15,800)		134,405

Cash flows from investing activities:
Proceeds from sale of Promacta license	812,797		—
Purchase of short-term investments	(1,281,274)		(745,783)
Proceeds from sale of short-term investments	43,724		12,791
Proceeds from maturity of short-term investments	791,006		110,175
Other	(5,673)		2,498
Net cash provided by (used in) investing activities	360,580		(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 ESPP	2,643		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 cash	7		—
Net increase in cash, cash equivalents and restricted cash	154,620		130,839
Cash, cash equivalents and restricted cash at beginning of period	119,780		20,620
Cash, cash equivalents and restricted cash at end of period	$	274,400	$	151,459


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.

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

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

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 ended												Six months ended
		June 30,												June 30,
		2019				2018				2019				2018
Royalties
	Promacta	$	—			$	24,806			$	14,193			$	40,379
	Kyprolis	4,882				4,730				8,715				8,125
	Evomela	1,144				1,160				2,055				2,760
	Other	600				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
	Milestone	4,175				1,919				16,107				4,744
	Other	3,647				1,135				5,852				2,301
		$	9,812			$	51,035			$	24,799			$	81,981

Total				$	24,987			$	90,043			$	68,471			$	146,200

Short-term Investments

Our investments consist of the following at June 30, 2019 and December 31, 2018 (in thousands):


	June 30, 2019														December 31, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

Short-term investments
Bank deposits	$	582,991	$	462	$	(13)	$	583,440	$	311,066	$	26	$	(29)	$	311,063
Corporate bonds	46,360		160		—		46,520		53,223		1		(45)		53,179
Commercial paper	423,578		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,
	2019		2018
Goodwill	$	88,000	$	86,646
Definite lived intangible assets
Complete technology	235,413		235,413
Less: accumulated amortization⁽¹⁾	(41,448)		(35,070)
Trade name	2,642		2,642
Less: accumulated amortization	(1,114)		(1,048)
Customer relationships	29,600		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.

Commercial License and Other Economic Rights

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


	June 30,		December 31,
	2019		2018
Aziyo and CorMatrix	$	17,696	$	17,696
Novan	12,000		—
Palvella	10,000		10,000
Selexis	8,602		8,602
Dianomi	2,000		—
	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

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,
	2019		2018
Compensation	$	2,856	$	4,045
Professional fees	738		942
Amounts owed to former licensees	411		428
Royalties owed to third parties	872		1,025
Payments due to broker for share repurchases	—		4,613
Return reserve	3,346		3,590
Restructuring	7		1,093
Current operating lease liabilities	989		—
Other	2,321		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):