Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
Goodwill
|
$
|
93,513
|
|
|
$
|
86,646
|
|
Definite lived intangible assets
|
|
|
|
Complete technology
|
242,813
|
|
|
235,413
|
|
Less: accumulated amortization(1)
|
(44,786)
|
|
|
(35,070)
|
|
Trade name
|
2,642
|
|
|
2,642
|
|
Less: accumulated amortization
|
(1,147)
|
|
|
(1,048)
|
|
Customer relationships
|
29,600
|
|
|
29,600
|
|
Less: accumulated amortization
|
(12,854)
|
|
|
(11,744)
|
|
Total goodwill and other identifiable intangible assets, net
|
$
|
309,781
|
|
|
$
|
306,439
|
|
|
|
|
|
(1) accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
|
|
|
|
Commercial License and Other Economic Rights
Commercial license and other economic rights consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
Aziyo and CorMatrix
|
$
|
17,696
|
|
|
$
|
17,696
|
|
Novan
|
12,000
|
|
|
—
|
|
Palvella
|
10,000
|
|
|
10,000
|
|
Selexis
|
8,602
|
|
|
8,602
|
|
Dianomi
|
2,000
|
|
|
—
|
|
|
50,298
|
|
|
36,298
|
|
Less: accumulated amortization attributed to principal or research and development
|
(14,885)
|
|
|
(4,838)
|
|
Total commercial license and other economic rights, net
|
$
|
35,413
|
|
|
$
|
31,460
|
|
Commercial license and other economics rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, Palvella in December 2018, Dianomi in January 2019 and Novan in May 2019. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and developments as further discussed below.
In May 2017, we entered into a Royalty Agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. We account for the Aziyo commercial license right as a financial asset, and in accordance with ASC 310, Receivables, we amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the Royalty Agreement with Aziyo as of September 30, 2019 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.
In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we may receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on any aggregate annual worldwide net sales of any PTX-022 products, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We paid Palvella an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for the development or commercialization of PTX-022. We determined the economic rights related to Palvella should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20, Research and Development Arrangements, and will reduce our asset as the funds are expended by Palvella. We will evaluate the remaining asset basis for impairment on an ongoing basis. As it is
anticipated, prior to the receipt of any payments from Palvella that the cost basis will be reduced to zero, we will recognize milestones and royalties as revenue when earned.
In May 2019, we entered into a development funding and royalties agreement with Novan, pursuant to which we will receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization of SB206. Pursuant to the agreement, we will receive up to $20.0 million of milestone payments upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition to the milestone payments, Novan will pay us tiered royalties from 7.0% to 10.0% based on aggregate annual net sales of SB206 or any other Novan Molluscum Product in North America. We determined the economic rights related to Novan should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20 and will reduce our asset as the funds are expended by Novan. We will evaluate the remaining asset basis for impairment on an ongoing basis.
See further detail described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2018 Annual Report.
Viking
Our equity ownership interest in Viking decreased in the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. As of September 30, 2019 and December 31, 2018, we recorded our common stock of Viking at fair value of $41.5 million and $46.2 million, respectively, in "investment in Viking" in our consolidated balance sheets. We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in “investment in Viking” in our condensed consolidated balance sheet at fair value of $8.3 million at September 30, 2019. Our investment in Viking warrants in the amount of $9.3 million was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018 to conform to the current period presentation.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Compensation
|
|
$
|
3,605
|
|
|
$
|
4,045
|
|
Professional fees
|
|
771
|
|
|
942
|
|
Amounts owed to former licensees
|
|
367
|
|
|
428
|
|
Royalties owed to third parties
|
|
1,049
|
|
|
1,025
|
|
Payments due to broker for share repurchases
|
|
—
|
|
|
4,613
|
|
Return reserve
|
|
3,157
|
|
|
3,590
|
|
Restructuring
|
|
7
|
|
|
1,093
|
|
Current operating lease liabilities
|
|
926
|
|
|
—
|
|
Other
|
|
3,178
|
|
|
3,464
|
|
Total accrued liabilities
|
|
$
|
13,060
|
|
|
$
|
19,200
|
|
Share-Based Compensation
Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
Share-based compensation expense as a component of:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
$
|
2,481
|
|
|
$
|
2,257
|
|
|
$
|
7,136
|
|
|
$
|
6,120
|
|
|
|
|
|
General and administrative expenses
|
3,816
|
|
|
3,213
|
|
|
11,079
|
|
|
8,717
|
|
|
|
|
|
|
$
|
6,297
|
|
|
$
|
5,470
|
|
|
$
|
18,215
|
|
|
$
|
14,837
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
Risk-free interest rate
|
1.6%
|
|
|
N/A
|
|
|
2.4%
|
|
|
2.8%
|
|
|
|
|
|
Dividend yield
|
—
|
|
|
N/A
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Expected volatility
|
41%
|
|
|
N/A
|
|
|
43%
|
|
|
34%
|
|
|
|
|
|
Expected term
|
5.3
|
|
N/A
|
|
5.2
|
|
5.7
|
|
|
|
|
Derivatives
On May 22, 2018, we amended our 2019 Notes making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our condensed consolidated statements of operations.
In connection with the payoff of the 2019 Notes on August 15, 2019, the bond hedge was settled and accordingly, the derivative asset and derivative liability were settled to zero. See Note 5, Convertible Senior Notes, for further information.
Net Income (loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) 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.
All of the 0.7 million weighted average shares of outstanding equity awards as of September 30, 2019 were anti-dilutive due to the net loss for the three months ended September 30, 2019.
Potentially dilutive common shares consist of shares issuable under 2019 Notes and 2023 Notes, stock options and restricted stock. 2019 Notes and 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. In addition, after May 22, 2018, the 2019 Notes can only be settled in cash and therefore there has been no further impact on income per share of these notes since then. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
Weighted average shares outstanding:
|
18,770
|
|
|
21,148
|
|
|
19,586
|
|
|
21,189
|
|
|
|
|
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
—
|
|
|
83
|
|
|
35
|
|
|
69
|
|
|
|
|
|
Stock options
|
—
|
|
|
1,248
|
|
|
728
|
|
|
1,167
|
|
|
|
|
|
2019 Convertible Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
924
|
|
|
|
|
|
Warrants
|
—
|
|
|
1,573
|
|
|
—
|
|
|
1,081
|
|
|
|
|
|
Shares used to compute diluted income per share
|
18,770
|
|
|
24,052
|
|
|
20,349
|
|
|
24,430
|
|
|
|
|
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect
|
11,549
|
|
|
3,126
|
|
|
8,694
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Sale of Promacta License
On March 5, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RPI Finance Trust (“RPI”), doing business as “Royalty Pharma”, who is not an affiliate. Under the Asset Purchase Agreement, we sold, transferred, assigned and conveyed to RPI, and RPI purchased, acquired and accepted from us, all of our rights, title and interest in and to the Purchased Assets, which include among other things the intellectual property and related know-how generated by us in connection with the license agreement (collectively, the “Purchased Assets”), dated December 29, 1994, by and between Novartis (as successor in interest to SmithKline Beecham Corporation) and Ligand, which allowed us to receive a royalty on net sales of Promacta. We concluded the sale does not qualify as a sale of a business, but as a sale of a non-financial asset. At the closing on March 6, 2019, RPI paid us $827.0 million in cash and we do not have any remaining performance obligations related to Novartis or RPI for Promacta. The carrying value of our Promacta asset as of March 6, 2019 was zero. Of the total cash proceeds from the sale, $14.2 million was recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.
3. Fair Value Measurements
Assets and Liabilities Measured on a Recurring Basis
The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(1)
|
|
2,171
|
|
|
872,147
|
|
|
65
|
|
|
874,383
|
|
|
1,326
|
|
|
599,891
|
|
|
—
|
|
|
601,217
|
|
Investment in Viking common stock
|
|
41,542
|
|
|
—
|
|
|
—
|
|
|
41,542
|
|
|
46,191
|
|
|
—
|
|
|
—
|
|
|
46,191
|
|
Investment in Viking warrants(2)
|
|
8,314
|
|
|
—
|
|
|
—
|
|
|
8,314
|
|
|
9,257
|
|
|
—
|
|
|
—
|
|
|
9,257
|
|
Total assets
|
|
$
|
52,027
|
|
|
$
|
872,147
|
|
|
$
|
65
|
|
|
$
|
924,239
|
|
|
$
|
56,774
|
|
|
$
|
599,891
|
|
|
$
|
—
|
|
|
$
|
656,665
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal contingent liabilities(3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,826
|
|
|
$
|
1,826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,477
|
|
|
$
|
6,477
|
|
CyDex contingent liabilities
|
|
—
|
|
|
—
|
|
|
465
|
|
|
465
|
|
|
—
|
|
|
—
|
|
|
514
|
|
|
514
|
|
Metabasis contingent liabilities(4)
|
|
—
|
|
|
7,498
|
|
|
—
|
|
|
7,498
|
|
|
—
|
|
|
5,551
|
|
|
—
|
|
|
5,551
|
|
Amounts owed to former licensor
|
|
61
|
|
|
—
|
|
|
—
|
|
|
61
|
|
|
199
|
|
|
—
|
|
|
—
|
|
|
199
|
|
Total liabilities
|
|
$
|
61
|
|
|
$
|
7,498
|
|
|
$
|
2,291
|
|
|
$
|
9,850
|
|
|
$
|
199
|
|
|
$
|
5,551
|
|
|
$
|
6,991
|
|
|
$
|
12,741
|
|
1.Short-term investments in marketable debt securities with original maturities greater than 90 days are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. 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 milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on intrinsic value estimated by management as of September 30, 2019.
2.Investment in warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in "Gain (loss) from Viking" in our condensed consolidated statement of operations.
3.The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. During the three months ended September 30, 2019, we paid a $3.0 million contingent liability on development milestones to former Crystal shareholders. At September 30, 2019, most of the development and regulatory milestones were estimated to be highly probable of being achieved by 2019. Changes in these estimates may materially affect the fair value.
4.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by 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 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10 million payment upon initiation of a Phase 3 clinical trial. Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.”
For the first quarter of 2019, we reduced the contingent liabilities associated with Crystal by $1.5 million based on management's estimates of timing and probability of achievement of certain milestones and revenue thresholds. We made $1.0 million and $3.0 million payments to the former shareholders of Crystal during the first quarter of 2018 and third quarter of 2019, respectively. Other than the payments mentioned, there was no significant change to the fair value of Crystal and CyDex during the third quarter of 2019 or 2018.
Assets Measured on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.
We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.
There were no triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the nine months ended September 30, 2019. Other than a certain indefinite-lived intangible asset, there were no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the nine months ended September 30, 2018.
4. Business Combination
On July 23, 2019, we acquired privately-held Ab Initio Biotherapeutics, Inc., an antigen-discovery company located in South San Francisco, California. The transaction was accounted for as a business combination. We applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. We did not incur any material acquisition related costs.
The initial purchase price of $12.0 million included $11.86 million cash consideration paid upon acquisition, and $0.15 million cash holdback for potential indemnification claims. As the acquisition is not considered significant, pro forma information has not been provided. The results of Ab Initio have been included in our results of operations since the date of acquisition.
The preliminary allocation of the purchase price consisted of (1) $0.03 million of fair value of tangible assets acquired, (2) $(0.06) million of liabilities assumed, (3) $7.4 million of acquired technologies, (4) $(1.0) million of deferred tax liability in connection with the acquired intangibles, and (5) $5.7 million of goodwill, none of which is deductible for tax purposes. 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 12%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of the approximately 20 years.
The preliminary purchase price allocation falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that exists as of the acquisition date.
5. Convertible Senior Notes
0.75% Convertible Senior Notes due 2019
In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83% and were convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of 2019 Notes, subject to adjustment upon certain events, which was equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes accrued cash interest at a rate of 0.75% per year, payable semi-annually.
Holders of the 2019 Notes could have converted the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
On May 22, 2018, we entered into a supplemental indenture whereby we made an irrevocable election to settle the entire 2019 Notes in cash. As such, we would have been required to deliver cash to settle the principal and any premium due upon conversion. As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option fair value of $341.6 million. In accordance with ASC 815, Derivatives and Hedging, the derivative was adjusted to its fair value as of September 30, 2018 of $563.2 million with the resulting $161.9 million and $221.6 million increase reflected in other expense, net, in our condensed consolidated statement of operations for the three and nine months ended September 30, 2018.
In March and April 2018, we received notices for conversion of $21.8 million of principal amount of the 2019 Notes which were settled in May and June 2018. We paid noteholders the conversion value of the notes in cash, up to the principal amount of the 2019 Notes. The excess of the conversion value over the principal amount, totaling $31.6 million, was paid in shares of common stock. This equity dilution upon conversion of the 2019 Notes was offset by the reacquisition of the shares under the convertible bond hedge transactions entered into in connection with the offering of the 2019 Notes as further discussed below. As a result of the conversions, we recorded a $0.6 million loss on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the 2019 Notes as of the settlement dates.
In July and August 2018, we received notices for conversion of $195.9 million of principal amount of the 2019 Notes which were settled in October and November 2018. We paid the noteholders (1) the $195.9 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $439.6 million in cash.
In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. As a result, we paid the noteholders (1) the $1.0 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $0.5 million in cash.
On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount and $11.9 million bond premium, which was classified as a derivative liability, in cash. We recorded the decrease in fair value of the derivative liability of $1.9 million and $11.0 million in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.
Convertible Bond Hedge and Warrant Transactions
In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes.
The convertible bond hedges have an exercise price of $75.05 per share and were exercisable when and if the 2019 Notes were converted. If upon conversion of the 2019 Notes, the price of our common stock was 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 equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2019 Notes. Holders of the 2019 Notes and warrants do not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.
As a result of the irrevocable cash election, conversion notices received relating to the 2019 Notes after May 22, 2018 must be fully settled in cash and amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the convertible bond hedge. We have accounted for the bond hedge as a derivative asset and marked it to market at the end of each reporting period. Upon the 2019 Notes payoff on August 15, 2019, the bond hedge was settled, with the resulting $1.9 million and $10.2 million fair value decrease reflected in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire approximately 3,264,643 shares of common stock with an exercise price of approximately $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital. In November 2018, we repurchased a total of 525,000 warrants. As a result, 2,739,643 warrants remained outstanding as of both September 30, 2019 and December 31, 2018.
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750.0 million aggregate principal amount of 0.75% convertible senior notes. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of September 30, 2019, the “if-converted value” did not exceed the principal amount of the 2023 Notes. In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the
liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of its common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.
The following table summarizes information about the 2019 Notes and 2023 Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Principal amount of 2019 Notes outstanding
|
$
|
—
|
|
|
$
|
27,326
|
|
Unamortized discount (including unamortized debt issuance cost)
|
—
|
|
|
(893)
|
|
Total current portion of notes payable
|
$
|
—
|
|
|
$
|
26,433
|
|
|
|
|
|
Principal amount of 2023 Notes outstanding
|
$
|
750,000
|
|
|
$
|
750,000
|
|
Unamortized discount (including unamortized debt issuance cost)
|
(118,467)
|
|
|
(140,136)
|
|
Total long-term portion of notes payable
|
$
|
631,533
|
|
|
$
|
609,864
|
|
|
|
|
|
Carrying value of equity component of 2023 Notes
|
$
|
108,205
|
|
|
$
|
127,997
|
|
Fair value of both 2019 Notes and 2023 Notes outstanding (Level 2)
|
$
|
625,088
|
|
|
$
|
713,533
|
|
|
|
|
|
|
|
|
|
6. Income Tax
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three and nine months ended September 30, 2019 was 23.2% and 20.9%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended September 30, 2019 was primarily attributable to state taxes and a lower R&D tax credit. The variance from the U.S. federal statutory tax rate of 21% for the nine months ended September 30, 2019 was primarily attributable to tax deductions related to stock award activities and the release of a valuation allowance relating to our R&D tax credits which were recorded as discrete items. The effective tax rate for the three and nine months ended September 30, 2018 was 15.0% and 19.3%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2018 was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items during the periods as well as the release of a valuation allowance relating to our investment in Viking during the first quarter of 2018.
7. Stockholders’ Equity
We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 8, Stockholders' Equity, of Notes to Consolidated Financial Statements in our 2018 Annual Report.
The following is a summary of our stock option and restricted stock activity and related information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Restricted Stock Awards
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Balance as of December 31, 2018
|
1,736,304
|
|
|
$
|
66.71
|
|
|
132,273
|
|
|
$
|
130.63
|
|
Granted
|
319,334
|
|
|
$
|
117.07
|
|
|
101,404
|
|
|
$
|
113.48
|
|
Options exercised/RSUs vested
|
(111,010)
|
|
|
$
|
23.67
|
|
|
(70,166)
|
|
|
$
|
110.99
|
|
Forfeited
|
(5,000)
|
|
|
$
|
136.72
|
|
|
(666)
|
|
|
$
|
134.36
|
|
Balance as of September 30, 2019
|
1,939,628
|
|
|
$
|
77.24
|
|
|
162,845
|
|
|
$
|
128.40
|
|
As of September 30, 2019, outstanding options to purchase 1.4 million shares were exercisable with a weighted average exercise price per share of $59.49.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Amended Employee Stock Purchase Plan, or ESPP, is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As of September 30, 2019, 60,642 shares were available for future purchases under the ESPP.
Share Repurchases
During the three and nine months ended September 30, 2019, we repurchased $181.2 million and $366.5 million, respectively, of our common stock under our stock repurchase programs as discussed below.
In September 2018, our Board of Directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years. On January 23, 2019, our Board of Directors increased the share repurchase authorization by $150.0 million. The available amount under the $350.0 million repurchase program was fully utilized during the third quarter of 2019.
On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing, but not obligating, the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and have entered into a Rule 10b5-1 trading plan, and may enter into additional Rule 10b5-1 trading plans in the future, to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. Our prior $350.0 million stock repurchase program mentioned above was terminated in connection with the approval of the new stock repurchase program. Authorization to repurchase $408.7 million of our common stock remained available as of September 30, 2019.
8. Commitment and Contingencies Legal Proceedings
We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.
On July 27, 2018, AG Oncon, LLC, AG Ofcon, Ltd., Calamos Market Neutral Income Fund, Capital Ventures International, Citadel Equity Fund Ltd., Opti Opportunity Master Fund, Polygon Convertible Opportunity Master Fund, Wolverine Flagship Fund Trading Limited, as plaintiffs, filed a complaint in the Court of Chancery of the State of Delaware (AG Oncon, LLC v. Ligand Pharmaceuticals Inc.) alleging claims for violation of the Trust Indenture Act, breach of contract, damages and a declaratory judgment that the Supplemental Indenture, dated as of February 20, 2018, entered into by us and Wilmington Trust, National Association, as trustee, is invalid. On October 1, 2018, we filed a motion to dismiss the plaintiffs’ complaint. On May 24, 2019, the Court granted the motion and subsequently entered an order dismissing the action with prejudice. On July 12, 2019, plaintiffs filed a notice of appeal in the Delaware Supreme Court. Plaintiffs filed their opening brief on August 29, 2019. We filed our opposition brief on September 30, 2019. Plaintiffs filed their reply brief on October 15, 2019. The court has not yet set a date for oral argument.
In November 2017, CyDex, our wholly-owned subsidiary, received a Paragraph IV certification Notice Letter from Teva stating that Teva had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of U.S. Patent Nos. 8,410,077 (“the ’077 patent”); 9,200,088 (“the ’088 patent”), or 9,493,582 (“the ’582 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or will not be infringed by Teva’s ANDA product. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that the filing of Teva’s ANDA constitutes infringement of each of the ’077 patent, the ’088 patent, and the ’582 patent. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On October 31, 2019, CyDex, Teva, and Acrotech Biopharma L.L.C. (the holder of the NDA for EVOMELA®) entered into a Confidential Settlement Agreement, settling this patent litigation. As a result of the settlement, Teva will be permitted to market a generic version of EVOMELA® in the United States on June 1, 2026 or earlier under certain circumstances. The terms of the settlement agreement are otherwise confidential.
On April 9, 2019, CyDex received a Paragraph IV certification Notice Letter from Alembic Global Holdings SA (“Alembic”) stating that Alembic had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. On July 29, 2019, Alembic filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on August 19, 2019, CyDex filed an answer to Alembic’s counterclaims.
On September 16, 2019, CyDex received a Paragraph IV certification Notice Letter from Lupin Ltd. (“Lupin”) stating that Lupin had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin.
On October 31, 2019, we received three civil complaints filed in the US District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned several hundred civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the company and no individualized factual allegations have been advanced against us in any of the three complaints. The complaints assert that the defendants deceptively marketed and sold various opioid products. The complaints seek compensatory and exemplary damages against all named defendants. However, no specific damages have been asserted at this time with respect to us. We have been engaged to respond to the complaints by requesting dismissals by the court. Since the MDL was designated and the cases were transferred to the Northern District of Ohio, the multiple litigants have been engaged in largely procedural matters. We reject all claims raised in the complaints and intend to vigorously defend these matters.
9. Leases
We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to seven years, some of which include options to extend the leases for up to seven years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are immaterial.
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Operating Lease Assets and Liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Balance Sheet Classification
|
Lease assets
|
$
|
10,280
|
|
|
Operating lease right-of-use assets
|
|
|
|
|
Current lease liabilities
|
$
|
(926)
|
|
|
Accrued liabilities
|
Non-current lease liabilities
|
(9,932)
|
|
|
Long-term operating lease liabilities
|
Total lease liabilities
|
$
|
(10,858)
|
|
|
|
During the nine months ended September 30, 2019, we entered into several new lease agreements including our San Diego headquarter expansion and a new UK office lease, which resulted an increase in lease assets and liabilities of $6.1 million and $6.0 million, respectively.
Maturity of Operating Lease Liabilities (in thousands):
|
|
|
|
|
|
|
|
|
Maturity Dates
|
|
September 30, 2019
|
Remaining three months ending December 31, 2019
|
|
$
|
251
|
|
2020
|
|
1,857
|
|
2021
|
|
2,142
|
|
2022
|
|
2,180
|
|
2023
|
|
1,905
|
|
Thereafter
|
|
5,257
|
|
Total lease payments
|
|
13,592
|
|
Less imputed interest
|
|
(2,734)
|
|
Present value of lease liabilities
|
|
$
|
10,858
|
|
As of September 30, 2019, our operating leases have a weighted-average remaining lease term of 7 years and a weighted-average discount rate of 6%. Cash paid for amounts included in the measurement of operating lease liabilities was $0.5 million and $1.6 million, for the three and nine months ended September 30, 2019, respectively. Operating lease expense was $0.5 million (net of sublease income of $0.02 million) and $1.6 million (net of sublease income of $0.7 million) , for the three and nine months ended September 30, 2019, respectively.