10-Q 1 lgnd-630201410q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________

x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014
or

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

For the Transition Period From ______ to ______ .
Commission File Number: 001-33093
________________________________________________________________________________________
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________

Delaware | 77-0160744
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
11119 North Torrey Pines Road, Suite 200 La Jolla, CA | 92037 (Zip Code)
(Address of principal executive offices) |

(858) 550-7500
(Registrant's Telephone Number, Including Area Code)
________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer | o |  | Accelerated Filer | x
Non-Accelerated Filer | o | (Do not check if a smaller reporting company) | Smaller Reporting Company | o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 5, 2014, the registrant had 20,780,756 shares of common stock outstanding.

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LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION |
| ITEM 1. Financial Statements | 3
| Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (Unaudited) | 3
| Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (Unaudited) | 4
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013 (Unaudited) | 5
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited) | 6
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 7
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 28
| ITEM 3. Quantitative and Qualitative Disclosures about Market Risk | 36
| ITEM 4. Controls and Procedures | 37
PART II. OTHER INFORMATION |
| ITEM 1. Legal Proceedings | 38
| ITEM 1A. Risk Factors | 39
| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | 47
| ITEM 3. Defaults Upon Senior Securities | 47
| ITEM 4. Mine Safety Disclosures | 47
| ITEM 5. Other Information | 47
| ITEM 6. Exhibits | 47
| SIGNATURE | 48

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PART I. | FINANCIAL INFORMATION

ITEM 1. | FINANCIAL STATEMENTS

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

| June 30, |  | December 31,
| 2014 |  | 2013
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 14,537 |  |  | $ | 11,639 |
Short-term investments | 7,490 |  |  | 4,340 |
Accounts receivable | 3,133 |  |  | 2,222 |
Inventory | 817 |  |  | 1,392 |
Capitalized IPO expenses, Viking Therapeutics, Inc. | 1,094 |  |  | — |
Other current assets | 1,123 |  |  | 959 |
Current portion of co-promote termination payments receivable | 391 |  |  | 4,329 |
Total current assets | 28,585 |  |  | 24,881 |
Restricted cash and investments | 1,261 |  |  | 1,341 |
Property and equipment, net | 619 |  |  | 867 |
Intangible assets, net | 51,911 |  |  | 53,099 |
Goodwill | 12,238 |  |  | 12,238 |
Commercial license rights | 4,567 |  |  | 4,571 |
Long-term portion of co-promote termination payments receivable | 413 |  |  | 7,417 |
Other assets | 253 |  |  | 299 |
Total assets | $ | 99,847 |  |  | $ | 104,713 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable (including $1.4 million related to a VIE, Viking Therapeutics, Inc.) | $ | 5,059 |  |  | $ | 3,951 |
Accrued liabilities | 3,241 |  |  | 5,337 |
Current portion of contingent liabilities | 2,877 |  |  | 1,712 |
Current portion of deferred income taxes | 1,574 |  |  | 1,574 |
Current portion of note payable | 2,698 |  |  | 9,109 |
Current portion of co-promote termination liability | 391 |  |  | 4,329 |
Current portion of lease exit obligations | 2,689 |  |  | 2,811 |
Current portion of deferred revenue | 92 |  |  | 116 |
Total current liabilities | 18,621 |  |  | 28,939 |
Long-term portion of co-promote termination liability | 413 |  |  | 7,417 |
Long-term portion of deferred revenue, net | 2,085 |  |  | 2,085 |
Long-term portion of lease exit obligations | 1,587 |  |  | 3,071 |
Deferred income taxes | 1,104 |  |  | 1,098 |
Long-term portion of contingent liabilities | 12,223 |  |  | 11,795 |
Other long-term liabilities | 728 |  |  | 695 |
Total liabilities | 36,761 |  |  | 55,100 |
Commitments and Contingencies |  |  |
Stockholders' equity: |  |  |
Common stock, $0.001 par value; 33,333,333 shares authorized; 20,778,526 and 20,468,521 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively | 21 |  |  | 21 |
Additional paid-in capital | 726,758 |  |  | 718,017 |
Accumulated other comprehensive income | 5,041 |  |  | 2,914 |
Accumulated deficit | (667,650 | ) |  | (671,339 | )
Total stockholders' equity attributable to parent | 64,170 |  |  | 49,613 |
Noncontrolling interests | (1,084 | ) |  | $ | — |
Total liabilities and stockholders' equity | $ | 99,847 |  |  | $ | 104,713 |

See accompanying notes.
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LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Revenues: |  |  |  |  |  |  |
Royalties | $ | 5,241 |  |  | $ | 4,916 |  |  | $ | 13,091 |  |  | $ | 10,742 |
Material sales | 3,476 |  |  | 3,993 |  |  | 9,191 |  |  | 5,532 |
Collaborative research and development and other revenues | 1,891 |  |  | 671 |  |  | 4,284 |  |  | 4,957 |
Total revenues | 10,608 |  |  | 9,580 |  |  | 26,566 |  |  | 21,231 |
Operating costs and expenses: |  |  |  |  |  |  |
Cost of sales | 1,186 |  |  | 1,214 |  |  | 3,637 |  |  | 1,877 |
Research and development | 2,689 |  |  | 2,022 |  |  | 5,821 |  |  | 4,487 |
General and administrative | 5,239 |  |  | 4,306 |  |  | 10,310 |  |  | 8,808 |
Lease exit and termination costs | 136 |  |  | 44 |  |  | 340 |  |  | 132 |
Write-off of in-process research and development | — |  |  | 480 |  |  | — |  |  | 480 |
Total operating costs and expenses | 9,250 |  |  | 8,066 |  |  | 20,108 |  |  | 15,784 |
Income from operations | 1,358 |  |  | 1,514 |  |  | 6,458 |  |  | 5,447 |
Other (expense) income: |  |  |  |  |  |  |
Interest expense, net | (181 | ) |  | (453 | ) |  | (429 | ) |  | (1,361 | )
(Increase) decrease in contingent liabilities | (1,312 | ) |  | 2,741 |  |  | (3,260 | ) |  | 900 |
Other, net | 1,376 |  |  | 2 |  |  | 621 |  |  | 188 |
Total other (expense) income, net | (117 | ) |  | 2,290 |  |  | (3,068 | ) |  | (273 | )
Income before income taxes | 1,241 |  |  | 3,804 |  |  | 3,390 |  |  | 5,174 |
Income tax benefit (expense) | 47 |  |  | (110 | ) |  | (6 | ) |  | (176 | )
Income from continuing operations | 1,288 |  |  | 3,694 |  |  | 3,384 |  |  | 4,998 |
Discontinued operations: |  |  |  |  |  |  |
Gain on sale of Avinza Product Line before income taxes | — |  |  | 2,397 |  |  | — |  |  | 2,588 |
Income from discontinued operations | — |  |  | 2,397 |  |  | — |  |  | 2,588 |
Net income: | 1,288 |  |  | 6,091 |  |  | 3,384 |  |  | 7,586 |
Less: Net loss attributable to noncontrolling interests | (304 | ) |  | — |  |  | (304 | ) |  | — |
Net income attributable to Ligand common shareholders | $ | 1,592 |  |  | $ | 6,091 |  |  | $ | 3,688 |  |  | $ | 7,586 |
Per share amounts attributable to Ligand common shareholders: |  |  |  |  |  |  |
Basic per share amounts: |  |  |  |  |  |  |
Income from continuing operations | $ | 0.08 |  |  | $ | 0.18 |  |  | $ | 0.18 |  |  | $ | 0.25 |
Income from discontinued operations | — |  |  | 0.12 |  |  | — |  |  | 0.13 |
Net income | $ | 0.08 |  |  | $ | 0.30 |  |  | $ | 0.18 |  |  | $ | 0.38 |
Diluted per share amounts: |  |  |  |  |  |  |
Income from continuing operations | $ | 0.07 |  |  | $ | 0.18 |  |  | $ | 0.17 |  |  | $ | 0.24 |
Income from discontinued operations | — |  |  | 0.12 |  |  | — |  |  | 0.13 |
Net income | $ | 0.07 |  |  | $ | 0.30 |  |  | $ | 0.17 |  |  | $ | 0.37 |
Weighted-average number of common shares-basic | 20,738,299 |  |  | 20,258,618 |  |  | 20,668,110 |  |  | 20,223,634 |
Weighted-average number of common shares-diluted | 21,780,034 |  |  | 20,427,360 |  |  | 21,776,125 |  |  | 20,277,763 |

See accompanying notes.
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LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Net income attributable to Ligand common shareholders | $ | 1,592 |  |  | $ | 6,091 |  |  | $ | 3,688 |  |  | $ | 7,586 |
Unrealized net (loss) gain on available-for-sale securities, net of tax of $0 | (5,127 | ) |  | 229 |  |  | 3,095 |  |  | 1,395 |
Less: Reclassification of net realized gains included in net income | (774 | ) |  | — |  |  | (968 | ) |  | — |
Comprehensive income (loss) attributable to Ligand common shareholders | $ | (4,309 | ) |  | $ | 6,320 |  |  | $ | 5,815 |  |  | $ | 8,981 |

See accompanying notes.
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LIGAND PHARMACEUTICAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

| Six months ended
| June 30,
| 2014 |  | 2013
Operating activities |  |  |
Net income including noncontrolling interests | $ | 3,384 |  |  | $ | 7,586 |
Less: gain from discontinued operations | — |  |  | 2,588 |
Income from continuing operations | 3,384 |  |  | 4,998 |
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: |  |  |
Non-cash change in estimated fair value of contingent liabilities | 3,261 |  |  | (900 | )
Write-off of in-process research and development | — |  |  | 480 |
Realized gain on sale of short-term investment | (968 | ) |  | — |
Gain on write-off of assets | (16 | ) |  | — |
Depreciation and amortization | 1,337 |  |  | 1,339 |
Stock-based compensation | 5,093 |  |  | 2,616 |
Non-cash upfront fee | (1,211 | ) |  | — |
Deferred income taxes | 6 |  |  | 176 |
Accretion of note payable | 169 |  |  | 225 |
Other | — |  |  | (13 | )
Changes in operating assets and liabilities: |  |  |
Accounts receivable | (911 | ) |  | 3,890 |
Inventory | 575 |  |  | 429 |
Other current assets | (136 | ) |  | (382 | )
Other long-term assets | (231 | ) |  | 123 |
Accounts payable and accrued liabilities | (3,743 | ) |  | (3,006 | )
Deferred revenue | (24 | ) |  | (318 | )
Net cash provided by operating activities of continuing operations | 6,585 |  |  | 9,657 |
Net cash used in operating activities of discontinued operations | — |  |  | (642 | )
Net cash provided by operating activities | 6,585 |  |  | 9,015 |
Investing activities |  |  |
Purchase of commercial license rights | — |  |  | (3,571 | )
Payments to CVR holders and former license holders | (1,668 | ) |  | — |
Proceeds from sale of property and equipment | 125 |  |  | 3 |
Proceeds from sale of short-term investments | 1,156 |  |  | — |
Other, net | (1 | ) |  | (158 | )
Net cash used in investing activities | (388 | ) |  | (3,726 | )
Financing activities |  |  |
Repayment of debt | (6,947 | ) |  | (12,933 | )
Net proceeds from stock option exercises | 3,648 |  |  | 1,186 |
Net cash used in financing activities | (3,299 | ) |  | (11,747 | )
Net increase (decrease) in cash and cash equivalents | 2,898 |  |  | (6,458 | )
Cash and cash equivalents at beginning of period | 11,639 |  |  | 12,381 |
Cash and cash equivalents at end of period | $ | 14,537 |  |  | $ | 5,923 |
Supplemental disclosure of cash flow information |  |  |
Interest paid | $ | 212 |  |  | $ | 1,245 |
Taxes paid | $ | 3 |  |  | $ | — |
Supplemental schedule of non-cash activity |  |  |
Liability for commercial license rights | $ | — |  |  | $ | 1,000 |
Accrued inventory purchases | $ | — |  |  | $ | 997 |
Unrealized gain on AFS investments | $ | 3,095 |  |  | $ | 1,395 |

See accompanying notes.
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LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company" or "Ligand") is a biopharmaceutical company that develops and acquires royalty and other revenue generating assets and couples them with a lean corporate cost structure. The Company diversifies its portfolio of assets across numerous technology types, therapeutic areas, drug targets, and industry partners. The Company added Captisol® to its technology portfolio in January 2011. Captisol is a formulation technology that has enabled six FDA approved products, including Onyx's Kyprolis® and Baxter International's Nexterone®, and is currently being developed in a number of clinical-stage partner programs. The Company's therapies address the unmet medical needs of patients for a broad spectrum of diseases including hepatitis, multiple myeloma, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, asthma, Focal Segmental Glomerulosclerosis ("FSGS") and osteoporosis. Ligand has established multiple alliances with the world’s leading pharmaceutical companies including GlaxoSmithKline, Onyx Pharmaceuticals (a subsidiary of Amgen, Inc.), Merck, Pfizer, Baxter International, Lundbeck Inc. and Spectrum Pharmaceuticals, Inc. The Company’s principal market is the United States. The Company sold its Oncology Product Line ("Oncology") and Avinza Product Line ("Avinza") on October 25, 2006 and February 26, 2007, respectively. The operating results for Oncology and Avinza have been presented in the accompanying condensed consolidated financial statements as "Discontinued Operations."
The Company has incurred significant losses since its inception. As of June 30, 2014, the Company’s accumulated deficit was approximately $667.7 million and the Company had working capital of approximately $10.0 million. Management believes that cash flows from operations will improve due to Captisol® sales, an increase in royalty revenues driven primarily from continued increases in Promacta® and Kyprolis® sales, and also from anticipated new license and milestone revenues. In the event revenues and operating cash flows are not meeting expectations, management plans to reduce discretionary expenses. It is possible, however, that the Company may be required to seek additional financing. There can be no assurance that additional financing will be available on terms acceptable to management, or at all. Management believes its currently available cash, cash equivalents and short-term investments, as well as its current and future royalty, license and milestone revenues and Captisol material sales will be sufficient to satisfy its anticipated operating and capital requirements through at least the next 12 months. The Company’s future operating and capital requirements will depend on many factors, including, but not limited to: the pace of scientific progress in its research and development programs; the potential success of these programs; the scope and results of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the amount of royalties on sales of the commercial products of its partners; the efforts of its collaborative partners; obligations under its operating lease agreements; costs associated with future acquisitions; and the capital requirements of any companies the Company may acquire in the future. The ability of the Company to achieve its operational targets is dependent upon the Company’s ability to further implement its business goals and generate sufficient operating cash flow.
Principles of Consolidation
The accompanying condensed consolidated financial statements include Ligand and its wholly owned subsidiaries, Ligand JVR, Allergan Ligand Retinoid Therapeutics, Seragen, Inc., Pharmacopeia, Inc. ("Pharmacopeia"), Neurogen Corporation ("Neurogen"), CyDex Pharmaceuticals, Inc. ("CyDex"), Metabasis Therapeutics, Inc. ("Metabasis") and Nexus VI, Inc. Also included is Viking Therapeutics, Inc. ("Viking"), a variable interest entity ("VIE") for which the Company is deemed under applicable accounting guidance to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The Company’s accompanying unaudited condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. The Company’s condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company and
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its subsidiaries, have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the consolidated financial statements and notes therein included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, contingent assets and liabilities, definite and indefinite lived intangible assets, goodwill, co-promote termination payments receivable and co-promote termination liabilities, uncertain tax positions, deferred revenue, lease exit liability and income tax net operating loss carryforwards during the reporting period. The Company’s critical accounting policies are those that are both most important to the Company’s financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the condensed consolidated financial statements, actual results may materially vary from these estimates.
Income Per Share
Basic income per share is calculated by dividing net income by the weighted-average number of common shares and vested restricted stock units outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and vested restricted stock units outstanding and the weighted-average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units. Common stock equivalents are only included in the diluted income per share calculation when their effect is dilutive. The total number of potential common shares excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive was 0.4 million and 1.1 million, as of June 30, 2014 and 2013, respectively.
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The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
EPS attributable to Ligand common shareholders: |  |  |  |  |  |  |
Net income from continuing operations | $ | 1,592 |  |  | $ | 3,694 |  |  | 3,688 |  |  | $ | 4,998 |
Net income from discontinued operations | — |  |  | 2,397 |  |  | — |  |  | 2,588 |
Net income | $ | 1,592 |  |  | $ | 6,091 |  |  | $ | 3,688 |  |  | $ | 7,586 |
Shares used to compute basic income per share | 20,738,299 |  |  | 20,258,618 |  |  | 20,668,110 |  |  | 20,223,634 |
Dilutive potential common shares: |  |  |  |  |  |  |
Restricted stock | 29,029 |  |  | 46,391 |  |  | 44,815 |  |  | 35,864 |
Stock options | 1,012,706 |  |  | 122,351 |  |  | 1,063,200 |  |  | 18,265 |
Shares used to compute diluted income per share | 21,780,034 |  |  | 20,427,360 |  |  | 21,776,125 |  |  | 20,277,763 |
Basic per share amounts: |  |  |  |  |  |  |
Income from continuing operations | $ | 0.08 |  |  | $ | 0.18 |  |  | $ | 0.18 |  |  | $ | 0.25 |
Income from discontinued operations | — |  |  | 0.12 |  |  | — |  |  | 0.13 |
Net income | $ | 0.08 |  |  | $ | 0.30 |  |  | $ | 0.18 |  |  | $ | 0.38 |
Diluted per share amounts: |  |  |  |  |  |  |
Income from continuing operations | $ | 0.07 |  |  | $ | 0.18 |  |  | $ | 0.17 |  |  | $ | 0.24 |
Income from discontinued operations | — |  |  | 0.12 |  |  | — |  |  | 0.13 |
Net income | $ | 0.07 |  |  | $ | 0.30 |  |  | $ | 0.17 |  |  | $ | 0.37 |

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Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist of cash and highly liquid securities with maturities at the date of acquisition of three months or less. Securities received by the Company as a result of a milestone payment from licensees are considered short-term investments and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included in the statement of comprehensive income. The Company determines the cost of investments based on the specific identification method.
Restricted Cash and Investments
Restricted cash and investments consist of certificates of deposit held with a financial institution as collateral under a facility lease and third-party service provider arrangements.
The following table summarizes the various investment categories at June 30, 2014 and December 31, 2013 (in thousands):

| Cost |  | Gross unrealized gains |  | Gross unrealized losses |  | Estimated fair value
June 30, 2014 |  |  |  |  |  |  |
Short-term investments | $ | 2,449 |  |  | $ | 5,079 |  |  | $ | (38 | ) |  | $ | 7,490 |
Certificates of deposit-restricted | 1,261 |  |  | — |  |  | — |  |  | 1,261 |
| $ | 3,710 |  |  | $ | 5,079 |  |  | $ | (38 | ) |  | $ | 8,751 |
December 31, 2013 |  |  |  |  |  |  |
Short-term investments | $ | 1,426 |  |  | $ | 2,914 |  |  | $ | — |  |  | $ | 4,340 |
Certificates of deposit-restricted | 1,341 |  |  | — |  |  | — |  |  | 1,341 |
| $ | 2,767 |  |  | $ | 2,914 |  |  | $ | — |  |  | $ | 5,681 |

Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, investments and accounts receivable.
The Company invests its excess cash principally in U.S. government debt securities, investment-grade corporate debt securities and certificates of deposit. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company did not experience any significant losses on its cash equivalents, short-term investments or restricted investments for the periods ending June 30, 2014 and December 31, 2013.
As of June 30, 2014 and December 31, 2013, cash deposits held at financial institutions in excess of FDIC insured amounts of $250,000 were approximately $13.9 million and $11.1 million, respectively.
Accounts receivable from one customer was 92% of total accounts receivable at June 30, 2014, the majority of which has been received. Accounts receivable from two customers was 75% of total accounts receivable at December 31, 2013.
The Company currently obtains Captisol from a single supplier. If this supplier were not able to supply the requested amounts of Captisol and the existing inventory was depleted, the Company would be unable to continue to derive revenues from the sale of Captisol until it obtained an alternative source, which might take a considerable length of time. The Company maintains inventory of Captisol, which has a five year shelf life, at three geographically spread storage locations in the United States and Europe. If disasters were to strike one or all three of these locations, it could lead to supply interruptions.
Inventory
Inventory is stated at the lower of cost or market value. The Company determines cost using the first-in, first-out method. The Company analyzes its inventory levels periodically and writes down inventory to its 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 and six months ended June 30, 2014 and 2013.
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Property and Equipment
Property and equipment is stated at cost and consists of the following (in thousands):

| June 30, |  | December 31,
| 2014 |  | 2013
Lab and office equipment | $ | 2,509 |  |  | $ | 3,737 |
Leasehold improvements | 273 |  |  | 387 |
Computer equipment and software | 631 |  |  | 616 |
| 3,413 |  |  | 4,740 |
Less accumulated depreciation and amortization | (2,794 | ) |  | (3,873 | )
Total property and equipment, net | $ | 619 |  |  | $ | 867 |

Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Depreciation expense recognized for each of the three and six months ended June 30, 2014 and the three months ended June 30, 2013 was $0.1 million. Depreciation expense for the six months ended June 30, 2013 was $0.2 million. Depreciation expense is included in operating expenses.
Other Current Assets
Other current assets consist of the following (in thousands):

| June 30, |  | December 31,
| 2014 |  | 2013
Prepaid expenses | $ | 745 |  |  | $ | 786 |
Other receivables | 378 |  |  | 173 |
Total current assets | $ | 1,123 |  |  | $ | 959 |

Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):

| June 30, |  | December 31,
| 2014 |  | 2013
Indefinite lived intangible assets |  |  |
Acquired in-process research and development | $ | 12,556 |  |  | $ | 12,556 |
Goodwill | 12,238 |  |  | 12,238 |
Definite lived intangible assets |  |  |
Complete technology | 15,267 |  |  | 15,267 |
Less: Accumulated amortization | (2,617 | ) |  | (2,235 | )
Trade name | 2,642 |  |  | 2,642 |
Less: Accumulated amortization | (454 | ) |  | (387 | )
Customer relationships | 29,600 |  |  | 29,600 |
Less: Accumulated amortization | (5,083 | ) |  | (4,344 | )
Total goodwill and other identifiable intangible assets, net | $ | 64,149 |  |  | $ | 65,337 |

The Company accounts for goodwill and other intangible assets in accordance with Accounting Standards Codification ("ASC") Topic 350 - Intangibles - Goodwill and Other which, among other things, establishes standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and certain non-
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amortizing intangibles to be evaluated for impairment on an annual basis. The Company uses the income approach and the market approach, each weighted at 50%, when performing its goodwill impairment analysis. For the income approach, the Company considers the present value of future cash flows and the carrying value of its assets and liabilities, including goodwill. The market approach is based on an analysis of revenue multiples of peer public companies. If the carrying value of the assets and liabilities, including goodwill, were to exceed the Company’s estimation of the fair value, the Company would record an impairment charge in an amount equal to the excess of the carrying value of goodwill over the implied fair value of the goodwill. The Company performs an evaluation of goodwill and other intangibles as of December 31 of each year, absent any indicators of earlier impairment, to ensure that impairment charges, if applicable, are reflected in the Company's financial results before December 31 of each year. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill and other intangible asset balances are included in the identifiable assets of the business segment to which they have been assigned. Any goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the respective business segments' operating income.
Amortization of definite-lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of 20 years. Amortization expense of $0.6 million and $1.2 million was recognized for each of the three and six months ended June 30, 2014 and 2013, respectively. Estimated amortization expense for the years ending December 31, 2014 through 2018 is $2.4 million per year.
Acquired In-Process Research and Development
Intangible assets related to acquired in-process research and development ("IPR&D") are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered to be indefinite-lived, they will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed definite-lived and would then be amortized based on their respective estimated useful lives at that point in time. For the three and six months ended June 30, 2014 there was no impairment of IPR&D. For the three and six months ended June 30, 2013, the Company recorded a non-cash impairment charge of $0.5 million for the write-off of IPR&D for Captisol-enabled Clopidogrel (MDCO-157). The asset was impaired upon notification from the Medicines Company that they intended to terminate the license agreement and return the rights of the compound to the Company. MDCO-157 is an intravenous option of the anti-platelet medication designed for situations where the administration of oral platelet inhibitors is not feasible or desirable.
Impairment of Long-Lived Assets
Management reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value for the Company’s long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved. As of June 30, 2014, management does not believe there have been any events or circumstances indicating that the carrying amount of its long-lived assets may not be recoverable.
Commercial license rights
Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired in accordance with the Royalty Stream and Milestone Payments Purchase Agreement entered into with Selexis SA ("Selexis") in April 2013. The portfolio consists of over 15 Selexis commercial license agreement programs with various pharmaceutical-company counterparties. The purchase price was $4.6 million, inclusive of acquisition costs. The Company paid $3.6 million upon closing and paid an additional $1.0 million in April 2014. Individual commercial license rights acquired under the agreement are carried at allocated cost and approximate fair value. The carrying value of the license rights will be reduced on a pro-rata basis as revenue is realized over the term of the agreement. Declines in the fair value of individual license rights below their carrying value that are deemed to be other than temporary are reflected in earnings in the period such determination is made. As of June 30, 2014, management does not believe there have been any events or circumstances indicating that the carrying amount of its commercial license rights may not be recoverable.
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Accrued Liabilities
Accrued liabilities consist of the following (in thousands):

| June 30, |  | December 31,
| 2014 |  | 2013
Compensation | $ | 1,123 |  |  | $ | 1,929 |
Professional fees | 279 |  |  | 697 |
Other | 1,839 |  |  | 2,711 |
Total accrued liabilities | $ | 3,241 |  |  | $ | 5,337 |

Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):

| June 30, |  | December 31,
| 2014 |  | 2013
Deposits | $ | 385 |  |  | $ | 345 |
Deferred rent | 343 |  |  | 350 |
Total other long-term liabilities | $ | 728 |  |  | $ | 695 |

Contingent Liabilities
In connection with the Company’s acquisition of CyDex in January 2011, the Company recorded a $17.6 million contingent liability, inclusive of the $4.3 million payment made in January 2012, for amounts potentially due to holders of the CyDex contingent value rights ("CVRs") and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales. Any change in fair value is recorded in the Company’s consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid under the CVR agreements may be materially different than the carrying amount of the liability. The fair value of the liability at June 30, 2014 and December 31, 2013 was $10.4 million and $9.3 million, respectively. The Company recorded a fair-value adjustment to increase the liability for CyDex-related contingent liabilities by $3.2 million and $2.7 million for the three and six months ended June 30, 2014, respectively, and an adjustment to decrease the liability by $5.2 million and $3.3 million for the three and six months ended June 30, 2013, respectively. There was a revenue-sharing payment of $1.6 million made during the six months ended June 30, 2014, and no revenue sharing payments were made during the three months ended June 30, 2014 and three and six months ended June 30, 2013.
In connection with the Company’s acquisition of Metabasis in January 2010, the Company issued to Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs will entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by the Company from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement. Changes in the fair values are reported in the statement of operations as income (decreases) or expense (increases). 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. The fair value of the liability was estimated to be $4.7 million and $4.2 million as of June 30, 2014 and December 31, 2013, respectively. The Company recorded a decrease in the liability for Metabasis-related CVRs of $1.9 million and an increase in the liability of $0.5 million for the three and six months ended June 30, 2014, respectively. The Company recorded an increase in the liability of $2.4 million for each of the three and six months ended June 30, 2013.
Fair Value of Financial Instruments
Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset
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or liability. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Quoted prices in active markets;
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly; and
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.
The Company’s short-term investments include investments in equity securities which were received by the Company as a result of event-based and upfront payments from licensees. Additionally, there is a liability related to the investment in equity securities for amounts owed to former license holders. The Metabasis CVR liability is marked-to-market at each reporting period based upon the quoted market prices of the underlying CVR. The fair value of the CyDex contingent liabilities are determined at each reporting period based upon an income valuation model. The co-promote termination payments receivable represents a non-interest-bearing receivable for future payments to be made by Pfizer related to Avinza product sales and is recorded at its fair value. The receivable and liability will remain equal, and are adjusted each quarter for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales.
The Company evaluates its financial instruments at each reporting period to determine if any transfers between the various three-level hierarchy have occurred and appropriately reclassifies its financial instruments to the appropriate level within the hierarchy.
Treasury Stock
The Company may on occasion repurchase its common stock on the open market or in private transactions. When such stock is repurchased it is not constructively or formally retired and may be reissued if certain regulatory requirements are met; however, the Company may from time to time choose to retire the shares of common stock held in its treasury. The purchase price of the common stock repurchased is charged to treasury stock. During the year ended December 31, 2013, the Company retired 1,118,222 shares of its common stock held in treasury.
Revenue Recognition
Royalties on sales of products commercialized by the Company’s partners are recognized in the quarter reported by the respective partner. Generally, the Company receives royalty reports from its licensees approximately one quarter in arrears due to the fact that its agreements require partners to report product sales between 30 and 60 days after the end of the quarter. The Company recognizes royalty revenues when it can reliably estimate such amounts and collectability is reasonably assured. Under this accounting policy, the royalty revenues reported are not based upon estimates and such royalty revenues are typically reported to the Company by its partners in the same period in which payment is received.
Revenue from material sales of Captisol is recognized upon transfer of title, which normally passes upon shipment to the customer. The Company’s credit and exchange policy includes provisions for the return of product between 30 to 90 days, depending on the specific terms of the individual agreement, when that product (1) does not meet specifications, (2) is damaged in shipment (in limited circumstances where title does not transfer until delivery), or (3) is exchanged for an alternative grade of Captisol.
Nonrefundable, upfront license fees are recognized as revenue upon delivery of the license, if the license is determined to have standalone value that is not dependent on any future performance by the Company under the applicable collaboration agreement. Nonrefundable contingent event-based payments are recognized as revenue when the contingent event is met, which is usually the earlier of when payments are received or collections are assured, provided that it does not require future performance by the Company. The Company occasionally has sub-license obligations related to arrangements for which it receives license fees, milestones and royalties. The Company evaluates the determination of gross versus net reporting based on each individual agreement.
Sales-based contingent payments from partners are accounted for similarly to royalties, with revenue recognized upon achievement of the sales targets assuming all other revenue recognition criteria for milestones are met. Revenue from development and regulatory milestones is recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive, its achievability was not reasonably assured at the inception of the agreement, and the Company has no further performance obligations relating to that event, and (ii) collectability is reasonably assured. If these criteria are not met, the milestone payment is recognized over the remaining period of the Company’s performance obligations under the arrangement.
The Company analyzes its revenue arrangements and other agreements to determine whether there are multiple elements that should be separated and accounted for individually or as a single unit of accounting. For multiple element
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contracts, arrangement consideration is allocated at the inception of the arrangement to all deliverables on the basis of relative selling price, using a hierarchy to determine selling price. Management first considers vendor-specific objective evidence ("VSOE"), then third-party evidence ("TPE") and if neither VSOE nor TPE exist, the Company uses its best estimate of selling price.
Many of the Company's revenue arrangements involve the bundling of a license with the option to purchase manufactured product. Licenses are granted to pharmaceutical companies for the use of Captisol in the development of pharmaceutical compounds. The licenses may be granted for the use of the Captisol product for all phases of clinical trials and through commercial availability of the host drug or may be limited to certain phases of the clinical trial process. Management believes that its licenses have stand-alone value at the outset of an arrangement because the customer obtains the right to use Captisol in its formulations without any additional input by the Company.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the best estimate of the amount of probable losses in the Company’s existing accounts receivable. Accounts receivable that are outstanding longer than their contractual payment terms, ranging from 30 to 90 days, are considered past due. When determining the allowance for doubtful accounts, several factors are taken into consideration, including historical write-off experience and review of specific customer accounts for collectability. Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for recovery is considered remote. There was no allowance for doubtful accounts included in the balance sheets at June 30, 2014 and December 31, 2013.
Accounting for Stock-Based Compensation
Stock-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. Compensation cost for consultant awards is recognized over each separate tranche’s vesting period. The following table summarizes stock-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 |  | Six months ended
| June 30, |  | June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Stock-based compensation expense as a component of: |  |  |  |  |  |  |
Research and development expenses | $ | 956 |  |  | $ | 448 |  |  | $ | 1,645 |  |  | $ | 834 |
General and administrative expenses | 2,071 |  |  | 1,044 |  |  | 3,448 |  |  | 1,782 |
| $ | 3,027 |  |  | $ | 1,492 |  |  | $ | 5,093 |  |  | $ | 2,616 |

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 |  | Six months ended
| June 30, |  | June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Risk-free interest rate | 1.9% |  | 1.4% |  | 1.9% |  | 1.3%
Dividend yield | — |  | — |  | — |  | —
Expected volatility | 67% |  | 69% |  | 69% |  | 69%
Expected term | 6.4 |  | 6.3 |  | 6.4 |  | 6.3
Forfeiture rate | 8.6% |  | 8.4% |  | 8.6%-9.7% |  | 8.4%-9.8%

The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant. The expected term of the employee and non-employee director options is the estimated weighted-average period until exercise or cancellation of vested options (forfeited unvested options are not considered) based on historical experience. The expected term for consultant awards is the remaining period to contractual expiration. Volatility is a measure of the expected amount of variability in the stock price over the expected life of an option expressed as a standard deviation. In making this assumption, the Company used the
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historical volatility of the Company’s stock price over a period equal to the expected term. The forfeiture rate is based on historical data at the time of the grant.
Preclinical Study and Clinical Trial Accruals
Substantial portions of the Company’s preclinical studies and all of the Company's clinical trials have been performed by third-party laboratories, contract research organizations, or other vendors (collectively "CROs"). Some CROs bill monthly for services performed, while others bill based upon milestone achievement. The Company accrues for each of the agreements it has with CROs on a monthly basis. For preclinical studies, accruals are estimated based upon the percentage of work completed and the contract milestones achieved. For clinical studies, accruals are estimated based upon a percentage of work completed, the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to it by the CROs, correspondence with the CROs and clinical site visits. The Company's estimates are dependent upon the timelines and accuracy of the data provided by its CROs regarding the status of each program and total program spending. The Company periodically evaluates its estimates to determine if adjustments are necessary or appropriate based on information it receives concerning changing circumstances, and conditions or events that may affect such estimates. No material adjustments to preclinical study and clinical trial accrued expenses have been recognized to date.
Sale of Royalty Rights
The Company previously sold to third parties the rights to future royalties of certain of its products. As part of the underlying royalty agreements, the partners have the right to offset a portion of any future royalty payments owed to the Company to the extent of previous milestone payments. Accordingly, the Company deferred a portion of the revenue associated with each tranche of royalty right sold, equal to the pro-rata share of the potential royalty offset. Such amounts associated with the offset rights against future royalty payments will be recognized as revenue upon receipt of future royalties from the respective partners. As of June 30, 2014 there was no deferred revenue remaining related to the sale of royalty rights. As of December 31, 2013, the Company had deferred $0.1 million of revenue related to the sale of royalty rights.
Product Returns
In connection with the sale of the Avinza and Oncology product lines, the Company retained the obligation for returns of product that were shipped to wholesalers prior to the close of the transactions. The accruals for product returns, which were recorded as part of the accounting for the sales transactions, are based on historical experience. Any subsequent changes to the Company’s estimate of product returns are accounted for as a component of discontinued operations.
Milestone Payments
In May 2014, the Company entered into a licensing agreement and research collaboration with Omthera Pharmaceuticals. The research collaboration will target the development of novel products that utilize the proprietary Ligand-developed LTP TECHNOLOGY™ to improve lipid-lowering activity of certain omega-3 fatty acids. The Company is eligible to receive development, regulatory, and event-based payments, of which the Company determined a $1.0 million payment upon completion of a proof of concept under the development program represents a milestone under the milestone method of accounting as (1) it is an event that can only be achieved in part on the Company's past performance, (2) there is substantive uncertainty at the date the arrangement was entered into that the event will be achieved and (3) it results in additional payment being due to us. None of the other event-based payments represents a milestone under the milestone method of accounting. No event based payment or milestone was achieved during the periods presented.
Cost of Goods Sold
The Company determines cost using the first-in, first-out method. Cost of goods sold include all costs of purchase and other costs incurred in bringing the inventories to their present location and condition, including costs to store and distribute.
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Research and Development
Collaborative research and development expense consists of labor, material, equipment and allocated facility costs of the Company’s scientific staff who are working pursuant to the Company’s collaborative agreements. From time to time, collaborative research and development expense includes costs related to research efforts in excess of those required under certain collaborative agreements. Management has the discretion to set the scope of such excess efforts and may increase or decrease the level of such efforts depending on the Company’s strategic priorities.
Proprietary research and development expense consists of intellectual property in-licensing costs, labor, materials, contracted services, and allocated facility costs that are incurred in connection with internally funded drug discovery and development programs.
Income Taxes
Income taxes are accounted for under the liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the consolidated financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit or if future deductibility is uncertain. As of June 30, 2014, the Company had provided a full valuation allowance against its deferred tax assets as recoverability was uncertain. Developing the provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company's judgments and tax strategies are subject to audit by various taxing authorities. While management believes the Company has provided adequately for its income tax liabilities in its consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the Company's consolidated financial condition and results of operations.
The Company's ending deferred tax liability represents a future tax obligation for current tax amortization claimed on acquired IPR&D. As the Company cannot estimate when the IPR&D assets will be amortizable for financial reporting purposes, the deferred tax liability associated with the IPR&D assets cannot be used to support the realization of the Company's deferred tax assets. As a result, the Company is required to increase its valuation allowance and record a charge to deferred taxes.
Discontinued Operations-Oncology Product Line
In September 2006, the Company and Eisai Inc. and Eisai Co., Ltd. (collectively "Eisai"), entered into a purchase agreement, ("the Oncology Purchase Agreement"), pursuant to which Eisai agreed to acquire all of the Company's worldwide rights in and to its oncology products, including, among other things, all related inventory, equipment, records and intellectual property, and to assume certain liabilities as set forth in the Oncology Purchase Agreement. The Oncology product line included the Company's four marketed oncology drugs: Ontak, Targretin capsules, Targretin gel and Panretin gel.
Discontinued Operations-Avinza Product Line
In September 2006, the Company and King Pharmaceuticals, now a subsidiary of Pfizer, entered into a purchase agreement ("the Avinza Purchase Agreement"), pursuant to which Pfizer acquired all of the rights in and to Avinza in the United States, its territories and Canada, including, among other things, all Avinza inventory, records and related intellectual property, and to assume certain liabilities as set forth in the Avinza Purchase Agreement.
Pursuant to the terms of the Avinza Purchase Agreement, the Company retained the liability for returns of product from wholesalers that had been sold by the Company prior to the close of the transaction. Accordingly, as part of the accounting for the gain on the sale of Avinza, the Company recorded a reserve for Avinza product returns.
During the three and six months ended June 30, 2014 the Company did no t recognize any gain or loss on the sale of the Avinza product line. The Company recognized a pre-tax gain of $2.4 million and $2.6 million for the three and six months ended June 30, 2013, due to subsequent changes in certain estimates and liabilities recorded as of the sale date.
Segment Reporting
Under ASC 280, Segment Reporting ("ASC 280"), operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity’s chief operating decision maker,
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in deciding how to allocate resources and in assessing performance. The Company has evaluated this codification and has identified two reportable segments: the development and commercialization of drugs using Captisol technology by CyDex and the biopharmaceutical company with a business model that is based upon the concept of developing or acquiring royalty revenue generating assets and coupling them with a lean corporate cost structure.
Comprehensive Income
Comprehensive income represents net income adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net income. The unrealized gains or losses are reported on the consolidated statements of comprehensive income.
Consolidation of Variable Interest Entities
The Company identifies an entity as a VIE if either: (1) the entity does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the entity's equity investors lack the essential characteristics of a controlling financial interest. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in any VIE and therefore is the primary beneficiary. If the Company is the primary beneficiary of a VIE, it must consolidate the VIE under applicable accounting guidance. The Company determined it holds a variable interest in Viking Therapeutics, Inc. ("Viking") based on management's assessment that it does not have sufficient resources to carry out its principal activities without the support of the Company. The Company's variable interests in Viking are a loan provided by the Company to Viking and a license agreement executed concurrently. As of June 30, 2014, total assets include $2.0 million and total liabilities include $3.1 million related to Viking. Viking's consolidated assets are owned by Viking, and Viking's consolidated liabilities are without recourse against Ligand.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. Implementing ASU 2013-02 did not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this ASU are effective for the Company for fiscal years, and interim periods within those years, beginning after January 1, 2014. The Company's adoption of this standard did not materially affect the consolidated financial statements.
In July, 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU 2013-11 is effective for the Company for interim and annual periods beginning after December 15, 2013. The Company's adoption of this standard did not materially affect the consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and modifies the related disclosure requirements. Under the new guidance, only disposals resulting in a strategic shift that will have a major effect on an entity's operations and financial results will be reported as discontinued operations. ASU 2014-08 also removes the requirement that an entity not have any significant continuing involvement in the operations of the component after disposal to qualify for reporting of the disposal as a discontinued operation. The guidance is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted for any disposal transaction not previously reported. Management does not believe the adoption of this guidance will have a material impact on the Company's consolidated financial statements.
In May, 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The revenue standard’s
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core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Management is currently evaluating the effect the adoption of this standard will have on its financial statements.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update will be effective for the Company as of January 1, 2016. Earlier adoption is permitted. Entities may apply the amendments in this update either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. Management is currently assessing the impact of this update, and believes that its adoption on January 1, 2016 will not have a material impact on its consolidated financial statements.
2. Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income, equity securities, co-promote termination payments receivable and the related liability, and contingent liabilities.
The fair value of the Company’s investments which were classified as short-term investments as of June 30, 2014 and December 31, 2013 is determined using quoted market prices in active markets. These securities were received by the Company in December 2012 and June 2014 as a result of an event-based payment and an upfront license payment, respectively, under licensees. Additionally, the liability for CVRs for Metabasis are determined using quoted market prices in active markets. The co-promote termination payments receivable represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding future Avinza product sales. The receivable and liability will remain equal, and are adjusted each reporting period for changes in the fair value of the obligation including any changes in the estimate of future net Avinza product sales. The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach using a Monte Carlo analysis. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders and CVR holders. Changes in these assumptions can materially affect the fair value estimate.
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The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 (in thousands):

Fair Value Measurements at Reporting Date Using
|  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
| Total |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |
Current portion of co-promote termination payments receivable | $ | 391 |  |  | $ | — |  |  | $ | — |  |  | $ | 391 |
Available-for-sale securities | 7,490 |  |  | 7,490 |  |  | — |  |  | — |
Restricted cash and investments | 1,261 |  |  | — |  |  | 1,261 |  |  | — |
Long-term portion of co-promote termination payments receivable | 413 |  |  | — |  |  | — |  |  | 413 |
Total assets | $ | 9,555 |  |  | $ | 7,490 |  |  | $ | 1,261 |  |  | $ | 804 |
Liabilities: |  |  |  |  |  |  |
Current portion of contingent liabilities-CyDex | $ | 2,877 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,877 |
Current portion of co-promote termination liability | 391 |  |  | — |  |  | — |  |  | 391 |
Long-term portion of contingent liabilities-Metabasis | 4,724 |  |  | 4,724 |  |  | — |  |  | — |
Long-term portion of contingent liabilities-CyDex | 7,498 |  |  | — |  |  | — |  |  | 7,498 |
Liability for short-term investments owed to former licensees | 1,078 |  |  | 1,078 |  |  | — |  |  | — |
Long-term portion of co-promote termination liability | 413 |  |  | — |  |  | — |  |  | 413 |
Total liabilities | $ | 16,981 |  |  | $ | 5,802 |  |  | $ | — |  |  | $ | 11,179 |

The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

Fair Value Measurements at Reporting Date Using
|  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
| Total |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |
Current portion of co-promote termination payments receivable | $ | 4,329 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,329 |
Available-for-sale securities | 4,340 |  |  | 4,340 |  |  | — |  |  | — |
Restricted cash and investments | 1,341 |  |  | — |  |  | 1,341 |  |  | — |
Long-term portion of co-promote termination payments receivable | 7,417 |  |  | — |  |  | — |  |  | 7,417 |
Total assets | $ | 17,427 |  |  | $ | 4,340 |  |  | $ | 1,341 |  |  | $ | 11,746 |
Liabilities: |  |  |  |  |  |  |
Current portion of contingent liabilities-CyDex | $ | 1,712 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,712 |
Current portion of co-promote termination liability | 4,329 |  |  | — |  |  | — |  |  | 4,329 |
Long-term portion of contingent liabilities-Metabasis | 4,196 |  |  | 4,196 |  |  | — |  |  | — |
Long-term portion of contingent liabilities-CyDex | 7,599 |  |  | — |  |  | — |  |  | 7,599 |
Liability for short-term investments owed to former licensees | 651 |  |  | 651 |  |  | — |  |  | — |
Long-term portion of co-promote termination liability | 7,417 |  |  | — |  |  | — |  |  | 7,417 |
Total liabilities | $ | 25,904 |  |  | $ | 4,847 |  |  | $ | — |  |  | $ | 21,057 |

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The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:

| June 30, 2014 |  | December 31, 2013
Range of annual revenue subject to revenue sharing (1) | $13.1 million-$18.9 million |  | $4.2 million-$19.8 million
Revenue volatility | 25% |  | 25%
Average of probability of commercialization | 79.3% |  | 67.6%
Sales beta | 0.60 |  | 0.60
Credit rating | BBB |  | BBB
Equity risk premium | 6% |  | 6%

(1) | Revenue subject to revenue sharing represent management’s estimate of the range of total annual revenue subject to revenue sharing (i.e. annual revenues in excess of $15 million) through December 31, 2016, which is the term of the CVR agreement.

A reconciliation of the level 3 financial instruments as of June 30, 2014 is as follows (in thousands):

Assets: |
Fair value of level 3 financial instrument assets as of December 31, 2013 | $ | 11,746 |
Assumed payments made by Pfizer or assignee | (631 | )
Fair value adjustments to co-promote termination liability | (10,311 | )
Fair value of level 3 financial instrument assets as of June 30, 2014 | $ | 804 |
Liabilities: |
Fair value of level 3 financial instrument liabilities as of December 31, 2013 | $ | 21,057 |
Assumed payments made by Pfizer or assignee | (631 | )
Payments to CVR and other former license holders | (1,668 | )
Fair value adjustments to contingent liabilities | 2,732 |
Fair value adjustments to co-promote termination liability | (10,311 | )
Fair value of level 3 financial instrument liabilities as of June 30, 2014 | $ | 11,179 |

3. Variable Interest Entities
The Company determined it holds a variable interest in Viking based on management's assessment that it does not have sufficient resources to carry out its principal activities without the support of the Company. The Company's variable interests in Viking are a loan provided by the Company to Viking and a license agreement executed concurrently. Additionally, the Company has a shared services and sublease agreement with Viking. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE and therefore required to consolidate the investment. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of its partner, voting rights, involvement in day-to-day operating decisions, representation on Viking's executive committee, and level of economics between the Company and Viking.
In May 2014, the Company entered into a Master License Agreement ("License Agreement") to license the rights to five programs to Viking, an unrelated clinical-stage biopharmaceutical company focused on the development of novel therapies for metabolic and endocrine disorders. As part of this transaction, the Company extended a $2.5 million convertible loan facility to Viking that can be used to pay Viking’s operating and financing-related expenses. Under the terms of the convertible loan facility, the principal amount outstanding accrues interest at a fixed rate equal to the lesser of 5% and the maximum interest rate permitted by law. The loan is due and payable in May 2016, unless the loans are converted into equity prior to such time. Upon the earlier to occur of an Initial Public Offering ("IPO") or qualified financing event, the Company may elect to be repaid in equity equal to 200% of the accrued principal and interest or require Viking to pay in cash an amount equal to 200% of the accrued principal and interest. The Company funded $1.3 million towards the convertible loan facility for both the three and six months ended June 30, 2014.
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The debt conversion feature embedded in the loan is accounted for under ASC Topic 815 Derivatives and Hedging. The valuation of the bifurcated debt conversion feature was performed using Level 3 inputs, requiring Viking to make assumptions about the probability of the occurrence of an IPO or qualified financing and the loan being converted based on the applicable conversion terms.
As partial consideration for the grant of the rights and licenses under the License Agreement, in the event Viking consummates an IPO or other qualified financing event with a minimum raise of $45.0 million, Viking will issue to the Company a certain amount of equity. At the closing of an IPO a number of shares of common stock having an aggregate value of $29.0 million will be issued to the Company, subject to adjustment in certain circumstances. In the event Viking consummates a private financing prior to an IPO, the Company has the option to receive a number of shares of the same class and type of securities issued in the private financing having an aggregate value of $29.0 million, subject to adjustment in certain circumstances. The Company has the right to terminate the License Agreement on or before April 30, 2015 if Viking has neither completed an IPO or received aggregate net proceeds of at least $20.0 million in one or more private financings. The Company also has the right to terminate the License Agreement in the event of insolvency or bankruptcy of Viking. On July 1, 2014, Viking filed an initial Form S-1 with the Securities and Exchange Commission for an IPO. As of the date of this report, the filed Form S-1 has not been declared effective. As of June 30, 2014, no amounts have been recorded for the potential receipt of equity related to a financing transaction in accordance with authoritative guidance.
The following table represents the consolidated assets and liabilities, which are owned by and are obligations of Viking and are with no recourse to the Company, as of June 30, 2014 (in thousands):

| June 30, 2014
Cash and cash equivalents | $ | 891 |
Other current assets | 28 |
Capitalized IPO expenses | 1,094 |
Total current assets | $ | 2,013 |
Other assets | 1 |
Total assets | $ | 2,014 |
Accounts payable | $ | 1,416 |
Accrued liabilities | 52 |
Current portion of notes payable | 345 |
Total current liabilities | $ | 1,813 |
Long-term portion of notes payable | 1,285 |
Total liabilities | $ | 3,098 |

The Company has recorded 100% of the losses incurred since May 21, 2014, the effective date of the transaction, as net loss attributable to noncontrolling interest due to the fact that it is considered a primary beneficiary with no equity interest in the VIE. The advances under the loan agreement are included as notes payable by Viking and are eliminated in consolidation.
4. Avinza Co-Promotion
In 2003, the Company and Organon Pharmaceuticals USA Inc. (Organon) entered into an agreement for the co-promotion of Avinza. Subsequently in 2006, the Company signed an agreement with Organon that terminated the Avinza co-promotion agreement between the two companies and returned Avinza co-promotion rights to the Company. In consideration of the early termination, the Company agreed to make quarterly royalty payments to Organon equal to 6.5% of Avinza net sales through December 31, 2012 and thereafter equal to 6.0% of Avinza net sales through patent expiration, currently anticipated to be November 2017.
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In January 2006, the Company and King Pharmaceuticals, now a subsidiary of Pfizer, entered into an agreement pursuant to which Pfizer acquired all of the Company’s rights in and to Avinza. Pfizer also assumed the Company’s co-promote termination obligation to make royalty payments to Organon based on net sales of Avinza. In connection with Pfizer's assumption of this obligation, Organon did not consent to the legal assignment of the co-promote termination obligation to Pfizer. Accordingly, the Company remains liable to Organon in the event of Pfizer's default of the obligation. Therefore, the Company recorded an asset as of February 26, 2007 to recognize Pfizer's assumption of the obligation, while continuing to carry the co-promote termination liability in the Company's consolidated financial statements to recognize the Company’s legal obligation as primary obligor to Organon. This asset represents a non-interest bearing receivable for future payments to be made by Pfizer and is recorded at its fair value. The receivable and liability will remain equal, and are adjusted each reporting period for changes in the fair value of the obligation including for any changes in the estimate of future net Avinza product sales. This receivable will be assessed on a quarterly basis or when a triggering event occurs for impairment (e.g. in the event Pfizer defaults on the assumed obligation to pay Organon).
On a quarterly basis, management reviews the carrying value of the co-promote termination liability. In February 2014, Actavis launched a generic form of Avinza which resulted in a significant decrease in estimates of future net sales used to value the co-promote termination asset and liability. Due to assumptions and judgments inherent in determining the estimates of future net Avinza sales through November 2017, the actual amount of net Avinza sales used to determine the current fair value of the Company’s co-promote termination asset and liability may be materially different from current estimates.
A summary of the co-promote termination liability as of June 30, 2014 is as follows (in thousands):

Net present value of payments based on estimated future net Avinza product sales as of December 31, 2013 | $ | 11,746 |
Assumed payments made by Pfizer or assignee | (631 | )
Fair value adjustments | (10,311 | )
Total co-promote termination liability as of June 30, 2014 | 804 |
Less: current portion of co-promote termination liability as of June 30, 2014 | 391 |
Long-term portion of co-promote termination liability as of June 30, 2014 | $ | 413 |

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5. Lease Obligations
The Company leases office and laboratory facilities in California, Kansas and New Jersey. These leases expire between 2014 and 2019, some of which are subject to annual rent increases which range from 3.0% to 3.5%. The Company currently subleases office and laboratory space in California and New Jersey. The following table provides a summary of operating lease obligations and payments expected to be received from sublease agreements as of June 30, 2014 (in thousands):

Operating lease obligations: |  | Lease Termination Date |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years |  | Total
Corporate headquarters- San Diego, CA |  | July 2019 |  | $ | 673 |  |  | $ | 1,399 |  |  | $ | 1,474 |  |  | $ | — |  |  | $ | 3,546 |
Bioscience and Technology Business Center- Lawrence, KS |  | December 2017 |  | 55 |  |  | 108 |  |  | 27 |  |  | — |  |  | 190 |
Vacated office and research facility-San Diego, CA |  | July 2015 |  | 2,273 |  |  | 190 |  |  | — |  |  | — |  |  | 2,463 |
Vacated office and research facility- Cranbury, NJ |  | August 2016 |  | 2,563 |  |  | 3,050 |  |  | — |  |  | — |  |  | 5,613 |
Total operating lease obligations |  |  |  | $ | 5,564 |  |  | $ | 4,747 |  |  | $ | 1,501 |  |  | $ | — |  |  | $ | 11,812 |
Sublease payments expected to be received: |  |  |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years |  | Total
Office and research facility- San Diego, CA |  | July 2015 |  | $ | 919 |  |  | $ | 78 |  |  | $ | — |  |  | $ | — |  |  | $ | 997 |
Office and research facility- Cranbury, NJ |  | August 2014 and 2016 |  | 480 |  |  | 566 |  |  | — |  |  | — |  |  | 1,046 |
Net operating lease obligations |  |  |  | $ | 4,165 |  |  | $ | 4,103 |  |  | $ | 1,501 |  |  | $ | — |  |  | $ | 9,769 |

In 2010, the Company ceased use of its facility located in New Jersey. As a result, the Company recorded lease exit costs of $9.7 million for costs related to the difference between the remaining lease obligations of the abandoned operating leases, which run through August 2016, and management's estimate of potential future sublease income, discounted to present value. In addition, the Company wrote-off property and equipment with a net book value of approximately $5.4 million related to the facility closure.
As of June 30, 2014 and December 31, 2013, the Company had lease exit obligations of $4.3 million and $5.9 million, respectively. For the three and six months ended June 30, 2014, the Company made cash payments, net of sublease payments received of $0.9 million and $1.8 million, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of $0.1 million and $0.2 million for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, the Company made cash payments, net of sublease payments received of $0.9 million and $1.9 million, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of $44,000 and $0.1 million for the three and six months ended June 30, 2013, respectively.
Total rent expense under all office leases for each of the three and six months ended June 30, 2014 and 2013 was $0.2 million and $0.4 million, respectively. The Company recognizes rent expense on a straight-line basis. Deferred rent at June 30, 2014 and December 31, 2013 was $0.3 million and $0.4 million, respectively, and is included in other long-term liabilities.
6. Segment Reporting
The Company evaluates performance based on the operating income (loss) of the respective business segments. The segment results may not represent actual results that would be expected if they were independent, stand-alone businesses. Segment information is as follows (in thousands):
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Balance Sheet Data: | As of June 30, 2014
| Ligand |  | CyDex |  | Total
Total assets | $ | 32,577 |  |  | $ | 67,270 |  |  | $ | 99,847 |
| As of December 31, 2013
| Ligand |  | CyDex |  | Total
Total assets | $ | 38,408 |  |  | $ | 66,305 |  |  | $ | 104,713 |
Operating Data: | For the three months ended June 30, 2014
| Ligand |  | CyDex |  | Total
Net revenues from external customers | $ | 5,692 |  |  | $ | 4,916 |  |  | $ | 10,608 |
Depreciation and amortization expense | 68 |  |  | 601 |  |  | 669 |
Operating (loss) income | (867 | ) |  | 2,225 |  |  | 1,358 |
Interest expense, net | 181 |  |  | — |  |  | 181 |
Income tax expense from continuing operations | 45 |  |  | 2 |  |  | 47 |
| For the three months ended June 30, 2013
| Ligand |  | CyDex |  | Total
Net revenues from external customers | 3,820 |  |  | 5,760 |  |  | $ | 9,580 |
Depreciation and amortization expense | 59 |  |  | 610 |  |  | $ | 669 |
Write-off of in-process research and development | — |  |  | 480 |  |  | $ | 480 |
Operating (loss) income | (1,200 | ) |  | 2,714 |  |  | $ | 1,514 |
Interest expense, net | 453 |  |  | — |  |  | $ | 453 |
Income tax expense (benefit) from continuing operations | (145 | ) |  | 35 |  |  | $ | (110 | )
Gain on sale of Avinza Product Line before income taxes | 2,397 |  |  | — |  |  | $ | 2,397 |
| For the six months ended June 30, 2014
| Ligand |  | CyDex |  | Total
Net revenues from external customers | 12,483 |  |  | $ | 14,083 |  |  | $ | 26,566 |
Depreciation and amortization expense | 134 |  |  | 1,203 |  |  | 1,337 |
Operating (loss) income | (938 | ) |  | 7,396 |  |  | 6,458 |
Interest expense, net | 429 |  |  | — |  |  | 429 |
Income tax expense from continuing operations | 6 |  |  | — |  |  | 6 |
| For the six months ended June 30, 2013
| Ligand |  | CyDex |  | Total
Net revenues from external customers | $ | 10,057 |  |  | $ | 11,174 |  |  | $ | 21,231 |
Depreciation and amortization expense | 117 |  |  | 1,222 |  |  | 1,339 |
Write-off of in-process research and development | — |  |  | 480 |  |  | 480 |
Operating income | 198 |  |  | 5,249 |  |  | 5,447 |
Interest expense, net | 1,361 |  |  | — |  |  | 1,361 |
Income tax expense (benefit) from continuing operations | (205 | ) |  | 29 |  |  | (176 | )
Gain on sale of Avinza Product Line before income taxes | 2,588 |  |  | — |  |  | 2,588 |

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7. Financing Arrangements
The Company has a secured term loan credit facility ("secured debt"). Under the terms of the secured debt, the Company made interest-only payments through February 2013. Subsequent to the interest-only payments, the note amortized with principal and interest payments through the remaining term of the loan. Additionally, the Company made an additional final payment equal to 6% of the total amount borrowed which was due at maturity and was accreted over the life of the loan. The maturity date of the loan was August 1, 2014, and the Company fully repaid the loan as of July 31, 2014.
In March 2013, the Company prepaid $7.0 million of the secured term loan credit facility. Additionally, the Company paid a prepayment fee of 1% of the prepayment amount, or $0.1 million and a prorated final-payment fee of 6% of the final payment, or $0.4 million.
The carrying values and the fixed contractual coupon rates of the Company's financing arrangements as of June 30, 2014 and December 31, 2013 were as follows (in thousands):

| June 30, 2014 |  | December 31, 2013
Convertible notes payable, Viking Therapeutics, Inc. | $ | 345 |  |  | $ | — |
Current portion notes payable, 8.64%, due August 1, 2014 | 1,716 |  |  | 6,642 |
Current portion notes payable, 8.9012%, due August 1, 2014 | 637 |  |  | 2,467 |
Total current portion of notes payable | $ | 2,698 |  |  | $ | 9,109 |

8. Stockholders’ Equity
The Company grants options and awards to employees, non-employee consultants, and non-employee directors. Only new shares of common stock are issued upon the exercise of stock options. Non-employee directors are accounted for as employees. Options and restricted stock granted to certain directors vest in equal monthly installments over the one-year period following the date of grant. Options granted to employees vest 1/8 on the six month anniversary of the date of grant, and 1/48 each month thereafter for 42 months. Option awards generally expire ten years from the date of grant.
Stock Option Activity
The following is a summary of the Company’s stock option plan activity and related information:

| Shares |  | Weighted- Average Exercise Price |  | Weighted-Average Remaining Contractual Term in Years |  | Aggregate Intrinsic Value (In thousands)
Balance as of December 31, 2013 | 1,746,709 |  |  | $ | 16.79 |  |  | 7.6 |  | $ | 62,705 |
Granted | 366,184 |  |  | 73.81 |  |  |  |  |
Exercised | (233,929 | ) |  | 15.72 |  |  |  |  |
Forfeited | (49,967 | ) |  | 16.69 |  |  |  |  |
Cancelled | (3,814 | ) |  | 84.38 |  |  |  |  |
Balance as of June 30, 2014 | 1,825,183 |  |  | 28.23 |  |  | 7.7 |  | $ | 66,386 |
Exercisable as of June 30, 2014 | 945,222 |  |  | 16.30 |  |  | 6.8 |  | $ | 43,474 |
Options vested and expected to vest as of June 30, 2014 | 1,825,183 |  |  | 28.23 |  |  | 7.7 |  | $ | 66,386 |

The weighted-average grant date fair value of all stock options granted during the six months ended June 30, 2014 was $47.44 per share. The total intrinsic value of all options exercised during the six months ended June 30, 2014 and 2013 was approximately $13.7 million and $0.8 million, respectively. As of June 30, 2014, there was $17.5 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2.5 years.
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Net cash received from options exercised during the six months ended June 30, 2014 and 2013 was approximately $3.6 million and $1.1 million, respectively. There is no current tax benefit related to options exercised because of net operating losses for which a full valuation allowance has been established.
As of June 30, 2014, 1.1 million shares were available for future option grants or direct issuance under the Company's 2002 Stock Incentive Plan, as amended.
Restricted Stock Activity
Restricted stock activity for the six months ended June 30, 2014 was as follows:

| Shares |  | Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2013 | 115,386 |  |  | $ | 21.93 |
Granted | 41,671 |  |  | 72.50 |
Vested | (74,079 | ) |  | 25.24 |
Cancelled | (3,972 | ) |  | 18.42 |
Nonvested at June 30, 2014 | 79,006 |  |  | $ | 45.68 |

Restricted stock awards generally vest over three years. As of June 30, 2014, there was $2.7 million of total unrecognized compensation cost related to nonvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.7 years.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan, as amended and restated (the "Amended ESPP") allows participants to purchase up to 1,250 shares of Ligand common stock during each offering period, but in no event may a participant purchase more than 1,250 shares of common stock during any calendar year. The length of each offering period is six months, and employees are eligible to participate in the first offering period beginning after their hire date.
The Amended ESPP allows employees to purchase Ligand common stock at the end of each six month period at a price equal to 85% of the lesser of fair market value on either the start date of the period or the last trading day of the period (the "Lookback Provision"). The 15% discount and the Lookback Provision make the Amended ESPP compensatory. There were 2,230 and 5,016 shares of common stock issued under the amended ESPP during the six months ended June 30, 2014 and 2013, respectively. The Company recorded compensation expense related to the ESPP of $30,627 and $26,000 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, 77,285 shares were available for future purchases under the Amended ESPP.
Public Offerings
During the three and six months ended June 30, 2014 and 2013, the Company did not issue any common shares pursuant to its at-the-market equity issuance plan.
Corporate Share Repurchases
On May 8, 2013, the Company's Board of Directors authorized the Company to repurchase up to $5.0 million of its common stock for a period of up to one year. The Company did not repurchase any common shares pursuant to the repurchase program.
On July 17, 2014, the Company's Board of Directors authorized the Company to repurchase up to $10.0 million of its common stock from time to time in privately negotiated and open market transactions for a period of up to one year, subject to the Company's evaluation of market conditions, applicable legal requirements and other factors.
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9. Litigation
The Company records 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, the Company records the minimum estimated liability related to the claim in accordance with ASC Topic 450-Contingencies. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. Revisions in the Company's estimates of potential liability could materially impact its results of operations.
Securities Litigation
On June 8, 2012, a federal securities class action and shareholder derivative lawsuit was filed in the Eastern District of Pennsylvania against Genaera Corporation and its officers, directors, major shareholders and trustee ("Genaera Defendants") for allegedly breaching their fiduciary duties to Genaera shareholders. The lawsuit also names the Company and its Chief Executive Officer John Higgins as additional defendants for allegedly aiding and abetting the Genaera Defendants' various breaches of fiduciary duties based on the Company's purchase of a licensing interest in a development-stage pharmaceutical drug program from the Genaera Liquidating Trust in May 2010 and the Company's subsequent sale of half of its interest in the transaction to Biotechnology Value Fund, Inc.
Following an amendment to the complaint and a round of motions to dismiss, the court dismissed the amended complaint with prejudice on August 12, 2013. Plaintiff appealed that dismissal on September 10, 2013. Briefing is now complete, and the parties are awaiting the scheduling of oral argument before the Third Circuit, which management anticipates will take place in the next few months. Management believes it is very likely to prevail on appeal, and, for that reason, believes the litigation presents a remote likelihood of material loss.
Other Litigation
On June 19, 2014, a complaint seeking attorneys’ fees in connection with claims related to executive compensation matters described in the Company’s June 6, 2013 supplemental proxy materials was filed in California Superior Court. Management believes the fees demanded by plaintiffs’ counsel are excessive and intends to defend itself vigorously in the litigation. Due to the complex nature of the legal and factual issues involved, however, the outcome of this matter is not presently determinable.

ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations

Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Part II, Item 1A:"Risk Factors." This outlook represents our current judgment on the future direction of our business. These statements include those related to our Captisol-related revenues, our Promacta, Kyprolis, and other product royalty revenues, product returns, and product development. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Promacta, Kyprolis, Captisol and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market. In addition, ongoing or future arbitration, or litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Our trademarks, trade names and service marks referenced herein include Ligand. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.
References to “Ligand Pharmaceuticals Incorporated,” “Ligand,” the “Company,” “we” or ”our” include our wholly owned subsidiaries: Ligand JVR, Allergan Ligand Retinoid Therapeutics, Seragen, Inc., Pharmacopeia, Inc., or Pharmacopeia, Neurogen Corporation, or Nuerogen, CyDex Pharmaceuticals, Inc., or CyDex, Metabasis Therapeutics, Inc., or Metabasis, and Nexus VI, Inc.
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Overview
We are a biotechnology company that develops and acquires revenue generating assets and coupling them with a lean corporate cost structure. Our goal is to create a sustainably profitable business and generate meaningful value for our stockholders. Since a portion of our business model is based on the goal of partnering with other pharmaceutical companies to commercialize and market our assets, a significant amount of our revenue is based largely on payments made to us by partners for royalties, milestones, event-based payments, and license fees. We recognized the important role of the drug reformulation segment in the pharmaceutical industry and in 2011 added Captisol® to our technology portfolio. Captisol is a formulation technology that has enabled seven FDA approved products, including Onyx's Kyprolis® and Baxter International's Nexterone® and is currently being developed in a number of clinical-stage partner programs. In comparison to our peers, we believe we have assembled one of the largest and most diversified asset portfolios in the industry with the potential to generate significant revenue in the future. The therapies in our development portfolio address the unmet medical needs of patients for a broad spectrum of diseases including hepatitis, multiple myeloma, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, epilepsy, FSGS and osteoporosis. We have established multiple alliances with the world’s leading pharmaceutical companies including GlaxoSmithKline, Onyx Pharmaceuticals (a subsidiary of Amgen, Inc.), Merck, Pfizer, Baxter International, Lundbeck Inc., Eli Lilly and Co., and Spectrum Pharmaceuticals, Inc.
Highlights from the first six months of 2014 include:

• | We received a $1.0 million commercial sales-based contingent payment from Onyx. The payment was triggered by the achievement of over $250 million of annual product sales of Kyprolis in 2013.

• | We received a $1.0 million event-based payment as a result of the recent FDA approval of Merck’s NOXAFIL® which is a new Captisol-enabled formulation of NOXAFIL for intravenous (IV) use. We will also generate revenue from Captisol material sales to Merck for this product under a commercial supply agreement.

• | Our partner Lundbeck LLC announced that the FDA accepted for review a New Drug Application ("NDA") for its investigational therapy intravenous carbamazepine, an intravenous formulation of the anti-epileptic drug carbamazepine. With acceptance of the NDA filing, we earned a $0.2 million event-based payment.

• | We completed the dosing of the last patient in its Glucagon Receptor Agonist Phase 1 Single Ascending Dose (SAD) clinical trial.

• | We received an event-based payment of $0.2 million in connection with an amendment to our license agreement with Sage Therapeutics, Inc. for the additional of a new subfield.

• | We received a $0.1 million project development fee as a result of entering into a licensing agreement and research collaboration with Omthera Pharmaceuti cals. The research collaboration will target the development of novel products that utilize the proprietary Ligand-developed LTP TECHNOLOGY™ to improve lipid-lowering activity of certain omega-3 fatty acids. Under the terms of the agreement, we will be eligible to receive payments of up to $44.5 million upon the achievement of specific events, as well as tiered royalties ranging from mid to high single digits of net sales.

• | We entered into a master license agreement with Viking covering the following five programs: FBPase inhibitor program for type 2 diabetes, a Selective Androgen Receptor Modulator (SARM) program for muscle wasting, a Thyroid Hormone Receptor-ß (TRß) Agonist program for dyslipidemia, an Erythropoietin Receptor (EPOR) Agonist program for anemia, and an Enterocyte-Directed Diacylglycerol Acyltransferase-1 (DGAT-1) Inhibitor program for dyslipidemia. The FBPase Inhibitor program was the subject of an option originally granted to Viking in 2012. As part of the transaction, we agreed to extend a $2.5 million convertible loan facility to Viking that will be used to pay Viking's operating and financing-related expenses.

• | We received 125,000 upfront shares of common stock in its partner TG Therapeutics, Inc., as a result of entering into a license agreement. The shares were initially valued at $1.2 million.

Results of Operations
Three and six months ended June 30, 2014 and 2013
Total revenues for the three and six months ended June 30, 2014 were $10.6 million and $26.6 million, respectively, compared to $9.6 million and $21.2 million, respectively, for the same periods in 2013. We reported income from continuing
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operations of $1.3 million and $3.4 million for the three and six months ended June 30, 2014, respectively, compared to $3.7 million and $5.0 million, respectively, for the same periods in 2013.
Royalty Revenue
Royalty revenues were $5.2 million and $13.1 million for the three and six months ended June 30, 2014, respectively, compared to $4.9 million and $10.7 million, respectively, for the same periods in 2013. The increase in royalty revenue is primarily due to an increase in Promacta and Kyprolis royalties, partially offset by a decline in Avinza royalties as a result of generic competition entering the market in February 2014.
Material Sales
We recorded material sales of $3.5 million and $9.2 million for the three and six months ended June 30, 2014, respectively, compared to $4.0 million and $5.5 million, respectively, for the same periods in 2013. The decrease in material sales for the three months ended June 30, 2014 and the increase in material sales for the six months ended June 30, 2014 is due to timing of customer purchases.
Collaborative Research and Development and Other Revenues
We recorded collaborative research and development and other revenues of $1.9 million and $4.3 million for the three and six months ended June 30, 2014, respectively, compared to $0.7 million and $5.0 million, respectively, for the same periods in 2013. The increase of $1.2 million for the three months ended June 30, 2014 is primarily due to an upfront license payment of $1.2 million received in the second quarter of 2014. The decrease of $0.7 million for the six months ended June 30, 2014 is due to timing of event-based payments and upfront license fees earned.
Cost of Sales
Cost of sales were $1.2 million and $3.6 million for the three and six months ended June 30, 2014, respectively, compared to $1.2 million and $1.9 million, respectively, for the same periods in 2013. The increase of $1.7 million for the six months ended June 30, 2014 is primarily due to an increase in material sales.
Research and Development Expenses
Research and development expenses were $2.7 million and $5.8 million for the three and six months ended June 30, 2014, respectively, compared to $2.0 million and $4.5 million, respectively, for the same periods in 2013. The increase of $0.7 million and $1.3 million for the three and six months ended June 30, 2014, respectively, is primarily due to an increase in stock-based compensation expense.
As summarized in the table below, we are developing several proprietary products for a variety of indications. Our programs are not limited to the following, but are representative of a range of future licensing opportunities to expand our partnered asset portfolio.

Program |  | Disease/Indication |  | Development Phase
Glucagon Receptor Antagonist |  | Diabetes |  | Phase I
HepDirect™ |  | Liver Diseases |  | Preclinical
Oral Human Granulocyte Colony Stimulating Factor |  | Neutropenia |  | Preclinical
LTP Technology Platform |  | Metabolic and Cardiovascular Disease |  | Preclinical
Captisol-enabled Lamotrigine |  | Epilepsy |  | Preclinical

We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of complex research, our inability to predict the results of clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMA, our inability to predict the decisions of our collaborative partners, our ability to fund research and development programs, competition from other entities of which we may become aware in future periods, predictions of market potential from products that may be derived from our research and development efforts, and our ability to recruit and retain personnel or third-party research organizations with the necessary knowledge and skills to perform certain research. Refer to “Item 1A. Risk Factors” for additional discussion of the uncertainties surrounding our research and development initiatives.
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General and Administrative Expenses
General and administrative expenses were $5.2 million and $10.3 million for the three and six months ended June 30, 2014, respectively, compared to $4.3 million and $8.8 million, respectively, for the same periods in 2013. The increase of $0.9 million and $1.5 million for three and six months ended June 30, 2014, respectively, is primarily due to an increase in stock-based compensation expense.
Lease Exit and Termination Costs
In September 2010, we ceased use of our facility located in Cranbury, New Jersey. As a result, during the three months ended September 30, 2010, we recorded lease exit costs of $9.7 million for costs related to the difference between the remaining lease obligations of the abandoned operating leases, which run through August 2016, and management’s estimate of potential future sublease income, discounted to present value. Actual future sublease income may differ materially from our estimate, which would result in us recording additional expense or reductions in expense. In addition, we wrote-off approximately $5.4 million of property and equipment related to the facility closure and recorded approximately $1.8 million of severance related costs. Lease exit and termination costs were $0.1 million and $0.3 million for the three and six months ended June 30, 2014, respectively, compared to $44,000 and $0.1 million, respectively for the same periods in 2013. The increase for the three and six months ended June 30, 2014 is primarily due to changes in sublease assumptions.
Interest Expense, net
Interest expense was $0.2 million and $0.4 million for the three and six months ended June 30, 2014, respectively, compared to $0.5 million and $1.4 million, respectively, for the same periods in 2013. The decrease in interest expense of $0.3 million and $1.0 million for the three and six months ended June 30, 2014, respectively, is due to a lower principal balance due to the $7.0 million payoff in March 2013 as well as principal amortization.
(Increase) decrease in Contingent Liabilities
We recorded an increase in contingent liabilities of $1.3 million and $3.3 million for the three and six months ended June 30, 2014, respectively, compared to a decrease of $2.7 million and $0.9 million for the same periods in 2013. The increase for the three months ended June 30, 2014 primarily relates to an increase in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition of $3.2 million and is partially offset by a decrease of $1.9 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The increase for the six months ended June 30, 2014 primarily relates to an increase of $2.7 million in the liability for amounts potentially due to holders of CVRs related to our CyDex acquisition and an increase of $0.5 million in the liability for amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The decrease for the three months ended June 30, 2013 relates to a decrease of $5.2 million in the liability for amounts potentially due to holders of CVRs and former license holders associated with our CyDex acquisition primarily due to a decrease in amounts potentially due to CyDex CVR holders and former license holders related to Captisol-enabled Clopidogrel. The Medicines Company notified us of the termination of development of Captisol-enabled IV clopidogrel and the return of the rights to the compound to us. The decrease was partially offset by an increase of $2.4 million in amounts potentially due to holders of CVRs associated with our Metabasis acquisition. The decrease for the six months ended June 30, 2013 is primarily due to a decrease of $3.3 million in amounts potentially due to CyDex CVR holders and former license holders related to Captisol-enabled Clopidogrel, and is partially offset by an increase of $2.4 million in Metabasis CVRs.
Income Tax Expense
We recorded an income tax benefit from continuing operations of $47,000 and income tax expense of $6,000 for the three and six months ended June 30, 2014, respectively, compared to income tax expense from continuing operations of $0.1 million and $0.2 million, respectively for the three and six months ended June 30, 2013. Our estimated annual effective rate of 2.09% is primarily attributable to deferred taxes associated with the amortization of acquired IPR&D assets for tax purposes.
Discontinued Operations
Avinza Product Line
In September 2006, we and King Pharmaceuticals, now a subsidiary of Pfizer, entered into a purchase agreement, or the Avinza Purchase Agreement, pursuant to which Pfizer acquired all of our rights in and to Avinza in the United States, its territories and Canada, including, among other things, all Avinza inventory, records and related intellectual property, and assume certain liabilities as set forth in the Avinza Purchase Agreement.
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Pursuant to the terms of the Avinza Purchase Agreement, we retained the liability for returns of product from wholesalers that had been sold by us prior to the close of this transaction. Accordingly, as part of the accounting for the gain on the sale of Avinza, we recorded a reserve for Avinza product returns.
During the three and six months ended June 30, 2014, there were no pre-tax gains or losses recognized on the sale of the Avinza product line due to subsequent changes in certain estimates and liabilities recorded as of the sale date. During the three and six months ended June 30, 2013, we recognized pre-tax gains of $2.4 million and $2.6 million, respectively, as a result of subsequent changes in certain estimates and liabilities recorded as of the sale date.
Liquidity and Capital Resources
We have financed our operations through offerings of our equity securities, borrowings from long-term debt, issuance of convertible notes, product sales and the subsequent sales of our commercial assets, royalties, collaborative research and development and other revenues, and capital and operating lease transactions.
We have incurred significant losses since inception. At June 30, 2014, our accumulated deficit was $667.7 million and we had working capital of $10.0 million. We believe that cash flows from operations will improve due to Captisol sales, an increase in royalty revenues driven primarily from continued increases in Promacta and Kyprolis sales, recent product approvals and regulatory developments, as well as revenues from new licenses and event-based payments. In the event revenues and operating cash flows do not meet expectations, management plans to reduce discretionary expenses. However, it is possible that we may be required to seek additional financing. There can be no assurance that additional financing will be available on terms acceptable to management, or at all. We believe our available cash, cash equivalents and short-term investments as well as our current and future royalty, license and milestone revenues will be sufficient to satisfy our anticipated operating and capital requirements through at least the next 12 months. We expect to build cash in future months as we continue to generate significant cash flows from operations and have fully repaid our loan with Oxford Financial Group as of July 31, 2014. Our future operating and capital requirements will depend on many factors, including, but not limited to: the pace of scientific progress in our research and development programs; the potential success of these programs; the scope and results of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the amount of royalties on sales of the commercial products of our partners; the efforts of our collaborative partners; obligations under our operating lease agreements; and the capital requirements of any companies we acquire, including Pharmacopeia, Neurogen, Metabasis and CyDex. We believe that the actions presently being taken will generate sufficient operating cash flow for us to continue as a going concern. While we believe in the viability of our strategy to generate sufficient operating cash flow and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to achieve our operational targets is dependent upon our ability to further implement our business plan and generate sufficient operating cash flow.
In January 2011, we entered into a $20.0 million secured term loan credit facility with Oxford Financial Group. The loan was amended in January 2012 to increase the secured credit facility to $27.5 million. The original $20.0 million borrowed under the facility bore interest at a fixed rate of 8.6%. The additional $7.5 million bore interest at a fixed rate of 8.9%. Under the terms of the secured debt, we made interest-only payments through February 2013. Subsequent to the interest-only payments, the note amortized with principal and interest payments through the remaining term of the loan. We were required to make an additional final payment equal to 6% of the total amount borrowed at maturity, which was accreted over the life of the loan. The maturity date of the term loan was August 1, 2014, and we fully repaid the loan as of July 31, 2014.
In March 2013, we prepaid $7.0 million of the secured term loan credit facility. Additionally, we paid a prepayment fee of 1% of the prepayment amount, or $0.1 million, and a prorated final-payment fee of 6% of the final payment, or $0.4 million. As of June 30, 2014, the remaining principal balance of the note was $2.4 million.
In October 2013, we filed a universal shelf registration statement with the Securities and Exchange Commission, or the SEC, that was automatically declared effective due to our status as a well-known seasoned issuer. This registration statement provides additional financial flexibility for us to sell shares of common stock or other equity or debt securities as needed at any time, including through our at-the-market equity issuance program. During the three and six months ended June 30, 2014, we did not issue any common shares through this at-the-market equity issuance program.
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Operating Activities
Operating activities generated cash of $6.6 million for the six months ended June 30, 2014, compared to $9.0 million for the same period in 2013.
The cash generated for the six months ended June 30, 2014 reflects net income of $3.4 million, adjusted by $7.7 million of non-cash items to reconcile net income to net cash generated from operations. These reconciling items primarily reflect an increase in the estimated fair value of contingent liabilities of $3.3 million, depreciation and amortization of $1.3 million, stock-based compensation of $5.1 million, and accretion of notes payable of $0.2 million, partially offset by a non-cash upfront fee received of $1.2 million and a realized gain on investments of $1.0 million. The cash generated during the six months ended June 30, 2014 is further impacted by changes in operating assets and liabilities due primarily to an increase in accounts receivable of $0.9 million, a decrease in other current assets of $0.1 million, a decrease in other long-term assets of $0.2 million and a decrease in accounts payable and accrued liabilities of $3.7 million, partially offset by an increase in inventory of $0.6 million.
The cash generated for the six months ended June 30, 2013 reflects net income of $7.6 million, adjusted by $2.6 million of gain from discontinued operations and $3.9 million of non-cash items to reconcile the net income to net cash generated in operations. These reconciling items primarily reflect depreciation and amortization of $1.3 million, stock-based compensation of $2.6 million, the non-cash change in the estimated fair value of contingent liabilities of $0.9 million, the change in deferred income taxes of $0.2 million and accretion of note payable of $0.2 million. The cash generated during the six months ended June 30, 2013 is further impacted by changes in operating assets and liabilities due primarily to a decrease in accounts receivable of $3.9 million, a decrease in inventory of $0.4 million, and a decrease in other long term assets of $0.1 million, partially offset by increases in other current assets of $0.4 million and decreases in accounts payable and accrued liabilities of $2.6 million, other liabilities of $0.4 million, and a decrease in deferred revenue of $0.3 million. Cash used in operating activities of discontinued operations was $0.6 million for the six months ended June 30, 2013.
Investing Activities
Investing activities used cash of $0.4 million for the six months ended June 30, 2014, compared to $3.7 million for the same period in 2013.
Cash used by investing activities during the six months ended June 30, 2014 primarily reflects payments to CVR holders of $1.7 million, partially offset by proceeds from short-term investments of $1.2 million and proceeds from the sale of equipment of $0.1 million.
Cash used by investing activities during the six months ended June 30, 2013 primarily reflects the purchase of
commercial license rights of $3.6 million.
Financing Activities
Financing activities used cash of $3.3 million for the six months ended June 30, 2014, compared to $11.7 million for the same period in 2013.
Cash used by financing activities for the six months ended June 30, 2014 primarily reflects $6.9 million of repayment of debt, partially offset by proceeds from stock option exercises and our employee stock purchase plan of $3.6 million.
Cash used by financing activities for the six months ended June 30, 2013 primarily reflects $12.9 million of repayment
of debt, partially offset by proceeds from stock option exercises and the employee stock purchase plan of $1.2 million.
Other
In connection with the acquisition of Metabasis in January 2010, Metabasis security holders received CVRs under four CVR agreements. The CVRs entitle the holders to cash payments upon the sale or licensing of certain assets and upon the achievement of specified milestones. The fair value of the liability at June 30, 2014 was $4.7 million, and as of December 31, 2013 was $4.2 million.
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In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. In 2011, $0.9 million was paid to the CyDex shareholders upon completion of a licensing agreement with the Medicines Company for the Captisol-enabled Intravenous formulation of Clopidogrel. An additional $2.0 million was paid to the CyDex shareholders upon acceptance by the FDA of Onyx’s NDA, $4.3 million was paid in January 2012 under the terms of the agreement, and an additional $3.5 million was paid upon approval by the FDA of Kyprolis for the potential treatment of patients with relapsed and refractory multiple myeloma. We recorded a cash payment of $0.1 million for the Topiramate orphan drug designation milestone to former license holders. We may be required to make additional payments upon achievement of certain clinical and regulatory milestones to the CyDex shareholders and former license holders. In addition, we will pay CyDex shareholders, for each respective year from 2014 through 2016, 20% of all CyDex-related revenue, but only to the extent that, and beginning only when, CyDex-related revenue for such year exceed $15.0 million; plus an additional 10% of all CyDex-related revenue recognized during such year, but only to the extent that, and beginning only when aggregate CyDex-related revenue for such year exceeds $35.0 million. We have paid $2.8 million to the CyDex shareholders for revenue sharing payments under the terms of the CVR agreement. The estimated fair value of the contingent liabilities recorded as part of the CyDex acquisition at June 30, 2014 was $10.4 million.
Leases and Off-Balance Sheet Arrangements
We lease our office and research facilities under operating lease arrangements with varying terms through November 2021. Some of our agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases ranging from 3.0% to 3.5%. We also sublease a portion of our facilities through August 2016. The sublease agreement provides for a 3% increase in annual rents. We had no off-balance sheet arrangements at June 30, 2014 and December 31, 2013.
Contractual Obligations and Off-Balance Sheet Arrangements
As of June 30, 2014, future minimum payments due under our contractual obligations were as follows (in thousands):

| Payments Due by Period
| Total |  | Less than 1 year |  | 2-3 years |  | 4-5 years |  | More than 5 years
Obligations for uncertain tax positions (1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Co-promote termination obligations (2) | $ | 804 |  |  | $ | 391 |  |  | $ | 351 |  |  | $ | 62 |  |  | $ | — |
Purchase obligations (3) | $ | 8,495 |  |  | $ | 8,495 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Contingent liabilities (4) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Note and interest payment obligations | $ | 2,354 |  |  | $ | 2,354 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Operating lease obligations (5) | $ | 11,812 |  |  | $ | 5,564 |  |  | $ | 4,747 |  |  | $ | 1,501 |  |  | $ | — |

(1) | Expected payments related to obligations for uncertain tax positions cannot be reasonably estimated.

(2) | Co-promote termination obligations represent our legal obligation as primary obligor to Organon due to the fact that Organon did not consent to the legal assignment of the co-promote termination obligation to Pfizer. The liability is offset by an asset which represents a non-interest bearing receivable for future payments to be made by Pfizer.

(3) | Purchase obligations represent our commitments under our supply agreement with Hovione, LLC for Captisol purchases.

(4) | Contingent liabilities to former shareholders and licenseholders are subjective and affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones and affect amounts owed to former license holders and CVR holders. Only payments due as a result of achievement of revenue thresholds or development and regulatory milestones are included in the table above.

(5) | We lease office and research facilities that we have fully vacated under operating lease arrangements expiring in July 2015 and August 2016. We sublet portions of these facilities through the end of our lease. As of June 30, 2014, we expect to receive aggregate future minimum lease payments totaling $2.0 million (nondiscounted) over the duration of the sublease agreement (not included in the table above) as follows: less than one year: $1.4 million, and two to three years: $0.6 million.

We are also required under our CyDex CVR Agreement to invest at least $1.5 million per year, inclusive of employee expenses, in the acquired business through the year ended 2015. As of June 30, 2014, we estimate we will exceed that amount for the year ended December 31, 2014.
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Critical Accounting Policies
Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our accounting policies as disclosed in the Form 10-K.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2014, our investment portfolio included investments in available-for-sale equity securities of $7.5 million. These securities are subject to market risk and may decline in value based on market conditions.
We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash and cash equivalents and restricted cash and investments have significant risk of default or illiquidity. We made this determination based on discussions with our investment advisors and a review of our holdings. While we believe our cash and cash equivalents and restricted cash and investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. All of our cash and cash equivalents and restricted cash and investments are held at fair value.
We purchase Captisol from Hovione, located in Lisbon, Portugal. Payments to Hovione are denominated and paid in U.S. dollars, however the unit price of Captisol contains an adjustment factor which is based on the sharing of foreign currency risk between the two parties. The effect of an immediate 10% change in foreign exchange rates would not have a material impact on our financial condition, results of operations or cash flows.
We are exposed to market risk involving rising interest rates. To the extent interest rates rise, our interest costs could increase. An increase in interest costs of 10% would not have a material impact on our financial condition, results of operations or cash flows.
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ITEM 4. | CONTROLS AND PROCEDURES

As of June 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit pursuant to the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our disclosure controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.
There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (excluding additional controls implemented related to the consolidation of a VIE, Viking Therapeutics, Inc.).
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PART II. | OTHER INFORMATION

Item 1. | Legal Proceedings

From time to time we are subject to various lawsuits and claims with respect to matters arising out of the normal course of our business. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.
Securities Litigation
On June 8, 2012, a federal securities class action and shareholder derivative lawsuit was filed in the Eastern District of Pennsylvania against Genaera Corporation and its officers, directors, major shareholders and trustee ("Genaera Defendants") for allegedly breaching their fiduciary duties to Genaera shareholders. The lawsuit also names us and our Chief Executive Officer John Higgins as additional defendants for allegedly aiding and abetting the Genaera Defendants' various breaches of fiduciary duties based on our purchase of a licensing interest in a development-stage pharmaceutical drug program from the Genaera Liquidating Trust in May 2010 and our subsequent sale of half of its interest in the transaction to Biotechnology Value Fund, Inc.
Following an amendment to the complaint and a round of motions to dismiss, the court dismissed the amended complaint with prejudice on August 12, 2013. Plaintiff appealed that dismissal on September 10, 2013. Briefing is now complete, and the parties are awaiting the scheduling of oral argument before the Third Circuit, which we anticipate will take place in the next few months. We believe we are very likely to prevail on appeal, and, for that reason, we believe the litigation presents a remote likelihood of material loss.
Other Litigation
On June 19, 2014, a complaint seeking attorneys’ fees in connection with claims related to executive compensation matters described in our Company’s June 6, 2013 supplemental proxy materials was filed in California Superior Court. Management believes the fees demanded by plaintiffs’ counsel are excessive and intends to defend itself vigorously in the litigation. Due to the complex nature of the legal and factual issues involved, however, the outcome of this matter is not presently determinable.
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ITEM 1A. | RISK FACTORS

The following is a summary description of some of the many risks we face in our business. You should carefully review these risks in evaluating our business, including the businesses of our subsidiaries. You should also consider the other information described in this report.
Revenues based on Promacta and Kyprolis represent a substantial portion of our overall current and/or expected future revenues.
GSK is obligated to pay us royalties on its sales of Promacta and we receive revenue from Onyx based on both sales of Kyprolis and purchases of Captisol material for clinical and commercial uses. These payments are expected to be a substantial portion of our ongoing revenues for some time. As a result, any setback that may occur with respect to Promacta or Kyprolis could significantly impair our operating results and/or reduce the market price of our stock. Setbacks for Promacta and Kyprolis could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the product, as well as higher than expected total rebates, returns or discounts.
Revenue from sales of Captisol material to our collaborative partners represents a significant portion of our current revenue and our continued development and supply of Captisol is subject to a number of risks.
In January 2011, we completed our merger with CyDex. All of CyDex's products and product candidates, as well as the technology that it outlicenses, are based on Captisol. As a result, any setback that may occur with respect to Captisol could significantly impair our operating results and/or reduce the market price of our stock. Setbacks for Captisol could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the products using Captisol, as well as higher than expected total rebates, returns or discounts for such products.
If products or product candidates incorporating Captisol technology were to cause any unexpected adverse events, the perception of Captisol safety could be seriously harmed. If this were to occur, we may not be able to market Captisol products unless and until we are able to demonstrate that the adverse event was unrelated to Captisol, which we may not be able to do. Further, whether or not the adverse event was a result of Captisol, we could be required by the FDA to submit to additional regulatory reviews or approvals, including extensive safety testing or clinical testing of products using Captisol, which would be expensive and, even if we were to demonstrate that the adverse event was unrelated to Captisol, would delay our marketing of Captisol-enabled products and receipt of revenue related to those products, which could significantly impair our operating results and/or reduce the market price of our stock.
We obtain Captisol from a sole source supplier, and if this supplier were to cease to be able, for any reason, to supply Captisol to us in the amounts we require, or decline to supply Captisol to us, we would be required to seek an alternative source, which could potentially take a considerable length of time and impact our revenue and customer relationships.
We currently depend on our arrangements with our outlicensees to sell products using our Captisol technology. These agreements generally provide that outlicensees may terminate the agreements at will. If our outlicensees discontinue sales of products using our Captisol technology, fail to obtain regulatory approval for products using our Captisol technology, fail to satisfy their obligations under their agreements with us, or choose to utilize a generic form of Captisol should it become available, or if we are unable to establish new licensing and marketing relationships, our financial results and growth prospects would be materially affected. We maintain inventory of Captisol, which has a five year shelf life, at three geographically spread storage locations in the United States and Europe. If we were to encounter problems maintaining our inventory, such as natural disasters, at one or all three of these locations, it could lead to supply interruptions. Further, under most of our Captisol outlicenses, the amount of royalties we receive will be reduced or will cease when the relevant patent expires. Our high purity patents, U.S. Patent Nos. 7,635,773 and 8,410,077 and foreign equivalents, are not expected to expire until 2029 and our morphology patents, U.S. Patent Nos. 7,629,331 and 8,049,003 and foreign equivalents, are not expected to expire until 2025, but the initially filed patents relating to Captisol expired starting in 2010 in the United States and will expire by 2016 in most countries outside the United States. If our other intellectual property rights are not sufficient to prevent a generic form of Captisol from coming to market and if in such case our outlicensees choose to terminate their agreements with us, our Captisol revenue may decrease significantly.
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The product candidates of our partners and us face significant development and regulatory hurdles prior to partnering and/or marketing which could delay or prevent licensing, sales and/or milestone revenue.
Before we or our partners obtain the approvals necessary to sell any of our unpartnered assets or partnered programs, we must show through preclinical studies and human testing that each potential product is safe and effective. We and/or our partners have a number of partnered programs and unpartnered assets moving toward or currently awaiting regulatory action. Failure to show any product's safety and effectiveness could delay or prevent regulatory approval of a product and could adversely affect our business. The drug development and clinical trials process is complex and uncertain. For example, the results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a product's safety and effectiveness to the satisfaction of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials. The FDA may also require additional clinical trials after regulatory approvals are received. Such additional trials may be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization of a product.
The rates at which we complete our scientific studies and clinical trials depends on many factors, including, but are not limited to, our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial and other potential drug candidates being studied. Delays in patient enrollment for our trials may result in increased costs and longer development times. In addition, our collaborative partners have rights to control product development and clinical programs for products developed under our collaborations. As a result, these collaborative partners may conduct these programs more slowly or in a different manner than expected. Moreover, even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.
We rely heavily on collaborative relationships, and any disputes or litigation with our collaborative partners or termination or breach of any of the related agreements could reduce the financial resources available to us, including milestone payments and future royalty revenues.
Our strategy for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaboration agreements with corporate partners and others. These agreements give our collaborative partners significant discretion when deciding whether or not to pursue any development program. Our existing collaborations may not continue or be successful, and we may be unable to enter into future collaborative arrangements to develop and commercialize our unpartnered assets.
In addition, our collaborators may develop drugs, either alone or with others that compete with the types of drugs they are developing with us (or that we are developing on our own). This would result in increased competition for our or our partners' programs. If products are approved for marketing under our collaborative programs, revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaborative partners, who generally retain commercialization rights under the collaborative agreements. Generally, our current collaborative partners also have the right to terminate their collaborations at will or under specified circumstances. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully (for example, by not making required payments when due, or at all), our product development under these agreements will be delayed or terminated. Disputes or litigation may also arise with our collaborators (with us and/or with one or more third parties), including those over ownership rights to intellectual property, know-how or technologies developed with our collaborators. Such disputes or litigation could adversely affect our rights to one or more of our product candidates. Any such dispute or litigation could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, create uncertainty as to ownership rights of intellectual property, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.
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Expirations of, challenges to or failure to secure patents and other proprietary rights may significantly hurt our business.
Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. We have had and will continue to have discussions with our current and potential collaborative partners regarding the scope and validity of our patents and other proprietary rights. If a collaborative partner or other party successfully establishes that our patent rights are invalid, we may not be able to continue our existing collaborations beyond their expiration. Any determination that our patent rights are invalid also could encourage our collaborative partners to seek early termination of our agreements. Such invalidation could adversely affect our ability to enter into new collaborations.
We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others' rights. If this occurs, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor's rights. In addition, if any of our competitors have filed patent applications in the United States which claim technology we also have invented, the United States Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.
We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, collaborative partners and others to sign confidentiality agreements when they begin their relationship with us. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.
Generally, our success will depend on our ability and the ability of us and our licensors to obtain and maintain patents and proprietary rights for our potential products both in the United States and in foreign countries. Patents may not be issued from any of these applications currently on file, or, if issued, may not provide sufficient protection. Our patent position, like that of many biotechnology and pharmaceutical companies, is uncertain and involves complex legal and technical questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, such patents may not adequately protect the technology we own or have licensed. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or license and rights we receive under those patents may not provide competitive advantages to us. For example, our European patent related to Agglomerated forms of Captisol was limited during an opposition proceeding and could be challenged further on appeal, and the rejection of our European patent application related to High Purity Captisol is currently being appealed.
We have obtained patent protection in the United States through 2025 on one or more Agglomerated forms of Captisol and through 2029 on one or more High Purity forms of Captisol. We also have filed patent applications covering the Captisol product that if issued, would not be set to expire until 2033 (for example, our patent WO 2013/130666, filed Feb. 27, 2013, contains composition of matter and use claims). There is no guarantee that our patents will be sufficient to prevent competitors from creating a generic form of Captisol and competing against us, or from developing combination patents for products that will prevent us from developing products using those APIs. In addition, most of the agreements in our Captisol outlicensing business, provide that once the relevant patent expires, the amount of royalties we receive will be reduced or eliminated.
Our collaborative partners may change their strategy or the focus of their development and commercialization efforts with respect to our partnered programs, and the success of our partnered programs could be adversely affected.
If our collaborative partners terminate their collaborations with us or do not commit sufficient resources to the development, manufacture, marketing or distribution of our partnered programs, we could be required to devote additional resources to our partnered programs, seek new collaborative partners or abandon such partnered programs, all of which could have an adverse effect on our business.
Third party intellectual property may prevent us or our partners from developing our potential products and we may owe a portion of any payments we receive from our collaborative partners to one or more third parties.
Our success will depend on our ability and the ability of our collaborative partners to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. In addition, disputes with licensors under our license agreements may arise which could result in additional financial liability or loss of important technology and potential products and related revenue, if any. Further, the manufacture, use or sale of our potential products or our collaborative partners' products or potential products may infringe the patent rights of others. This could impact Captisol, Promacta, Kyprolis, Avinza, Duavee, Viviant and Conbriza, Nexterone, and other products or potential products.
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Several drug companies and research and academic institutions have developed technologies, filed patent applications or received patents for technologies that may be related to our business. Others have filed patent applications and received patents that conflict with patents or patent applications we have licensed for our use, either by claiming the same methods or compounds or by claiming methods or compounds that could dominate those licensed to us. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, U.S. patent applications may be kept confidential while pending in the United States Patent and Trademark Office and patent applications filed in foreign countries are often first published six months or more after filing.
Disputes with our collaborative partners could delay our ability and the ability of our collaborative partners to achieve milestones or our receipt of other payments. In addition, other possible disputes could delay, interrupt or terminate the research, development and commercialization of certain potential products being developed by either our collaborative partners or by us. The occurrence of any of the foregoing problems could be time-consuming and expensive and could adversely affect our business.
Third parties have not directly threatened an action or claim against us, although we do periodically receive other communications or have other conversations with the owners of other patents or other intellectual property. If others obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.
In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact our results of operations and financial condition. We cannot predict or determine the occurrence or outcome of these matters or reasonably estimate the amount or range of amounts of any fines or penalties that might result from a settlement or an adverse outcome. However, a settlement or an adverse outcome could have a material adverse effect on our financial position, liquidity and results of operations.
If we are unable to maintain the effectiveness of our internal controls, our financial results may not be accurately reported.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. While we anticipate maintaining the integrity of our internal controls over financial reporting and all other aspects of Sarbanes-Oxley Act of 2002, we cannot be certain that a material weakness will not be identified when we test the effectiveness of our control systems in the future. The existence of one or more material weaknesses or significant deficiencies in our internal control over financial reporting could result in errors in our consolidated financial statements. Substantial costs and resources may be required to rectify any internal control deficiencies. If we fail to maintain the adequacy of our internal controls in accordance with applicable standards, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting. If we cannot produce reliable financial reports, our business and financial condition could be harmed, investors could lose confidence in our reported financial information, or the market price of our stock could decline significantly. In addition, our ability to obtain additional financing to operate and expand our business, or obtain additional financing on favorable terms, could be materially and adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities. Moreover, our reputation with customers, lenders, investors, securities analysts and others may be adversely affected.
We may undertake strategic acquisitions in the future and any difficulties from integrating such acquisitions could adversely affect our stock price, operating results and results of operations.
We may acquire companies, businesses and products that complement or augment our existing business. We may not be able to integrate any acquired business successfully or operate any acquired business profitably. Integrating any newly acquired business could be expensive and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than we predict. The diversion of our management's attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our on-going business or inconsistencies in standards and controls that could negatively affect our ability to maintain third-party relationships. Moreover, we may need to raise additional funds through public or private debt or equity financing, or issue additional shares, to acquire any businesses or products, which may result in dilution for stockholders or the incurrence of indebtedness.
As part of our efforts to acquire companies, business or product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the
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transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we may consummate in the future or have consummated in the past, whether as a result of unidentified risks, integration difficulties, regulatory setbacks, litigation with current or former employees and other events, our business, results of operations and financial condition could be adversely affected. If we acquire product candidates, we will also need to make certain assumptions about, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates. Our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.
In addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. For transactions that are ultimately not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisors in connection with our efforts. Even if our efforts are successful, we may incur, as part of a transaction, substantial charges for closure costs associated with elimination of duplicate operations and facilities and acquired In-Process Research and Development, or IPR&D, charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.
We may not be able to hire and/or retain key employees.
If we are unable to hire and/or retain key employees, we may not have sufficient resources to successfully manage our assets or our business, and we may not be able to perform our obligations under various contracts and commitments. Furthermore, there can be no assurance that we will be able to retain all of our key management and scientific personnel. If we fail to retain such key employees, it could materially and adversely affect our business, financial condition, results of operations or the market price of our stock.
Aggregate revenues based on sales of our other products may not meet expectations.
Revenues based on sales of Avinza, Duavee, Conbriza and Nexterone may not meet expectations. Any setback that may occur with respect to these products could impair our operating results and/or reduce the market price of our stock. Setbacks for these products could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the product, as well as higher than expected total rebates, returns or discounts. These products also are or may become subject to generic competition. Any such setback could reduce our revenue.
If plaintiffs bring product liability lawsuits against us or our partners, we or our partners may incur substantial liabilities and may be required to limit commercialization of our approved products and product candidates, and we may be subject to other liabilities related to the sale of our prior commercial product lines.
As is common in our industry, our partners and we face an inherent risk of product liability as a result of the clinical testing of our product candidates in clinical trials and face an even greater risk for commercialized products. Although we are not currently a party to product liability litigation, if we are sued, we may be held liable if any product or product candidate we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, liability claims may result in decreased demand for any product candidates or products that we may develop, injury to our reputation, discontinuation of clinical trials, costs to defend litigation, substantial monetary awards to clinical trial participants or patients, loss of revenue and the inability to commercialize any products that we develop. We have product liability insurance that covers our clinical trials up to a $5.0 million annual limit. If we are sued for any injury caused by our product candidates or any future products, our liability could exceed our total assets.
In addition, we have agreed to indemnify Eisai and King Pharmaceuticals (now a subsidiary of Pfizer), under certain circumstances pursuant to the asset purchase agreements we entered into in connection with the sale of our prior commercial product lines. Some of our indemnification obligations still remain and our potential liability in certain circumstances is not limited to specific dollar amounts. We cannot predict the liabilities that may arise as a result of these matters. Any claims related to our indemnification obligations to Pfizer or Eisai could materially and adversely affect our financial condition. In addition, Pfizer assumed our obligation to make payments to Organon based on net sales of Avinza (the fair value of which was $0.8 million as of June 30, 2014). We remain liable to Organon in the event Pfizer defaults on this obligation. Any requirement to pay a material amount to Organon could adversely affect our business and the price of our securities. The sale of our prior commercial product lines does not relieve us of exposure to product liability risks on products we sold prior to divesting these product lines. A successful product liability claim or series of claims brought against us may not be insured against and could result in payment of significant amounts of money and divert management's attention from our business.
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If our partners do not reach the market with our partnered programs before our competitors offer products for the same or similar uses, or if our partners are not effective in marketing our partnered programs, our revenues from product sales, if any, will be reduced.
We face intense competition in our development activities. Our competitors might succeed in obtaining regulatory approval for competitive products more rapidly than our partners can for our partnered programs. In addition, competitors might develop technologies and products that are less expensive and perceived to be safer or more effective than those being developed by us or our partners, which could impair our product development and render our technology obsolete.
If our business does not perform according to our expectations, we may not have sufficient resources to operate our business as currently contemplated.
We believe that our capital resources, including our currently available cash, cash equivalents, and short-term investments as well as our current and future royalty revenues will be adequate to fund our operations at their current levels at least for the next 12 months. However, changes may occur that would cause us to consume available capital resources before that time and we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on terms favorable to us. In addition, these financings, if completed, may not meet our capital needs and could result in substantial dilution to our stockholders. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or drug development programs. We may also be required to liquidate our business or file for bankruptcy protection. Alternatively, we may be forced to attempt to continue development by entering into arrangements with collaborative partners or others that require us to relinquish some or all of our rights to technologies or drug candidates that we would not otherwise relinquish.
Our ability to use our net operating losses, or NOLs, to offset taxes that would otherwise be due could be limited or lost entirely.
Our ability to use our NOLs to offset taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the NOLs, and we cannot predict with certainty whether we will be able to generate future taxable income. In addition, even if we generate taxable income, realization of our NOLs to offset taxes that would otherwise be due could be restricted by annual limitations on use of NOLs triggered by a past or future “ownership change” under Section 382 of the Internal Revenue Code and similar state provisions. An “ownership change” may occur when there is a 50% or greater change in total ownership of our company by one or more 5% shareholders within a three-year period. The loss of some or all of our NOLs could materially and adversely affect our business, financial condition and results of operations. In addition, California and certain states have suspended use of NOLs for certain taxable years, and other states may consider similar measures. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability to use NOLs in states in which we are subject to income tax could have an adverse impact on our operating results and financial condition. The calculation of the amount of our net operating loss carryforwards may be changed as a result of a challenge by the IRS or other governmental authority or our learning of new information about the ownership of, and transactions in, our securities.
We use hazardous materials, which may expose us to significant liability.
In connection with our research and development activities, we handle hazardous materials, chemicals and various radioactive compounds. To properly dispose of these hazardous materials in compliance with environmental regulations, we are required to contract with third parties. We believe that we carry reasonably adequate insurance for toxic tort claims. However, we cannot eliminate the risk or predict the exposure of accidental contamination or injury from the handling and disposing of hazardous materials, whether by us or our third-party contractors. Any accident in the handling and disposing of hazardous materials may expose us to significant liability.
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Our shareholder rights plan, concentration of ownership and charter documents may hinder or prevent change of control transactions.
Our shareholder rights plan and provisions contained in our certificate of incorporation and bylaws may discourage transactions involving an actual or potential change in our ownership. In addition, our Board of Directors may issue shares of common or preferred stock without any further action by the stockholders. Our directors and Biotechnology Value Fund, L.P. and its affiliates, or BVF, collectively beneficially own a significant portion of our outstanding common stock. BVF can increase its ownership level up to 19.99% under the terms of an agreement we have with BVF, and BVF has agreed to vote the shares it owns above 15% of our outstanding common stock in accordance with our Board of Director's recommendations in the event that BVF exceeds a 15% ownership level. Such restrictions, circumstances and issuances may have the effect of delaying or preventing a change in our ownership. If changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our current Board of Directors to be removed and replaced, even if you or our other stockholders believe that such actions are in the best interests of us and our stockholders.
Funding of our drug development programs may not result in future revenues.
Our drug development programs may require substantial additional capital to successfully complete, arising from costs to: conduct research, preclinical testing and human studies; establish pilot scale and commercial scale manufacturing processes and facilities; and establish and develop quality control, regulatory, marketing, sales and administrative capabilities to support these programs. While we expect to fund our research and development activities from cash generated from royalties and milestones from our partners in various past and future collaborations to the extent possible, if we are unable to do so, we may need to complete additional equity or debt financings or seek other external means of financing. These financings could depress our stock price. If additional funds are required to support our operations and we are unable to obtain them on terms favorable to us, we may be required to cease or reduce further development or commercialization of our products, to sell some or all of our technology or assets or to merge with another entity.
Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.
Our results of operations could be materially negatively affected by economic conditions generally, both in the United States and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, and the U.S. financial markets have contributed to increased volatility and diminished expectations for the economy and the markets going forward. Domestic and international equity markets periodically experience heightened volatility and turmoil. These events may have an adverse effect on us. In the event of a market downturn, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. We cannot provide assurance that our investments are not subject to adverse changes in market value. If our investments experience adverse changes in market value, we may have less capital to fund our operations.
Our stock price has been volatile and could experience a sudden decline in value.
The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has recently experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Continued volatility in the overall capital markets could reduce the market price of our common stock in spite of our operating performance. Further, high stock price volatility could result in higher stock-based compensation expense.
Our common stock has experienced significant price and volume fluctuations and may continue to experience volatility in the future. Many factors may have a significant impact on the market price of our common stock, including, but not limited to, the following factors: results of or delays in our preclinical studies and clinical trials; the success of our collaboration agreements; publicity regarding actual or potential medical results relating to products under development by us or others; announcements of technological innovations or new commercial products by us or others; developments in patent or other proprietary rights by us or others; comments or opinions by securities analysts or major stockholders; future sales of our common stock by existing stockholders; regulatory developments or changes in regulatory guidance; litigation or threats of litigation; economic and other external factors or other disaster or crises; the departure of any of our officers, directors or key employees; period-to-period fluctuations in financial results; and price and volume fluctuations in the overall stock market.
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Impairment charges pertaining to goodwill, identifiable intangible assets or other long-lived assets from our mergers and acquisitions could have an adverse impact on our results of operations and the market value of our common stock.
The total purchase price pertaining to our acquisitions in recent years of Pharmacopeia, Neurogen, Metabasis and CyDex have been allocated to net tangible assets, identifiable intangible assets, in-process research and development and goodwill. To the extent the value of goodwill or identifiable intangible assets or other long-lived assets become impaired, we will be required to incur material charges relating to the impairment. Any impairment charges could have a material adverse impact on our results of operations and the market value of our common stock.
The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose key data which could cause us to curtail or cease operations.
We are vulnerable to damage and/or loss of vital data from natural disasters, such as earthquakes, tornadoes, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any disaster were to occur, our ability to operate our business could be seriously impaired. We have property, liability, and business interruption insurance which may not be adequate to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and prospects.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. | MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. | OTHER INFORMATION

None.

ITEM 6. | EXHIBITS

The Exhibit Index to this Quarterly Report on Form 10-Q is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: | August 5, 2014 |  | By: | /s/ Nishan de Silva
|  |  |  | Nishan de Silva
|  |  |  | Vice President, Finance and Strategy and Chief Financial Officer
|  |  |  | Duly Authorized Officer and Principal Financial Officer

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EXHIBIT INDEX

Exhibit Number | Description
10.1† | Loan and Security Agreement, dated May 21, 2014 between the Company and Viking Therapeutics, Inc.
10.2† | Master License Agreement, dated May 21, 2014 between the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc.
10.3† | Research and License Agreement, dated May 9, 2014 between the Company and Omthera Pharmaceuticals, Inc.
10.4† | License Agreement, dated June 23, 2014 between the Company and TG Therapeutics, Inc.
31.1 | Certification by Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 | Certification by Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 | Certification by Principal Executive Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 | Certification by Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema Document
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB | XBRL Taxonomy Extension Label Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document

† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission.
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