Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 2021 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.
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 2021 Annual Report.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Accounting Standards Updates, Recently Adopted
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The guidance simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Consequently, a convertible debt instrument, such as the Company’s 2023 Notes, will be accounted for as a single liability measured at its amortized cost, if no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
We adopted this guidance effective January 1, 2022 under the modified retrospective approach and the comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption and our 2023 Notes are no longer bifurcated into separate liability and equity components. The principal amount of the 2023 Notes is classified as a single liability measured at amortized cost in the condensed consolidated balance sheet for the period ended March 31, 2022. Upon adoption of ASU 2020-06 on January 1 2022, we recorded an adjustment to the 2023 Notes liability component, deferred tax liabilities, additional paid-in-capital and retained earnings. This adjustment was calculated based on the carrying amount of the 2023 Notes as if it had always been treated as a single liability measured at amortized cost. Furthermore, we recorded an adjustment to the debt issuance costs contra liability and equity (additional paid-in-capital) components under the same premise, as if debt issuance costs had always been treated as a contra liability only. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2023 Notes by $20.4 million, reduced deferred tax liabilities by $4.4 million, reduced additional paid-in capital by $51.1 million and increased retained earnings by $35.1 million. The net balance of the 2023 Notes at January 1, 2022 is $341.1 million which includes an unamortized discount of $2.2 million.
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.
For R&D services we recognize revenue over time and we 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. We estimate the amount of effort we expend, including the time it will take us to complete the activities, or the costs we may incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
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. During the three months ended March 31, 2022 and 2021, the amount recognized as revenue that was previously deferred was $3.7 million, and $7.3 million, respectively.
Disaggregation of Revenue
The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Royalties | | | | | | | |
Kyprolis | $ | 4,622 | | | $ | 4,287 | | | | | |
Evomela | 2,701 | | | 2,333 | | | | | |
Teriparatide injection | 2,911 | | | 16 | | | | | |
Rylaze | 1,649 | | | — | | | | | |
Other | 1,812 | | | 476 | | | | | |
| $ | 13,695 | | | $ | 7,112 | | | | | |
| | | | | | | |
Captisol | | | | | | | |
Captisol - Core | $ | 6,226 | | | $ | 1,253 | | | | | |
Captisol - COVID(1) | 5,896 | | | 30,019 | | | | | |
| $ | 12,122 | | | $ | 31,272 | | | | | |
| | | | | | | |
Contract revenue | | | | | | | |
Service Revenue | $ | 5,146 | | | $ | 5,462 | | | | | |
License Fees | 3,086 | | | 1,043 | | | | | |
Milestone | 9,089 | | | 8,417 | | | | | |
Other | 2,555 | | | 1,844 | | | | | |
| $ | 19,876 | | | $ | 16,766 | | | | | |
Total | $ | 45,693 | | | $ | 55,150 | | | | | |
(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 March 31, 2022 and December 31, 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
March 31, 2022 | | | | | | | | | | | |
Bank deposits | $ | 6,231 | | | | $ | — | | | | $ | (50) | | | | $ | 6,181 | | |
Corporate bonds | 4,899 | | | | — | | | | (84) | | | | 4,815 | | |
| | | | | | | | | | | |
Commercial paper | — | | | | — | | | | — | | | | — | | |
Corporate equity securities | 5,807 | | | | 344 | | | | (3,043) | | | | 3,108 | | |
Mutual fund | 152,253 | | | | — | | | | (854) | | | | 151,399 | | |
US government securities | 3,245 | | | | — | | | | (74) | | | | 3,171 | | |
Warrants | — | | | | 187 | | | | — | | | | 187 | | |
| $ | 172,435 | | | | $ | 531 | | | | $ | (4,105) | | | | $ | 168,861 | | |
Viking common stock | | | | | | | | | | 20,145 | | |
Total short-term investments | | | | | | | | | | $ | 189,006 | | |
| | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | |
Bank deposits | $ | 63,389 | | | | $ | 13 | | | | $ | (21) | | | | $ | 63,381 | | |
Corporate bonds | 29,308 | | | | 17 | | | | (38) | | | | 29,287 | | |
| | | | | | | | | | | |
Commercial paper | 36,008 | | | | 2 | | | | (12) | | | | 35,998 | | |
Corporate equity securities | 5,807 | | | | 402 | | | | (2,027) | | | | 4,182 | | |
Mutual fund | 152,136 | | | | — | | | | (249) | | | | 151,887 | | |
US government securities | 5,577 | | | | — | | | | (23) | | | | 5,554 | | |
Warrants | — | | | | 408 | | | | — | | | | 408 | | |
| $ | 292,225 | | | | $ | 842 | | | | $ | (2,370) | | | | $ | 290,697 | | |
Viking common stock | | | | | | | | | | 30,889 | | |
Total short-term investments | | | | | | | | | | $ | 321,586 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 months ended March 31, 2022.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):
| | | | | | | | | | | |
| March 31, 2022 |
| Amortized Cost | | Fair Value |
Within one year | $ | 10,095 | | | $ | 10,011 | |
After one year through five years | 6,523 | | | 6,398 | |
Total | $ | 16,618 | | | $ | 16,409 | |
Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 13 positions which were in an unrealized loss position as of March 31, 2022. 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 months ended March 31, 2022.
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 months ended March 31, 2022, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our business and recorded an adjustment of $(0.1) million of allowance for credit losses, respectively, as of March 31, 2022.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method.
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 related to obsolete inventory recorded for the three months ended March 31, 2022 and 2021. As of March 31, 2022 inventory consists of Captisol prepayments of $21.1 million, and as of December 31, 2021 inventory consists of Captisol prepayments of $24.6 million.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Indefinite-lived intangible assets | | | |
Goodwill | $ | 181,206 | | | $ | 181,206 | |
Definite lived intangible assets | | | |
Complete technology | 281,097 | | | 280,617 | |
Less: accumulated amortization | (82,861) | | | (78,991) | |
Trade name | 2,642 | | | 2,642 | |
Less: accumulated amortization | (1,477) | | | (1,444) | |
Customer relationships | 40,700 | | | 40,700 | |
Less: accumulated amortization | (18,934) | | | (18,267) | |
Contractual relationships | 362,000 | | | 362,000 | |
Less: accumulated amortization | (43,460) | | | (36,217) | |
Total goodwill and other identifiable intangible assets, net | $ | 720,913 | | | $ | 732,246 | |
| | | |
Commercial License Rights
Commercial license rights consist of the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Gross | | Adjustments(1) | | Net | | Gross | | Adjustments(2) | | Net |
Aziyo and CorMatrix | | $ | 17,696 | | | $ | (9,456) | | | $ | 8,240 | | | $ | 17,696 | | | $ | (9,461) | | | $ | 8,235 | |
Selexis and Dianomi | | 10,602 | | | (8,721) | | | 1,881 | | | 10,602 | | | (8,727) | | | 1,875 | |
Total | | $ | 28,298 | | | $ | (18,177) | | | $ | 10,121 | | | $ | 28,298 | | | $ | (18,188) | | | $ | 10,110 | |
(1) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of March 31, 2022.
(2) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of December 31, 2021.
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 in 2017, and Dianomi Therapeutics, Inc. (Dianomi) 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 2021 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 months ended March 31, 2022, we further considered the current and expected future economic and market conditions surrounding the novel coronavirus (COVID-19) pandemic and concluded no further adjustment was needed on the allowance for credit losses as of March 31, 2022.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Compensation | $ | 3,620 | | | $ | 6,532 | |
Professional fees | 3,974 | | | 2,046 | |
Amounts owed to former licensees | 2,677 | | | 630 | |
Royalties owed to third parties | — | | | 149 | |
Return reserve | — | | | 2,420 | |
Acquisition related liabilities | — | | | 1,000 | |
Subcontractor | 1,757 | | | 1,759 | |
Supplier | 1,697 | | | 848 | |
Accrued interest | 394 | | | 291 | |
Other | 1,758 | | | 1,904 | |
Total accrued liabilities | $ | 15,877 | | | $ | 17,579 | |
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 | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
SBC - Research and development expenses | $ | 3,914 | | | $ | 3,939 | | | | | |
SBC - General and administrative expenses | 5,130 | | | 4,466 | | | | | |
| $ | 9,044 | | | $ | 8,405 | | | | | |
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 | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Risk-free interest rate | 1.6% | | 0.5% | | | | |
Dividend yield | — | | — | | | | |
Expected volatility | 50% | | 63% | | | | |
Expected term (years) | 4.7 | | 5 | | | | |
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 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. 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. The 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the maximum conversion price. 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. 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 4, Convertible Senior Notes and Note 6, Stockholders’ Equity.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Weighted average shares outstanding: | 16,824 | | | 16,435 | | | | | |
Dilutive potential common shares: | | | | | | | |
Restricted stock | — | | | 112 | | | | | |
Stock options | — | | | 701 | | | | | |
| | | | | | | |
Shares used to compute diluted income per share | 16,824 | | | 17,248 | | | | | |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 6,001 | | | 4,277 | | | | | |
For the three months ended March 31, 2022, due to the net loss for the period, all of the 0.4 million weighted average equity awards and 1.8 million of potentially dilutive shares in connection with the adoption of ASU 2020-06 were anti-dilutive. Under the new standard, we are required to reflect the dilutive effect of the 2023 Notes by application of the if-converted method.
2. Segment Information
ASC 280, Segment reporting, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and for which discrete financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.
We are a biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. Our operating segments are identified in the same manner as they are reported internally and used by our chief operating decision maker for the purpose of evaluating performance and allocating resources. Historically, we have disclosed one reportable segment. On March 23, 2022, we entered into the Merger Agreement, pursuant to which APAC will combine with OmniAb, and acquire the OmniAb Business, in a Reverse Morris Trust transaction. Immediately prior to the Merger and pursuant to the Separation Agreement, we will, among other things, transfer 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. to OmniAb (the “Reorganization”) and, in connection therewith, will distribute (the “Distribution”) to Ligand stockholders 100% of the common stock of OmniAb. Immediately following the Distribution, Merger Sub will merge with and into OmniAb (the “Merger”), with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of APAC.
In connection with the execution of the Merger Agreement, we have made organizational changes to better align our organizational structure with our strategy and operations, and management has 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 operate the following two reportable segments: (1) OmniAb business and (2) Ligand core business. The OmniAb business segment is 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.
Our chief operating decision maker relies on internal management reporting processes that provide revenue and operating income by reportable segment for making financial decisions and allocating resources. Segment operating income (loss) represents income (loss) before income taxes, interest income, interest expense, other income (expense), net, unallocated share-based compensation, and unallocated corporate overhead. Our management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed.
The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results and was derived from each segment’s internal financial information as used for corporate management purposes (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
OmniAb business revenue | | | |
Royalties | $ | 263 | | | $ | — | |
Contract | 8,915 | | | 8,559 | |
Total OmniAb business revenue | 9,178 | | | 8,559 | |
Ligand core business revenue | | | |
Royalties | 13,432 | | | 7,112 | |
Captisol - Core | 6,226 | | | 1,253 | |
Captisol - COVID | 5,896 | | | 30,019 | |
Contract | 10,961 | | | 8,207 | |
Total Ligand core business revenue | 36,515 | | | 46,591 | |
Total revenue | $ | 45,693 | | | $ | 55,150 | |
| | | |
Segment operating income (loss) | | | |
OmniAb business | $ | (6,189) | | | $ | (4,604) | |
Ligand core business | 9,991 | | | 18,446 | |
Total segment operating income | 3,802 | | | 13,842 | |
| | | |
Unallocated corporate items | | | |
Shared-based compensation | 5,657 | | | 4,870 | |
Other corporate expenses | 7,451 | | | 4,257 | |
Total unallocated corporate items | 13,108 | | | 9,127 | |
Income (loss) from operations | $ | (9,306) | | | $ | 4,715 | |
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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | |
Short-term investments, excluding Viking(1) | | $ | 6,279 | | | $ | 162,394 | | | $ | 188 | | | $ | 168,861 | | | $ | 9,735 | | | $ | 280,553 | | | $ | 409 | | | $ | 290,697 | |
Investment in Viking common stock | | 20,145 | | | — | | | — | | | 20,145 | | | 30,889 | | | — | | | — | | | 30,889 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 26,424 | | | $ | 162,394 | | | $ | 188 | | | $ | 189,006 | | | $ | 40,624 | | | $ | 280,553 | | | $ | 409 | | | $ | 321,586 | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
CyDex contingent liabilities | | $ | — | | | $ | — | | | $ | 334 | | | $ | 334 | | | $ | — | | | $ | — | | | $ | 349 | | | $ | 349 | |
Metabasis contingent liabilities(2) | | — | | | 2,782 | | | — | | | 2,782 | | | — | | | 3,358 | | | — | | | 3,358 | |
Icagen contingent liabilities(3) | | — | | | — | | | 5,376 | | | 5,376 | | | — | | | — | | | 7,364 | | | 7,364 | |
xCella contingent liabilities(4) | | — | | | — | | | 480 | | | 480 | | | — | | | — | | | — | | | — | |
Amounts owed to former licensor | | 75 | | | — | | | — | | | 75 | | | 86 | | | — | | | — | | | 86 | |
Total liabilities | | $ | 75 | | | $ | 2,782 | | | $ | 6,190 | | | $ | 9,047 | | | $ | 86 | | | $ | 3,358 | | | $ | 7,713 | | | $ | 11,157 | |
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 mutual 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 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. During the three months ended March 31, 2022, we adjusted the balance of the Metabasis CVR liability by $0.6 million to mark to market.
3.The fair value of Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on certain revenue milestones as defined in the asset purchase agreement with Icagen. 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. Changes in these estimates may materially affect the fair value. During the three months ended March 31, 2022, we paid $1.5 million contingent liability based on revenue milestones to former Icagen shareholders.
4.The fair value of xCella contingent liabilities is determined when it is probable that the earnout liability will occur and the amount can be reasonably estimated. Management concluded that no earnout liability would be recognized at the acquisition date in September 2020. During the three months ended March 31, 2022, management recorded $0.5 million of earnout liability to be allocated to the cost of the acquired assets due to contingencies being met as part of the acquisition agreement.
A reconciliation of the level 3 financial instruments as of March 31, 2022 is as follows (in thousands):
| | | | | |
Fair value of level 3 financial instruments as of December 31, 2021 | $ | 7,713 | |
Payments to CVR holders and other contingent payments | (1,545) | |
Fair value adjustments to contingent liabilities | (458) | |
Contingent liabilities from xCella asset acquisition | 480 |
Fair value of level 3 financial instruments as of March 31, 2022 | $ | 6,190 | |
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.
In connection with the organizational changes to the Company’s reportable segments, we re-allocated goodwill between the two identified reporting units (OmniAb business and Ligand core business). We performed a goodwill impairment analysis immediately before and after the allocation of goodwill and concluded no impairment. At March 31, 2022, there were no indicators of impairment at either of the reporting units.
At March 31, 2022, there were no indicators of impairment of our indefinite-lived intangible assets, or long-lived assets.
4. Convertible Senior Notes
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. The maximum conversion rate of the 2023 Notes is 5.2317 per $1,000 principal amount of the 2023 Notes which represents a maximum conversion price of approximately $191.14.
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. 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, is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes, and the effective interest rate as of March 31, 2022 is 0.5%. During the three months ended March 31, 2022 we recognized a total of $0.8 million in interest expense which includes $0.5 million in contractual interest expense and $0.3 million in amortized issuance costs.
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.
During 2021, we repurchased $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million. After the repurchases, approximately $343.3 million in principal amount of the 2023 Notes were outstanding as of December 31, 2021.
During the three months ended March 31, 2022, we repurchased $165.8 million in principal of the 2023 Notes for $163.7 million in cash, including accrued interest of $0.4 million. We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $1.5 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the three months ended March 31, 2022, and a $0.9 million reduction in debt discount.
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 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.
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. We received $18.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 598,021. These unwind transactions resulted in a $0.5 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of December 31, 2021.
The following table summarizes information about the 2023 Notes (in thousands): | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021(1) |
Principal amount of the 2023 Notes outstanding | $ | 177,527 | | | $ | 343,301 | |
Unamortized discount (including unamortized debt issuance cost) | (987) | | | (22,584) | |
Total long-term portion of notes payable | $ | 176,540 | | | $ | 320,717 | |
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| | | |
Fair value of the 2023 Notes outstanding (Level 2) | $ | 172,535 | | | $ | 341,801 | |
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(1) - Balances as of December 31, 2021 reported before the adoption of ASU 2020-06.
5. 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 months ended March 31, 2022 and 2021 was 23.6% and (214.1)%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2022 was due primarily to the tax deductions related to foreign derived intangible income tax credit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation during the period. The variance from the U.S. federal tax rate of 21% for the three months ended March 31, 2021 was significantly impacted by the discrete tax benefit related to the net excess tax windfalls from the share based compensation resulting from increased stock option exercise activity, stock award vesting and appreciation of our stock price during the period.
6. 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 2021 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, 2021 | 2,199,598 | | | $ | 106.00 | | | 264,143 | | | $ | 138.21 | |
Granted | 14,100 | | | $ | 114.13 | | | 24,840 | | | $ | 99.85 | |
Options exercised/RSUs vested | (17,689) | | | $ | 19.61 | | | (126,049) | | | $ | 121.18 | |
Forfeited | (23,285) | | | $ | 54.49 | | | (782) | | | $ | 131.95 | |
Balance as of March 31, 2022 | 2,172,724 | | | $ | 107.31 | | | 162,152 | | | $ | 145.60 | |
As of March 31, 2022, outstanding options to purchase 1.5 million shares were exercisable with a weighted average exercise price per share of $100.59.
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 March 31, 2022, 44,360 shares were available for future purchases under the ESPP.
Share Repurchases
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 may enter into Rule 10b5-1 trading plans, 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. We did not have any share repurchases during the three months ended March 31, 2022. Authorization to repurchase $248.8 million of our common stock remained available as of March 31, 2022.
7. 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 October 31, 2019, we received three civil complaints filed in the U.S. 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 more than one thousand 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. We reject all claims raised in the complaints and intend to vigorously defend these matters.
CyDex and Baxter Healthcare Corp. (“Baxter”) are parties to a license agreement relating to Ligand’s Captisol technology and, more specifically, relating to Captisol-enabled Nexterone (amiodarone HCl premixed injection). Baxter contends that it has
overpaid royalties for several years, and seeks both refunds of those overpayment and a reduced royalty going forward. CyDex contends that Baxter has not paid the royalties due to CyDex under the terms of the license agreement. On April 6, 2021, Baxter initiated an arbitration with the American Arbitration Association pursuant to the arbitration provision of the license agreement. On April 21, 2021, CyDex filed an Answering Statement and Counterdemand. On May 5, 2021, Baxter filed an Answering Statement in response to CyDex’s Counterdemand. On June 30, 2021, the parties held a Preliminary Hearing before the arbitrator. The parties have completed fact discovery, exchanged expert witness statements and completed depositions of the expert witnesses. The arbitration hearing is currently scheduled for late May 2022.
From time to time, we may also become subject to other legal proceedings or claims arising in the ordinary course of our business. We currently believe that none of the claims or actions pending against us is likely to have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. Given the unpredictability inherent in litigation, however, we cannot predict the outcome of these matters.
8. Leases
We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to ten years, some of which include options to extend the leases for up to five 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 adjusted for lease incentives and other items as prescribed by ASC Topic 842, Leases. 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 and Finance Lease Assets and Liabilities (in thousands):
| | | | | | | | | | | |
Assets | March 31, 2022 | | December 31, 2021 |
Operating lease assets | $ | 15,783 | | | $ | 16,542 | |
Finance lease assets | 15,620 | | | 16,207 | |
Total lease assets | $ | 31,403 | | | $ | 32,749 | |
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Liabilities | | | |
Current operating lease liabilities | $ | 1,850 | | | $ | 2,053 | |
Current finance lease liabilities | 52 | | | 46 | |
| 1,902 | | | 2,099 | |
Long-term operating lease liabilities | 16,758 | | | 15,494 | |
Long-term finance lease liabilities | 39 | | | 58 | |
Total lease liabilities | $ | 18,699 | | | $ | 17,651 | |
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Maturity of Operating and Finance Lease Liabilities as of March 31, 2022 (in thousands):
| | | | | | | | | |
Maturity Dates | Operating Leases | | |
Remaining nine months ending December 31, 2022 | $ | 1,020 | | | |
2023 | 2,712 | | | |
2024 | 2,716 | | | |
2025 | 2,614 | | | |
2026 | 2,700 | | | |
2027 | 2,727 | | | |
Thereafter | 8,074 | | | |
Total lease payments | 22,563 | | | |
Less imputed interest | (3,864) | | | |
Present value of lease liabilities | $ | 18,699 | | | |
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