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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, 2020
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-20200630_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 4, 2020, the registrant had 16,078,143 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
2019 Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 27, 2020
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.
Acrotech BiopharmaAcrotech Biopharma, LLC
AmgenAmgen, Inc.
ANDAAbbreviated New Drug Application
ASCAccounting Standards Codification
ASCO
American Society of Clinical Oncology
ASUAccounting Standards Update
AziyoAziyo Med, LLC
CECaptisol-enabled
cGMPcurrent Good Manufacturing Practices
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
CorMatrixCorMatrix Cardiovascular, Inc.
CVRContingent value right
CrystalCrystal Bioscience, Inc.
CStone PharmaceuticalsCStone Pharmaceuticals (Suzhou) Co., Ltd.
CyDexCyDex Pharmaceuticals, Inc.
Dianomi TherapeuticsDianomi Therapeutics, Inc.
ESPPEmployee Stock Purchase Plan, as amended and restated
EUAEmergency Use Authorization
FASBFinancial Accounting Standards Board
FDAFood and Drug Administration
GAAPGenerally accepted accounting principles in the United States
Gloria BiosciencesGloria Biosciences, Co.
Glucagon CVRThe contingent value right issued pursuant to the Glucagan CVR Agreement, dated January 10, 2010 by and between the Company, Meatabasis and the other parties named therein
GileadGilead Sciences, Inc.
GRAGlucagon receptor antagonist
IcagenIcagen, Inc.
IPR&DIn-process Research and Development
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
MetabasisMetabasis Therapeutics, Inc.
NDANew Drug Application
PfizerPfizer Inc.
Q2 2019The Company's fiscal quarter ended June 30, 2019
Q2 2020The Company's fiscal quarter ended June 30, 2020
RoivantRoivant Sciences GmbH
Roivant License AgreementLicense Agreement, dated March 5, 2018, between Ligand and Roivant
RetrophinRetrophin, Inc.
SBCShare-based compensation expense
SECSecurities and Exchange Commission
SelexisSelexis, SA
sNDASupplemental New Drug Application
TevaTeva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC, collectively
VernalisVernalis plc
VikingViking Therapeutics, Inc.
YTDYear-to-date

3



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, 2020December 31, 2019
ASSETS
Current assets:
   Cash and cash equivalents$115,156  $71,543  
   Short-term investments694,724  998,324  
   Accounts receivable, net41,874  30,387  
   Inventory3,702  7,296  
   Income taxes receivable2,679  11,361  
   Other current assets5,489  4,734  
      Total current assets863,624  1,123,645  
Deferred income taxes, net26,411  25,608  
Intangible assets, net215,295  210,448  
Goodwill103,369  95,229  
Commercial license and other economic rights, net10,606  20,090  
Property and equipment, net7,883  7,185  
Operating lease right-of-use assets9,689  10,353  
Other assets6,059  2,357  
      Total assets$1,242,936  $1,494,915  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable $6,103  $2,420  
   Accrued liabilities12,828  9,836  
   Current contingent liabilities1,416  2,607  
   Deferred revenue8,917  2,139  
      Total current liabilities29,264  17,002  
2023 convertible senior notes, net449,672  638,959  
Long-term contingent liabilities10,005  6,335  
Deferred income taxes, net23,340  32,937  
Long-term operating lease liabilities9,181  9,970  
Other long-term liabilities26,471  22,480  
      Total liabilities547,933  727,683  
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at June 30, 2020 and December 31, 2019
    
   Common stock, $0.001 par value; 60,000 shares authorized; 16,071 and 16,823 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
16  17  
   Additional paid-in capital304,404  367,326  
   Accumulated other comprehensive loss(2,310) (216) 
   Retained earnings 392,893  400,105  
      Total stockholders' equity695,003  767,232  
      Total liabilities and stockholders' equity$1,242,936  $1,494,915  

See accompanying notes to unaudited condensed consolidated financial statements.






4



LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three months endedSix months ended
June 30,June 30,
2020201920202019
Revenues:
   Royalties$7,181  $6,626  $13,746  $26,164  
   Captisol24,468  8,549  45,577  17,508  
   Service revenue4,582  4,559  7,939  8,442  
   Contract revenue5,189  5,253  7,319  16,357  
Total revenues41,420  24,987  74,581  68,471  
Operating costs and expenses:
   Cost of Captisol7,644  2,405  12,327  6,263  
   Amortization of intangibles3,875  3,505  7,410  7,008  
   Research and development12,732  12,213  24,623  23,502  
   General and administrative10,069  10,994  19,333  22,082  
Total operating costs and expenses34,320  29,117  63,693  58,855  
Gain from sale of Promacta license      812,797  
Income from operations7,100  (4,130) 10,888  822,413  
Other income (expense):
   Gain (loss) from short-term investments23,460  (15,061) (7,281) 4,488  
   Interest income1,969  9,285  6,699  15,194  
   Interest expense(6,213) (9,012) (14,761) (17,918) 
   Other income, net1,803  890  2,159  508  
Total other income (loss), net21,019  (13,898) (13,184) 2,272  
Income (loss) before income taxes28,119  (18,028) (2,296) 824,685  
Income tax benefit (expense)(6,033) 3,609  251  (172,767) 
Net income (loss)$22,086  $(14,419) $(2,045) $651,918  
     Basic net income (loss) per share$1.38  $(0.74) $(0.13) $32.60  
     Shares used in basic per share calculations16,055  19,558  16,292  20,000  
     Diluted net income (loss) per share$1.32  $(0.74) $(0.13) $31.34  
     Shares used in diluted per share calculations16,694  19,558  16,292  20,799  


See accompanying notes to unaudited condensed consolidated financial statements.
5






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

Three months endedSix months ended
June 30,June 30,
2020201920202019
Net income (loss):$22,086  $(14,419) $(2,045) $651,918  
Unrealized net gain (loss) on available-for-sale securities, net of tax2,742  503  (30) 733  
Foreign currency translation(185) (542) (2,064) (251) 
Comprehensive income (loss)$24,643  $(14,458) $(4,139) $652,400  

See accompanying notes to unaudited condensed consolidated financial statements.

6



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

Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained earningsTotal stockholders' equity
SharesAmount
Balance at January 1, 202016,823  $17  $367,326  $(216) $400,105  $767,232  
Issuance of common stock under employee stock compensation plans, net105  —  (1,008) —  —  (1,008) 
Share-based compensation—  —  5,653  —  —  5,653  
Repurchase of common stock(878) (1) (73,286) —  —  (73,287) 
Unrealized net loss on available-for-sale securities, net of deferred tax—  —  —  (2,772) —  (2,772) 
Foreign currency translation adjustment—  —  —  (1,879) —  (1,879) 
Reacquisition of equity due to 2023 debt extinguishment, net of tax
—  —  (2,745) —  —  (2,745) 
Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax
—  —  —  —  (5,167) (5,167) 
Net loss—  —  —  —  (24,131) (24,131) 
Balance at March 31, 202016,050  $16  $295,940  $(4,867) $370,807  $661,896  
Issuance of common stock under employee stock compensation plans, net21  —  1,128  —  —  1,128  
Share-based compensation—  —  7,359  —  —  7,359  
Unrealized net gain on available-for-sale securities, net of deferred tax—  —  —  2,742  —  2,742  
Foreign currency translation adjustment—  —  —  (185) —  (185) 
Adjustment on reacquisition of equity due to 2023 debt extinguishment, net of tax
—  —  (23) —  —  (23) 
Net income—  —  —  —  22,086  22,086  
Balance at June 30, 202016,071  $16  $304,404  $(2,310) $392,893  $695,003  


Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained 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  

See accompanying notes to unaudited condensed consolidated financial statements.
7



LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended
June 30,
20202019
Cash flows from operating activities:
Net income (loss)$(2,045) $651,918  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain from sale of Promacta license  (812,797) 
Change in estimated fair value of contingent liabilities(371) 984  
Depreciation and amortization of intangible assets7,869  7,699  
Amortization of premium (discount) on investments, net1,198  (6,023) 
Amortization of debt discount and issuance fees12,442  14,999  
Amortization of commercial license and other economic rights2,733  5,452  
Gain on debt extinguishment(659)   
Share-based compensation13,012  11,918  
Deferred income taxes(8,890) 55,661  
Loss (gain) from short-term investments7,281  (4,488) 
Other(1,499) (4,429) 
Changes in operating assets and liabilities, net of acquisition:
     Accounts receivable, net(11,466) 35,591  
     Inventory6,977  (4,573) 
     Accounts payable and accrued liabilities 2,909  (3,764) 
     Income tax receivable8,673  47,455  
     Other economic rights  (12,000) 
     Other3,140  597  
                Net cash provided by (used in ) operating activities41,304  (15,800) 
Cash flows from investing activities:
Proceeds from sale of Promacta license  812,797  
Purchase of short-term investments(336,726) (1,281,274) 
Proceeds from sale of short-term investments179,431  43,724  
Proceeds from maturity of short-term investments452,405  791,006  
Cash paid for acquisition(15,140)   
Other1,809  (5,673) 
               Net cash provided by investing activities281,779  360,580  
Cash flows from financing activities:
Repurchase of 2023 Notes(203,210)   
Net proceeds from stock option exercises and ESPP1,550  2,643  
Taxes paid related to net share settlement of equity awards(1,429) (2,893) 
Share repurchase(73,287) (189,917) 
Payments to CVR Holders(1,800)   
Other(1,134)   
               Net cash used in financing activities(279,310) (190,167) 
Effect of exchange rate changes on cash(160) 7  
Net increase in cash, cash equivalents and restricted cash43,613  154,620  
Cash, cash equivalents and restricted cash at beginning of period72,273  119,780  
Cash, cash equivalents and restricted cash at end of period$115,886  $274,400  

Supplemental disclosure of cash flow information:
Interest paid$2,531  $2,915  
Taxes paid$  $69,703  
Restricted cash in other current assets$730  $1,353  
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases$292  $54  
Accrued inventory purchases$3,553  $  
Unrealized gain (loss) on AFS investments$(38) $938  
See accompanying notes to unaudited condensed consolidated financial statements.
8



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 2019 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 condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, effective the first quarter of 2020, we began to present service revenue and contract revenue separately, which were combined in license fees, milestones and other revenues in prior years. As a result, service revenue and contract revenue in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 have been reclassified to conform to the current period presentation. In addition, effective the second quarter of 2020, we began to include our investment in Viking in “short-term investments” in the condensed consolidated balance sheet as of June 30, 2020, and present “gain (loss) from short-term investments” in the condensed consolidated statements of operations for the three and six months ended June 30, 2020 to include both the gain (loss) from investment in Viking and other short-term investments, which was previously included in “other income, net”. As a result, the audited consolidated balance sheet as of December 31, 2019 and the condensed consolidated statements of operations for the three and six months ended June 30, 2019 have been reclassified to conform to the current period presentation.

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 2019 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.

Impact of COVID-19 Pandemic

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees and partners, patients, communities and business operations, as well as the U.S. and global economy and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have restricted in-person access to our executive offices, our administrative employees are mostly working remotely, and we have limited the number of staff in our research and development laboratories and other facilities. The continued spread of the COVID-19 pandemic and the measures taken by the governments of countries have affected, and could continue to affect, our business and the business of our partners, including future disruptions to our supply chain and the manufacture or shipment of drug substance and finished drug product for Captisol, delays by us or our partners in the initiation or enrollment of patients in clinical trials, discontinuations by patients enrolled in clinical trials, difficulties launching or commercializing products and other related activities, which could delay ongoing clinical trials, increase development costs,
9



reduce royalty revenues and have a material adverse effect on our business, financial condition and results of operations. Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues.

Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead for Veklury® (remdesivir), the first new treatment for COVID-19 available under an EUA and is also being evaluated in multiple ongoing clinical trials and, as a result, we have worked to increase our manufacturing of Captisol to meet this increased demand. We believe our existing production capacity, together with our planned expansion, will provide adequate supply of Captisol and do not expect any significant risk or disruption to our supply chain for the foreseeable future. In addition, certain of our OmniAb and Vernalis partners have initiated antibody discovery programs for the potential treatment of COVID-19.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, the businesses of our partners, our results of operations and our financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, including the timing and extent of governments reopening activities, and the economic impact on local, regional, national and international markets.

Accounting Standards Recently Adopted

Credit Losses - 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. This standard includes our financial instruments, such as accounts receivable, investments that are generally of high credit quality, and commercial license rights. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new guidance requires us to identify, analyze, document and support new methodologies for quantifying expected credit loss estimates for our financial instruments, using information such as historical experience and current economic conditions, plus the use of reasonable supportable forecast information. We adopted ASU 2016-13 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance sheet of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment, net of tax, recorded on January 1, 2020, is approximately $5.2 million on our unaudited condensed consolidated balance sheet as of January 1, 2020. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under previously applicable accounting standards. See additional disclosure on credit losses under “Short-term Investments”, “Accounts Receivable and Allowance for Credit Losses” and “Commercial License and Other Economic Rights” discussed below.

Goodwill Impairment Testing - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed 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. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed 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. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.
10




Income Taxes - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The standard is expected to reduce cost and complexity related to accounting for income taxes. The new guidance eliminates certain exceptions and clarifies and amends existing guidance to promote consistent application among reporting entities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. We adopted this standard on a prospective basis on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

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

Revenue

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

Royalties, Service Revenue, and Contract Revenue

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 when the underlying sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

We recognize service revenue for contracted R&D services performed for our customers over time. We measure our progress using an input method based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.

Our contract revenue includes license fees and 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.

Captisol 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
11



regarding payment terms or transfer of control. We have elected to recognize the cost for freight and shipping when or after control over Captisol material has transferred to the customer as an expense in cost of Captisol. 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.

Deferred Revenue

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. 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.

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 condensed 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, 2020, the amount recognized as revenue that was previously deferred was $2.0 million and $2.4 million, respectively. 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.

Disaggregation of Revenue

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

Three months endedSix months ended
June 30,June 30,
2020201920202019
Royalties
Kyprolis$5,481  $4,882  $9,886  $8,715  
Evomela1,199  1,144  2,775  2,055  
Other501  600  1,085  1,201  
Promacta      14,193  
$7,181  $6,626  $13,746  $26,164  
Captisol$24,468  $8,549  $45,577  $17,508  
Service Revenue$4,582  $4,559  $7,939  $8,442  
Contract Revenue
License Fees$660  $1,990  $1,635  $2,840  
Milestone3,472  2,497  3,806  12,751  
Other1,057  766  1,878  766  
$5,189  $5,253  $7,319  $16,357  
Total$41,420  $24,987  $74,581  $68,471  

12



Short-term Investments
Our investments, excluding investment in Viking, consist of the following at June 30, 2020 and December 31, 2019 (in thousands):
June 30, 2020December 31, 2019
Amortized costGross unrealized gainsGross unrealized lossesEstimated fair valueAmortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Short-term investments
     Bank deposits$269,114  $221  $(56) $269,279  $411,690  $188  $(3) $411,875  
     Corporate bonds55,380  125  (94) 55,411  63,818  161    63,979  
     Commercial paper163,590  134    163,724  210,525  43  (16) 210,552  
     Corporate equity securities4,506  634  (2,484)