lgnd-20230930

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 September 30, 2023


☐			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 November 6, 2023, the registrant had 17,435,958 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)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Stockholders' Equity	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	11
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	34
	ITEM 4. Controls and Procedures	34
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	34
	ITEM 1A. Risk Factors	34
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
	ITEM 3. Defaults Upon Senior Securities	35
	ITEM 4. Mine Safety Disclosures	35
	ITEM 5. Other Information	35
	ITEM 6. Exhibits	37
	SIGNATURE	37


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation			Definition
2022 Annual Report			Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023
2023 Notes			$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
APAC			Avista Public Acquisition Corp. II (prior to its domestication in Delaware and change of name to OmniAb, Inc.)
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Company			Ligand Pharmaceuticals Incorporated, including subsidiaries
CVR			Contingent value right
CyDex			CyDex Pharmaceuticals, Inc.
ESPP			Employee Stock Purchase Plan, as amended and restated
FASB			Financial Accounting Standards Board
GAAP			Generally accepted accounting principles in the United States
Ligand			Ligand Pharmaceuticals Incorporated, including subsidiaries
Merger Agreement			Agreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub
Merger Sub			Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC
Metabasis			Metabasis Therapeutics, Inc.
NDA			New Drug Application
New OmniAb			OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II and after it domestication in Delaware)
OmniAb			OmniAb Operations, Inc. (formerly known as OmniAb, Inc. and prior to being spun off by the Company)
OmniAb Business			Ligand's antibody discovery business (prior to being spun off by the Company)
PDUFA			Prescription Drug User Fee Act
Pfenex			Pfenex Inc.
Q3 2022			The Company's fiscal quarter ended September 30, 2022
Q3 2023			The Company's fiscal quarter ended September 30, 2023
SBC			Share-based compensation expense
SEC			Securities and Exchange Commission
Separation Agreement			Separation and Distribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb
Takeda			Takeda Pharmaceutical Company Limited
Travere			Travere Therapeutics, Inc.
Viking			Viking Therapeutics, 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)


	September 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	19,275	$	45,006
Short-term investments	171,227		166,864
Accounts receivable, net	36,003		30,424
Inventory	25,392		13,294
Income taxes receivable	—		4,614
Other current assets	2,097		3,399
Total current assets	253,994		263,601
Deferred income taxes, net	8,530		8,530
Intangible assets, net	314,843		342,455
Goodwill	103,770		105,673
Commercial license rights, net	6,602		10,182
Property and equipment, net	16,178		12,482
Operating lease right-of-use assets	6,235		10,914
Financing lease right-of-use assets	3,566		4,095
Equity method investment in Primrose Bio	13,985		—
Equity securities in Primrose Bio	33,097		—
Other assets	8,426		4,736
Total assets	$	769,226	$	762,668
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,475	$	5,307
Accrued liabilities	10,635		15,681
Income taxes payable	1,204		—
Current operating lease liabilities	497		670
2023 convertible senior notes, net	—		76,695
Other current liabilities	916		457

Total current liabilities	15,727		98,810
Long-term contingent liabilities	3,515		3,456
Deferred income taxes, net	32,586		30,615
Long-term operating lease liabilities	5,832		10,336

Other long-term liabilities	43,670		21,966

Total liabilities	101,330		165,183
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at September 30, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value; 60,000 shares authorized; 17,421 and 16,951 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	18		17
Additional paid-in capital	183,994		147,590
Accumulated other comprehensive loss	(944)		(984)
Retained earnings	484,828		450,862
Total stockholders' equity	667,896		597,485
Total liabilities and stockholders' equity	$	769,226	$	762,668

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				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Revenues:
Royalties	$	23,863	$	19,255	$	61,447	$	50,507
Captisol	8,608		35,949		24,450		77,616
Contract revenue	397		4,017		17,316		17,740
Total revenues	32,868		59,221		103,213		145,863
Operating costs and expenses:
Cost of Captisol	3,485		14,153		8,871		31,213
Amortization of intangibles	8,238		8,568		25,316		25,698
Research and development	5,532		9,239		19,049		26,885
General and administrative	14,656		14,920		36,798		38,931
Total operating costs and expenses	31,911		46,880		90,034		122,727
Gain on sale of Pelican	(2,121)		—		(2,121)		—
Operating income from continuing operations	3,078		12,341		15,300		23,136
Other income (expense):
Gain (loss) from short-term investments	(13,184)		(923)		30,340		(15,709)
Interest income	2,263		591		6,018		1,023
Interest expense	(1)		(332)		(525)		(1,559)
Other (loss) income, net	(4,300)		677		(4,570)		4,980
Total other income (expense), net	(15,222)		13		31,263		(11,265)
Income (loss) before income taxes from continuing operations	(12,144)		12,354		46,563		11,871
Income tax benefit (expense)	1,871		(2,709)		(10,932)		(2,556)
Net income (loss) from continuing operations	(10,273)		9,645		35,631		9,315
Net loss from discontinued operations	—		(9,241)		(1,665)		(25,191)
Net income (loss)	$	(10,273)	$	404	$	33,966	$	(15,876)

Basic net income from continuing operations per share	$	(0.59)	$	0.57	$	2.07	$	0.55
Basic net loss from discontinued operations per share	$	—	$	(0.55)	$	(0.10)	$	(1.49)
Basic net income (loss) per share	$	(0.59)	$	0.02	$	1.97	$	(0.94)
Shares used in basic per share calculation	17,380		16,888		17,241		16,860

Diluted net income from continuing operations per share	$	(0.59)	$	0.56	$	2.00	$	0.54
Diluted net loss from discontinued operations per share	$	—	$	(0.54)	(0.09)		$	(1.47)
Diluted net income (loss) per share	$	(0.59)	$	0.02	1.91		$	(0.93)
Shares used in diluted per share calculation	17,380		17,132		17,784		17,128

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				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income (loss)	$	(10,273)	$	404	$	33,966	$	(15,876)
Unrealized net gain (loss) on available-for-sale securities, net of tax	23		6		40		(143)
Comprehensive income (loss)	$	(10,250)	$	410	$	34,006	$	(16,019)

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)		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at December 31, 2022	16,951	$	17	$	147,590	$	(984)	$	450,862	$	597,485
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	183	—		(762)		—		—		(762)
Share-based compensation	—	—		5,931		—		—		5,931
Unrealized net gain on available-for-sale securities, net of tax	—	—		—		49		—		49
Final distribution of OmniAb	—	—		1,665		—				1,665
Net income	—	—		—		—		41,949		41,949
Balance at March 31, 2023	17,134	$	17	$	154,424	$	(935)	$	492,811	$	646,317
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	218	—		9,110		—		—		9,110
Share-based compensation	—	—		7,207		—		—		7,207
Unrealized net loss on available-for-sale securities, net of tax	—	—		—		(32)		—		(32)

Net income	—	—		—		—		2,290		2,290
Balance at June 30, 2023	17,352	$	17	$	170,741	$	(967)	$	495,101	$	664,892
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	69	1		3,284		—		—		3,285
Share-based compensation	—	—		6,884		—		—		6,884
Unrealized net gain on available-for-sale securities, net of tax	—	—		—		23		—		23

Tax return to provision	—	—		3,085		—		—		3,085
Net loss	—	—		—		—		(10,273)		(10,273)
Balance at September 30, 2023	17,421	$	18	$	183,994	$	(944)	$	484,828	$	667,896


	Common Stock			Additional paid in capital		Accumulated other comprehensive loss		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at December 31, 2021	16,767	$	17	$	372,969	$	(917)	$	449,090	$	821,159
ASU 2020-06 adoption, net of tax (Note 1)				(51,130)				35,133		(15,997)
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	94	—		(5,515)		—		—		(5,515)
Share-based compensation	—	—		9,044		—		—		9,044
Unrealized net loss on available-for-sale securities, net of tax	—	—		—		(114)		—		(114)



Net loss	—	—		—		—		(15,385)		(15,385)
Balance at March 31, 2022	16,861	$	17	$	325,368	$	(1,031)	$	468,838	$	793,192
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	21	—		604		—		—		604
Share-based compensation	—	—		9,499		—		—		9,499
Unrealized net loss on available-for-sale securities, net of tax	—	—		—		(35)		—		(35)

Net loss	—	—		—		—		(895)		(895)
Balance at June 30, 2022	16,882	$	17	$	335,471	$	(1,066)	$	467,943	$	802,365
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	12	—		724		—		—		724
Share-based compensation	—	—		12,597		—		—		12,597
Unrealized net loss on available-for-sale securities, net of tax	—	—		—		6		—		6

Warrant and bond hedge unwind transactions	—	—		202		—		—		202
Net income	—	—		—		—		404		404
Balance at September 30, 2022	16,894	$	17	$	348,994	$	(1,060)	$	468,347	$	816,298

See accompanying notes to unaudited condensed consolidated financial statements.

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine months ended
	September 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	33,966	$	(15,876)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities	132		(1,378)
Depreciation and amortization of intangible assets	27,605		40,399
Amortization of premium on investments, net	(938)		75
Amortization of debt discount and issuance fees	159		639
Amortization of commercial license rights	(883)		(163)
CECL adjustment to commercial license rights	3,190		—
Impairment loss of commercial license rights	924		—
Gain on sale of Pelican	(2,121)		—
Gain on debt extinguishment	—		(4,192)
Share-based compensation	20,022		31,140
Deferred income taxes	6,761		(25,570)
(Gain) loss from short-term investments	(30,340)		15,709
Lease amortization expense	1,231		4,535
Other	215		(45)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net	(5,436)		20,550
Inventory	(11,577)		10,702
Accounts payable and accrued liabilities	(7,461)		(405)
Income tax receivable and payable	5,818		15,111
Deferred revenue	226		(5,182)
Other current assets	918		(17)
Other assets and liabilities	(899)		(1,654)
Net cash provided by operating activities	41,512		84,378

Cash flows from investing activities:
Purchase of short-term investments	(107,262)		(39,052)
Proceeds from sale of short-term investments	96,318		202,552
Proceeds from maturity of short-term investments	37,941		24,830
Cash paid for equity method investment - Nucorion	—		(750)
Cash paid for investment in Primrose Bio	(15,235)		—
Cash paid for Novan acquisition, net of restricted cash received	(10,405)		—
Purchase of property and equipment	(3,104)		(15,792)
Payments to CVR Holders	—		(960)
Proceeds from commercial license rights	349		—

Other	—		80
Net cash (used in) provided by investing activities	(1,398)		170,908

Cash flows from financing activities:
Repayment at maturity/repurchase of 2023 Notes	(76,854)		(260,949)

Proceeds from convertible bond hedge settlement	—		202

Net proceeds from stock option exercises and ESPP	15,922		1,831
Taxes paid related to net share settlement of equity awards	(4,290)		(6,018)
Payments to CVR Holders	—		(1,545)
Payments for OmniAb transaction costs	—		(4,171)
Other	(40)		(42)
Net cash used in financing activities	(65,262)		(270,692)
Net decrease in cash, cash equivalents and restricted cash	(25,148)		(15,406)
Cash, cash equivalents and restricted cash at beginning of period	45,006		19,522
Cash, cash equivalents and restricted cash at end of period	$	19,858	$	4,116


Supplemental disclosure of cash flow information:
Interest paid	$	288	$	1,139
Taxes paid	$	10	$	6,630
Restricted cash in other assets	$	583	$	—
Acquisition:
Fair value of tangible assets acquired, net of cash and restricted cash received	$	17,101	—
Goodwill	2,229		—
Intangible assets	17,600		—
Liabilities assumed	(26,525)		—
Net cash paid for Novan	$	10,405	—

Supplemental schedule of non-cash activity:



Accrued Primrose transaction costs	$	1,013	$	—
Accrued fixed asset purchases	$	409	$	3,626
Accrued inventory purchases	$	521	$	7,676

Unrealized gain (loss) on AFS investments, net of tax	$	40	$	(143)

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

Business

On November 1, 2022, we completed the separation (the “Separation”) of our antibody discovery business and certain related assets and liabilities (the “OmniAb Business”) through a spin-off of OmniAb to Ligand’s shareholders of record as of October 26, 2022 on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of a separate public company, OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II (“New OmniAb”)), in a Reverse Morris Trust transaction pursuant to the Agreement and Plan of Merger, dated as of March 23, 2022 (the “Merger Agreement”), and the Separation and Distribution Agreement, dated as of March 23, 2022 (the “Separation Agreement”) (the Merger Agreement and Separation Agreement, collectively with the other related transaction documents, the “Transaction Agreements”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc.

After the spin-off of our OmniAb antibody discovery business, Ligand is a revenue-generating biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. We operate in one business segment: development and licensing of biopharmaceutical assets.

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 2022 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

Discontinued Operations

The Company determined that the spin-off of the OmniAb Business in November 2022 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). Accordingly, the accompanying condensed consolidated financial statements have been updated to present the results of all discontinued operations reported as a separate component of loss in the condensed consolidated statements of operations and comprehensive loss (see Note 4, Spin-off of OmniAb). All disclosures have been adjusted to reflect continuing operations.

Significant Accounting Policies

We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2022 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.

Revenue

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

We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Royalties

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under contractual agreements. 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 royalty to be recorded no sooner than 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, which have not been material, are adjusted in the period in which they become known, typically the following quarter.

Captisol Sales

Revenue from Captisol sales is recognized when control of Captisol material is transferred or intellectual property license rights are granted to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products or rights. 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. For Captisol material or intellectual property license rights, we consider our performance obligation satisfied once we have transferred control of the product or granted the intellectual property rights, 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 have elected to recognize the cost of freight and shipping when control over Captisol material has transferred to the customer as an expense in Cost of Captisol. 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.

Contract Revenue

Our contracts with customers often include variable consideration in the form of contingent milestone payments. We include contingent milestone payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone payment is based on sales, 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 milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval.

Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services. In general, for R&D services, which has not been significant, we recognize revenue over time and measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation.

Some customer contracts are sublicenses which require that we make payments to an upstream licensor related to license fees, milestones and royalties which we receive from customers. In such cases, we evaluate the determination of gross revenue as a principal versus net revenue as an agent reporting based on each individual agreement.

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. 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 any contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue, which has not been significant.

Disaggregation of Revenue

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Royalties
Kyprolis	$	10,537	$	9,123	$	24,862	$	20,872
Evomela	2,497		3,123		7,404		8,218
Teriparatide injection	2,800		4,071		9,913		12,484
Rylaze	3,678		2,099		9,315		6,065
Other	4,351		839		9,953		2,868
	$	23,863	$	19,255	$	61,447	$	50,507

Captisol
Captisol - Core	$	8,608	$	3,582	$	24,450	$	13,133
Captisol - COVID(1)	—		32,367		—		64,483
	$	8,608	$	35,949	$	24,450	$	77,616

Contract revenue
Service revenue	263		90		534		1,047

Milestone	—		2,658		15,300		8,651
Other	134		1,269		1,482		8,042
	$	397	$	4,017	$	17,316	$	17,740
Total	$	32,868	$	59,221	$	103,213	$	145,863

(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.

Short-term Investments

Our short-term investments consist of the following at September 30, 2023 and December 31, 2022 (in thousands):



September 30, 2023	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Bank deposits	$	28,972	$	11	$	(11)	$	28,972
Bond fund	84,811		—		(808)		84,003
Commercial paper	18,935		—		(4)		18,931
Corporate bonds	8,077		1		(35)		8,043
Corporate equity securities	5,775		—		(4,903)		872

Municipal bonds	1,027		—		(6)		1,021
US government securities	4,702		—		(19)		4,683
Warrants	—		22		—		22
	$	152,299	$	34	$	(5,786)	$	146,547
Viking common stock							24,680
Total short-term investments							$	171,227

December 31, 2022
Bank deposits	$	5,012	$	2	$	(34)	$	4,980
Bond fund	81,815		—		(1050)		80,765
Commercial paper	7,211		3		—		7,214
Corporate bonds	6,701		13		(58)		6,656

Corporate equity securities	5,807		262		(4,239)		1,830
U.S. government securities	2,232		—		(70)		2,162
Warrants	—		135		—		135
	$	108,778	$	415	$	(5,451)	$	103,742
Viking common stock							63,122
Total short-term investments							$	166,864

During the nine months ended September 30, 2023, we sold 4.5 million shares of Viking common stock and recognized a realized gain of $37.2 million in total. During the three months ended September 30, 2023, there were no sales of Viking common stock.

Gain (loss) from short-term investments in our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.

Allowances are recorded for available-for-sale debt securities with unrealized losses. This limits the amount of credit losses that can be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The provisions of the credit losses standard did not have a material impact on our available-for-sale debt securities during the three and nine months ended September 30, 2023.

The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):


	September 30, 2023
	Amortized Cost		Fair Value
Within one year	$	71,095	$	71,070
After one year through five years	6,966		6,927
Total	$	78,061	$	77,997

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 48 investments which were in an unrealized loss position with a total of $0.1 million unrealized losses as of September 30, 2023. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities and it is not more-likely-than-not that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the three and nine months ended September 30, 2023.

Accounts Receivable and Allowance for Credit Losses

Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three and nine months ended September 30, 2023, we considered the current and expected future economic and market conditions and concluded an increase of $0.1 million and an increase of $0.1 million of allowance for credit losses, respectively.

Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the specific identification method.

We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write-downs recorded against inventory for the three and nine months ended September 30, 2023 and 2022. In addition to finished goods, as of September 30, 2023 inventory consists of Captisol prepayments of $4.7 million, and as of December 31, 2022 inventory consists of Captisol prepayments of $5.9 million.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):


	September 30,		December 31,
	2023		2022
Indefinite-lived intangible assets
Goodwill	$	103,770	$	105,673
Definite lived intangible assets
Complete technology	49,810		55,211
Less: accumulated amortization	(20,176)		(22,560)
Trade name	2,642		2,642
Less: accumulated amortization	(1,677)		(1,577)
Customer relationships	29,600		29,600
Less: accumulated amortization	(18,788)		(17,670)
Contractual relationships	360,000		362,000
Less: accumulated amortization	(86,568)		(65,191)
Total goodwill and other identifiable intangible assets, net	$	418,613	$	448,128

Commercial License Rights

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


	September 30, 2023						December 31, 2022
	Gross		Adjustments(1)		Net		Gross		Adjustments(2)		Net
Elutia and CorMatrix	$	17,696	$	(11,881)	$	5,815	$	17,696	$	(9,538)	$	8,158
Selexis and Dianomi	10,602		(9,815)		787		10,602		(8,578)		2,024
Total	$	28,298	$	(21,696)	$	6,602	$	28,298	$	(18,116)	$	10,182

(1) Amounts represent accumulated amortization to principal of $11.1 million, credit loss adjustments of $9.7 million and impairment of $0.9 million as of September 30, 2023.

(2) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of December 31, 2022.

Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis, S.A. (Selexis) in April 2013 and April 2015, CorMatrix Cardiovascular, Inc. (CorMatrix) in May 2016, which was later acquired by Aziyo (Aziyo changed its corporate name to Elutia Inc. ("Elutia") in September 2023) in 2017, and Dianomi Therapeutics, Inc. in January 2019. Commercial license rights acquired are accounted for as financial assets in accordance with ASC 310, Receivables, as further discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2022 Annual Report.

We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the three and nine months ended September 30, 2023, we further considered the current and expected future economic and market conditions and recorded a $3.2 million credit loss adjustment to Elutia commercial license rights based on the assessment of current company performance and nonpayment by Elutia in recent quarters. Management is in process of modifying the payment terms with Elutia and has placed the loan on the non-accrual method during the three months ended September 30, 2023, instead of the effective interest method until we are able to reliably estimate future cash flows. During the three months ended September 30, 2023 we did not recognized revenue related to the Elutia commercial license right. During the nine months ended September 30, 2023 we recognized $0.8 million of revenue related to the Elutia commercial license right.

In addition, we recorded a $0.9 million impairment loss for Selexis commercial license rights during the three and nine months ended September 30, 2023 as a result of recently reduced programs.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	September 30,		December 31,
	2023		2022
Compensation	$	2,890	$	6,201
Subcontractor	1,966		1,756
Professional fees	3,229		662
Customer deposit	621		621
Supplier	303		634
Royalties owed to third parties	—		12
Amounts owed to former licensees	45		3,989



Other	1,581		1,806
Total accrued liabilities	$	10,635	$	15,681

Share-Based Compensation

Share-based compensation expense for awards to employees and non-employee directors is a non-cash expense and is recognized on a straight-line basis over the vesting period. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2023		2022(a)		2023		2022(a)
SBC - Research and development expenses	$	1,639	$	3,277	$	5,362	$	7,920
SBC - General and administrative expenses	5,245		5,830		14,660		15,297
	$	6,884	$	9,107	$	20,022	$	23,217

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:


	Three months ended		Nine months ended
	September 30,		September 30,
	2023	2022	2023	2022
Risk-free interest rate	4.3%	2.8%	4.1%	2.9%
Dividend yield	—	—	—	—
Expected volatility	44.7%	50.0%	51.5%	50.0%
Expected term (years)	5.2	4.9	5.3	4.8

A limited amount of performance-based restricted stock units (PSUs) contain a market condition based on our relative total shareholder return ranked on a percentile basis against the NASDAQ Biotechnology Index over a three year performance period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation cost for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the performance conditions.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted net loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. Although we paid off the 2023 Notes in May 2023, it would have a dilutive impact when the average market price of our common stock exceeds the maximum conversion price during the nine months ended September 30, 2023. It was our intent and policy to settle conversions through combination settlement, which involved payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards. See Note 6, Debt and Note 8, Stockholders’ Equity.

In accordance with ASC 260, Earnings per Share, if a company had a discontinuing operation, the company uses income from continuing operations, adjusted for preferred dividends and similar adjustments, as its control number to determine whether potential common shares are dilutive. The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):


	Three months ended		Nine months ended
	September 30,		September 30,
	2023	2022	2023	2022
Weighted average shares outstanding:	17,380	16,888	17,241	16,860
Dilutive potential common shares:
Restricted stock	—	65	82	54
Stock options	—	179	302	214
2023 convertible senior notes	—	—	159	—
Shares used to compute diluted income per share	17,380	17,132	17,784	17,128
Potentially dilutive shares excluded from calculation due to anti-dilutive effect	4,762	6,706	4,663	6,503

For the three months ended September 30, 2023, due to the net loss for the period, all of the 0.3 million weighted average equity awards were anti-dilutive.

2. Sale of Pelican Business and Investment in Primrose Bio

On September 18, 2023, we entered into a merger agreement, pursuant to which our subsidiary, Pelican Technology Holdings, Inc. (“Pelican”) became a wholly owned subsidiary of Primrose Bio. Primrose Bio is a private company focused on synthetic biology. Pelican has developed technology related to PET (protein expression technology) and PelicCRM197 (vaccine material), and has property and equipment, as well as leased property in San Diego, CA. As part of the transaction, we received 2,146,957 common shares, 4,278,293 preferred shares and 474,746 restricted shares of Primrose Bio. Simultaneous with the merger, we entered into a Purchase and Sale Agreement with Primrose Bio and contributed $15.0 million in exchange for 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. In addition, starting January 1, 2025, we will receive 25% of sales revenue of PeliCRM197 above $3.0 million and 35% of all PeliCRM197 licensing revenue in perpetuity.

We retained contractual relationships utilizing the Pelican Expression Technology, including the commercial royalty rights to Jazz’s RYLAZE, Merck’s VAXNEUVANCE and V116 vaccines, Alvogen’s Teriparatide, Serum Institute of India’s vaccine programs, including Pneumosil and MenFive vaccines, among others.

We determined that the sale of Pelican meets the definition of a deconsolidation of a business. Net assets sold together with allocated goodwill and cash consideration paid were as follows (in thousands):


Property and equipment, net	$	8,250
Intangible assets	19,895
Other assets	717
Operating lease right-of-use assets	8,693
Financing lease right-of-use assets	20
Accrued liabilities	(630)
Deferred revenue	(495)
Long-term operating lease liabilities	(8,445)
Other liabilities	(74)
Net assets sold	27,931
Allocated goodwill	4,132
Cash consideration paid	15,000
	$	47,063

Fair value of the consideration received includes the following (in thousands):


Equity method investment	$	13,706
Equity securities	32,278
Derivative assets	3,200
	$	49,184

Goodwill allocated to the selling business based on the relative fair value of the Pelican business and Ligand that was written off was $4.1 million, resulting in a $2.1 million gain on sale of Pelican recorded to income (loss) from operations for the three and nine months ended September 30, 2023.

Transaction costs of $1.2 million were allocated to the equity method investment and equity securities based on the relative fair value.

As described above, we will receive 25% of sales revenue of PeliCRM197 above $3.0 million and 35% of all PeliCRM197 licensing revenue in perpetuity. The considerations were recognized as contingent consideration under the loss recovery model and they will be measured based on the gain contingency model under ASC 450, Contingencies, and thus, will be recognized as the underlying contingencies are resolved.

In addition, we will receive 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. The considerations were recognized as derivative assets with a fair value of $3.2 million, at the disposition date, which was included under other long-term asset in our condensed consolidated balance sheet. They are recognized as derivative assets under ASC 815, Derivatives and Hedging, as they have two underlyings

(development and commercial milestones) and (i) the commercial milestones are dependent on the development milestones and (ii) the commercial milestone underlying is not determined to be predominate. The derivative assets are recorded at fair value as of September 18, 2023, and will be marketed to fair value at each reporting period going forward.

Investment in Primrose Bio

We received 2,146,957 common shares, 4,278,293 preferred shares and 474,746 restricted shares of Primrose Bio in consideration for the sale of Pelican. We apply the equity method to investments in common stock and to other investments in entities that have risk and reward characteristics that are substantially similar to an investment in the investee’s common stock. Since the preferred stock and restricted share investment in Primrose Bio has a substantive liquidation preference, it is not substantially similar to the common stock investment and is therefore recorded as an equity security under ASC 321, Investments - Equity Securities.

We account for our common stock investment in Primrose Bio under the equity method as we have the ability to exercise significant influence over its operating and financial results. In applying the equity method, we record the investment at fair value. Ligand's proportionate share of net loss of Primrose Bio is recorded in our condensed consolidated statements of operations for the three and nine months ended September 30, 2023. Our equity method investments are reviewed for indicators of impairment at each reporting period and are written down to fair value if there is evidence of a loss in value that is other-than-temporary. Our share of the net losses of Primrose Bio since the divestiture date for the quarter ended September 30, 2023 was $0.07 million; which reduced Ligand's equity method investment accordingly.

We determined that the Series A preferred stock investment in Primrose Bio did not have a readily determinable fair value and therefore elected the measurement alternative in ASC 321 to subsequently record the investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. When fair value becomes determinable, from observable price changes in orderly transactions, our investment will be marked to fair value. There have been no observable price changes or impairments identified since September 18, 2023.

3. Acquisition

Novan

On September 27, 2023, we closed the transaction to acquire certain assets of Novan, Inc. (“Novan”) pursuant to the agreement we entered into with Novan on July 17, 2023 for $15.0 million in cash (which agreement contemplated Novan filing for bankruptcy relief) and provide up to $15.0 million in debtor-in-possession (“DIP”) financing inclusive of a $3.0 million bridge loan funded on the same day. Novan filed for Chapter 11 reorganization on July 17, 2023. On September 27, 2023, the bankruptcy court approved our $12.2 million bid to purchase from Novan its lead product candidate berdazimer gel, 10.3%, all other assets related to the NITRICIL technology platform and the rights to one commercial stage asset. The remaining commercial assets of Novan will be sold to other parties. The approved $12.2 million bid was credited to the $15.0 million DIP financing, with the balance of $2.8 million and accrued interest repaid to us.

The acquisition was accounted for as business combination. We recorded $3.3 million of acquisition-related costs for legal, due diligence and other costs in connection with the acquisition within operating expenses in our condensed consolidated statement of operations for the nine months ended September 30, 2023.

The following table sets forth an allocation of the preliminary purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):


Restricted Cash	$	583
Property and equipment, net	13,054
Right-of-use asset	3,683
Other assets	364
Intangible assets acquired	17,600
Goodwill	2,229
Deferred revenue	(2,342)
Lease liabilities	(3,683)
Other liabilities	(20,500)
Cash paid for Novan, including restricted cash received	10,988
DIP loan fees and interest	1,162
Total consideration	$	12,150

Acquired intangible assets of $17.6 million related to core technology. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 29%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 15 years.

Acquired other liabilities of $20.5 million related to a royalty and milestone payments purchase agreement, entered by Novan in 2019 and assumed as part of the acquisition, which previously provided Novan $25.0 million of funding used primarily in the clinical development of berdazimer gel, 10.3%. Pursuant to the purchase agreement, Novan will pay ongoing quarterly payments, calculated based on an applicable percentage per product of any upfront fees, milestone payments, royalty payments or equivalent payments received by Novan pursuant to any out-license agreement, net of any upfront fees, milestone payments, royalty payments or equivalent payments paid by Novan to third parties pursuant to any agreements under which Novan has in-licensed intellectual property with respect to such products. If Novan decides to commercialize any product on its own following regulatory approval, as opposed to commercializing through an out-license agreement or other third-party arrangement, Novan will be obligated to pay a low single digits royalty on net sales of such products. This contract liability was fair valued based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the related programs mentioned above, by applying a discount rate of 9.6% (our estimated rate of borrowing).

The estimated fair values of assets acquired, liabilities assumed and purchased intangibles are provisional. Specifically, the provisional amounts include estimated projections on the completion of the clinical development process and projected revenue related to commercializing products based on the underlying technology. The accounting for these amounts falls within the measurement period and, therefore, we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

4. Spin-off of OmniAb

On March 23, 2022, we entered into the Separation Agreement to separate our OmniAb Business and the Merger Agreement, pursuant to which APAC would combine with OmniAb, and acquire Ligand's OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). In connection with the execution of the Merger Agreement, we made organizational changes to better align our organizational structure with our strategy and operations, and management reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operated the following two reportable segments: (1) OmniAb Business and (2) Ligand core business. The OmniAb Business segment was focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb Business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines.

After the closing date of the Transactions on November 1, 2022, the historical financial results of OmniAb have been reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution. Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. Immediately following the Distribution, Merger Sub merged with and into OmniAb, with OmniAb continuing as the

surviving company in the Merger and as a wholly owned subsidiary of New OmniAb. The entire transaction was completed on November 1, 2022, and following the Merger, New OmniAb is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.” After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after November 1, 2022.

Discontinued operations

In connection with the Merger, the Company determined its antibody discovery business qualified for discontinued operations accounting treatment in accordance with ASC 205-20. We recognized a $1.7 million tax provision adjustment related to deferred taxes during the nine months ended September 30, 2023 that was attributable to the discontinued operations. There was no revenue or expenses attributable to the discontinued operations during the three months ended September 30, 2023. The following table summarizes revenue and expenses of the discontinued operations for the three and nine months ended September 30, 2022 (in thousands):


	Three months ended September 30, 2022		Nine months ended September 30, 2022
Revenues:
Royalties	$	582	$	984
Contract revenue	6,285		22,353
Total revenues	6,867		23,337
Operating costs and expenses:
Amortization of intangibles	3,250		9,757
Research and development	12,797		34,576
General and administrative	2,525		11,279
Total operating costs and expenses	18,572		55,612
Loss from operations	(11,705)		(32,275)
Other income (expense):
Other income (expense), net	208		485
Total other income (expense), net	208		485
Loss before income tax	(11,497)		(31,790)
Income tax (expense) benefit	2,256		6,599
Net loss	$	(9,241)	$	(25,191)

The following table summarizes the significant non-cash items, capital expenditures of the discontinued operations, and financing activities that are included in the consolidated statements of cash flows for the nine months ended September 30, 2022 (in thousands):


	Nine months ended
	September 30, 2022
Operating activities:
Change in fair value of contingent consideration	$	(486)
Depreciation and amortization	12,070
Stock-based compensation expense	7,923

Investing activities:

Purchase of property, plant and equipment	(12,415)
Payments to CVR Holders	(960)

Financing activities:
Payments to CVR Holders	$	(1,545)

Supplemental cash flow disclosures:
Purchases of property, plant and equipment included in accounts payable and accrued expenses	$	3,458

5. Fair Value Measurements

Assets and Liabilities Measured on a Recurring Basis

The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):


	September 30, 2023								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Short-term investments, excluding Viking(1)	$	5,555	$	140,970	$	22	$	146,547	$	3,992	$	99,615	$	135	$	103,742
Investment in Viking common stock	24,680		—		—		24,680		63,122		—		—		63,122
Derivative assets(3)	—		—		3,281		3,281		—		—		—		—
Total assets	$	30,235	$	140,970	$	3,303	$	174,508	$	67,114	$	99,615	$	135	$	166,864
Liabilities:
CyDex contingent liabilities	$	—	$	—	$	164	$	164	$	—	$	—	$	84	$	84
Metabasis contingent liabilities(2)	—		3,431		—		3,431		—		3,429		—		3,429
Amounts owed to former licensor	—		—		—		—		44		—		—		44
Total liabilities	$	—	$	3,431	$	164	$	3,595	$	44	$	3,429	$	84	$	3,557

1.Excluding our investment in Viking, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in bond funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black-Scholes value estimated by management on the last day of the period.

2.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. During the three and nine months ended September 30, 2023, we adjusted the balance of the Metabasis CVR liability by decreasing $0.1 million and increasing $0.002 million to mark to market, respectively.

3.In connection with the Purchase and Sale Agreement with Primrose Bio, we will receive 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. The considerations were recognized as derivative assets included under other long-term asset in our condensed consolidated balance sheet. They are recognized as derivative assets under ASC 815, Derivatives and Hedging, as they have two underlyings (development and commercial milestones) and (i) the commercial milestones are dependent on the development milestones and (ii) the commercial milestone underlying is not determined to be predominate. The fair value of the derivative assets was determined using a discounted cash flow approach using a discount rate inline with the stages of the underlying contracts.

A reconciliation of the level 3 liabilities as of September 30, 2023 is as follows (in thousands):


Fair value of level 3 financial instruments as of December 31, 2022	$	84
Payments to CVR holders and other contingent payments	(50)
Fair value adjustments to contingent liabilities	130

Fair value of level 3 financial instruments as of September 30, 2023	$	164

Assets Measured on a Non-Recurring Basis

We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.

We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.

Other than a reduction in goodwill resulting from the sale of Pelican business disclosed in Note 2, Sale of Pelican Business and Investment in Primrose Bio, and a $0.9 million impairment loss for Selexis commercial license rights based on fair value of the program disclosed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, there was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the three and nine months ended September 30, 2023 and September 30, 2022.

6. Debt

0.75% Convertible Senior Notes due 2023

In May 2018, we issued $750.0 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million.

In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees, and is being amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. The effective interest rate for the nine months ended September 30, 2023 is 0.5%. During the nine months ended September 30, 2023 we recognized a total of $0.6 million in interest expense which includes $0.4 million in contractual interest expense and $0.2 million in amortized issuance costs.

On May 15, 2023, the 2023 Notes maturity date, we paid the remaining $76.9 million principal amount and $0.3 million accrued interest in cash.

Convertible Bond Hedge and Warrant Transactions

In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we were required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $206.65 per share and were exercisable when and if the 2023 Notes were converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock had been above the exercise price of the convertible bond hedges, the counterparties would have delivered shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants did not have any rights with respect to the convertible bond hedges.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

In January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

During the year ended December 31, 2021, in connection with the repurchases of $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,559,254.

In August 2022, in connection with the repurchases of $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million made during the six months ended June 30, 2022, we entered into Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes.

7. Income Tax

Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for continuing operations for the three and nine months ended September 30, 2023 and 2022 was 15.4% and 21.9%, and 23.5% and 21.5%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2023 was primarily due to Internal Revenue Code Section 162(m) limitation on deduction for officer compensation, non-deductible incentive stock option (ISO) related stock compensation expense, which were partially offset by foreign derived intangible income tax benefit during the period. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2022 was primarily due to the tax deductions related to foreign derived intangible income tax benefit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation during the period.

8. Stockholders’ Equity

We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 9, Stockholders’ Equity, of the Notes to Consolidated Financial Statements in our 2022 Annual Report.