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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
FORM 10-K
_____________________________________________________________________________________________

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2019
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .
Commission File No. 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) |  | (IRS Employer Identification No.)
3911 Sorrento Valley Boulevard, Suite 110 |  |
San Diego |  |
CA |  | 92121
(Address of Principal Executive Offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (858) 550-7500
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share | LGND | The Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
I ndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer | ☒ |  | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates was approximately $1.8 billion based on the last sales price of the Registrant’s Common Stock on the Nasdaq Global Market of the Nasdaq Stock Market LLC on June 28, 2019. For purposes of this calculation, shares of Common Stock held by directors, officers and 10% stockholders known to the Registrant have been deemed to be owned by affiliates which should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant.
As of February 21, 2020, the Registrant had 16,505,197 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 2020 Annual Meeting of Stockholders to be filed with the Commission within 120 days of December 31, 2019 are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.

Table of Contents

Part I |  |
Item 1. | Business | 1
Item 1A. | Risk Factors | 25
Item 1B. | Unresolved Staff Comments | 36
Item 2. | Properties | 36
Item 3. | Legal Proceedings | 37
Item 4. | Mine Safety Disclosures | 37
Part II |  |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | 37
Item 6. | Selected Consolidated Financial Data | 39
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 47
Item 8. | Consolidated Financial Statements and Supplementary Data | 48
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 87
Item 9A. | Controls and Procedures | 87
Item 9B. | Other Information | 87
Part III |  |
Item 10. | Directors, Executive Officers and Corporate Governance | 89
Item 11. | Executive Compensation | 89
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 89
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 89
Item 14. | Principal Accountant Fees and Services | 89
Part IV |  |
Item 15. | Exhibits, Financial Statement Schedules | 90
Item 16. | Form 10-K - Summary | 90
Signatures |  | 94

GLOSSARY OF TERMS AND ABBREVIATIONS |
Abbreviation | Definition
2019 Notes | $245.0 million aggregate principal amount of convertible senior unsecured notes due 2019
2023 Notes | $750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
AAALAC | Accreditation of Laboratory Animal Care International
Ab Initio | Ab Initio Biotherapeutics, Inc.
Abvivo | Abvivo, LLC
ACOVA | ACOVA, Inc.
ADHF | Acute decompensated heart failure
Aldeyra | Aldeyra Therapeutics, Inc.
Amended Interest Purchase Agreement | Amended and Restated Interest Purchase Agreement, dated May 31, 2017, between the Company and CorMatrix Cardiovascular, Inc.
Amgen | Amgen, Inc.
ANDA | Abbreviated New Drug Application
API | Active pharmaceutical ingredient
Aptevo | Aptevo Therapeutics
Arcus | Arcus Biosciences, Inc.
ASC | Accounting Standards Codification
ASCO | American Society of Clinical Oncology
ASCT | Autologous Stem Cell Transplantation
ASU | Accounting Standards Update
Aziyo | Aziyo Med, LLC
Baxter | Baxter International, Inc.
BeiGene | BeiGene Switzerland GmbH
BendaRx | BendaRx Corp.
Bexson Biomedical | Bexson Biomedical, Inc.
BMS | Bristol Myers Squibb
CStone | CStone Pharmaceuticals (Suzhou) Co., Ltd.
CASI | CASI Pharmaceuticals, Inc.
Cardioxyl | Cardioxyl Pharmaceuticals, Inc.
CI-AKI | Contrast-induced acute kidney injury
Code of Conduct | Code of Conduct and Ethics Policy
Coherus | Coherus Biosciences, Inc.
CoM | Composition of Matter
Company | Ligand Pharmaceuticals Incorporated, including subsidiaries
Convertible Note | Senior Convertible Promissory Note
COPD | Chronic obstructive pulmonary disease
Cormatrix | Cormatrix Cardiovascular, Inc.
Cormatrix Asset Sale | Asset sale from CorMatrix to Aziyo
Corvus | Corvus Pharmaceuticals, Inc.
COSO | Committee of Sponsoring Organizations of the Treadway Commission
CRO | Contract Research Organization
Crystal | Crystal Bioscience, Inc.
Cumulus | Cumulus Oncology, Ltd.
CVR | Contingent value right
CyDex | CyDex Pharmaceuticals, Inc.

Daiichi Sankyo | Daiichi Sankyo Company, Ltd.
Dianomi | Dianomi Therapeutics, Inc.
DMF | Drug Master File
ESG | Environmental, Social and Governance
Eisai | Eisai Inc.
Eli Lilly | Eli Lilly and Company
ECM | Extracellular matrix
EPA | Environmental Protection Agency
ESPP | Employee Stock Purchase Plan, as amended and restated
EU | European Union
Exelixis | Exelixis, Inc.
FASB | Financial Accounting Standards Board
FDA | Food and Drug Administration
FSGS | Focal segmental glomerulosclerosis
GAAP | Generally accepted accounting principles in the United States
GBM | Glioblastoma
Genagon | Genagon Therapeutics AB
GCSF | Granulocyte-colony stimulating factor
GigaGen | GigaGen, Inc.
Gilead | Gilead Sciences, Inc.
GPCR | G-protein coupled receptor
GRA | Glucagon receptor antagonist
HanAll | HanAll Biopharma Co., Ltd.
Harbour | Harbour BioMed Shanghai Co., Ltd.
HBV | Hepatitis B Virus
HCC | Hepatocellular Carcinoma
Hikma | Hikma Pharmaceuticals PLC
HNO | Nitroxyl
Hovione | Hovione FarmCiencia, S.A.
Icagen | Icagen, Inc.
IPR&D | In-Process Research and Development
IRAK4 | Interleukin-1 Receptor Associated Kinase-4
IRS | Internal Revenue Service
IV | Intravenous
iMBP | iMetabolic Biopharma Corporation
Immunovant | Immunovant Sciences GmbH
IND | Investigational New Drug
Kira Pharma | Kira Pharmaceuticals Ltd.
KSQ Therapeutics | KSQ Therapeutics, Inc.
Ligand | Ligand Pharmaceuticals Incorporated, including subsidiaries
LTP | Liver targeting prodrug
Lundbeck | Lundbeck A/S
Marinus | Marinus Pharmaceuticals, Inc.
MCM | Mineral Coated Microparticle
Melinta | Melinta Therapeutics, Inc.
Merck | Merck & Co., Inc.
Merrimack | Merrimack Pharmaceuticals, Inc.

Metabasis | Metabasis Therapeutics, Inc.
Metavant | Metavant Sciences Ltd.
Millennium | Millennium Pharmaceuticals, Inc.
MLA | Master License Agreement
MRSA | Methicillin-resistant Staphylococcus aureu
NASH | Non-alcoholic steatohepatitis
NDA | New Drug Application
NOLs | Net Operating Losses
Novan | Novan, Inc.
Novartis | Novartis AG
Nucorion | Nucorion Pharmaceuticals, Inc.
OMT | Open Monoclonal Technology, Inc.
Ono | Ono Pharmaceutical Co., Ltd.
Opthea | Opthea Limited
Orange Book | Publication identifying drug products approved by the FDA based on safety and effectiveness
Original Interest Purchase Agreement | Interest Purchase Agreement, dated May 3, 2016, between the Company and CorMatrix Cardiovascular, Inc.
Palvella | Palvella Therapeutics, Inc.
Par | Par Pharmaceutical, Inc.
Pfizer | Pfizer, Inc.
PFS | Progression-free Survival
Pharmacopeia | Pharmacopeia, Inc.
Phoenix Tissue | Phoenix Tissue Repair
PhoreMost | PhoreMost Limited
PPD | Post-Partum Depression
PSU | Performance stock unit
R&D | Research and Development
Retrophin | Retrophin Inc.
Roivant | Roivant Sciences GMBH
RSU | Restricted stock unit
SAGE | Sage Therapeutics, Inc.
SARM | Selective Androgen Receptor Modulator
SEC | Securities and Exchange Commission
Sedor | Sedor Pharmaceuticals, Inc., or RODES, Inc.
Seelos | Seelos Therapeutics, Inc.
Selexis | Selexis, SA
Sermonix | Sermonix Pharmaceuticals, LLC
Spectrum | Spectrum Pharmaceuticals, Inc.
SQ Innovation | SQ Innovation, Inc.
Sunshine Lake Pharma | Sunshine Lake Pharma Co., Ltd.
Takeda | Takeda Pharmaceuticals Company Limited
Talem | Talem Therapeutics LLC
Tax Act | The Tax Cuts and Jobs Act
Teva | Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC
TG Therapeutics | TG Therapeutics, Inc.
TR-Beta | Thyroid hormone receptor beta
Valanbio | Valanbio Therapeutics, Inc.

VDP | Vernalis Design Platform
VentiRx | VentiRx Pharmaceuticals, Inc.
Vernalis | Vernalis plc
Verona | Verona Pharma plc
Viking | Viking Therapeutics
Vireo | Vireo Health
WuXi | WuXi Biologics Ireland Limited
WuXi Agreement | The Platform License Agreement, dated March 23, 2015, by and between Ligand and WuXi, as amended
Xi'an Xintong | Xi'an Xintong Medicine Research
X-ALD | X-linked adrenoleukodystrophy
xCella Biosciences | xCella Biosciences, Inc.
Zydus Cadila | Zydus Cadila Healthcare, Ltd

PART I
Cautionary Note Regarding Forward-Looking Statements:
You should read the following report together with the more detailed information regarding our company, our common stock and our financial statements and notes to those statements appearing elsewhere in this document.
This report contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “plan,” “intends,” “estimates,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as those related to our future results of operations and financial position, royalties and milestones under license agreements, Capitsol material sales, product development, and product regulatory filings and approvals, and the timing thereof, as well as other statements that are not historical. You should be aware that the occurrence of any of the events discussed under the caption “Risk Factors” could negatively affect our results of operations and financial condition and the trading price of our stock.
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.
References to “Ligand Pharmaceuticals Incorporated,” “Ligand,” the “Company,” “we,” “our” and “us” include Ligand Pharmaceuticals Incorporated and our wholly-owned subsidiaries.
Partner Information
Information regarding partnered products and programs comes from information publicly released by our partners and licensees.
Trademarks
Our trademarks, trade names and service marks referenced herein include Ligand®, Captisol®, LTP™, LTP technology™, OmniAb®, OmniMouse®, OmniRat®, OmniFlic®, OmniClic™, OmniChicken® , Vernalis®, VDP™ and HepDirect™ which are protected under applicable intellectual property laws and are our property. All other trademarks, trade names and service marks including Kyprolis®, Evomela®, ZulressoTM, Minnebro®, Baxdela®, CarnexivTM, ConbrizaTM, Duavee®, Promacta®, SUREtechnology PlatformTM, Viviant®, VivitraTM, Bryxta®, and Exemptia® are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this report may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to such trademarks, trade names and service marks. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, us by the trademark or trade dress owners.
1

Item 1. | Business

Overview
We are a biopharmaceutical company focused on developing and acquiring technologies that help pharmaceutical companies discover and develop medicines. We employ research technologies such as antibody discovery technologies, structure-based drug design, formulation science and liver targeted pro-drug technologies to assist companies in their work toward securing prescription drug and biologic approvals. We currently have partnerships and license agreements with over 120 pharmaceutical and biotechnology companies. Over 200 different programs are in various stages of commercialization and development and fully funded by our collaboration partners and licensees. We have contributed novel research and technologies for approved medicines that treat cancer, osteoporosis, fungal infections and PPD, among others. Our collaboration partners and licensees have programs currently in clinical development targeting cancer, seizure, diabetes, cardiovascular disease, muscle wasting, liver disease, and kidney disease, among others. We have over 1,200 issued patents worldwide.
We have assembled our large portfolio of fully-funded programs either by licensing our own proprietary drug development programs, licensing our platform technologies such as Captisol or OmniAb to partners for use with their proprietary programs, or acquiring existing partnered programs from other companies. Fully-funded programs, which we refer to as "shots on goal," are those for which our partners pay all of the development and commercialization costs. For our internal programs, we generally plan to advance drug candidates through early-stage drug development or clinical proof-of-concept and then seek partners to continue development and potential commercialization.
Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development.
Our revenue consists of three primary elements: royalties from commercialized products, sale of Captisol material, and revenue from license, milestone and other service payments. In addition to discovering and developing our own proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.
2019 and Recent Major Business Highlights
Major Transactions and Strategic Investments
Consistent with our business model, we pursued novel investments to augment our technology platforms and assets. We acquired Ab Initio in a $12 million acquisition that brought Ligand a patented antigen technology that is synergistic with our OmniAb® therapeutic antibody discovery platform. We also invested $3 million in Dianomi in exchange for equity and a royalty rights on future development programs using Dianomi’s patented Mineral Coated Microparticle (MCM) technology. In 2019, we sold our assets and royalty rights for Promacta to Royalty Pharma for $827 million.
On February 11, 2020, we announced the signing of an agreement to acquire the core assets, partnered programs and ion channel technology from Icagen for $15 million in cash. Icagen will also be entitled to receive up to an additional $25 million of cash payments based on certain revenue achievements. The transaction is subject to certain closing conditions, including a vote of Icagen stockholders, and is expected to close in April 2020.
Corporate and Governance Highlights
2

Ligand’s Board of Directors is highly committed to policies and practices focused on environmental sustainability, positively impacting our social community and maintaining and cultivating good corporate governance. By focusing on such ESG policies and practices, we believe we can affect a meaningful and positive change in our community and maintain our open, collaborative corporate culture. We will continue our proactive shareholder and employee engagement in 2020. See www.ligand.com for information about our ESG policies and practices.
Sarah Boyce joined our Board, increasing the total number of Directors to nine. Also in 2019, two members of our Board, Nancy Gray and Sarah Boyce, were named to WomenInc’s Most Influential Corporate Directors list.
OmniAb Technology Platform Updates
We continue to invest in and expand the OmniAb Technology platform, and in 2019 we launched OmniClic™, a novel next-generation common light chain OmniChicken-based discovery technology focused on bispecific antibodies. We entered into nine new OmniAb platform license agreements in 2019 with Sanofi, Millennium/Takeda, GigaGen, Talem Therapeutics, Kira Pharma, Genagon, Ascella, Unity Biotechnology and Abvivo. Our scientists and our partners presented data highlighting the utility of the OmniAb platform at multiple conferences throughout the year, and we published multiple papers in peer-reviewed journals.
Development-stage OmniAb partners continue to report progress clinically; notable advancements include:
•CStone’s CS1001, an OmniAb-derived anti-PD-L1 antibody, that demonstrated promising antitumor activity with a complete response rate of 33.3% in a Phase 2 trial in patients with relapsed or refractory extranodal natural killer/T-cell lymphoma. CStone also announced the start of a Phase 3 trial assessing CS1001 in combination with chemotherapy for treatment of gastric or gastro-esophageal cancers.
•Immunovant starting ASCEND-GO 2, a placebo-controlled Phase 2b trial evaluating OmniAb-derived IMVT-1401 in patients with Graves’ ophthalmopathy. IMVT-1401 is a fully human antibody that selectively binds to and inhibits the neonatal Fc receptor.
•Aptevo Therapeutics announcing positive Phase 1 data for APVO436, and GenMab highlighting clinical progress of the OmniAb-derived DuoBody-PD-L1x4-1BB.
Captisol Technology Updates
We reported the highest level of annual Captisol material sales in 2019, and we entered into new Captisol clinical use or license and supply agreements with a number of new partners, including: Millennium/Takeda; Merck KGaA, reVision Therapeutics; SQ Innovation; BendaRx; Bexson Biomedical, Valanbio; and others.
Kyprolis® is an Amgen product that utilizes Captisol in its formulation. We earn royalties on global sales of Kyprolis and also receive revenue for material sales. In September 2019, Amgen announced that the Phase 3 CANDOR study met its primary endpoint of progression-free survival. The regimen resulted in a 37% reduction in the risk of progression or death in patients with relapsed or refractory multiple myeloma. In October 2019, Amgen announced a strategic collaboration with BeiGene, an oncology-focused biotechnology company with an established infrastructure in China, to expand its oncology presence in the region. Kyprolis is currently under regulatory review in China for relapsed and refractory multiple myeloma.
New Captisol-enabled products were launched or expanded into new geographies in 2019, with SAGE launching ZULRESSO™ for the treatment of postpartum depression in the US, and CASI launching Evomela® in China.
Gilead Sciences announced on January 31, 2020 that they are working closely with global health authorities to respond to the novel coronavirus (COVID-19) outbreak through the appropriate experimental use of remdesivir (GS-5734). Remdesivir is formulated with Captisol. Gilead has initiated clinical trials together with Chinese authorities in patients who have been infected with COVID-19 to determine the safety and efficacy of remdesivir as a potential treatment for the virus. Remdesivir was also highlighted in The New England Journal of Medicine for treating the first case of COVID-19 in the United States. We have a non-exclusive supply agreement with Gilead, and our economics are built into Captisol material sales.
On February 20, 2020, we entered into a Captisol Use/Supply Agreement with China Resources Double-Crane Pharmaceuticals Co., Ltd, (“CR Double Crane”), pursuant to which we will supply Captisol to CR Double Crane for use in preclinical and clinical studies of remdesivir to treat the 2019 novel coronavirus, 2019-nCoV. We will receive revenues based on the amount of Captisol ordered by CR Double Crane.
Development-stage Captisol partners reported progress of programs in a variety of therapy areas, notably:
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•Marinus announced positive results from a Phase 2 trial of ganaxolone in Refractory Status Epilepticus.
•Merck KGaA announced Phase 2 results for M6620, an ATR kinase inhibitor, demonstrating that addition of M6620 to gemcitabine extended PFS without added toxicity in patients with platinum-resistant cancer.
•Takeda announced results of a Phase 1 proof-of-concept study of Captisol-enabled TAK-925, a selective orexin type-2 receptor (OX2R) agonist, in individuals with narcolepsy type 1.
•SAGE announced plans for SAGE-689, a potential therapy for disorders associated with GABA hypofunction. SAGE expects to commence a Phase 1 trial in 2020.
Vernalis Design Platform (VDP) Updates
We continued to expand our portfolio of VDP-derived partnerships during 2019, following our 2018 acquisition of Vernalis and VDP partners continued to report on development progress.
•Verona Pharma announced positive data in a 4-week Phase 2b COPD trial with nebulized ensifentrine on top of tiotropium therapy. The primary endpoint was met at all doses, and ensifentrine produced clinically and statistically significant improvements in lung function. Verona intends to start Phase 3 in 2020.
•We entered a license agreement with Cumulus for VER250840, a novel, oral, Chk1 kinase inhibitor. We are eligible to receive more than $76 million of milestones and tiered royalties in the mid-to-high single digits.
•We entered into a VDP collaboration with PhoreMost and will share revenues with PhoreMost on any future licenses.
Additional Pipeline Developments
Our existing pipeline of partnered programs continued to advance, with multiple partners reporting on clinical and regulatory developments. Selected highlights include:
•Viking presented new results from a Phase 2 study of VK2809, its novel liver-selective thyroid hormone receptor beta agonist, in patients with non-alcoholic fatty liver disease and elevated low-density lipoprotein cholesterol, and also announced the start of a Phase 2b trial in patients with biopsy-confirmed NASH.
•Palvella announced that the Phase 3 pivotal portion of the seamless Phase 2/3 VALO study of PTX-022 for the treatment of patients with pachyonychia congenita had commenced.
•Retrophin announced new data from the Phase 2 DUET study, examining the impact of sparsentan on quality of life in patients with FSGS.
•Sermonix started a Phase 2 trial of lasofoxifene in breast cancer, and announced grant of Fast Track Designation.
•Sanofi presented positive Phase 3 data of sutimlimab in patients with cold agglutinin disease.
•Metavant informed Ligand that they no longer planned to initiate a proof-of-concept trial for RVT-1502 in Type 1 diabetes following requests from FDA for additional non-clinical studies. Metavant is evaluating its development plans for the program.
•Daiichi Sankyo announced the launch of MINNEBRO® (esaxerenone) tablets in Japan.
Select Partner Financing Events
Multiple partners completed financing events in 2019 to fund development of Ligand-partnered programs. Notably, CStone listed shares on the HKG and raised $266 million it is using to fund development of CS1001. Seelos completed a reverse merger and listed on Nasdaq. In conjunction with the transaction, Seelos generated gross proceeds of $18 million to fund its pipeline. And, Nucorion announced the closing of a $5 million Series B financing to support Phase development for its lead program, NCO-1010 for hepatitis B. NCO-1010 utilizes Ligand’s LTP Platform™ technology. Guangdong Ji-Bao Pharmaceutical Company of Guangzhou, China invested $4 million and Ligand invested $1 million in the Nucorion Series B round.
Internal Pipeline Highlights
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We continue to invest in internal R&D with the goal to secure valuable partnerships in the future. In 2019, we announced positive top-line results from a Phase 1 trial of our internal Captisol-enabled (CE) Iohexol program. The trial achieved the primary endpoint by demonstrating pharmacokinetic bioequivalence of CE-Iohexol injection and a reference Iohexol injection (OMNIPAQUE™) after IV administration in healthy adults. CE-Iohexol injection was well tolerated, and adverse events were in line with the known safety profile of OMNIPAQUE. We plan to submit an IND with the FDA and to initiate a Phase 2 study in the U.S. in 2020. We also progressed five internal antibody-related programs leveraging our OmniChicken technology that we initiated in mid-2018. The programs are focused on targets for which biology is known, centered in the oncology space.
Technologies
A variety of technology platforms that enable elements of drug discovery or development form the basis of our portfolio of fully-funded shots on goal. Platform technologies or individual drugs discovered by Ligand are related to a broad estate of intellectual property that includes over 1,200 patents issued worldwide.
OmniAb Technologies
O ur OmniAb technology includes our OmniRat, OmniMouse, OmniFlic, OmniChicken and OmniClic technology platforms for use in discovering fully human antibodies. The OmniRat, OmniMouse, and OmniFlic platforms consist of genetically-engineered transgenic animals that produce a broadly diversified repertoire of antibodies and enable novel fully-human antibody drug discovery and development by our OmniAb partners. Fully-human OmniAb antibodies provide advantages to our partners in that fully-human antibodies have reduced immunogenicity, streamlined development timelines and costs, and accelerated novel antibody discovery. The OmniChicken and OmniClic platforms consist of genetically-engineered transgenic chickens which enable the generation of novel antibodies against targets that are not immunogenic in mammals like mice and rats. We acquired these technologies through the acquisition of OMT in January 2016 and Crystal in October 2017. As of December 31, 2019, we had entered into OmniAb platform license agreements with more than 40 collaboration partners, including 2 partners who have rights through our partnership with WuXi. Our OmniAb partners were working on approximately 180 active programs, of which 12 were in various stages of clinical trials as of December 31, 2019.
Captisol Technology
Captisol is our patented, uniquely-modified cyclodextrin that is specifically designed to maximize safety, while improving the solubility, stability and bioavailability of APIs. Captisol can enable faster and more efficient development paths for our partners, given its known regulatory acceptance. In addition to solid Captisol powder, we offer our partners access to cGMP manufactured aqueous Captisol concentrate. This product offering was established in 2017 to reduce cycle time and increase Captisol production capacity for large volume drug products. We maintain both Type IV and Type V DMFs with the FDA. These DMFs contain manufacturing and safety information relating to Captisol that our licensees can reference when developing Captisol-enabled drugs. We also have active DMFs in Japan, China and Canada. As of December 31, 2019, Captisol-enabled drugs were being marketed in more than 70 countries, and over 40 partners had Captisol-enabled drugs in development.
Vernalis Design Platform (VDP)
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The VDP technology leverages our leadership in structure-guided drug discovery in which protein structure, drug fragment screening and modeling are integrated with medicinal chemistry to enable the rapid discovery of novel drugs. The VDP approach establishes structural information via x-ray crystallography and NMR methods and develops reliable assay systems to test biophysical, functional and cellular properties. The VDP has proven success with highly-challenging pharmaceutical targets and has generated a broad portfolio, with over 5,000 novel drug/target complexes determined and over 400 granted and pending patents. We acquired the VDP technology through our acquisition of Vernalis in October of 2018, and maintain state-of-the-art laboratories in Cambridge, UK. As of December 31, 2019, we have agreements with 10 partners for active research collaboration using VDP technology on a total of 17 active programs.
HepDirect/LTP Technology Platform
The HepDirect platform is a first generation liver-targeting prodrug technology designed to deliver certain phosphorus-containing drugs to the liver by using a proprietary chemical modification that renders an API biologically inactive until cleaved by a liver-specific enzyme. The HepDirect™ technology may improve the efficacy and/or safety of certain drugs and can be applied to marketed or new drug products to treat liver diseases or diseases caused by hemostasis imbalance of circulating molecules controlled by the liver.
Our LTP platform is a broad second generation liver-targeting prodrug technology that has an activation mechanism similar to HepDirect but with broader applications and many improved features. The proprietary chemical modifications can be used with many chemical classes of drugs in addition to phosphorus-containing compounds and have multiple chemistry strategies, designed to improve flexibility and success rates. In addition, the second generation technology eliminates the undesirable by-products released during activation of the first generation prodrugs. As of December 31, 2019, we had entered into HepDirect/LTP platform agreements with six partners, all of whom had active programs.
SUREtechnology Platform (owned by Selexis)
We acquired economic rights to various SURE technology Platform programs from Selexis. The SURE technology Platform, developed and owned by Selexis, is a novel technology that improves the way that cells are utilized in the development and manufacturing of recombinant proteins and drugs. As of December 31, 2019, we are entitled to certain economic rights to SUREtechnology Platform license agreements with 14 partners developing or having commercialized 23 programs.
Partners and Licensees
We currently have partnerships and license agreements with over 120 pharmaceutical and biotechnology companies. In addition to the table below, we also have more than 10 undisclosed partners and licensees.
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Big Pharma | Ticker |  | Generics, continued | Ticker |  | Biotech, continued | Ticker
AbbVie | ABBV |  | Hikma | HIK |  | MEI | MEIP
AstraZeneca | AZN |  | Par | Private |  | Melinta | MLNT
Baxter | BAX |  | Zydus Cadila | CADILAHC |  | Menarini | Private
Boehringer Ingelheim | Private |  | Biotech | Ticker |  | Meridian Labs | Private
BMS | BMY |  | ABBA | Private |  | Metavant | Private
Daiichi Sankyo | DSKY |  | ABL Bio | 298380 |  | Merrimack | MACK
Eli Lilly | LLY |  | Abvivo | Private |  | Novan | NOVN
Eisai | 4523 |  | Aldeyra | ALDX |  | Novogen | NVGN
GSK | GSK |  | Amgen | AMGN |  | Nucorion | Private
Janssen | JNJ |  | Arcus | RCUS |  | Opthea | OPT
Merck | MRK |  | Asahi Kasei | 3407 |  | Outlook | OTLK
Merck KGaA | MRK.DE |  | Ascella | Private |  | Palvella | Private
Novartis | NVS |  | BendaRx | Private |  | Phoenix Tissue | Private
Ono | 4528 |  | Bexson Biomedical | Private |  | Precision Biologics | Private
Otsuka | 4768 |  | bluebird bio | BLUE |  | Retrophin | RTRX
Pfizer | PFE |  | Cantex | Private |  | Revision | Private
Sanofi | SNY |  | Celgene | CELG |  | SAGE | SAGE
Takeda | 4502 |  | Corvus | CRVS |  | Seattle Genetics | SGEN
Specialty Pharma | Ticker |  | CStone | 2616.HK |  | Seelos | SEEL
Acrotech | Private |  | Cumulus | Private |  | Servier | Private
Aytu Bioscience | AYTU |  | Curon | Private |  | Sunshine Lake | Private
Aziyo | Private |  | CURx | Private |  | Surface | SURF
Beloteca | Private |  | Aptevo | APVO |  | Symphogen | Private
CASI | CASI |  | Electra | Private |  | Talem | Private
CorMatrix | Private |  | Exelixis | EXEL |  | Teneobio | Private
CTI Biopharma | CTIC |  | Five Prime | FRPX |  | TG Therapeutics | TGTX
Cuda | Private |  | F-Star | Private |  | Tizona | Private
Ferring | Private |  | Genmab | GEN |  | Unity | UBX
Gloria | 2437 |  | Genagon | Private |  | Valanbio | Private
Lundbeck | LUN |  | Genekey Biotech | Private |  | Vaxxas | Private
Proximagen | Private |  | Glenmark | GLENMARK |  | Vega | Private
Sedor | Private |  | GigaGen | Private |  | VenBio | Private
Sermonix | Private |  | Gilead Sciences | GILD |  | VentiRx | Private
Shire | SHPG |  | HanAll | 9420 |  | Verona | VRNA
SQ Innovation | Private |  | Harbour | Private |  | Vertex | VRTX
Teijin | TINLF |  | IBC Generium | Private |  | Viking | VKTX
Vireo Health | Private |  | iMetabolic | Private |  | Virtuoso | Private
Generics | Ticker |  | Immunovant | IMVT |  | xCella | Private
Alvogen | Private |  | J-Pharma | Private |  | Xi'an Xintong | Private
BioCad | Private |  | Kira | Private |  | XTL Bio | XTLB
Coherus | CHRS |  | KSQ | Private |  | WuXi | 603259
Gedeon Richter | GEDSF |  | Marinus | MRNS |  | Zhilkang Hongyi | Private

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Commercial and Clinical Stage Partnered Portfolio
We have a large portfolio of current and future potential revenue-generating programs, including over 200 fully-funded by our partners. In addition to the table below, we also have more than 100 undisclosed preclinical programs.

Approved |  |
Partner Name | Program | Therapeutic Area
Acrotech/CASI | Evomela | Cancer
Alvogen | Voriconazole | Infectious Disease
Amgen/Ono | Kyprolis | Cancer
Aytu | Tuzistra | Infectious Disease
Aziyo | ECM portfolio | Medical device/Cardiology
Baxter | Nexterone | Cardiovascular
Biocad | Teberif | Inflammatory/Metabolic
Exelixis/Daiichi-Sankyo | Minnebro | Cardiovascular
Hikma | Voriconazole | Infectious Disease
Lundbeck | Carnexiv | Central Nervous System
Melinta | Baxdela | Infectious Disease
Menarini | Frovatriptan | Central Nervous System
Merck | Noxafil-IV | Infectious Disease
Par | Posaconazole | Infectious Disease
Pfizer | Viviant/Conbriza | Inflammatory/Metabolic
Pfizer | Duavee | Inflammatory/Metabolic
Pfizer | Vfend-IV | Infectious Disease
SAGE | Zulresso | Central Nervous System
Zydus Cadila | Vivitra | Cancer
Zydus Cadila | Bryxta/ZyBev | Cancer
Zydus Cadila | Exemptia | Inflammatory/Metabolic
Zydus Cadila | Vortuxi | Inflammatory/Metabolic
Phase 3/Pivotal or Regulatory Submission Stage |  |
Partner Name | Program | Therapeutic Area
Aldeyra | Reproxalap | Other/Undisclosed
Biocad | BCD-066 | Blood Disorders
CStone | CS1001 | Cancer
IBC Generium | GNR-008 | Severe and Rare
Novan | SB206 | Infectious Disease
Outlook Therapeutics | ONS-5010 | Other/Undisclosed
Retrophin | Sparsentan | Severe and Rare
Sanofi | Sutimlimab | Blood Disorders
Sedor | CE-Fosphenytoin | Central Nervous System
Sunshine Lake | Vilazodone | Central Nervous System
Takeda | Pevonedistat | Cancer

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Phase 2 |  |
Partner Name | Program | Therapeutic Area
Cantex | CX-01 | Cancer
Cardioxyl/BMS | BMS986231 | Cardiovascular
CTI Biopharma | Tosedostat | Cancer
Eisai | FYCOMPA | Central Nervous System
Gilead | GS-5734 | Infectious Disease
Gloria | GLS010 | Cancer
Immunovant | IMVT-1401 | Inflammatory/Metabolic
J-Pharma | JPH-203 | Cancer
Marinus | Ganaxalone IV | Central Nervous System
Merck | M6620 | Cancer
Metavant | RT-1502 | Inflammatory/Metabolic
Novartis | KLM465 | Blood disorders
Novartis | CE-Trametinib | Cancer
Novartis | ECF843 | Inflammatory/Metabolic
Opthea | OPT-302 | Other/Undisclosed
Palvella | PTX-022 | Other/Undisclosed
Precision Biologics | NPC-1C | Cancer
Sedor | CE-Budesonide | Inflammatory/Metabolic
Seelos | Aplindore | Central Nervous System
Sermonix | Lasofoxifene | Cancer
VentiRx | VTX-2337 | Cancer
Verona | Ensifentrine | Inflammatory/Metabolic
Viking | VK5211 | Inflammatory/Metabolic
Viking | VK2809 | Inflammatory/Metabolic
Viking | VK0214 | Inflammatory/Metabolic
Viking | VK0612 | Inflammatory/Metabolic
Xi'an Xintong | Pradefovir | Infectious Disease
XTL Bio | hCDR1 | Severe and Rare
Phase 1 |  |
Partner Name | Program | Therapeutic Area
Amgen | AMG-330 | Cancer
Aptevo | APVO436 | Cancer
Arcus | AB122 | Cancer
Corvus | Cifordenant | Cancer
CSL | CSL-324 | Cancer
Cuda | Cudafol | Central Nervous System
F-Star | FS-102 | Cancer
Gedeon Richter | Bevacizumab | Cancer
Gedeon Richter | RGB-03 | Inflammatory/Metabolic
Genekey Biotech | PCSK-9 | Inflammatory/Metabolic

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Genmab | Gen1046 | Cancer
Gossamer Bio | PFK-158 | Cancer
HanAll/Harbour | HL161 | Inflammatory/Metabolic
Janssen | JNJ64007957 | Cancer
Janssen | JNJ67371244 | Cancer
MEI Pharma | ME-344 | Cancer
Meridian | ML-061 | Cancer
Novartis | MIK-665 | Cancer
Novartis | BCL-201 | Cancer
Phoenix Tissue | PTR-01 | Other/Undisclosed
Proximagen | CXCR4 | Cancer
Servier | S55746/S64315 | Cancer
Symphogen | SYM022/SYM023 | Cancer
Takeda | TAK-020 | Inflammatory/Metabolic
Takeda | TAK-925 | Severe and Rare
Teva | Anti-IL5 | Central Nervous System
Vaxxas | Nanopatch | Infectious Disease
VentiRx Pharma | VTX-1463 | Cancer
Xi'an Xintong | MB07133 | Cancer

Selected Commercial Programs
We have multiple programs under license with other companies that have products that are already being commercialized. The following programs represent components of our current portfolio of revenue-generating assets and potential for near-term growth in royalty and other revenue. For information about the royalties owed to us for these programs, see “Royalties” later in this business section.
Promacta (Novartis)
In the first quarter of 2019, we sold our Promacta related intellectual property rights licensed to Novartis, including the royalty stream on worldwide net sales of Promacta to Royalty Pharma for $827.0 million in cash. See detail in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (2), Sale of Promacta License.”
Prior to the sale, Promacta accounted for nearly 50% of total revenue. We are entitled to no future royalty revenue from Promacta.
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Kyprolis (Amgen)
We supply Captisol to Amgen for use with Kyprolis (carfilzomib), and granted Amgen an exclusive product-specific license under our patent rights with respect to Captisol. Kyprolis is formulated with Ligand’s Captisol technology and is approved in the United States for the following:
•In combination with dexamethasone or combination with lenalidomide plus dexamethasone for the treatment of patients with relapsed or refractory multiple myeloma who have received one to three lines of therapy.
•As a single agent for the treatment of patients with relapsed or refractory multiple myeloma who have received one or more lines of therapy.

Kyprolis is also approved in multiple countries outside the U.S. and Amgen continues to invest significantly in Kyprolis to further expand its label and geography. Amgen’s obligation to pay royalties does not expire until four years after the expiration of the last-to-expire patent covering Captisol. Our patents and applications relating to the Captisol component of Kyprolis are not expected to expire until 2033. |  |  | Kyprolis (Amgen) |
|  |  | < $250 million | 1.5% |
|  |  | $250 to $500 million | 2.0% |
|  |  | $500 to $750 million | 2.5% |
|  |  | >$750 million | 3.0% |

Our agreement with Amgen may be terminated by either party in the event of material breach or bankruptcy, or unilaterally by Amgen with prior written notice, subject to certain surviving obligations. Absent early termination, the agreement will terminate upon expiration of the obligation to pay royalties. Under this agreement, we are entitled to receive revenue from clinical and commercial Captisol material sales and royalties on annual net sales of Kyprolis.
Evomela (Acrotech and CASI)
We supply Captisol to Acrotech Biopharma for sales of Evomela in the U.S. and to CASI Pharmaceuticals for sales of Evomela in China. Evomela received market approval by the China National Medical Products Administration (NMPA). It is the only approved and commercially available melphalan product in China. Evomela is a Captisol-enabled melphalan IV formulation which is approved by the FDA for use in two indications:
•A high-dose conditioning treatment prior to ASCT in patients with multiple myeloma.
•For the palliative treatment of patients with multiple myeloma for whom oral therapy is not appropriate.
Evomela has been granted Orphan Designation by the FDA for use as a high-dose conditioning regimen for patients with multiple myeloma undergoing ASCT. The Evomela formulation avoids the use of propylene glycol, which has been reported to cause renal and cardiac side-effects that limit the ability to deliver higher quantities of therapeutic compounds. The use of the Captisol technology to reformulate melphalan is anticipated to allow for longer administration durations and slower infusion rates, potentially enabling clinicians to safely achieve a higher dose intensity of pre-transplant chemotherapy.
Under the terms of the license agreement, Acrotech Biopharma has marketing rights worldwide excluding China and CASI Pharmaceuticals has rights to market in China. We are eligible to receive over $50 million in potential milestone payments under this agreement and royalties on global net sales of the Captisol-enabled melphalan product. Acrotech and CASI’s obligation to pay royalties will expire at the end of the life of the relevant patents or when a competing product is launched, whichever is earlier, but in no event within ten years of the commercial launch. Our patents and applications relating to the Captisol component of melphalan are not expected to expire until 2033. As described herein, we have entered into a settlement agreement with Teva and Acrotech Biopharma (the holder of the NDA for Evomela) which will allow Teva to market a generic version of Evomela in the United States on June 1, 2026, or earlier under certain circumstances. Absent early termination, the agreement will terminate upon expiration of the obligation to pay royalties. The agreement may be terminated by either party for an uncured material breach or unilaterally by Acrotech and CASI by prior written notice.
Nexterone (Baxter)
We have a license agreement with Baxter, related to Baxter's Nexterone, a Captisol-enabled formulation of amiodarone, which is marketed in the United States and Canada. We supply Captisol to Baxter for use in accordance with the terms of the license agreement under a separate supply agreement. Under the terms of the license agreement we will continue to earn milestone payments, royalties, and revenue from Captisol material sales. We are entitled to earn royalties on sales of Nexterone through early 2033.
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Zulresso (SAGE)
We have a license agreement with SAGE, related to SAGE's Zulresso, a Captisol-enabled formulation of brexanolone for the treatment of PPD. SAGE announced marketing approval on March 21, 2019 for Zulresso. Under the terms of the agreement, we receive royalties and revenue from Captisol material sales.
Noxafil-IV (Merck)
We have a supply agreement with Merck related to Merck’s NOXAFIL-IV, a Captisol-enabled formulation of posaconazole for IV use. NOXAFIL-IV is marketed in the United States, EU and Canada. In January 2020, Merck received approval in Japan for NOXAFIL-IV. We receive our commercial compensation for this program through the sale of Captisol, and we do not receive a royalty on this program.
Baxdela IV (Melinta)
Melinta’s Baxdela IV is a Captisol-enabled delafloxacin-IV that was approved for the treatment of acute bacterial skin and skin structure infections. Delafloxacin is a novel hospital-focused fluoroquinolone antibiotic with activity against a variety of disease-causing bacteria-gram-positives, gram-negatives, atypicals and anaerobes, including quinolone-resistant MRSA. Under the terms of the agreement, we may be entitled to regulatory milestones, as well as a royalty on future sales by Melinta, and revenue from Captisol material sales.
Duavee or Duavive (bazedoxifene/conjugated estrogens) and Viviant/Conbriza (Pfizer)
Pfizer is marketing bazedoxifene, a selective estrogen receptor modulator, under the brand names Viviant and Conbriza in various territories for the treatment of postmenopausal osteoporosis. Pfizer is responsible for the marketing of bazedoxifene, a synthetic drug specifically designed to reduce the risk of osteoporotic fractures while also protecting uterine tissue. Pfizer has combined bazedoxifene with the active ingredient in Premarin to create a combination therapy for the treatment of post-menopausal symptoms in women. Pfizer is marketing the combination treatment under the brand names Duavee and Duavive in various territories. Net royalties on annual net sales of Viviant/Conbriza and Duavee/Duavive are each payable to us through the life of the relevant patents or ten years from the first commercial sale, whichever is longer, on a country by country basis.
Aziyo Portfolio (Aziyo)
We receive a share of revenue from the currently marketed Aziyo portfolio of commercial pericardial repair and CanGaroo® Envelope ECM products. In addition, we have the potential to receive a share of revenue and potential milestones from the currently marketed CanGaroo® ECM Envelope for cardiac implantable electronic devices. Aziyo’s products are medical devices that are designed to permit the development and regrowth of human tissue.
Exemptia, Vivitra, Zybev and Bryxta (Zydus Cadila)
Zydus Cadila’s Exemptia (adalimumab biosimilar) is marketed in India for autoimmune diseases. Zydus Cadila uses the Selexis technology platform for Exemptia. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Zydus Cadila’s Vivitra (trastuzumab biosimilar) is marketed in India for breast cancer. Zydus Cadila uses the Selexis technology platform for Vivitra. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Zydus Cadila’s Bryxta and Zybev (bevacizumab biosimilar) is marketed in India for various indications. Zydus Cadila uses the Selexis technology platform for Bryxta and Zybev. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Minnebro (Exelixis)
Daiichi Sankyo announced on January 8, 2019 the receipt of marketing approval in Japan for MINNEBRO Tablets (esaxerenone) for the treatment of hypertension. Our partner, Exelixis, entered into a collaboration agreement with Daiichi Sankyo for the development of esaxerenone, a mineralocorticoid receptor antagonist. Under the terms of the agreement with Exelixis, we are entitled to receive a royalty on future sales.
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Summary of Selected Development Stage Programs
We have multiple fully-funded partnered programs that are either in or nearing the regulatory approval process, or given the area of research or value of the license terms, we consider particularly noteworthy. We are eligible to receive milestone payments and royalties on these programs. This list does not include all of our partnered programs. For information about the royalties owed to Ligand for these programs, see “Royalties” later in this business section. In the case of Captisol-related programs, we are also eligible to receive revenue for the sale of Captisol material supply.
Sparsentan (Retrophin)
Our partner, Retrophin, is developing sparsentan for orphan indications of severe kidney diseases, and has initiated a global pivotal Phase 3 clinical trial to enable an NDA filing for sparsentan for the treatment of FSGS. Additionally, Retrophin initiated a global pivotal Phase 3 clinical trial evaluating the long-term nephroprotective potential of sparsentan for the treatment of IgA nephropathy, a rare, immune complex mediated chronic glomerular disease. Certain patient groups with severely compromised renal function, including those with FSGS and IgA nephropathy, exhibit extreme proteinuria resulting in progression to dialysis and a high mortality rate. Sparsentan, with its unique dual blockade of angiotensin and endothelin receptors, is expected to provide meaningful clinical benefits in mitigating proteinuria in indications where there are no approved therapies.
Under our license agreement with Retrophin, we may be entitled to receive potential milestones of over $70 million and net royalties on future worldwide sales by Retrophin. The royalty term is expected to be 10 years following the first commercial sale. Retrophin is responsible for all development costs related to the program.
TR-Beta - VK2809 and VK0214 (Viking)

Our partner, Viking, is developing VK2809, a novel selective TR-Beta agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia and NASH. Viking announced positive results from its Phase 2 trial for VK2809 in hypercholesterolemia and fatty liver disease. Viking has also been granted orphan drug status by the FDA for the development of VK0214 for treatment of X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375 million of development, regulatory and commercial milestones and tiered royalties on potential future sales. Our TR Beta programs partnered with Viking are subject to CVR sharing and a portion of the cash received will be paid out to CVR holders. | TR-Beta - VK2809 and VK0214 (Viking) |
| < $500 million | 3.5% |
| $500 to $750 million | 5.5% |
| >$750 million | 7.5% |

BMS-986231 (BMS)
Our partner, BMS, is conducting Phase 2 clinical trials for a Captisol-enabled second-generation prodrug that chemically breaks down to produce HNO and an inactive byproduct. HNO is thought to have a dual mode of action, by improving cardiac function and acting as a vasodilator for treating ADHF. Under the terms of the agreement, we may be entitled to development and regulatory milestones, revenue from Captisol material sales and royalties on potential future sales by BMS.
IMVT-1401/HL161 (Immunovant, HanAll and Harbour)
Our partner, HanAll has granted Immunovant an exclusive license for the development, manufacture and marketing of IMVT-1401 (HL161, an anti-FcRn antibody) for the treatment of pathogenic IgG-mediated autoimmune diseases in the U.S., Canada, Mexico, the EU, the United Kingdom, Switzerland, Latin America, the Middle East and North Africa. Immunovant is currently conducting a Phase 2 clinical trial in myasthenia gravis and other inflammatory diseases. Additionally, HanAll and Harbour BioMed, are collaborating to develop HL161 for similar treatment in China and Korea. HanAll retains the rights to HL161 in Korea and Harbour will control the marketing in China. As part of our agreement with HanAll, we are entitled to development and regulatory milestones and royalties on potential future sales from HanAll and sublicense revenues from Immunovant and Harbour based on amounts received by HanAll.
SARM - VK5211 (Viking)
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Viking is also developing VK5211, a novel, potentially best-in-class SARM for patients recovering from hip-fracture. SARMs retain the beneficial properties of androgens without undesired side-effects of steroids or other less selective androgens. In the fourth quarter of 2017, Viking announced positive results from its Phase 2 trial in patients who suffered hip fracture. Under the terms of the agreement with Viking, we may be entitled to up to $270 million of development, regulatory and commercial milestones as well as tiered royalties on potential future sales. | SARM - VK5211 (Viking) |
| < $500 million | 7.25% |
| $500 to $750 million | 8.25% |
| >$750 million | 9.25% |

PTX - 022 (Palvella)

We acquired the economic rights to PTX-022 from Palvella in December 2018. PTX-022 is a novel, topical formulation comprising high-strength rapamycin in development to treat pachyonychia congenita (PC). PC is a serious, chronically debilitating lifelong monogenic rare skin disease with no approved treatment. Palvella is continuing enrollment for a pivotal Phase 2/3 clinical trial for PC and is expected to have top line data in late 2020. | PTX - 022 (Palvella) |
| < $50 million | 5.00% |
| $50 to $100 million | 7.50% |
| >$100 million | 9.80% |

Lasofoxifene (Sermonix)
Lasofoxifene is a selective estrogen receptor modulator for osteoporosis treatment and other diseases, discovered through the research collaboration between us and Pfizer.
Our partner, Sermonix has a license for the development of oral lasofoxifene for the United States and additional territories. Under the terms of the agreement, we are entitled to receive over $45 million in potential regulatory and commercial milestone payments as well as royalties on potential future net sales.
Pevonedistat - TAK-924 (Millennium/Takeda)
Our partner, Millennium/Takeda is currently conducting Phase 3 trials for the development of pevonedistat for the treatment of hematological malignancies and solid tumors. Pevonedistat is a Captisol-enabled Nedd8-Activating Enzyme Inhibitor. Under the terms of the clinical-stage agreement, we may be entitled to over $25 million in regulatory and development milestones from Millennium/Takeda, revenue from Captisol material sales, and royalties on potential future net sales.
Ensifentrine – RPL554 (Verona)
Our partner, Verona, is currently conducting a comprehensive Phase 2 clinical trial for the development of ensifentrine as a maintenance treatment of COPD with nebulized and inhaled formulations. Verona has also completed a positive Phase 2a study evaluating ensifentrine as a treatment for cystic fibrosis. Under the terms of our agreement with Verona, we are entitled to development and regulatory milestones, including a £5.0 million payment upon the first approval of any regulatory authority, and royalties on potential future sales.
JNJ64007957 (Janssen)
Our partner, Janssen, is developing JNJ64007957, a BCMAxCD3 bispecific antibody discovered in part with the OmniAb platform technology. Janssen is currently conducting two Phase 1 trials, as a single agent and in combination with daratumumab in multiple myeloma. We are entitled to earn development and regulatory milestones based on the development of JNJ64007957.
JNJ-67371244 (Janssen)
Janssen is also developing JNJ-67371244, an anti-CD33xCD3 antibody discovered in part with the OmniAb platform technology. Janssen is currently conducting a Phase I trial for cancer therapy. We are entitled to earn development and regulatory milestones based on the development of JNJ-67371244.
Ganaxalone IV (Marinus)
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Our partner, Marinus, is conducting Phase 2 clinical trials with Captisol-enabled ganaxolone IV in patients with PPD and refractory status epilepticus. Marinus has exclusive worldwide rights to Captisol-enabled ganaxolone, a GABAA receptor modulator, for use in humans. We are entitled to development and regulatory milestones, revenue from Captisol material sales, and royalties on potential future sales.
APVO436 (Aptevo)
Our partner, Aptevo, is currently conducting a Phase 1 trial of APVO436 for the treatment of acute myeloid leukemia. There is a high unmet medical need for targeted immunotherapies such as APVO436, that can potentially treat patients with relapsed or refractory disease, or patients who cannot tolerate traditional chemotherapy. Under the terms of the agreement with Aptevo, we are entitled to development and regulatory milestones and royalties on potential future net sales.
Gen1046 (GenMab)
Our partner, GenMab, is currently conducting a Phase 1 trial of Gen1046 for use in patients with malignant solid tumors. Under the terms of the agreement with GenMab, we are entitled to clinical and regulatory milestones and royalties on potential future sales.
SYM022 and SYM023 (Symphogen)
Our partner, Symphogen, is currently conducting Phase 1 trials of SYM022 and SYM023 to determine if it is safe and tolerable for patients with locally advanced/unresectable or metastatic solid tumor malignancies or lymphomas that are refractory to available therapy for which no standard therapy is available. Under the terms of the agreement with Symphogen, we are entitled to sublicense revenues, milestones and royalties on potential future net sales.
WuXi Partnership
Pursuant to the WuXi Agreement, we have granted WuXi a non-exclusive license to use our OmniRat, OmniMouse and OmniFlic platforms solely to research, develop and make antibodies, and we have agreed to use commercially reasonable efforts to deliver to WuXi animals from such platforms to support WuXi’s licensing rights under the WuXi Agreement. Further, WuXi has the right to out-license antibodies it discovers (whether for itself or at the direction of out-licensees) under the WuXi Agreement to out-licensees worldwide. We are entitled to royalties in the low single digits on net sales of products. Unless earlier terminated, the term of the WuXi Agreement shall continue indefinitely. Either party may terminate the WuXi Agreement upon specified notice of the other party's uncured material breach of the WuXi Agreement. In addition, we have the right to terminate the WuXi Agreement if WuXi or one of its out-licensees challenges the validity of one of our patents covering the platform and WuXi has the right to terminate the WuXi Agreement for convenience following a specified period after notice of termination.
In addition to other earlier stage programs, the following programs have been licensed pursuant to the WuXi Agreement:
AB122/GLS010 (Arcus and Gloria)
Our partner, WuXi, has outlicensed the rights to certain programs using the OmniAb technology to Arcus and Gloria. Arcus is conducting multiple Phase 1 trials to evaluate the safety and tolerability of AB122 in subjects with advanced solid tumors. Additionally, Gloria, is conducting a Phase 2 trial in China to evaluate the efficacy and safety of GLS-010 injection in the treatment of recurrent or refractory classical Hodgkin’s lymphoma. Under the terms of our agreement with WuXi, we are entitled to royalties on potential future sales.
CS1001 (CStone)
WuXi has also outlicensed the rights to certain programs using the OmniAb technology to CStone. CStone, is currently conducting a Phase 2 trial to evaluate the efficacy and safety of CS1001 to treat patients with natural killer cell/T-cell lymphoma and classical Hodgkin’s lymphoma. Under the terms of our agreement with WuXi, we are entitled to royalties on potential future sales.
SB206 (Novan)
We acquired certain economic rights to SB206 from Novan in May 2019. SB206 is a topical nitric-oxide antiviral gel for the treatment of viral skin infections, including molluscom contagiosum (MC). MC is an infection which causes skin-lesion that affects approximately 6 million people in the United States annually, with the greatest incidence in children aged one to 14 years. In Q1 2020, Novan announced that it did not achieve statistically significant results for its primary end point from its
15

Phase 3 pivotal trials of SB206 in MC. Novan continues to explore financial as well as strategic options in order to progress SB206.
Ciforadenant – CPI-444 (Corvus)
Our partner, Corvus, is conducting a Phase 1b/2 clinical trial in patients with renal cell carcinoma and metastatic castration resistant prostate cancer to evaluate Ciforadenant, an antagonist of adenosine A2A, in combination with the immunotherapy drug atezolizumab. Positive preliminary data was presented in February at ASCO 2020 Genitourinary Cancers Symposium (ASCO-GU) and additional data will be presented at ASCO 2020 in May/June. Ciforadenant is also being evaluated in a Phase 1b/2 trial in combination with atezolizumab in patients with non-small cell lung cancer who have failed no more than two prior regimens. Under the terms of our agreement with Corvus, we are entitled to development and regulatory milestones and tiered royalties on potential future sales. The aggregate potential milestone payments from Corvus are approximately $220 million for all indications.
Perampanel IV (Eisai)
Our partner, Eisai, recently completed an open-label, single group assignment, multicenter, Phase 2 study in Japan to evaluate the safety and tolerability of intravenous perampanel, formulated with Captisol, as substitute for oral tablets as an adjunctive therapy in patients with partial onset seizures (including secondarily generalized seizures) or primary generalized tonic-clonic seizures. The primary endpoint was the number of patients with adverse events and serious adverse events. We are entitled to revenue from Captisol material sales and tiered royalties on potential future sales.
USL-311 (Proximagen)
Our partner Proximagen, a wholly owned subsidiary of ACOVA, is developing USL-311, a CXCR4 antagonist, for the potential treatment of glioblastoma (GBM) and solid tumors. Proximagen is also investigating USL-311 for the potential treatment of inflammation. USL-311 is currently in a Phase 1/2 trial in patients with advanced solid tumors and relapsed/recurrent GBM. We are entitled to development and regulatory milestones and royalties on potential future sales.
Pradefovir (Xi'an Xintong)
Our Chinese licensee, Xi'an Xintong Medicine Research (following its acquisition of Chiva Pharmaceuticals), are developing pradefovir, an oral liver-targeting prodrug of the HBV DNA polymerase/reverse transcriptase inhibitor adefovir, for the potential treatment of hepatitis B virus (HBV) infection. Pradefovir was developed using Ligand’s HepDirect technology. In September 2019, Xi'an Xintong Medicine Research reported positive results from a Phase 2 trial of pradefovir, showing good efficacy, safety and tolerability. At the dose of 75 mg, the reduction of DNA viral load, the percentage of no viral load detected, and HBeAg negative conversion rate were better than tenofovir disoproxil fumarate (TDF) after 24 weeks of treatment. Overall incidence of side effects was less than TDF and there was no renal or skeletal toxicity. Xi'an Xintong Medicine Research is planning for a Phase 3 trial. We are entitled to an annual licensing maintenance fee and royalties on potential future sales.
MB07133 (Xi'an Xintong)
Chinese licensee Xi'an Xintong Medicine Research are also developing MB07133, a liver specific, HepDirect prodrug of cytarabine monophosphate, for the potential treatment of hepatocellular carcinoma (HCC) and intrahepatic cholangiocarcinoma. MB07133 is currently in Phase 1 in China. We are entitled to an annual licensing maintenance fee and royalties on potential future sales.
Royalties
We have multiple programs under license with other companies that have products that are already being commercialized. In addition to the table below, we have generally described a typical Captisol and OmniAb royalty arrangement as low- to mid-single digit royalties. The following table represents substantially all of the disclosed information about our royalty arrangements:
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Royalty Table

Ligand Licenses With Tiered Royalties |  |
Program | Licensee | Royalty Rate
CE-Budesonide | Sedor | 8.0% - 10.0%
CE-Meloxicam | Sedor | 8.0% - 10.0%
Ciforadenant | Corvus | Mid-single digit to low-teen royalty
DGAT-1 | Viking | 3.0% - 7.0%
Duavee | Pfizer | 0.5% - 2.5%
Ensifentrine (RPL554) | Verona | Low to mid-single digit royalty
FBPase Inhibitor (VK0612) | Viking | 7.5% - 9.5%
IRAK4 | TG Therapeutics | 6.0% - 9.5%
Kyprolis | Amgen | 1.5% - 3.0%
Lasofoxifene | Sermonix | 6.0% - 10.0%
Mineral Coated Microparticle | Dianomi | 2.0% - 3.0%
OmniAb-Genagon | Genagon | 4.0% - 6.0%
OmniAb-GigaGen | GigaGen | Mid-single digit royalty
OmniAb-iMetabolic | iMetabolic | <6%
OmniAb-Kira | Kira | Low to mid-single digit royalty
OmniAb-Takeda | Takeda | Low single digit royalty
Oral EPO | Viking | 4.5% - 8.5%
PTX-022 | Palvella | 5.0% - 9.8%
RVT-1502 | Metavant | Low double digit to mid-teen royalty
SARM (VK5211) | Viking | 7.25% - 9.25%
SB206 | Novan | 7.0% - 10.0%
TR Beta (VK2809 and VK0214) | Viking | 3.5% - 7.5%
Viviant/Conbriza | Pfizer | 0.5% - 2.5%
Various | Nucorion | 4.0% - 9.0%
Various | Seelos | 4.0% - 10.0%

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Ligand Licenses With Fixed Royalties |  |
Program | Licensee | Royalty Rate
4-1BB | Zhilkang Hongyi | Low single digit royalty |
AB122 | Arcus | Low single digit royalty |
Baxdela | Melinta | 2.5% |
CE-Fosphenytoin | Sedor | 11% |
CS1001 | CStone | Low single digit royalty |
Evomela | Acrotech/CASI | 20% |
KLM465 | Novartis | 14.5% (6.5% in year one) |
MB07133 | Xi'an Xintong | 6% |
ME-143 | MEI Pharma | Low single digit royalty |
ME-344 | MEI Pharma | Low single digit royalty |
OmniAb-KSQ Therapeutics | KSQ Therapeutics | Single digit royalty |
PCSK-9 | Genekey | Low single digit royalty |
Pradefovir | Xi'an Xintong | 9% |
Reproxalap | Aldeyra Therapeutics | Low single digit royalty |
Sparsentan | Retrophin | 9% |
Various | Gloria | Low single digit royalty |
Zulresso | SAGE | 3% |

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Contract Payments (Milestones)
Many of our programs under license with our partners will generate contract payments to us if our partners reach certain development, regulatory and commercial milestones. The following table represents the potential maximum value of our contract payment pipeline on milestones by development stage, technology and partner (in thousands):

Technology* |  |  | Stage* |  |  | Partner* |
OmniAb | > $800,000 |  |  | Preclinical | > $20,000 |  |  | Viking | $1,500,000
Captisol | > $180,000 |  |  | Clinical | > $450,000 |  |  | Janssen | $238,000
Vernalis | > $350,000 |  |  | Regulatory | > $1,600,000 |  |  | Seelos | $139,000
LTP/Hep Direct | > $275,000 |  |  | Commercial | > $1,200,000 |  |  | Retrophin | $100,000
NCE/Other | > $1,700,000 |  |  | Other | > $50,000 |  |  | Corvus | $91,000
Total | > $3,300,000 |  |  | Total | > $3,300,000 |  |  | Xi'an Xintong | $44,000
|  |  |  |  |  | Other | > $1,188,000 |
|  |  |  |  |  | Total | > $3,300,000 |

*All tables exclude our annual access fees and collaboration revenue for development work.
Internal Development Programs
We have a number of internal development or unpartnered programs focused on a wide-range of potential indications or disease. In July 2019, we announced positive top-line results from a Phase 1 clinical trial of our internal Captisol-enabled (CE) Iohexol program. The trial achieved the primary endpoint by demonstrating pharmacokinetic bioequivalence of CE-Iohexol injection and a reference Iohexol injection (OMNIPAQUE™) after IV administration in healthy adults. CE-Iohexol injection was well tolerated, and adverse events were in line with the known safety profile of OMNIPAQUE. On November 8, 2019, we presented the positive results from the Phase 1 clinical trial at ASN Kidney week 2019 in Washington D.C. The CE-Iohexol program was established in January 2018 to develop a Captisol-enabled, next-generation contrast agent for diagnostic imaging with a reduced risk of renal toxicity. CI-AKI is the acute impairment of renal function following intravascular administration of an iodinated contrast agent, and occurs most frequently following coronary angiography, percutaneous coronary intervention and contrast-enhanced computed tomography, especially among patients at risk of renal injury such as those with advanced age, diabetes or heart failure. Currently no products are approved to prevent or treat CI-AKI in this setting, and therefore We believe a significant opportunity exists for a safer formulation of contrast agents. The goal is for CE-Iohexol to improve upon the limitations of existing contrast agents and enable a future partner to gain meaningful market share. We plan to submit an IND with the FDA and initiate a Phase 2 study in the U.S. in second half of 2020.
Our primary research and development efforts are led by our teams in Emeryville, California and Cambridge, England. The following table represents internal programs eligible for further development or partnership:
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Program |  | Development Stage |  | Targeted Indication or Disease
Luminespib/Hsp90 Inhibitor |  | Phase 2 |  | Oncology
FAAH Inhibitor |  | Phase 1 |  | Pain
CE-Sertraline, Oral Concentrate |  | Phase 1 |  | Depression
CE-Iohexol |  | Phase 1 |  | Diagnostics
CCR1 Antagonist |  | Preclinical |  | Oncology
CE-Busulfan |  | Preclinical |  | Oncology
CE-Cetirizine Injection |  | Preclinical |  | Allergy
CE-Silymarin for Topical formulation |  | Preclinical |  | Sun damage
FLT3 Kinase Inhibitors |  | Preclinical |  | Oncology
GCSF Receptor Agonist |  | Preclinical |  | Blood disorders
Liver Specific Glucokinase Activator |  | Preclinical |  | Diabetes
Anti-B7-H3 |  | Preclinical |  | Oncology
Anti-TIM3 |  | Preclinical |  | Oncology
Anti-TIGIT |  | Preclinical |  | Oncology
Anti-CD38 |  | Preclinical |  | Oncology
Chk1 Inhibitor |  | Preclinical |  | Oncology

Manufacturing
We contract with a third party manufacturer, Hovione, for Captisol production. Hovione operates FDA-inspected sites in the United States, Macau, Ireland and Portugal. Manufacturing and distribution operations for Captisol are performed primarily at Hovione's Portugal and Ireland facilities. We believe we maintain adequate inventory of Captisol to meet our current and future partner needs.
In the event of a Captisol supply interruption, we are permitted to designate and, with Hovione’s assistance, qualify one or more alternate suppliers. If the supply interruption continues beyond a designated period, we may terminate the agreement. In addition, if Hovione cannot supply our requirements of Captisol due to an uncured force majeure event, we may also obtain Captisol from a third party and have previously identified such parties.
The current term of the agreement with Hovione is through December 2024. The agreement will automatically renew for successive two year renewal terms unless either party gives written notice of its intention to terminate the agreement no less than two years prior to the expiration of the initial term or renewal term. In addition, either party may terminate the agreement for the uncured material breach or bankruptcy of the other party or an extended force majeure event. We may terminate the agreement for extended supply interruption, regulatory action related to Captisol or other specified events. We have ongoing minimum purchase commitments under the agreement.
Competition
Some of the drugs we and our licensees and partners are developing may compete with existing therapies or other drugs in development by other companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish collaborative arrangements with our competitors.
Our Captisol business may face competition from other suppliers of similar cyclodextrin excipients or other technologies that are aimed to increase solubility or stability of APIs. Our OmniAb antibody technology faces competition from suppliers of other transgenic animal systems that are also available for antibody drug discovery.
Our competitive position also depends upon our ability to obtain patent protection or otherwise develop proprietary products or processes. For a discussion of the risks associated with competition, see below under “Item 1A. Risk Factors.”
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Environmental, Health and Safety (EHS)
We are committed to providing a safe and healthy workplace, promoting environmental excellence in our communities, and complying with all relevant regulations and industry standards. We establish and monitor programs to reduce pollution, prevent injuries, and maintain compliance with applicable regulations. By focusing on such practices, we believe we can affect a meaningful, positive change in our community and maintain a healthy and safe environment. During 2019, our animal health facility in Emeryville, California, received accreditation from Association for Assessment and Accreditation of Laboratory Animal Care International (AAALAC), a nonprofit organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs. We expect to continue our effort and to refine our EHS policies and practices in 2020.
Government Regulation
The research and development, manufacturing and marketing of pharmaceutical products are subject to regulation by numerous governmental authorities in the United States and other countries. We and our partners, depending on specific activities performed, are subject to these regulations. In the United States, pharmaceuticals are subject to regulation by both federal and various state authorities, including the FDA. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of pharmaceutical products. These activities are subject to additional regulations that apply at the state level. There are similar regulations in other countries as well. For both currently marketed products and products in development, failure to comply with applicable regulatory requirements can, among other things, result in delays, the suspension of regulatory approvals, as well as possible civil and criminal sanctions. In addition, changes in existing regulations could have a material adverse effect on us or our partners. For a discussion of the risks associated with government regulations, see below under “Item 1A. Risk Factors.”
Patents and Proprietary Rights
We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications to protect technology, inventions and improvements to our inventions that are considered important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position.
Patents are issued or pending for the following key products or product families. The scope and type of patent protection provided by each patent family is defined by the claims in the various patents. Patent term may vary by jurisdiction and depend on a number of factors including potential patent term adjustments, patent term extensions, and terminal disclaimers. For each product or product family, the patents and/or applications referred to are in force in at least the United States, and for most products and product families, the patents and/or applications are also in force in European jurisdictions, Japan and other jurisdictions.
Promacta
Patents covering Promacta are owned by Novartis. During the first quarter of 2019, we sold our Promacta related intellectual property rights to RPI Finance Trust, doing business as “Royalty Pharma”. We expect no future royalty revenue from Promacta.
Kyprolis
Patents protecting Kyprolis include those owned by Amgen and those owned by us. The United States patent listed in the Orange Book relating to Kyprolis with the latest expiration date is not expected to expire until 2029. Patents and applications owned by Ligand relating to the Captisol component of Kyprolis are not expected to expire until 2033. Amgen has filed suit against several generic drug companies over their applications to make generic versions of Kyprolis, with a decision expected by April 2020. The type of patent protection (e.g., composition of matter or use) for each patent listed in the Orange Book and the expiration dates for each patent listed in the Orange Book are provided in the following table. In addition, certain related patents in the commercially important jurisdictions of Europe and Japan are identified in the following table.
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Kyprolis |  |  |  |  |
United States |  |  | Corresponding Foreign |  |
Type of Protection | U.S. Patent No. | U.S. Expiration Date | Jurisdiction | Patent Number | Expiration Date‡
CoM | 7,232,818 | 4/14/2025 | EU | 1,745,064 | 4/14/2025
|  |  | EU | 1,781,688 |  | 8/8/2025
|  |  | EU | 2,266,999 |  | 8/8/2025
|  |  | EU | 2,270,026 |  | 8/8/2025
|  |  | EU | 3,101,026 |  | 8/8/2025
|  |  | Japan | 4,743,720 |  | 8/8/2025
|  |  | Japan | 5,394,423 | 4/14/2025
CoM | 7,417,042 | 7/20/2026 | EU | 1,781,688 | 8/8/2025
|  |  | EU | 2,266,999 |  | 8/8/2025
|  |  | EU | 2,270,026 |  | 8/8/2025
|  |  | EU | 3,101,026 |  | 8/8/2025
|  |  | Japan | 4,743,720 |  | 8/8/2025
|  |  | Japan | 5,394,423 |  | 4/14/2025
Use | 7,491,704 | 4/14/2025 | EU | 1,745,064 | 4/14/2025
|  |  | EU | 1,781,688 |  | 8/8/2025
|  |  | EU | 2,266,999 |  | 8/8/2025
|  |  | EU | 2,270,026 |  | 8/8/2025
|  |  | EU | 3,101,026 |  | 8/8/2025
|  |  | Japan | 4,743,720 |  | 8/8/2025
|  |  | Japan | 5,394,423 | 4/14/2025
CoM | 7,737,112 | 12/7/2027 | EU | 1,819,353 | 12/7/2025
|  |  | EU | 2,260,835 | 12/7/2025
|  |  | EU | 2,261,236 | 12/7/2025
|  |  | Japan | 4,990,155 | 12/7/2025
|  |  | Japan | 5,108,509 | 5/9/2025
Use | 8,129,346 | 4/14/2025 | EU | 1,745,064 | 4/14/2025
|  |  | Japan | 5,394,423 | 4/14/2025
|  |  | Japan | 5,616,569 |  | 4/14/2025
CoM | 8,207,125 | 4/14/2025 | EU | 1,781,688 | 8/8/2025
|  |  | EU | 1,745,064 |  | 4/14/2025
|  |  | Japan | 5,394,423 | 4/14/2025
|  |  | Japan | 5,616,569 |  | 4/14/2025
|  |  | Japan | 4,743,720 | 8/8/2025
CoM / Use | 8,207,126 | 4/14/2025 | EU | 1,745,064 |  | 4/14/2025
|  |  | Japan | 5,394,423 | 4/14/2025
|  |  | Japan | 5,616,569 |  | 4/14/2025
Use | 8,207,127 | 4/14/2025 | EU | 1,745,064 | 4/14/2025
|  |  | Japan | 5,394,423 | 4/14/2025
|  |  | Japan | 5,616,569 |  | 4/14/2025
CoM / Use | 8,207,297 | 4/14/2025 | EU | 1,745,064 | 4/14/2025
|  |  | Japan | 5,394,423 | 4/14/2025
|  |  | Japan | 5,616,569 |  | 4/14/2025
CoM | 9,493,582 |  | 2/27/2033 | Japan | 6,517,725 |  | 2/27/2033
Use | 9,511,109 | 10/21/2029 | EU | 2,796,134 |  | 10/21/2029
|  |  | Japan | 5,675,629 |  | 10/21/2029
|  |  | Japan | 6,081,964 |  | 10/21/2029

‡Expiration dates of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
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Captisol
Patents and pending patent applications covering Captisol and methods of making Captisol are owned by us. The patents covering the Captisol product, if issued, with the latest expiration date would not be set to expire until 2033 (see, e.g., U.S. Patent No. 9,493,582 (expires Feb. 27, 2033)). Other patent applications covering methods of making Captisol, if issued, potentially have terms to 2040. We have asserted U.S. Patents 8,410,077, 9,200,088, and 9,493,582 against Teva in connection with their attempt to obtain FDA approval to manufacture and sell a generic version of EVOMELA®. We also own several patents and pending patent applications covering drug products containing Captisol as a component. The type of patent protection (e.g., composition of matter or use) and the expiration dates for several issued patents covering Captisol are provided in the following table. In addition, certain related patents and applications in the commercially important jurisdictions of Europe and Japan are listed in the following table.

Captisol |  |  |  |  |
United States |  |  | Corresponding Foreign |  |
Type of Protection | U.S. Patent No. | U.S. Expiration Date | Jurisdiction | Patent Number | Expiration Date‡
CoM | 8,114,438 |  | 10/26/2025 | EU | 2,708,225 |  | 4/22/2025
|  |  | Japan | 6,141,906 |  | 4/22/2025
|  |  | Japan | 6,538,739 |  | 4/22/2025
CoM | 10,117,940 |  | 4/22/2025 | EU | 2,708,225 |  | 4/22/2025
|  |  | Japan | 6,141,906 |  | 4/22/2025
|  |  | Japan | 6,538,739 |  | 4/22/2025
CoM | 7,629,331 |  | 10/26/2025 | EU | 1,945,228 |  | 10/26/2025
|  |  | EU | 2,335,707 |  | 10/26/2025
|  |  | EU | 2,581,078 |  | 10/26/2025
|  |  | Japan | 5,465,432 |  | 10/26/2026
Use | 8,049,003 |  | 12/19/2026 | EU | 2,583,668 |  | 10/26/2025
CoM | 8,846,901 |  | 10/26/2025 | EU | 1,945,228 |  | 10/26/2025
|  |  | EU | 2,335,707 |  | 10/26/2025
|  |  | EU | 2,581,078 |  | 10/26/2025
|  |  | Japan | 5,465,432 |  | 10/26/2026
CoM | 8,829,182 |  | 10/26/2025 | EU | 1,945,228 |  | 10/26/2025
|  |  | EU | 2,335,707 |  | 10/26/2025
|  |  | EU | 2,581,078 |  | 10/26/2025
|  |  | EU | 2,952,197 |  | 10/26/2025
|  |  | Japan | 5,465,432 |  | 10/26/2026
CoM/Use/MoM | 9,617,352 |  | 6/8/2026 | EU | 2,952,197 |  | 10/26/2025
CoM/MoM | 10,202,468 |  | 10/26/2025 | N/A |  |
CoM / Use | 7,635,773 |  | 3/13/2029 | Japan | 4,923,144 |  | 4/28/2029
|  |  | Japan | 6,039,721 |  | 4/28/2029
|  |  | Japan | 6,276,828 |  | 4/28/2029
|  |  | Japan | 6,444,548 |  | 4/28/2029
CoM | 8,410,077 |  | 3/13/2029 | Japan | 4,923,144 |  | 4/28/2029
|  |  | Japan | 6,039,721 |  | 4/28/2029
|  |  | Japan | 6,276,828 |  | 4/28/2029
|  |  | Japan | 6,444,548 |  | 4/28/2029

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CoM | 9,200,088 |  | 3/13/2029 | Japan | 4,923,144 |  | 4/28/2029
|  |  | Japan | 6,039,721 |  | 4/28/2029
|  |  | Japan | 6,276,828 |  | 4/28/2029
|  |  | Japan | 6,444,548 |  | 4/28/2029
CoM | 9,750,822 |  | 3/13/2029 | Japan | 4,923,144 |  | 4/28/2029
|  |  | Japan | 6,039,721 |  | 4/28/2029
|  |  | Japan | 6,276,828 |  | 4/28/2029
|  |  | Japan | 6,444,548 |  | 4/28/2029
CoM | 10,117,951 |  | 3/13/2029 | Japan | 4,923,144 |  | 4/28/2029
|  |  | Japan | 6,039,721 |  | 4/28/2029
|  |  | Japan | 6,276,828 |  | 4/28/2029
|  |  | Japan | 6,444,548 |  | 4/28/2029
MoM | 9,751,957 |  | 6/28/2033 | EU | 2,814,849 |  | 2/14/2033
|  |  | Japan | 6,508,944 |  | 2/14/2033
CoM | 9,493,582 |  | 2/27/2033 | Japan | 6,517,725 |  | 2/27/2033
MoM | 10,323,103 |  | 2/27/2033 | Japan | 6,517,725 |  | 2/27/2033
CoM/MoM | 10,040,872 |  | 2/27/2033 | Japan | 6,557,144 |  | 10/21/2033

‡ Expiration date of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
Subject to compliance with the terms of the respective agreements, our rights to receive royalty payments under our licenses with our exclusive licensors typically extend for the life of the patents covering such developments. For a discussion of the risks associated with patent and proprietary rights, see below under “Item 1A. Risk Factors.”
OmniAb
Our OmniAb® therapeutic antibody platforms, including OmniRat®, OmniMouse® and OmniChicken™, produce naturally optimized, fully human antibodies in animals. We have received patent protection on OmniAb antibodies and methods in 30 countries, including the United States, multiple countries throughout Europe, Japan and China (see selected cases listed in the table below) and have 56 patent applications pending in 24 countries worldwide. The patents and applications owned by us are expected to expire between 2028 and 2034 and partners are able to use the OmniAb patented technology to generate novel antibodies, which may be entitled to additional patent protection.

OmniAb in OmniMouse and OmniRat |  |  |  |  |
United States |  |  | Corresponding Foreign |  |
Type of Protection | U.S. Patent No. | U.S. Expiration Date | Jurisdiction | Patent Number | Expiration Date‡
CoM | 8,703,485 | 10/10/2031 | EU | 2,152,880 | 5/30/2028
|  |  | EU | 2,336,329 | 5/30/2028
|  |  | EU | 2,603,323 |  | 5/30/2028
|  |  | Japan | 5,823,690 | 5/30/2028
|  |  | Japan | 6,220,827 |  | 5/30/2028
| 9,388,233 | 5/30/2028 | N/A |  |
| 10,072,069 |  | 5/30/2028 | N/A |  |
Use | 8,907,157 | 5/30/2028 | N/A |  |
CoM/Use | 9,475,859 | 4/15/2034 | N/A |  |
CoM | 10,285,132 |  | 1/8/2034 | N/A |  |

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OmniAb in OmniChicken |  |  |  |  |
United States |  |  | Corresponding Foreign |  |
Type of Protection | U.S. Patent No. | U.S. Expiration Date | Jurisdiction | Patent Number | Expiration Date‡
CoM/Use | 8,030,095 |  | 12/23/2029 | Europe | 2,271,657 |  | 3/2/2029
MoM | 8,415,173 |  | 3/2/2029 | Japan | 5,737,707 |  | 3/2/2029
CoM | 8,592,644 |  | 8/30/2030 | Japan | 5,756,802 |  | 8/11/2030
CoM | 9,404,125 |  | 12/29/2030 | N/A |  |
Use | 9,549,538 |  | 8/11/2030 | N/A |  |
CoM/Use | 10,010,058 |  | 8/11/2030 | N/A |  |
CoM/Use | 10,172,334 |  | 8/11/2030 | N/A |  |
CoM/Use | 10,362,770 |  | 8/11/2030 | N/A |  |
CoM/MoM/Use | 8,865,462 |  | 5/8/2032 | N/A |  |
Com/MoM/Use | 9,644,178 |  | 1/7/2031 | N/A |  |
CoM | 9,380,769 |  | 5/23/2032 | EU | 2,713,712 |  | 5/23/2032
CoM | 9,809,642 |  | 5/23/2032 | N/A |  |
CoM/Use | 9,394,372 |  | 10/16/2032 | N/A |  |
CoM | 9,982,062 |  | 10/16/2032 | N/A |  |

‡ Expiration date of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
Vernalis
Our acquisition of Vernalis in October 2018 provided us with a portfolio of fully-funded shots on goal, which now include RPL554, a Phase 2, novel treatment for COPD, which is partnered with Verona; Ciforadenant, a Phase 1 adenosine A2A receptor antagonist for treatment of solid tumors, partnered with Corvus; Tosedostat, an aminopeptidase inhibitor for treatment of blood cancers, partnered with Cell Therapeutics, Inc. (CTI), S65487, a Bcl-2 inhibitor, and S64315, an Mcl-1 inhibitor for treatment of cancers, both of which are partnered with Servier in collaboration with Novartis, and VER250840 (an oral, selective Chk1 inhibitor for treatment of cancer) partnered with Cumulus. Vernalis has a worldwide patent portfolio of over 240 granted patents and over 20 pending applications, spanning over 60 countries.
Employees
As of February 10, 2020, we have 115 employees, of whom 86 are involved directly in scientific research and development activities. We emphasize competitive compensation, benefits, equity participation, and a positive and attractive work environment in our efforts to attract and retain qualified personnel.
Investor Information
Financial and other information about us is available on our website at www.ligand.com. We make available on our website, without charge, copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. You may obtain copies of these documents by visiting the SEC’s website at www.sec.gov. These website addresses are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended to be a part of this filing.

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. Additional risks not presently known to us or that we currently deem immaterial also may impair our business.
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Risks Related to Our Business Operations and Reliance on Third Parties:
Future revenue based on Kyprolis and Evomela, as well as royalties from our other partnered products, may be lower than expected.
Substantially all of our royalty revenue is based on sales of Kyprolis by Amgen and sales of Evomela by Acrotech Biopharma. Royalties, including payments from Amgen and Acrotech Biopharma, are expected to be a substantial portion of our ongoing revenues for the foreseeable future. Any setback that may occur with respect to any of our partners' products, and in particular Kyprolis, could significantly impair our operating results and/or reduce our revenue and the market price of our stock. Setbacks for the products could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, including Amgen's or Acrotech Biopharma's failure to enforce their respective intellectual property rights, competition with existing or new products and physician or patient acceptance of the products, as well as higher than expected total rebates, returns, discounts, or unfavorable exchange rates. These products also are or may become subject to generic competition. For example, we entered into a settlement agreement with Teva and Acrotech Biopharma (the holder of the NDA for Evomela) which will allow Teva to market a generic version of Evomela in the United States on June 1, 2026, or earlier under certain circumstances. The entry of generic competition for Evomela may materially and adversely affect the revenue we derive from Evomela sales. Also, Amgen has settled patent litigation related to Kyprolis on confidential terms with several parties, but it has been publicly reported that the U.S. launch date for at least Breckenridge Pharmaceuticals’ applicable generic product will be “on a date that is held as confidential in 2027 or sooner, depending on certain occurrences” and litigation against one other party is awaiting a post-trial judgement.
Future revenue from sales of Captisol material to our license partners may be lower than expected.
Revenues from sales of Captisol material to our collaborative partners, including Amgen, represent a significant portion of our current revenues. 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.
If products or product candidates incorporating Captisol material 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 sell Captisol 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, the FDA could require us to submit additional information for regulatory review or approval, including data from extensive safety testing or clinical testing of products using Captisol. This would be expensive and it may delay the 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 maintain inventory of Captisol, which has a five year shelf life, at three geographically dispersed storage locations in the United States and Europe. If we were to encounter problems maintaining our inventory, such as natural disasters, at one or more of these locations, it could lead to supply interruptions. While we believe we maintain adequate inventory of Captisol to meet our current and expected future partner needs, our estimates and projections for Captisol demand may be wrong and any supply interruptions could materially adversely impact our operating results.
We currently depend on our arrangements with our partners and licensees to sell products using our Captisol technology. These agreements generally provide that our partners may terminate the agreements at will. If our partners discontinue sales of products using Captisol, fail to obtain regulatory approval for products using Captisol, fail to satisfy their obligations under their agreements with us, or choose to utilize a competing product, or if we are unable to establish new licensing and marketing relationships, our financial results and growth prospects would be materially affected. Furthermore, we maintain significant accounts receivable balances with certain customers purchasing Captisol materials, which may result in the concentration of credit risk. We generally do not require any collateral from our customers to secure payment of these accounts receivable. If any of our major customers were to default in the payment of their obligations to us, our business, operating results and cash flows could be adversely affected.
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 low-chloride patents and foreign equivalents are not expected to expire until 2033, our high
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purity patents and foreign equivalents, are not expected to expire until 2029 and our morphology patents 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 in 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 partners choose to terminate their agreements with us, our Captisol revenue may decrease significantly.
We rely heavily on collaboration relationships to generate milestone and royalty payments and our collaboration partners have significant discretion when deciding whether to pursue any development program, and any failure by our partners to successfully develop a product candidate or a termination or breach of any of the related agreements could reduce our milestone and license fee revenue, and potential reduce future royalties.
Our strategy for developing and commercializing many of our product candidates includes entering into collaboration agreements, outlicenses, and development funding and royalty purchase agreements with corporate partners and others. These agreements give our collaboration 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 collaboration arrangements to develop and commercialize our unpartnered assets.
In addition, our collaborators may develop products, either alone or with others that compete with the types of products 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 product candidates are approved for marketing under our collaboration programs, revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaboration partners, who generally retain commercialization rights under the collaboration agreements. Generally, our current collaboration partners also have the right to terminate their collaborations at will or under specified circumstances. If any of our collaboration partners breach (for example, by not making required payments when due, or at all) or terminate their agreements with us or otherwise fail to conduct their collaboration activities successfully, including due to insolvency events, ongoing 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 collaboration 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.
Our collaboration 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 collaboration 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 collaboration partners or abandon such partnered programs, all of which could reduce our revenues and otherwise have an adverse effect on our business. For example, several of our collaboration partners using our OmniAb antibody platform have terminated their contracts or substantially reduced their investment in the antibodies discovered based on the platform. Although we expect growth in the net number of partners with one more active programs based on antibodies discovered using our OmniAb platform, there can be no assurance that our partners will continue their programs or that we will be able to find new collaboration partners interested in discovering antibodies based on our OmniAb platform.
Our product candidates, and the product candidates of our partners, face significant development and regulatory hurdles prior to partnering and/or marketing which could delay or prevent licensing, sales-based royalties 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 product 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
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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 speed at which we and our partners complete our scientific studies and clinical trials depends on many factors, including, but not limited to, the 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 or our partners’ trials may result in increased costs and longer development times. In addition, our partners have rights to control product development and clinical programs for products developed under our collaborations. As a result, these partners may conduct these programs more slowly or in a different manner than expected. Moreover, even if clinical trials are completed, we or our partners still may not apply for FDA or foreign regulatory approval in a timely manner or the FDA or foreign regulatory authority still may not grant approval.
Our product candidate discovery, early-stage development, and product reformulation programs may require substantial additional capital to complete successfully. Our partners’ development programs may require substantial additional capital to complete successfully, 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 operations 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 OmniAb antibody platform faces specific risks, including the fact that no product using antibodies from the platform has been approved by the FDA or similar regulatory agency.
None of our collaboration partners using our OmniAb antibody platform have received approval from the FDA or similar regulatory agency to market a product discovered based on our platform. In addition, only a few of our collaboration partners’ product candidates based on the platform have been tested in late stage clinical trials. If one of our OmniAb collaboration partners’ product candidates fails during preclinical studies or clinical trials, our other OmniAb collaboration partners may decide to abandon product candidates using antibodies generated from the OmniAb platform, whether or not such failure is attributable to the platform. All of our OmniAb collaboration partners may terminate their programs at any time without penalty. In addition, our OmniRat and OmniFlic platforms, which we consider the most promising, are covered by six patents within the U.S. and three patents in the European Union and are subject to the same risks as our patent portfolio discussed elsewhere, including the risk that our patents may infringe on third party patent rights or that our patents may be invalidated. As of a result of these factors, the future revenue generated from this platform may be materially lower than what we currently anticipate. Further, we face significant competition from other companies selling human antibody-generating rodents, especially mice which compete with our OmniMouse platform, including the VelocImmune mouse, the AlivaMab mouse, the Trianni mouse and the Kymouse. Many of our competitors have greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market competing antibody platforms.
Risks Related to Intellectual Property:
Third party intellectual property may prevent us or our partners from developing our potential products; our and our partners’ intellectual property may not prevent competition; and any intellectual property issues may be expensive and time consuming to resolve.
The manufacture, use or sale of our potential products or our licensees' products or potential products may infringe the patent rights of others. 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.
Generally, our success will depend on our ability and the ability of our partners to obtain and maintain patents and other intellectual property rights for our and their potential products. Our patent position is uncertain and involves complex legal and technical questions for which legal principles are unresolved. Even if we or our partners do obtain patents, such patents may not adequately protect the technology we own or have licensed.
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We permit our partners to list our patents that cover their branded products in the Orange Book. If a third party files an NDA or ANDA for a generic drug product that relies in whole or in part on studies contained in our partner’s NDA for their branded product, the third party will have the option to certify to the FDA that, in the opinion of that third party, the patents listed in the Orange Book for our partner’s branded product are invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the third party’s generic drug product. A third party certification that a new product will not infringe Orange Book-listed patents, or that such patents are invalid, is called a paragraph IV patent certification. If the third party submits a paragraph IV patent certification to the FDA, a notice of the paragraph IV patent certification must be sent to the NDA owner and the owner of the patents that are subject to the paragraph IV patent certification notice once the third-party’s NDA or ANDA is accepted for filing by the FDA. A lawsuit may then be initiated to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of the receipt of notice of a paragraph IV patent certification automatically prevents the FDA from approving the generic NDA or ANDA until the earlier of the expiration of a 30-month period, the expiration of the patents, the entry of a settlement order stating that the patents are invalid or not infringed, a decision in the infringement case that is favorable to the NDA or ANDA applicant, or such shorter or longer period as the court may order. If a patent infringement lawsuit is not initiated within the required 45-day period, the third-party’s NDA or ANDA will not be subject to the 30-month stay.
Several third-parties have challenged, and additional third parties may challenge, the patents covering our partner’s branded products, including Kyprolis and Evomela, which could result in the invalidation or unenforceability of some or all of the relevant patent claims. We may from time to time become party to litigation or other proceedings as a result of Paragraph IV certifications. For example, as a result of the settlement of one such matter, Teva will be permitted to market a generic version of Evomela® in the United States on June 1, 2026 or earlier under certain circumstances. The terms of the settlement agreement are otherwise confidential. Also, as noted above, Amgen has settled patent litigation related to Kyprolis on confidential terms with several parties, but it has been publicly reported that the U.S. launch date for at least Breckenridge Pharmaceuticals’ applicable generic product will be “on a date that is held as confidential in 2027 or sooner, depending on certain occurrences” and litigation against one other party is awaiting a post-trial judgement.
In addition, we cannot assure you that all of the potentially relevant prior art information that was or is deemed available to a person of skill in the relevant art prior to the priority date of the claimed invention-relating to our and our partners’ patents and patent applications has been found. If such prior art exists, it can invalidate a patent or prevent a patent from issuing from a pending patent application, and we or our partners may be subject to a third party pre-issuance submission of prior art to the United States Patent and Trademark Office. Even if patents do successfully issue and even if such patents cover our or our partner’s products or potential products, third parties may initiate litigation or opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices, or similar proceedings challenging the validity, enforceability or scope of such patents, which may result in the patent claims being narrowed or invalidated, may allow third parties to commercialize our or our partners’ products and compete directly with us and our partners, without payment to us or our partners, or limit the duration of the patent protection of our and our partners’ technology and products.
Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with our partner’s products. Any adverse outcome of such litigation or other proceedings could result in one or more or our patents being held invalid or unenforceable, which could adversely affect our ability to successfully execute our business strategy and negatively impact our financial condition and results of operations. However, given the unpredictability inherent in litigation, we cannot predict or guarantee the outcome of these matters or any other litigation. Regardless of how these matters are ultimately resolved, these matters may be costly, time-consuming and distracting to our management, which could have a material adverse effect on our business.
In addition, periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and or applications will be due to the U.S. and various foreign patent offices at various points over the lifetime of our and our licensees’ patents and/or applications. We have systems in place to remind us to pay these fees, and we rely on our outside patent annuity service to pay these fees when due. Additionally, the U.S. and various foreign patent offices require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, it could have a material adverse effect on our business.
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Any conflicts with the patent rights of others could significantly reduce the coverage of our patents or limit our ability to obtain meaningful patent protection. For example, our European patent related to Agglomerated forms of Captisol was limited during an opposition proceeding, and the rejection of our European patent application related to High Purity Captisol was upheld on appeal. In addition, any determination that our patent rights are invalid may result in early termination of our agreements with our license partners and could adversely affect our ability to enter into new license agreements. We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, licensees 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.
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.
The occurrence of any of the foregoing problems could be time-consuming and expensive and could adversely affect our financial position, liquidity and results of operations.
The validity, scope and enforceability of any patents that cover our partners’ biologic product candidate can be challenged by third parties.
For biologics, the Biologics Price Competition and Innovation Act of 2009, BPCIA, provides a mechanism for one or more third parties to seek FDA approval to manufacture or sell a biosimilar or interchangeable versions of brand name biological products. Due to the large size and complexity of biological products, as compared to small molecules, a biosimilar must be “highly similar” to the reference product with “no clinically meaningful differences between the two.” The BPCIA does not require reference product sponsors to list patents in an Orange Book and does not include an automatic 30-month stay of FDA approval upon the timely filing of a lawsuit. The BPCIA, however, does require a formal pre-litigation process which includes the exchange of information between a biosimilar applicant and a reference biologic sponsor that includes the identification of relevant patents and each parties’ basis for infringement and invalidity. After the exchange of this information, sponsors may then initiate a lawsuit within 30 days to defend the patents identified in the exchange. If the biosimilar applicant successfully challenges the asserted patent claims it could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims or result in a finding of non-infringement. Such litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could limit our partners’ ability to prevent third parties from competing with their products or product candidates.
Risks Related to Government Regulation and Legal Proceedings:
Market acceptance and sales of any approved product will depend significantly on the availability and adequacy of coverage and reimbursement from third-party payors and may be affected by existing and future healthcare reform measures.
Sales of the products we license to our collaboration partners and the royalties we receive will depend in large part on the extent to which coverage and reimbursement is available from government and health administration authorities, private health maintenance organizations and health insurers, and other healthcare payors. Significant uncertainty exists as to the reimbursement status of healthcare products. Healthcare payors, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products. Even if a product is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover the costs associated with the research, development, marketing and sale of the product. If government and other healthcare payors do not provide adequate coverage and reimbursement levels for any product, market acceptance and any sales could be reduced.
From time to time, legislation is implemented to reign in rising healthcare expenditures. By way of example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, was enacted, which included a number of provisions affecting the pharmaceutical industry, including, among other things, annual, non-deductible fees on any entity that manufactures or imports some types of branded prescription drugs and increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program. Since its enactment,
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there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future.
Other legislative changes have been proposed and adopted since the ACA was enacted, including aggregate reductions of Medicare payments to providers of 2% per fiscal year and reduced payments to several types of Medicare providers. Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect our operations or financial condition.
We and our collaboration partners may be subject to federal and state healthcare laws, including fraud and abuse, false claims, physician payment transparency and health information privacy and security laws. Our operations and those of our collaboration partners are subject to various federal and state fraud and abuse laws, including, without limitation, anti-kickback, false claims and physician payment transparency statutes. These laws may impact, among other things, financial arrangements with physicians, sales, marketing and education programs and the manner in which any of those activities are implemented. In addition, we may be subject to federal and state patient privacy regulations. If our operations or those of our collaboration partners are found to be in violation of any of those laws or any other applicable governmental regulations, we or our collaboration partners may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment, exclusion from government healthcare programs or the curtailment or restructuring of operations, any of which could adversely affect our ability to operate our business and our financial condition.
Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business or the business of our partners.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business or the business of our partners. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. If the timing of FDA’s review and approval of new products is delayed, the timing of our or our partners’ development process may be delayed which would result in delayed milestone revenues and materially harm our operations of business.
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.
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, partnered products 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 product recall or withdrawal from the market and the inability to commercialize any products that we develop. We have product liability insurance that covers our clinical trials up to a $10.0 million annual limit. Our insurance coverage may not be sufficient to cover all of our product liability related
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expenses or losses and may not cover us for any expenses or losses we may suffer. If we are sued for any injury caused by our product candidates, partnered products or any future products, our liability could exceed our total assets.
We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials and the generation, transportation and storage of waste. Although we have secured clearance from the EPA historically, and currently are operating in material compliance with applicable EPA rules and regulations, our business could be adversely affected if we discover that we or an acquired business is not in material compliance with these rules and regulations. In the future, we may pursue the use of other surfactant substances that will require clearance from the EPA, and we may fail to obtain such clearance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.
Risk Related to Our Strategic Transactions:
Any difficulties from strategic 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 ongoing 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 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 IPR&D charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.
Other Risks:
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.
Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:
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•the royalties from the sales of Kyprolis, Evomela and other products sold by our partners;
•the success of our collaboration partners’ preclinical and clinical programs;
•the timing of Captisol purchases for use in clinical trials and commercial products;
•the timing and cost of, and level of investment in, research, development, regulatory approval and commercialization activities relating to our internal development programs, which may change from time to time;
•expenditures that we may incur to acquire or develop additional product candidates and platform technologies; and
•future accounting pronouncements or changes in our accounting policies.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results and revenues. This variability and unpredictability could result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.
Changes or modifications in financial accounting standards, including those related to revenue recognition, may harm our results of operations.
From time to time, the FASB either alone or jointly with other organizations, promulgates new accounting principles that could have an adverse impact on our results of operations. For example, in May 2014, FASB issued an accounting standard for revenue recognition-Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or ASC 606-that supersedes most current revenue recognition guidance. The guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The guidance became effective in fiscal 2018.
Under ASC 606, Ligand estimates and books royalties in the same quarter that our partners report the sale of the underlying product. We rely on our partners’ earning releases and other information from our partners to determine the sales of our partners’ products and to estimate the related royalty revenues. If our partners report incorrect sales, or if our partners delay reporting of their earnings release, our royalty estimates may need to be revised and/or our financial reporting may be delayed.
Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.
The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, and significantly affected U.S. tax law, including by changing how the U.S. imposes tax on certain types of income of corporations and by reducing the general U.S. corporate income tax rate. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued.
The Tax Act requires certain complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of certain information not previously required or regularly produced. As a result, we have provided a provisional estimate on the effect of the Tax Act in our financial statements. As additional and other regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.
Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations.
As of December 31, 2019, we had U.S. federal and state net operating loss carryforwards (NOLs) of approximately $31.5 million and $119.1 million, respectively. Our federal NOLs expire through 2037 and our state NOLs begin to expire in 2028, if not utilized. Under the Tax Act, any federal NOLs arising in taxable years ending after December 31, 2017 will carry forward indefinitely. As of December 31, 2019, we had federal and California research and development tax credit carryforwards of approximately $0.6 million and $22.9 million, respectively. The federal research and development tax credit carryforwards expire in various years through 2038, if not utilized. The California research and development credit will carry forward indefinitely. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended (Code) if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research
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tax credits, to offset its future post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We believe we have experienced certain ownership changes in the past and have reduced our deferred tax assets related to NOLs and research and development tax credit carryforwards accordingly. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result future transactions in our stock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net taxable income that we earn in the event that we attain profitability. Furthermore, under the Tax Act, although the treatment of tax losses generated in tax years beginning before December 31, 2017 has generally not changed, tax losses generated in tax years beginning after December 31, 2017 may only offset 80% of our taxable income. This change may require us to pay federal income taxes in future years despite having potentially generated a loss for federal income tax purposes in prior years. Any such limitations on the ability to use our NOLs and other tax assets could adversely impact our business, financial condition and operating results.
We rely on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including internet-based systems, to support business processes as well as internal and external communications. Despite the implementation of security measures, our internal computer systems and those of our partners are vulnerable to damage from cyber-attacks, computer viruses, security breaches, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our operations, could lead to the loss of trade secrets or other intellectual property, could lead to the public exposure of personal information of our employees and others, and could result in a material disruption of our clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our business and financial condition could be harmed.
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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Conversion of our outstanding convertible notes may result in losses, result in the dilution of existing stockholders, create downward pressure on the price of our common stock, and restrict our ability to take advantage of future opportunities.
In May 2018, we issued $750.0 million principle amount of the 2023 Notes. The sale of the 2023 Notes may affect our earnings per share figures, as accounting procedures require that we include in our calculation of earnings per share the number of shares of our common stock into which the 2023 Notes are convertible. The convertible notes may be converted into cash and shares of our common stock, if any (subject to our right or obligation to pay cash in lieu of all or a portion of such shares). If shares of our common stock are issued to the holders of the convertible notes upon conversion, there will be dilution to our shareholders equity and the market price of our shares may decrease due to the additional selling pressure in the market. Any downward pressure on the price of our common stock caused by the sale or potential sale of shares issuable upon conversion of the convertible notes could also encourage short sales by third parties, creating additional selling pressure on our stock. Upon the occurrence of certain circumstances, holders of the convertible notes may require us to purchase all or a portion of their notes for cash, which may require the use of a substantial amount of cash. If such cash is not available, we may be required to sell other assets or enter into alternate financing arrangements at terms that may or may not be desirable. The existence of the convertible notes and the obligations that we incurred by issuing them may restrict our ability to take advantage of certain future opportunities, such as engaging in future debt or equity financing activities.
As of December 31, 2019, we had $750.0 million aggregate principal amount of 2023 Notes. The notes are convertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the notes to be extinguished and their corresponding net carrying value. The fair value of the notes to be extinguished depends on our current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is lower than the implied interest rate of the notes, we will record a loss in our consolidated statement of income during the period in which the notes are converted.
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 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.
Our investments are subject to market and credit risks that could diminish their value and these risks could be greater
during periods of extreme volatility or disruption in the financial and credit markets, which could adversely impact our
business, financial condition, results of operations, liquidity and cash flows.
Our investments are subject to risks of credit defaults and changes in market values. Periods of macroeconomic weakness or recession, heightened volatility or disruption in the financial and credit markets could increase these risks, potentially resulting in other than temporary impairment of assets in our investment portfolio. Any event reducing the estimated fair value of these securities, other than on a temporary basis, could have a material and adverse effect on our business, results of operations, financial condition, liquidity and cash flows. If our investment manager, fails to react appropriately to difficult
market, economic and geopolitical conditions, our investment portfolio could incur material losses.
We have a risk management framework in place to identify, assess and prioritize risks, including the market and credit
risks to which our investments are subject. As part of that framework, we test our investment portfolio based on various market
scenarios. Under certain stressed market scenarios, unrealized losses on our investment portfolio could lead to material
reductions in its carrying value.
A decline in fair value below the amortized cost of a security requires management to assess whether an impairment has occurred. The decision on whether to record an impairment is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as management’s assertion of whether it is more likely than not that we will sell the particular security before recovery.
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Our charter documents and concentration of ownership may hinder or prevent change of control transactions.
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 certain of our institutional investors collectively beneficially own a significant portion of our outstanding common stock. Such provisions 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.
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 share-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 or changed securities analysts' reports or recommendations; future sales or shorting 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.
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. Concerns over inflation, energy costs, geopolitical issues, public health emergencies, the availability and cost of credit, and the U.S. financial markets have in the past contributed to, and may continue in the future to contribute to, increased volatility and diminished expectations for the economy and the markets. For example, the outbreak of a novel strain of coronavirus has affected the People’s Republic of China and elsewhere and has affected worldwide equity markets. 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.

Item 1B. | Unresolved Staff Comments

None.

Item 2. | Properties

The following table summarizes our principal facilities leased as of December 31, 2019, including the location and size of each facility, and their designated use. We also lease facilities in other locations. We believe our facilities are adequate for our current and near-term needs, and we will be able to locate additional facilities, as needed.
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Location | Approximate Square Feet | Operation | Lease Expiration Date
San Diego, CA | 7,000 |  | Corporate headquarters office | June 2023
Emeryville, CA | 13,000 |  | Office and laboratory | August 2021
Cambridge, United Kingdom | 28,000 |  | Office and laboratory | September 2026

Item 3. | Legal Proceedings

See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (10), Commitments and Contingencies—Legal Proceedings.”

Item 4. | Mine Safety Disclosures

Not applicable.
PART II

Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Global Market under the symbol “LGND.” As of February 14, 2020, there were approximately 446 holders of record of the common stock.
Except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business, to pay down debt and potentially for share repurchases. Any future determination to pay dividends on common stock will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements and such other factors as the board deems relevant.
The following table presents information regarding repurchases by us of our common stock during the three months ended December 31, 2019 under the stock repurchase program approved by our board of directors in September 2019, under which we may acquire up to $500 million of our common stock in open market and negotiated purchases for a period of up to three years.
ISSUER PURCHASES OF EQUITY SECURITIES

|  | Total Number of Shares Purchased |  | Average Price Paid Per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands)
October 1 - October 31, 2019 |  | — |  |  | $ | — |  |  | — |  |  | $ | 408,730 |
November 1 - November 30, 2019 |  | 625,409 |  |  | $ | 107.74 |  |  | 625,409 |  |  | $ | 341,351 |
December 1 - December 31, 2019 |  | 135,519 |  |  | $ | 107.47 |  |  | 135,519 |  |  | $ | 326,786 |
Total |  | 760,928 |  |  | $ | 107.69 |  |  | 760,928 |  |  |

Since December 31, 2019 and as of February 21, 2020, we acquired 405,527 additional shares during 2020, and the maximum dollar value of shares that may yet be purchased under the repurchase program was $290.0 million.
The information required by Item 201(d) of Regulation S-K is incorporated by reference to the 2020 Annual Meeting Proxy Statement as defined in Item 10 below.
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Performance Graph
The graph below shows the five-year cumulative total stockholder return assuming the investment of $100 and is based on the returns of the component companies weighted monthly according to their market capitalizations. The graph compares total stockholder returns of our common stock, of all companies traded on the Nasdaq Stock market, as represented by the Nasdaq Composite® Index, and of the Nasdaq Biotechnology Stock Index, as prepared by The Nasdaq Stock Market Inc.
The stockholder return shown on the graph below is not necessarily indicative of future performance and we will not make or endorse any predictions as to future stockholder returns.
Value of $100 Invested Over Time

|  |  |  | 12/31/2014 |  | 12/31/2015 |  | 12/31/2016 |  | 12/31/2017 |  | 12/31/2018 |  | 12/31/2019
Ligand |  |  |  | $ | 100.00 |  |  | $ | 203.76 |  |  | $ | 190.96 |  |  | $ | 257.34 |  |  | $ | 255.03 |  |  | $ | 196.00 |
NASDAQ Composite-Total Return |  |  |  | $ | 100.00 |  |  | $ | 106.96 |  |  | $ | 116.45 |  |  | $ | 150.96 |  |  | $ | 146.67 |  |  | $ | 200.49 |
NASDAQ Biotechnology Index |  |  |  | $ | 100.00 |  |  | $ | 111.77 |  |  | $ | 87.91 |  |  | $ | 106.95 |  |  | $ | 97.47 |  |  | $ | 121.94 |

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Item 6. | Selected Consolidated Financial Data

The following selected historical consolidated financial and other data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our selected statement of operations data set forth below for each of the years ended December 31, 2019, 2018, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2019, 2018, 2017, 2016 and 2015 are derived from our consolidated financial statements.
The comparability of the information is affected by a variety of factors, including acquisitions and divestitures of businesses, issuance and repayment of debt, share-based compensation expense, and repurchases of common stock under our stock repurchase programs. In addition, the consolidated statement of operations data for each of the years ended December 31, 2017, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 and 2015 set forth in the tables below do not reflect the adoption of Topic 606 and continue to be reported under the standards in effect for those periods. Additionally, the selected consolidated balance sheet data as of December 31, 2018, 2017, 2016 and 2015 set forth in the tables below do not reflect the adoption of Topic 842 regarding leases and continue to be reported under Topic 840 for those periods. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and related notes. Our historical results are not necessarily indicative of our future results.

| Year Ended December 31, |  |  |  |  |  |  |  |
| 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015
Consolidated Statements of Operations Data: |  |  | (in thousands, except per share amounts) |  |  |  |  |  |
Royalties | $ | 46,976 |  |  | $ | 128,556 |  |  | $ | 88,685 |  |  | $ | 59,423 |  |  | $ | 38,194 |
Material sales | 31,489 |  |  | 29,123 |  |  | 22,070 |  |  | 22,502 |  |  | 27,662 |
License fees, milestones, and other revenues | 41,817 |  |  | 93,774 |  |  | 30,347 |  |  | 27,048 |  |  | 6,058 |
Total revenues | 120,282 |  |  | 251,453 |  |  |  | 141,102 |  |  |  | 108,973 |  |  | 71,914 |
Cost of material sales | 11,347 |  |  | 6,337 |  |  | 5,366 |  |  | 5,571 |  |  | 5,807 |
Amortization of intangibles | 16,864 |  |  | 15,792 |  |  | 12,120 |  |  | 10,643 |  |  | 2,375 |
Research and development | 55,908 |  |  | 27,863 |  |  | 26,887 |  |  | 21,221 |  |  | 11,005 |
General and administrative | 41,884 |  |  | 37,734 |  |  | 28,653 |  |  | 27,653 |  |  | 25,398 |
Total operating costs and expenses | 126,003 |  |  | 87,726 |  |  |  | 73,026 |  |  |  | 65,088 |  |  | 44,585 |
Gain from sale of Promacta license | 812,797 |  |  |  | — |  |  | — |  |  |  | — |  |  | — |
Income from operations | 807,076 |  |  | 163,727 |  |  | 68,076 |  |  | 43,885 |  |  | 27,329 |
Total other income (expense), net | (10,437) |  |  | 9,603 |  |  | (10,845) |  |  | (35,925) |  |  | 8,000 |
Income tax benefit (expense) | (167,337) |  |  | (30,009) |  |  | (44,675) |  |  | (10,327) |  |  | 192,115 |
Income (loss) from continuing operations including noncontrolling interests | 629,302 |  |  | 143,321 |  |  | 12,556 |  |  | (2,367) |  |  | 227,444 |
Less: Net loss attributable to noncontrolling interests | — |  |  | — |  |  | — |  |  | — |  |  | (2,380) |
Income (loss) from continuing operations | 629,302 |  |  | 143,321 |  |  | 12,556 |  |  | (2,367) |  |  | 229,824 |
Discontinued operations | — |  |  | — |  |  | — |  |  | 731 |  |  | — |
Net income (loss) | $629,302 |  | $143,321 |  | $12,556 |  | $(1,636) |  | $229,824
Basic per share amounts: |  |  |  |  |  |  |  |  |
Income (loss) from continuing operations | $ | 33.13 |  |  | $ | 6.77 |  |  | $ | 0.60 |  |  | $ | (0.11) |  |  | $ | 11.61 |
Discontinued operations | — |  |  | — |  |  | — |  |  | 0.04 |  |  | — |
Net income (loss) | $ | 33.13 |  |  | $ | 6.77 |  |  | $ | 0.60 |  |  | $ | (0.08) |  |  | $ | 11.61 |
Weighted average number of common shares-basic | 18,995 |  |  | 21,160 |  |  | 21,032 |  |  | 20,831 |  |  | 19,790 |
Diluted per share amounts: |  |  |  |  |  |  |  |  |
Income (loss) from continuing operations | $ | 31.85 |  |  | $ | 5.96 |  |  | $ | 0.53 |  |  | $ | (0.11) |  |  | $ | 10.83 |
Discontinued operations | — |  |  | — |  |  | — |  |  | 0.04 |  |  | — |
Net income (loss) | $ | 31.85 |  |  | $ | 5.96 |  |  | $ | 0.53 |  |  | $ | (0.08) |  |  | $ | 10.83 |
Weighted average number of common shares-diluted | 19,757 |  |  | 24,067 |  |  | 23,481 |  |  | 20,831 |  |  | 21,228 |

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| December 31, |  |  |  |  |  |  |  |
| 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015
| (in thousands) |  |  |  |  |  |  |  |
Consolidated Balance Sheet Data: |  |  |  |  |  |  |  |  |
Cash, cash equivalents, short-term investments, restricted cash and investments | $ | 1,070,597 |  |  | $ | 776,445 |  |  | $ | 208,099 |  |  | $ | 149,393 |  |  | $ | 229,947 |
Working capital (deficit) | $ | 1,106,643 |  |  | $ | 788,291 |  |  | $ | (1,847) |  |  | $ | (64,076) |  |  | $ | (8,109) |
Total assets | $ | 1,494,915 |  |  | $ | 1,260,803 |  |  | $ | 671,021 |  |  | $ | 601,585 |  |  | $ | 503,061 |
Other long-term obligations (excludes long-term portions of deferred revenue, net and deferred gain) | $ | 71,722 |  |  | $ | 7,776 |  |  | $ | 9,981 |  |  | $ | 3,603 |  |  | $ | 3,330 |
Total notes payable, net (including current portion) | $ | 638,959 |  |  | $ | 636,297 |  |  | $ | 224,529 |  |  | $ | 212,910 |  |  | $ | 201,985 |
Retained earnings (accumulated deficit) | $ | 400,105 |  |  | $ | (229,197) |  |  | $ | (400,924) |  |  | $ | (431,127) |  |  | $ | (429,491) |
Total stockholders’ equity | $ | 767,232 |  |  | $ | 560,914 |  |  | $ | 399,788 |  |  | $ | 341,290 |  |  | $ | 237,282 |

Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying consolidated financial statements and notes. Comparisons under this heading refer to twelve months ended December 31, 2019 and 2018, respectively, unless otherwise indicated.
Our MD&A is organized as follows:
•Results of Operations. Detailed discussion of our revenue and expenses for twelve months ended December 31, 2019 and 2018. A comparison of our results of operations for twelve months ended December 31, 2018 and 2017 can be found under “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019.
•Liquidity and Capital Resources. Discussion of key aspects of our consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
•Contractual Obligations. Tabular disclosure of known contractual obligations as of December 31, 2019.
•Critical Accounting Policies and Estimates. Discussion of significant changes we believe are important to understand the assumptions and judgments underlying our consolidated financial statements.
•Recent Accounting Pronouncements. For summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”
Results of Operations
Revenue

(Dollars in thousands) | 2019 |  | 2018 |  | Change |  | % Change |
Royalty Revenue | $ | 46,976 |  |  | $ | 128,556 |  |  | $ | (81,580) |  |  | (63) | % |
Material Sales | 31,489 |  |  | 29,123 |  |  | 2,366 |  |  | 8 | % |
License fees, milestones and other revenue | 41,817 |  |  | 93,774 |  |  | (51,957) |  |  | (55) | % |
Total revenue | $ | 120,282 |  |  | $ | 251,453 |  |  | $ | (131,171) |  |  | (52) | % |

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Royalty revenue is a function of our partners' product sales and the applicable royalty rate. Promacta and Kyprolis royalty rates are under a tiered royalty rate structure with the highest being 9.4% and 3.0%, respectively. Evomela has a fixed royalty rate of 20%. On March 6, 2019, we sold all of our rights, title and interest in and to the Promacta license to RPI. Subsequent to March 6, 2019, we no longer recognize revenue related to sales of Promacta. See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (2), Sale of Promacta License.”
Royalty revenue decreased in 2019 as compared to 2018 driven primarily by the above mentioned sale of the Promacta license in March 2019. Material sales increased year over year in 2019 due to timing of customer purchases of Captisol for use in clinical trials and in commercialized products. The decrease in license fee, milestones and other revenues in 2019 compared to 2018 was primarily driven by a $47.0 million OmniAb platform license fee received from WuXi and $20.0 million received from Roivant upon entering into the GRA license agreement to develop and commercialize RVT-1502 (formerly named LGD-6972) during 2018, partially offset by the additional revenue generated in 2019 from our Vernalis acquisition in October 2018.
The following table represents royalty revenue by program:

(in millions) | 2019 Estimated Partner Product Sales | Effective Royalty Rate | 2019 Royalty Revenue |  | 2018 Estimated Partner Product Sales | Effective Royalty Rate | 2018 Royalty Revenue
Promacta | $ | 225.1 |  | 6.3% |  | $ | 14.2 |  |  | $ | 1,173.4 |  | 8.5% |  | $ | 99.3 |
Kyprolis | 1,095.4 |  | 2.3% |  | 25.0 |  |  | 980.5 |  | 2.2% |  | 21.7 |
Evomela | 26.0 |  | 20.0% |  | 5.2 |  |  | 28.1 |  | 20.0% |  | 5.7 |
Other | 194.1 |  | 1.3% |  | 2.6 |  |  | 163.5 |  | 1.2% |  | 1.9 |
Total | $ | 1,540.6 |  |  | $ | 47.0 |  |  | $ | 2,345.5 |  |  | $ | 128.6 |

Operating Costs and Expenses

(Dollars in thousands) | 2019 |  | 2018 |  | Change |  | % Change
Cost of material sales | $ | 11,347 |  |  | $ | 6,337 |  |  | $ | 5,010 |  |  | 79 | %
Amortization of intangibles | 16,864 |  |  | 15,792 |  |  | 1,072 |  |  | 7 | %
Research and development | 55,908 |  |  | 27,863 |  |  | 28,045 |  |  | 101 | %
General and administrative | 41,884 |  |  | 37,734 |  |  | 4,150 |  |  | 11 | %
Total operating costs and expenses | $ | 126,003 |  |  | $ | 87,726 |  |  | $ | 38,277 |  |  | 44 | %

Total operating costs and expenses for 2019 increased $38.3 million or 44% compared with 2018. Cost of material sales increased year over year in 2019 primarily due to higher material sales as a result of timing of customer purchases and mix of Captisol sales in 2019. Amortization of intangibles increased year over year in 2019 primarily due to the acquisitions of Vernalis in October 2018 and Ab Initio in July 2019 as well as $2.7 million of accelerated amortization of the GRA asset due to the unlikelihood of continued program development. Research and development expenses increased year over year in 2019 due to timing of internal development costs, the Vernalis acquisition, and amortization of other economic rights during 2019. General and administrative expenses increased year over year in 2019 primarily due to increased business development activities, an increase in share-based compensation and the Vernalis acquisition.
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 research and clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMA, our inability to predict the decisions of our 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 for products that may be derived from our work, and our ability to recruit and retain personnel or third-party contractors 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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Other income (expense)

(Dollars in thousands) | 2019 |  | 2018 |  | Change |  | % Change
Gain (loss) from Viking | $ | 2,888 |  |  | $ | 50,187 |  |  | $ | (47,299) |  |  | (94) | %
Interest income | 28,430 |  |  | 13,999 |  |  | 14,431 |  |  | 103 | %
Interest expense | (35,745) |  |  | (48,276) |  |  | 12,531 |  |  | (26) | %
Other income (expense), net | (6,010) |  |  | (6,307) |  |  | 297 |  |  | (5) | %
Total other income (expense,) net | $ | (10,437) |  |  | $ | 9,603 |  |  | $ | (20,040) |  |  | (209) | %

The fluctuation in the gain (loss) from Viking is driven by the changes in the fair value of the Viking common stock and warrants.
Interest income consists primarily of interest earned on our short-term investments. The year over year increase in 2019 was due to the increase in our short-term investment balances as a result of the proceeds from the 2023 Notes financing on May 22, 2018 and the proceeds from the sale of the Promacta license in March 2019.
Interest expense includes the 0.75% coupon cash interest expense in addition to the non-cash accretion of discount (including the amortization of debt issuance costs) on our 2019 Notes and 2023 Notes. The year over year decrease in 2019 was primarily due to lower average debt outstanding balance as compared to the prior year. The 2019 Notes were paid off upon the maturity date in August 2019. See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (7), Convertible Senior Notes.”
Other income (expense), net, for the twelve months ended December 31, 2019, consists primarily of a $5.1 million reduction in the value of our Selexis commercial license right. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies - Commercial License and Other Economic Rights.” Other income (expense), net, for the twelve months ended December 31, 2018, consists primarily of changes in the fair value of contingent liabilities associated with our Crystal and Metabasis acquisitions and net changes in derivative instrument expense associated with our convertible notes and bond hedge transactions. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (7), Convertible Senior Notes.”
Income tax expense

(Dollars in thousands) | 2019 |  | 2018 |  | Change |  | % Change
Income before income tax expense | $ | 796,639 |  |  | $ | 173,330 |  |  | $ | 623,309 |  |  | 360 | %
Income tax expense | (167,337) |  |  | (30,009) |  |  | (137,328) |  |  | 458 | %
Income from operations | $ | 629,302 |  |  | $ | 143,321 |  |  | $ | 485,981 |  |  | 339 | %
Effective Tax Rate | 21 | % |  | 17 | % |  |  |  |

Our effective tax rate for 2019 and 2018 was 21% and 17%, respectively. Our tax rate is affected by recurring items, such as the U.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the items below had the most significant impact on the difference between our statutory U.S. income tax rate and our effective tax rate.
2019
•$1.2 million (0.1%) decrease due to the release of a valuation allowance primarily relating to research and development tax credits.
•$0.9 million (0.1%) decrease from research and development tax credits
•$0.8 million (0.1%) decrease due to excess tax benefits from share-based compensation which are recorded as a discrete item within the provision for income tax pursuant to ASU 2016-09
2018
•$8.1 million (5%) decrease due to excess tax benefits from share-based compensation which are recorded as a discrete item within the provision for income tax pursuant to ASU 2016-09
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•$4.2 million (2%) decrease due to changes in valuation allowance primarily relating to capital loss carryovers and research and development tax credits.
•$3.1 million (2%) increase from expired NOLs and credits
•$2.8 million (2%) reduction from research and development tax credits
•$0.9 million (1%) increase from non-cash contingent consideration charges that are nondeductible for tax purposes
•$0.9 million (1%) increase from Section 162(m) limitation
Liquidity and Capital Resource
At December 31, 2019, we had approximately $1,011.5 million in cash, cash equivalents, and short-term investments, of which approximatel y $6.8 million was held by our foreign subsidiaries. Cash and cash equivalents and short-term investments increased by $293.2 million from last year, due to factors described in the "Cash Flow Summary" below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, which increased during 2019 primarily from the sale of the Promacta license, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.
Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. Our short-term investments include U.S. government debt securities, investment-grade corporate debt securities, mutual funds and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as 6.0 million shares of common stock in Viking.
In August 2014, we issued the 2019 Notes with aggregate principal amount of $245.0 million. During 2018, $217.7 million in principal of the 2019 Notes were converted into cash. In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount.
In May 2018, we issued the 2023 Notes with an aggregate principal amount of $750.0 million. A portion of the proceeds from such issuance totaling $49.7 million were used to repurchase 260,000 shares of our common stock. The 2023 Notes were not convertible as of December 31, 2019. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. See detail in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (7), Convertible Senior Notes.”
In September 2018, our Board of Directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years. On January 23, 2019, our Board of Directors increased the share repurchase authorization by $150.0 million. The available amount under the $350.0 million repurchase plan was fully utilized during the third quarter of 2019.
On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and have entered into a Rule 10b5-1 trading plan, and may enter into additional Rule 10b5-1 trading plans in the future, to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. Our prior $350.0 million stock repurchase program mentioned above was terminated in connection with the approval of the new stock repurchase program. Authorization to repurchase $326.8 million of our common stock remained available as of December 31, 2019. See “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities.”
We believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital; capital expenditure and debt service requirements; continued advancement of research and development efforts; potential stock repurchases; and other business initiatives we plan to strategically pursue, including acquisitions and strategic investments.
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As of December 31, 2019, we had $8.9 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.
Cash Flow Summary

(in thousands) |  | 2019 |  | 2018 |  | 2017
Net cash provided by (used in): |  |  |  |  |  |
Operating activities |  | $ | (29,336) |  |  | $ | 194,059 |  |  | $ | 88,570 |
Investing activities |  | $ | 466,918 |  |  | $ | (423,269) |  |  | $ | (79,179) |
Financing activities |  | $ | (485,172) |  |  | $ | 328,585 |  |  | $ | (7,523) |

In 2019, we generated $827 million from the sale of the Promacta license (including $14.2 million recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019), used cash for net purchases of short-term investments, used $453.0 million to repurchase our common stock, used $103.8 million to pay federal and state estimated income taxes, paid off the remaining balance of the 2019 Notes in the amount of $27.3 million, paid $12.0 million for the purchase of Novan economic rights and paid $11.8 million for the Ab Initio acquisition (net of cash acquired).
In 2018, we generated cash from operations, from issuance of the 2023 Notes and associated warrants, and from issuance of common stock under employee stock plans. During the same period we used cash for investing activities, including the acquisition of commercial rights, net purchases of short-term investments, payments made to acquire Vernalis, payments to CVR holders and capital expenditures. We also used cash for financing activities, including principal payments related to conversions of the 2019 Notes, payments to purchase the bond hedge associated with the 2023 Notes, payments for taxes related to net share settlement of equity awards and to repurchase shares of our common stock.
In 2017, we generated cash from operations and from issuance of common stock under employee stock plans. During the same period we used cash for investing activities, including net purchases of short-term investments, payments made to acquire Crystal, payments to CVR holders and capital expenditures. We also used cash to pay taxes related to net share settlement of equity awards and to repurchase shares of our common stock.
Off-Balance Sheet Arrangements
We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 31, 2019, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the SEC.
We lease our office facilities under operating lease arrangements with varying terms through September 2026. The agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases of 3.0%. We had no off-balance sheet arrangements at December 31, 2019, 2018 and 2017.
Contractual Obligations
As of December 31, 2019, future minimum payments due under our contractual obligations are as follows (in thousands):

| Payments Due by Period |  |  |  |  |  |  |  |
| Total |  | Less than 1 year |  | 1-2 years |  | 3-4 years |  | Thereafter
Purchase obligations (1) | $ | 19,646 |  |  | $ | 12,139 |  |  | $ | 7,507 |  |  | $ | — |  |  | $ | — |
Notes payable (2) | $ | 769,219 |  |  | $ | 5,625 |  |  | $ | 11,250 |  |  | $ | 752,344 |  |  | $ | — |
Operating lease obligations (3) | $ | 13,866 |  |  | $ | 1,914 |  |  | $ | 4,482 |  |  | $ | 3,977 |  |  | $ | 3,493 |

(1) Amounts represent our commitments under our supply agreement with Hovione for Captisol purchases.
(2) Amounts represent contractual amounts due under our 2023 Notes, including interest based on the fixed rate of 0.75% per year.
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(3) We lease an office facility, which we have fully vacated under operating lease arrangements expiring on February 2023. We sublet the facility through the end of our lease. As of December 31, 2019, we expect to receive aggregate future minimum lease payments totaling $0.9 million (non-discounted) over the duration of the sublease agreement, which are not included in the table above.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
On January 1, 2018, we adopted ASC 606, which amends the guidance for recognition of revenue from contracts with customers using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. We apply the following five-step model in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether
they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under the contractual agreements. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.
Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when it is probable to estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.
For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
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Revenue from material sales is recognized when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.
We occasionally have sub-license obligations related to arrangements for which we receive license fees, milestones and royalties. We evaluate the determination of gross as a principal versus net as an agent reporting based on each individual agreement.
Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. A review of identifiable intangible assets and other long-lived assets is performed when an event occurs indicating the potential for impairment. If indicators of impairment exist, we first assess the impairment evaluation and then assess the recoverability of the affected long-lived assets and compare their fair values to the respective carrying amounts if needed. An impairment evaluation is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of assets and liabilities.
In order to estimate the fair value of identifiable intangible assets and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Contingent Liabilities
In October 2017, we acquired Crystal for total cash consideration of $27.2 million, plus contingent consideration of up to an additional $10.5 million over a five year period following the acquisition date based on certain research milestones and a portion of the payments that we receive from a specified part of the historical Crystal business. The contingent consideration is measured at fair value using an income approach valuation technique, specifically with probability weighted and discounted cash flows. The fair value of the liability is assessed at each reporting date and the change in fair value is recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability. The fair value of the contingent consideration liability as of December 31, 2019 was $2.7 million.
In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as proceeds are received by us from the sale or partnering of any of the Metabasis drug development programs. 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
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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.
See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (5), Fair Value Measurement.”
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Recent Accounting Pronouncements
For the summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”

Item 7A. | Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from interest rates and equity prices which could affect our results of operations, financial condition and cash flows. We manage our exposure to these market risks through our regular operating and financing activities.
Investment Portfolio Risk
At December 31, 2019, our investment portfolio included investments in available-for-sale securities of $940.0 million and investment in Viking common stock and warrants of $58.3 million. These securities are subject to market risk and may decline in value based on market conditions.
Equity Price Risk
In order to minimize the impact of potential dilution to our common stock upon the conversion of our then-existing 2019 Notes, we entered into convertible bond hedges covering 3,264,643 shares of our common stock. Concurrently with entering into the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants with an exercise price of approximately $125.08 per share, subject to adjustment. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. In November 2018, we repurchased a total of 525,000 warrants. As of December 31, 2019, 849,292 warrants had expired, and 1,890,359 warrants remained outstanding.
47

Our 2023 Notes include conversion and settlement provisions that are based on the price of our common stock at conversion or maturity of the notes, as applicable. As of December 31, 2019, the “if-converted value” did not exceed the principal amount of the 2023 Notes. See detail in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (7), Convertible Senior Notes.”
Foreign Currency Risk
Through our licensing and business operations, together with our recent acquisition of Vernalis, we are exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenues and profit translated into U.S. dollars. Our license partners sell our products worldwide in currencies other than the U.S. dollar. Because of this, our revenues from royalty payments are subject to risk from changes in exchange rates.
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 do not currently hedge our exposures to foreign currency fluctuations.
Interest Rate Risk
We are exposed to changes in interest rates related primarily to our investment portfolio. Our investment policy and strategy are focused on the preservation of capital and supporting our liquidity requirements. We use a combination of internal and external management to execute our investment strategy. We typically invest in highly rated securities, with the primary objective of minimizing the risk of principal loss. Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates across all maturities would not materially impact the fair market value of the portfolio in either period.
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Item 8. | Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

| Page
Report of Independent Registered Public Accounting Firm | 50
Consolidated Balance Sheets | 51
Consolidated Statements of Operations | 52
Consolidated Statements of Comprehensive Income (Loss) | 53
Consolidated Statements of Stockholders’ Equity | 55
Consolidated Statements of Cash Flows | 55
Notes to Consolidated Financial Statements | 57

49

Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ligand Pharmaceuticals Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ligand Pharmaceuticals Incorporated (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income , stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes, (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for recognizing revenue due to the adoption of Accounting Standards Update (ASU) 2014-09, R evenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-10, and 2016-12, effective January 1, 2018.
Adoption of ASU No. 2016-01
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for financial instruments due to the adoption of Accounting Standards Update (ASU) 2016-01, Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
50

are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they relate.

Description of the Matter |  | Uncertain Tax Positions As discussed in Note 11 to the consolidated financial statements, the Company had unrecognized income tax benefits of $29 million related to its uncertain tax positions at December 31, 2019. The Company uses judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. Estimated tax benefits related to uncertain tax positions that are not more likely than not to be sustained are reported as unrecognized income tax benefits. Auditing management's analysis of the Company’s uncertain tax positions and the amount of recognized tax benefit is complex and involves judgment because management’s estimate is based upon interpretations of tax laws, and legal rulings.
How We Addressed the Matter in Our Audit |  | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the Company’s accounting process related to uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of recognized tax benefits. Our audit procedures included, among others, testing the completeness and accuracy of the underlying data used by the Company to determine its uncertain tax positions. We involved our tax professionals to assess the technical merits of the Company’s tax positions including its consideration of relevant tax laws and current interpretations. In addition, we compared the estimated liabilities for unrecognized income tax benefits to similar positions in prior periods and assessed the historical accuracy of management’s estimates of its uncertain tax positions by comparing the estimates with the resolution of those positions as applicable. We also evaluated the adequacy of the Company’s disclosures included in Note 11 in relation to these tax matters.
|  | Gain from sale of Promacta license
Description of the Matter |  | As discussed in Note 2 to the consolidated financial statements, on March 6, 2019 the Company sold the Promacta-related rights, title and interest in and to intellectual property and related know-how for $827 million in cash. Of the total cash proceeds from the sale, $14.2 million was recorded as revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. Auditing the sale of Promacta license was especially challenging as the transaction was highly complex and the conclusions involved interpretation of complex accounting standards. This transaction required the exercise of auditor judgment in evaluating management’s determination of when control passed to the customer.
How We Addressed the Matter in Our Audit |  | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over management’s process for evaluating the transaction. For example, we tested controls over management’s review of the technical assessment over the asset sale. Our auditing procedures included, among others, obtaining and reading the agreements relating to the Promacta license sale and related documentation to evaluate the Company’s accounting conclusions. We performed procedures to test whether the terms of the agreement transferred all technology, rights and materials to the counter party. We vouched proceeds of the sale and that all obligations had been satisfied as of the transaction date.

/s/ Ernst & Young LLP
We have served as the Company's auditor since 2016.
San Diego, California
February 27, 2020
51

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)

| December 31, |  |
| 2019 |  | 2018
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 71,543 |  |  | $ | 117,164 |
Short-term investments | 939,989 |  |  | 601,217 |
Investment in Viking | 58,335 |  |  | 55,448 |
Accounts receivable, net | 30,387 |  |  | 55,850 |
Inventory | 7,296 |  |  | 7,124 |
Derivative asset | — |  |  | 22,576 |
Income taxes receivable | 11,361 |  |  | 142 |
Other current assets | 4,734 |  |  | 11,019 |
Total current assets | 1,123,645 |  |  | 870,540 |
Deferred income taxes, net | 25,608 |  |  | 46,521 |
Intangible assets, net | 210,448 |  |  | 219,793 |
Goodwill | 95,229 |  |  | 86,646 |
Commercial license and other economic rights | 20,090 |  |  | 31,460 |
Property and equipment, net | 7,185 |  |  | 5,372 |
Operating lease right-of-use assets | 10,353 |  |  | — |
Other assets | 2,357 |  |  | 471 |
Total assets | $ | 1,494,915 |  |  | $ | 1,260,803 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 2,420 |  |  | $ | 4,183 |
Accrued liabilities | 9,836 |  |  | 19,200 |
Current contingent liabilities | 2,607 |  |  | 5,717 |
Deferred revenue | 2,139 |  |  | 3,286 |
Derivative liability | — |  |  | 23,430 |
2019 convertible senior notes, net | — |  |  | 26,433 |
Total current liabilities | 17,002 |  |  | 82,249 |
2023 convertible senior notes, net | 638,959 |  |  | 609,864 |
Long-term contingent liabilities | 6,335 |  |  | 6,825 |
Deferred income taxes, net | 32,937 |  |  | — |
Long-term operating lease liabilities | 9,970 |  |  | — |
Other long-term liabilities | 22,480 |  |  | 951 |
Total liabilities | 727,683 |  |  | 699,889 |
Commitments and contingencies |  |  |
Stockholders’ equity: |  |  |
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at December 31, 2019 and 2018 | — |  |  | — |
Common stock, $0.001 par value; 60,000 shares authorized; 16,823 and 20,766 shares issued and outstanding at December 31, 2019 and 2018, respectively | 17 |  |  | 21 |
Additional paid-in capital | 367,326 |  |  | 791,114 |
Accumulated other comprehensive loss | (216) |  |  | (1,024) |
Retained earnings (accumulated deficit) | 400,105 |  |  | (229,197) |
Total stockholders’ equity | 767,232 |  |  | 560,914 |
Total liabilities and stockholders’ equity | $ | 1,494,915 |  |  | $ | 1,260,803 |

See accompanying notes to these consolidated financial statements.
52

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Revenues: |  |  |  |  |
Royalties | $ | 46,976 |  |  | $ | 128,556 |  |  | $ | 88,685 |
Material sales | 31,489 |  |  | 29,123 |  |  | 22,070 |
License fees, milestones and other revenues | 41,817 |  |  | 93,774 |  |  | 30,347 |
Total revenues | 120,282 |  |  | 251,453 |  |  | 141,102 |
Operating costs and expenses: |  |  |  |  |
Cost of material sales | 11,347 |  |  | 6,337 |  |  | 5,366 |
Amortization of intangibles | 16,864 |  |  | 15,792 |  |  | 12,120 |
Research and development | 55,908 |  |  | 27,863 |  |  | 26,887 |
General and administrative | 41,884 |  |  | 37,734 |  |  | 28,653 |
Total operating costs and expenses | 126,003 |  |  | 87,726 |  |  | 73,026 |
Gain from sale of Promacta license | 812,797 |  |  | — |  |  | — |
Income from operations | 807,076 |  |  | 163,727 |  |  | 68,076 |
Other income (expense): |  |  |  |  |
Gain (loss) from Viking | 2,888 |  |  | 50,187 |  |  | (2,048) |
Interest income | 28,430 |  |  | 13,999 |  |  | 2,060 |
Interest expense | (35,745) |  |  | (48,276) |  |  | (13,460) |
Other income (expense), net | (6,010) |  |  | (6,307) |  |  | 2,603 |
Total other income (expense), net | (10,437) |  |  | 9,603 |  |  | (10,845) |
Income before income tax expense | 796,639 |  |  | 173,330 |  |  | 57,231 |
Income tax expense | (167,337) |  |  | (30,009) |  |  | (44,675) |
Net income | 629,302 |  |  | 143,321 |  |  | 12,556 |
Basic net income per share | $ | 33.13 |  |  | $ | 6.77 |  |  | $ | 0.60 |
Shares used in basic per share calculation | 18,995 |  |  | 21,160 |  |  | 21,032 |
Diluted net income per share | $ | 31.85 |  |  | $ | 5.96 |  |  | $ | 0.53 |
Shares used in diluted per share calculation | 19,757 |  |  | 24,067 |  |  | 23,481 |

See accompanying notes to these consolidated financial statements.
53

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

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Net income | $ | 629,302 |  |  | $ | 143,321 |  |  | $ | 12,556 |
Unrealized net gain on available-for-sale securities, net of tax | 200 |  |  | 73 |  |  | 143 |
Foreign currency translation | 608 |  |  | (921) |  |  | — |
Less: Reclassification of net realized gains included in net income, net of tax | — |  |  | — |  |  | (400) |
Comprehensive income | $ | 630,110 |  |  | $ | 142,473 |  |  | $ | 12,299 |

See accompanying notes to these consolidated financial statements.
54

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)

| Common Stock |  |  |  | Additional paid-in capital |  | Accumulated other comprehensive income (loss) |  | Accumulated deficit |  |  | Total stockholders’ equity
| Shares |  | Amount |  |  |  |  |  |  |  |  |
Balance at January 1, 2017 | 20,909,301 |  |  | $ | 21 |  |  | $ | 769,653 |  |  | $ | 2,743 |  |  | $ | (431,127) |  |  |  | $ | 341,290 |
Issuance of common stock under employee stock compensation plans, net | 253,364 |  |  | — |  |  | (5,558) |  |  | — |  |  | — |  |  |  | (5,558) |
Reclassification of equity component of currently redeemable convertible notes | — |  |  | — |  |  | 10,704 |  |  | — |  |  | — |  |  |  | 10,704 |
Share-based compensation | — |  |  | — |  |  | 24,916 |  |  | — |  |  | — |  |  |  | 24,916 |
Repurchase of common stock | (14,000) |  |  | — |  |  | (1,966) |  |  | — |  |  | — |  |  |  | (1,966) |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (257) |  |  | — |  |  |  | (257) |
Cumulative-effect adjustment from adoption of ASU 2016-09 | — |  |  | — |  |  | 456 |  |  | — |  |  | 17,647 |  |  | — |  | 18,103 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 12,556 |  |  |  | 12,556 |
Balance at December 31, 2017 | 21,148,665 |  |  | $ | 21 |  |  | $ | 798,205 |  |  | $ | 2,486 |  |  | $ | (400,924) |  |  |  | $ | 399,788 |
Issuance of common stock under employee stock compensation plans, net | 399,116 |  |  | — |  |  | 16,417 |  |  | — |  |  | — |  |  |  | 16,417 |
Reclassification of equity component of currently redeemable convertible notes | — |  |  | — |  |  | 18,859 |  |  | — |  |  | — |  |  |  | 18,859 |
Share-based compensation | — |  |  | — |  |  | 20,846 |  |  | — |  |  | — |  |  |  | 20,846 |
Repurchase of common stock | (782,248) |  |  | — |  |  | (127,481) |  |  | — |  |  | — |  |  |  | (127,481) |
Other comprehensive income | — |  |  | — |  |  | — |  |  | 73 |  |  | — |  |  |  | 73 |
Cumulative-effect adjustment from adoption of ASU 2016-01 | — |  |  | — |  |  | — |  |  | (2,662) |  |  | 2,662 |  |  |  | — |
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax | — |  |  | — |  |  | — |  |  | — |  |  | 25,581 |  |  |  | 25,581 |
Derivative associated with 2019 Notes and Bond Hedge | — |  |  | — |  |  | (1,559) |  |  | — |  |  | — |  |  |  | (1,559) |
Loss on settlement of 2019 Notes | — |  |  | — |  |  | 3,187 |  |  | — |  |  | — |  |  |  | 3,187 |
Warrant repurchase in connection with 2019 Notes | — |  |  | — |  |  | (30,472) |  |  | — |  |  | — |  |  |  | (30,472) |
Loss on repurchase of warrants in connection with 2019 Notes | — |  |  | — |  |  | 1,792 |  |  | — |  |  | — |  |  |  | 1,792 |
Tax effect on 2019 Notes transactions | — |  |  | — |  |  | (1,680) |  |  | — |  |  | — |  |  |  | (1,680) |
Derivative associated with 2023 Notes and Bond Hedge | — |  |  | — |  |  | (1,807) |  |  | — |  |  | — |  |  |  | (1,807) |
Warrant derivative in connection with 2023 Notes | — |  |  | — |  |  | 97,805 |  |  | — |  |  | — |  |  |  | 97,805 |
Tax effect for 2023 Notes transactions | — |  |  | — |  |  | (3,181) |  |  | — |  |  | — |  |  |  | (3,181) |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | (921) |  |  | — |  |  |  | (921) |
Other tax adjustments | — |  |  | — |  |  | 183 |  |  | — |  |  | 163 |  |  |  | 346 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 143,321 |  |  |  | 143,321 |
Balance at December 31, 2018 | 20,765,533 |  |  | $ | 21 |  |  | $ | 791,114 |  |  | $ | (1,024) |  |  | $ | (229,197) |  |  |  | $ | 560,914 |
Issuance of common stock under employee stock compensation plans, net | 179,838 |  |  | — |  |  | (1,421) |  |  | — |  |  | — |  |  |  | (1,421) |
Share-based compensation | — |  |  | — |  |  | 24,515 |  |  | — |  |  | — |  |  |  | 24,515 |
Repurchase of common stock | (4,122,133) |  |  | (4) |  |  | (448,429) |  |  | — |  |  | — |  |  |  | (448,433) |
Unrealized net gain on available-for-sale securities, net of deferred tax | — |  |  | — |  |  | — |  |  | 200 |  |  | — |  |  |  | 200 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | 608 |  |  | — |  |  |  | 608 |
Other tax adjustments | — |  |  | — |  |  | 1,547 |  |  | — |  |  | — |  |  |  | 1,547 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 629,302 |  |  |  | 629,302 |
Balance at December 31, 2019 | 16,823,238 |  |  | $ | 17 |  |  | $ | 367,326 |  |  | $ | (216) |  |  | $ | 400,105 |  |  |  | $ | 767,232 |

See accompanying notes to these consolidated financial statements.
55

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Operating activities |  |  |  |  |
Net income | $ | 629,302 |  |  | $ | 143,321 |  |  | $ | 12,556 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |  |
Gain from sale of Promacta license | (812,797) |  |  | — |  |  | — |
Change in estimated fair value of contingent liabilities | (30) |  |  | 3,448 |  |  | 2,580 |
Realized gain on sale of short-term investment | (41) |  |  | (2,611) |  |  | (831) |
Depreciation and amortization of intangible assets | 18,361 |  |  | 12,784 |  |  | 10,955 |
(Gain) loss on equity investment in Viking | (2,888) |  |  | (47,658) |  |  | (1,114) |
Amortization/accretion of premium (discount) on investments, net | (10,274) |  |  | (5,452) |  |  | (81) |
Amortization of debt discount and issuance fees | 29,988 |  |  | 43,954 |  |  | 11,619 |
Amortization of commercial license and other economic rights | 25,370 |  |  | 1,934 |  |  | 759 |
Share-based compensation | 24,515 |  |  | 20,846 |  |  | 24,915 |
Deferred income taxes, net | 74,829 |  |  | 29,739 |  |  | 44,518 |
Royalties recorded in retained earnings upon adoption of ASC 606 | — |  |  | 32,707 |  |  | — |
Other | (1,456) |  |  | 2,832 |  |  | (870) |
Changes in operating assets and liabilities, net of acquisitions: |  |  |  |  |
Accounts receivable, net | 25,463 |  |  | (29,544) |  |  | (8,358) |
Inventory | (2,061) |  |  | (2,559) |  |  | (843) |
Accounts payable and accrued liabilities | (6,826) |  |  | (4,542) |  |  | (1,713) |
Income taxes receivable | (11,219) |  |  | 318 |  |  | (460) |
Other economic rights | (12,000) |  |  | — |  |  | — |
Other | 2,428 |  |  | (5,458) |  |  | (5,062) |
Net cash provided by (used in) operating activities | (29,336) |  |  | 194,059 |  |  | 88,570 |
Investing activities |  |  |  |  |
Proceeds from sale of Promacta license | 812,797 |  |  | — |  |  | — |
Purchase of commercial license rights | — |  |  | (10,000) |  |  | — |
Cash paid for acquisition, net of cash acquired | (11,840) |  |  | (5,856) |  |  | (26,653) |
Purchases of property and equipment | (2,553) |  |  | (887) |  |  | (2,156) |
Purchases of short-term investments | (2,356,545) |  |  | (1,434,255) |  |  | (254,258) |
Proceeds from sale of short-term investments | 535,877 |  |  | 131,942 |  |  | 86,985 |
Proceeds from maturity of short-term investments | 1,494,851 |  |  | 892,873 |  |  | 109,649 |
Proceeds from commercial license rights | — |  |  | — |  |  | 7,054 |
Proceeds received from repayment of Viking note receivable | — |  |  | 3,914 |  |  | 200 |
Cash paid for equity method investment | (1,000) |  |  | — |  |  | — |
Other, net | (4,669) |  |  | (1,000) |  |  | — |
Net cash provided by (used in) investing activities | 466,918 |  |  | (423,269) |  |  | (79,179) |
Financing activities |  |  |  |  |
Repayment of debt | (27,323) |  |  | (217,674) |  |  | — |
Gross proceeds from issuance of 2023 Convertible Senior Notes | — |  |  | 750,000 |  |  | — |
Payment of debt issuance costs | — |  |  | (16,900) |  |  | — |
Proceeds from issuance of warrants | — |  |  | 90,000 |  |  | — |
Purchase of convertible bond hedge | — |  |  | (140,250) |  |  | — |
Proceeds from bond hedge settlement | 12,401 |  |  | 439,559 |  |  | — |
Payments to convert holders for bond conversion | (12,401) |  |  | (439,581) |  |  | — |
Net proceeds from stock option exercises and ESPP | 2,997 |  |  | 20,183 |  |  | 4,517 |
Taxes paid related to net share settlement of equity awards | (4,418) |  |  | (3,765) |  |  | (10,074) |
Share repurchases | (453,048) |  |  | (122,868) |  |  | (1,966) |
Repurchase of warrants | (380) |  |  | (30,094) |  |  | — |
Payments to CVR Holders | (3,000) |  |  | (25) |  |  | — |

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Net cash provided by (used in) financing activities | (485,172) |  |  | 328,585 |  |  | (7,523) |
Net increase (decrease) in cash and cash equivalents | (47,590) |  |  | 99,375 |  |  | 1,868 |
Effect of exchange rate changes on cash | 83 |  |  | (215) |  |  | — |
Cash, cash equivalents and restricted cash at beginning of year | 119,780 |  |  | 20,620 |  |  | 18,752 |
Cash, cash equivalents and restricted cash at end of year | $ | 72,273 |  |  | 119,780 |  |  | 20,620 |
Supplemental disclosure of cash flow information |  |  |  |  |
Cash paid during the year: |  |  |  |  |
Interest paid | $ | 5,827 |  |  | $ | 1,513 |  |  | $ | 1,838 |
Taxes paid | $ | 103,817 |  |  | $ | 341 |  |  | $ | 157 |
Restricted cash in other current assets | $ | 730 |  |  | $ | 2,616 |  |  | $ | — |
Supplemental schedule of non-cash investing and financing activities |  |  |  |  |
Accrued inventory purchases | $ | 170 |  |  | $ | 2,059 |  |  | $ | 1,007 |
Unrealized gain on AFS investments | $ | 256 |  |  | $ | 48 |  |  | $ | 144 |
Purchase of fixed assets recorded in accounts payable | $ | 495 |  |  | $ | 15 |  |  | $ | — |

See accompanying notes to these consolidated financial statements.
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Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Business
We are a biopharmaceutical company with a business model primarily based on developing or acquiring assets which generate royalty, milestone or other passive revenue for us using a lean corporate cost structure. We operate in one business segment: development and licensing of biopharmaceutical assets.
Principles of Consolidation
The accompanying consolidated financial statements include Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of our parent company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the previously issued financial statements to conform with the current period presentation. Specifically, our investment in Viking warrants was reclassified from “other current assets” to “investment in Viking” in the audited consolidated balance sheet as of December 31, 2018.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Concentrations of Business Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and investments. We invest excess cash principally in United States government debt securities, investment grade corporate debt securities, mutual funds and certificates of deposit. We have 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.
Revenue from significant partners, which is defined as 10% or more of our total revenue, was as follows:

| December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Partner A | 13 | % |  | 40 | % |  | 46 | %
Partner B | 27 | % |  | 13 | % |  | 19 | %
Partner C | < 10% |  |  | 20 | % |  | < 10% |

We obtain Captisol primarily from two sites at a single supplier, Hovione. If this supplier were not able to supply the requested amounts of Captisol from each site, and if our safety stocks of material were depleted, we would be unable to continue to derive revenues from the sale of Captisol until we obtained material from an alternative source, which could take a considerable length of time.
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Cash Equivalents & Short-term Investments
Cash equivalents consist of all investments with maturities of three months or less from the date of acquisition. Short-term investments primarily consist of investments in debt and equity securities and mutual funds. Debt securities have effective maturities greater than three months and less than twelve months from the date of acquisition. We classify our short-term investments as "available-for-sale". Such investments are carried at fair value, with unrealized gains and losses on debt securities included in the statement of comprehensive income (loss) and unrealized gains and losses on equity securities and mutual funds included the consolidated statement of operations. Mutual funds are valued at their net asset value (NAV) on the last day of the period. We determine the cost of investments based on the specific identification method.
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms which range from 30 to 90 days. We reserve specific receivables if collectability is no longer reasonably assured. We re-evaluate such reserves on a regular basis and adjust the reserves as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method. We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write downs related to obsolete inventory recorded for the years ended December 31, 2019, 2018 and 2017.
Property and Equipment
Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, which generally range from three to ten years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.
Business Combinations
The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination).
Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, including contingent consideration and all contractual contingencies, generally at the acquisition date fair value. Contingent purchase consideration to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in other income (expense), net. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred.
We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. In addition, IPR&D is capitalized and assessed for impairment annually. IPR&D is amortized upon product commercialization or upon out-licensing the underlying intellectual property where we have no active involvement in the licensee's development activities. IPR&D is amortized over the estimated life of the commercial product or licensing arrangement.
Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements in the period of change, if any.
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Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
Contingent Liabilities
In connection with the acquisition of Crystal in October 2017, we may be required to pay up to an additional $10.5 million in purchase consideration upon achievement of certain commercial and development milestones to the Crystal shareholders.
In connection with the acquisition of CyDex in January 2011, we recorded a contingent liability for amounts potentially due to holders of the CyDex CVRs and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales. In connection with the acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs for each Metabasis share. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement.
Any change in fair value is recorded in our consolidated statement of operations. For additional information, see “Note (5), Fair Value Measurement and Note (8), Balance Sheet Account Details.”
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. We operate in one reporting unit. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to perform the quantitative assessment. We will then evaluate goodwill for impairment by comparing the estimated fair value of the reporting unit to its carrying value, including the associated goodwill. To determine the fair value, we generally use a combination of market approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. We may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the quantitative assessment for the goodwill impairment test. We performed the annual assessment for goodwill impairment during the fourth quarter of 2019, noting no impairment.
Our identifiable intangible assets are typically composed of acquired core technologies, licensed technologies, customer relationships and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives. We regularly perform reviews to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to the net book value, significant changes in the ability of a particular asset to generate positive cash flows, and the pattern of utilization of a particular asset.
Commercial license and other economic rights
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Commercial license and other economic rights consist of the following (in thousands):

| As of December 31, |  |
| 2019 |  | 2018
Aziyo & CorMatrix | $ | 17,696 |  |  | $ | 17,696 |
Palvella | 10,000 |  |  | 10,000 |
Selexis | 8,602 |  |  | 8,602 |
Dianomi | 2,000 |  |  | — |
| 38,298 |  |  | 36,298 |
Less: accumulated amortization attributed to principal or research and development | (18,208) |  |  | (4,838) |
Total commercial license and other economic rights, net | $ | 20,090 |  |  | $ | 31,460 |

Commercial license and other economic rights as of December 31, 2019 represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, Palvella in December 2018, and Dianomi in January 2019. Commercial license rights acquired are accounted for as financial assets, and other economic rights are accounted for as funded research and developments as further discussed below.
In May 2019, we entered into a development funding and royalties agreement with Novan, pursuant to which we would receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization of SB206. Pursuant to the agreement, we would receive up to $20.0 million of milestone payments upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition to the milestone payments, Novan will pay us tiered royalties from 7.0% to 10.0% based on aggregate annual net sales of SB206 or any other Novan Molluscum Product in North America. We determined the economic rights related to Novan should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20, Research and Development Arrangement, and reduce our asset as the funds are expended by Novan. As of December 31, 2019, Novan had used up the $12.0 million upfront payment provided by us. As such, our other economic rights related to Novan has been fully amortized as of December 31, 2019.
In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we will receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on aggregate annual worldwide net sales of any PTX-022 products, if approved, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We made an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for development or commercialization of PTX-022. We determined the economic rights related to Palvella should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20, and will reduce our asset as the funds are expended by Palvella. We will evaluate the remaining asset basis for impairment on an ongoing basis. It is anticipated that the cost basis of the asset will be reduced to zero prior to the receipt of any payments from Palvella. Therefore, we will recognize milestones and royalties as revenue when earned.
In May 2017, we entered into a royalty agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. Pursuant to the agreement, we received $10.0 million in 2017 from Aziyo to buydown the royalty rates on the products CorMatrix sold to Aziyo. The agreement closed on May 31, 2017, in connection with the closing of the asset sale from CorMatrix to Aziyo (the “CorMatrix Asset Sale”). Per the agreement, we will receive a 5% royalty on the products Aziyo acquired in the CorMatrix Asset Sale, reduced from the original 20% royalty from CorMatrix pursuant to the previously disclosed interest purchase agreement, dated May 3, 2016 (the “Original Interest Purchase Agreement”) between CorMatrix and us. In addition, Aziyo has agreed to pay us up to $10.0 million of additional milestones tied to cumulative net sales of the products Aziyo acquired in the CorMatrix Asset Sale and to extend the term on these royalties by one year. The royalty agreement will terminate on May 31, 2027. In addition, in May 2017, we entered into an amended and restated interest purchase agreement (the “Amended Interest Purchase Agreement”) with CorMatrix, which supersedes in its entirety the Original Interest Purchase Agreement. Other than removing the commercial products sold to Aziyo in the CorMatrix Sale, the terms of the Amended Interest Purchase Agreement remain unchanged with respect to the CorMatrix
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developmental pipeline products, including the royalty rate of 5% on such pipeline products. The Amended Interest Purchase Agreement will terminate 10 years from the date of the first commercial sale of such products.
We account for the Aziyo commercial license right as a financial asset in accordance with ASC 310, Receivables, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the royalty agreement with Aziyo as of December 31, 2019 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in 2019 were accordingly allocated between revenue and the amortization of the commercial license rights.
For commercial license rights, we have elected a prospective approach to account for changes in estimated cash flows and selected a method for determining when an impairment would be recognized and how to measure that impairment. In circumstances where our new estimate of expected cash flows is greater than previously expected, we will update our yield prospectively. In circumstances where our new estimate of expected cash flows is less than previously expected and below our original estimated yield we record an impairment. Impairment is recognized by reducing the financial asset to an amount that represents the present value of our most recent estimate of expected cash flows discounted by the original effective interest rate. In circumstances where our new estimate of expected cash flows is less than previously expected, but not below our original estimated yield, we update our yield prospectively.
We account for commercial license rights related to developmental pipeline products such as Selexis and Dianomi on a non-accrual basis. These developmental pipeline products are non-commercialized, non-approved products that require FDA or other regulatory approval, and thus have uncertain cash flows. The developmental pipeline products are on a non-accrual basis as we are not yet able to forecast future cash flows given their pre-commercial stages of development. We will prospectively update the yield model under the effective interest method once the underlying products are commercialized and we can reliably forecast expected cash flows. Income will be calculated by multiplying the carrying value of the commercial license right by the effective interest rate. We regularly perform reviews to determine if any event has occurred that may indicate the carrying value of these commercial license rights are potentially impaired. If the affected commercial license rights are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. We recorded a $5.1 million reduction in the carrying value of the Selexis asset which was reflected in other expense, net, in our consolidated statement of operations for the twelve months ended December 31, 2019.
Revenue Recognition
Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, license fees and development, regulatory and sales based milestone payments.
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance for recognition of revenue from contracts with customers by using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. The results for reporting periods beginning January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. See additional information in Disaggregation of Revenue subsection below. Our accounting policies under the new standard were applied prospectively and are noted below.
Royalties, License Fees and Milestones
We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under the contractual agreements. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.
Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when it is probable to estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based
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payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.
For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
Material Sales
We recognize revenue when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the twelve months ended December 31, 2019, the amount recognized as revenue that was previously deferred at prior year-end was $3.3 million. During the twelve months ended December 31, 2018, the amount recognized as revenue that was previously deferred at prior year-end was $2.3 million.
We have revenue sharing arrangements whereby certain revenue proceeds are shared with a third party. The revenue standard requires an entity to determine whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. We received $4.6 million royalty payments from a license partner during 2019 of which $4.0 million was paid to a third-party in-licensor. We recorded net revenue of $0.6 million as we believe we are an agent in the transaction. We recorded an immaterial amount due to third-party in-licensors as general and administrative expenses as we are the principal in the transaction during 2019.
Disaggregation of Revenue
Royalty revenue for 2019, 2018 and 2017 are reported as below (in thousands):
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|  | Year ended December 31, |  |  |  |
|  | 2019(1) |  | 2018(1) |  | 2017(2)
Promacta |  | $ | 14,193 |  |  | $ | 99,260 |  |  | $ | 62,918 |
Kyprolis |  | 25,046 |  |  | 21,686 |  |  | 16,413 |
Evomela |  | 5,171 |  |  | 5,658 |  |  | 7,155 |
Other |  | 2,566 |  |  | 1,952 |  |  | 2,199 |
|  | $ | 46,976 |  |  | $ | 128,556 |  |  | $ | 88,685 |

(1) Royalty revenue for 2019 and 2018 was reported under the current revenue recognition guidance (ASC 606).
(2) Royalty revenue for 2017 was reported under the legacy revenue recognition guidance (ASC 605).
The following table represents disaggregation of Material Sales and License fees, milestone and other (in thousands), which are not affected by the adoption of ASC 606:

|  | Year ended December 31, |  |  |  |
|  | 2019 |  | 2018 |  | 2017
Material Sales |  |  |  |  |  |
Captisol |  | $ | 31,489 |  |  | $ | 29,123 |  |  | $ | 22,070 |
License fees, milestones and other |  |  |  |  |  |
License fees |  | 6,199 |  |  | 78,195 |  |  | 13,665 |
Milestones |  | 23,451 |  |  | 6,577 |  |  | 11,093 |
Other |  | 12,167 |  |  | 9,002 |  |  | 5,589 |
|  | $ | 41,817 |  |  | $ | 93,774 |  |  | $ | 30,347 |

Preclinical Study and Clinical Trial Accruals
Substantial portions of our preclinical studies and all of our clinical trials have been performed by third-party laboratories, CROs. We account for a significant portion of the clinical study costs according to the terms of our contracts with CROs. The terms of the CRO contracts may result in payment flows that do not match the periods over which services are provided to us under such contracts. Our objective is to reflect the appropriate preclinical and clinical trial expenses in our financial statements in the same period as the services occur. As part of the process of preparing our financial statements, we rely on cost information provided by our CROs. We are also required to estimate certain of our expenses resulting from the obligations under the CRO contracts. Accordingly, our preclinical study and clinical trial accrual is dependent upon the timely and accurate reporting of CROs and other third-party vendors. We periodically evaluate our estimates to determine if adjustments are necessary or appropriate as more information becomes available 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.
Research and Development Expenses
Research and development expense consists of labor, material, equipment, and allocated facilities costs of our scientific staff who are working pursuant to our collaborative agreements and other research and development projects. Also included in research and development expenses are third-party costs incurred for our research programs including in-licensing costs, CRO costs and costs incurred by other research and development service vendors. We expense these costs as they are incurred. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided. In addition, the amortization of the above mentioned other economic rights such as Palvella and Novan are included in research and development expenses in accordance with ASC 730-20.
Share-Based Compensation
We incur share-based compensation expense related to restricted stock, ESPP, and stock options.
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Restricted stock unit (RSU) and performance stock unit (PSU) are all considered restricted stock. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. We recognize share-based compensation expense based on the fair value on a straight-line basis over the requisite service periods of the awards, taking into consideration of forfeitures as they occur. PSU represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any expense change resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment.
We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock purchases under ESPP and stock options granted. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. We look to historical and implied volatilities of our stock to determine the expected volatility. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
We grant options, RSUs and PSUs to employees and non-employee directors. Non-employee directors are accounted for as employees. Options and RSUs granted to certain non-employee directors typically vest one year from the date of grant. Options granted to employees typically vest 1/8 on the six month anniversary of the date of grant, and 1/48 each month thereafter for forty-two months. RSUs and PSUs granted to employees vest over three years. All option awards generally expire ten years from the date of grant.
Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests.
Derivatives
In May 2018, we issued $750.0 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually, as further described in “Note (7), Convertible Senior Notes.” Concurrently with the issuance of the notes, we entered into a series of convertible note hedge and warrant transactions which in combination are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the notes. The conversion option associated with the 2023 Notes temporarily met the criteria for an embedded derivative liability which required bifurcation and separate accounting. In addition, the note hedge and warrants were also temporarily classified as a derivative asset and liability, respectively, on our consolidated balance sheet. As a result of shareholder approval to increase the number of authorized shares of our common stock on June 19, 2018, as discussed in “Note (7), Convertible Senior Notes,” the derivative asset and liabilities were reclassified to additional paid-in capital. Changes in the fair value of these derivatives prior to being classified in equity were reflected in other expense, net, in our consolidated statements of operations for the twelve months ended December 31, 2018.
In connection with our 2019 Notes, which we issued in August 2014 for $245.0 million aggregate principal amount, on May 22, 2018, we amended it making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our consolidated statements of operations.
In connection with the payoff of the 2019 Notes in August 15, 2019, the bond hedge was settled and accordingly, the derivative asset and derivative liability were settled to zero. See detail in “Note (7), Convertible Senior Notes.”
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected
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to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating the ability to recover deferred tax assets within the jurisdiction which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Income (loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under 2019 and 2023 convertible senior notes, stock options and restricted stock. 2019 and 2023 convertible senior notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. In addition, post May 22, 2018, the 2019 Notes can only be settled in cash and therefore there will be no further impact on income (loss) per share of these notes. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for stock options and restricted stock. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of otherwise dilutive potential common shares is anti-dilutive and therefore excluded.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Weighted average shares outstanding: | 18,995 |  |  | 21,160 |  |  | 21,032 |
Dilutive potential common shares: |  |  |  |  |
Restricted stock | 43 |  |  | 72 |  |  | 141 |
Stock options | 719 |  |  | 1,125 |  |  | 1,000 |
Warrants associated with 2019 Notes | — |  |  | 1,017 |  |  | 94 |
2019 Convertible Senior Notes | — |  |  | 693 |  |  | 1,214 |
Shares used to compute diluted income per share | 19,757 |  |  | 24,067 |  |  | 23,481 |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 8,926 |  |  | 2,845 |  |  | 335 |

Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, and reclassification adjustments for realized gains or losses included in net income (loss). The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Income (Loss).
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Foreign Currency Translation
The British Pound Sterling is the functional currency of Vernalis and the corresponding financial statements have been translated into U.S. Dollars in accordance with ASC 830-30, Translation of Financial Statements. Assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activity took place. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss).
Accounting Standards Recently Adopted
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. In 2018, the FASB issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, Leases (Topic 840), including its disclosure requirements, in the comparative periods presented. We adopted this standard on January 1, 2019 by applying this optional transition method. For leases with a term of 12 months or less, we elected to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases. In addition, we elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We did not elect to use the hindsight practical expedient to determine the lease term or evaluate impairment for existing leases. We continue to report our financial position as of December 31, 2018 under Topic 840 in our audited consolidated balance sheet. The adoption of this standard update resulted in the recognition of right-of-use assets of approximately $5.2 million and lease liabilities of approximately $5.9 million on our consolidated balance as of January 1, 2019, with no material impact to our consolidated statement of operations. See "Note (6), Leases" for further information regarding the impact of the adoption of ASU 2016-02 on our financial statements.
Accounting Standards Not Yet Adopted
Financial Instruments - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for us beginning in the first quarter of 2020, with early adoption permitted. This standard includes our financial instruments, such as accounts receivable, investments that are generally of high credit quality, and commercial license rights. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new guidance requires us to identify, analyze, document and support new methodologies for quantifying expected credit loss estimates for our financial instruments, using information such as historical experience and current economic conditions, plus the use of reasonable supportable forecast information. We will adopt this standard effective January 1, 2020, and we currently do not expect the adoption to result in a material impact to our consolidated financial statements.
Goodwill Impairment Testing - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. This standard is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We will adopt this standard effective January 1, 2020 and do not expect the adoption to have a material impact on our consolidated financial statements.
Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We will adopt this standard effective January 1, 2020, and will include the required disclosure beginning in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue
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recognized from contracts with customers. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period for entities that have adopted ASC 606. The standard should be applied retrospectively to the period when we initially adopted ASC 606. We will adopt this standard effective January 1, 2020, and do not expect the adoption will result in material impact to our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
2. Sale of Promacta License
On March 5, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RPI Finance Trust (“RPI”), doing business as “Royalty Pharma”, who is not an affiliate. Under the Asset Purchase Agreement, we sold, transferred, assigned and conveyed to RPI, and RPI purchased, acquired and accepted from us, all of our rights, title and interest in and to the Purchased Assets, which include among other things the intellectual property and related know-how generated by us in connection with the license agreement (collectively, the “Purchased Assets”), dated December 29, 1994, by and between Novartis (as successor in interest to SmithKline Beecham Corporation) and Ligand, which allowed us to receive a royalty on net sales of Promacta. We concluded the sale does not qualify as a sale of a business, but as a sale of a non-financial asset. At the closing on March 6, 2019, RPI paid us $827.0 million in cash and we do not have any remaining performance obligations related to Novartis or RPI for Promacta. The carrying value of our Promacta asset as of March 6, 2019 was zero. Of the total cash proceeds from the sale, $14.2 million was recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.
3. Investment in Viking
Our ownership in Viking was approximately 10.3% as of December 31, 2019, and we account for it as investment in an available-for-sale security, which is measured at fair value, with changes in fair value recognized in net income.
Prior to February 2018, we accounted for our investment in Viking under the equity method. As a result of Viking's public stock offerings, we recorded a dilution gain of $2.7 million for the year ended December 31, 2017. These amounts were recognized in Loss from Viking in our consolidated statement of operations. Our equity ownership interest in Viking decreased during the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. Viking is considered a related party as we maintain a seat on Viking's board of directors.
As of December 31, 2019 and December 31, 2018, we recorded our common stock in Viking at fair value of $48.4 million and $46.2 million, respectively. We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in "investment in Viking" in our consolidated balance sheets at fair value of $9.9 million and $9.3 million at December 31, 2019 and 2018, respectively. See further discussion in “Note (5), Fair Value Measurement.”
Subsequent to the adoption of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), on January 1, 2018, we no longer account for our investment in Viking under the equity method; instead, it is measured at fair value, with changes in fair value recognized in net income (loss).
4. Business Combinations
As set forth below, we completed three acquisitions from January 1, 2017 through December 31, 2019, and all were accounted for as business combinations. We applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. For each acquisition, we did not incur any material acquisition related costs.
Ab Initio Acquisition
On July 23, 2019, we acquired privately-held Ab Initio, an antigen-discovery company located in South San Francisco, California. Ab Initio has a patented antigen technology that is synergistic with the OmniAb® therapeutic antibody discovery platform, providing our current and potential new partners enhanced capabilities for the discovery of therapeutic antibodies
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against difficult-to-access cellular targets. Ab Initio has a collaboration agreement with Pfizer to discover novel therapeutic antibodies against an undisclosed target in the GPCR superfamily.
The purchase price of $12.0 million included $11.84 million cash consideration paid upon acquisition, net of cash acquired, and $0.15 million cash holdback for potential indemnification claims. As the acquisition is not considered significant, pro forma information has not been provided.
The preliminary allocation of the consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and other assets | $ | 28 |
Accounts payable and accrued liabilities | (83) |
Deferred tax liabilities, net | (1,609) |
Intangibles assets with finite life - core technologies | 7,400 |
Goodwill | 6,275 |
| $ | 12,011 |

None of the goodwill is deductible for tax purposes. The fair value of the core technologies was determined based on the discounted cash flow method that estimated the present value of the hypothetical royalty/ milestone streams from the licensing of the antigen-discovery technology and collaboration agreement. These projected cash flows were discounted to present value using a discount rate of 12.0%. The fair value of the core technologies is being amortized on a straight-line basis over the weighted average estimated useful life of approximately 20 years.
The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, and purchased intangibles are provisional. The accounting for these amounts falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.
Vernalis Acquisition
In October 2018, we acquired Vernalis, a structure-based drug discovery biotechnology company for $43.0 million, funded through cash on hand. The acquisition of Vernalis increases our overall portfolio of fully-funded programs. As Vernalis' operations are not considered material, pro forma information is not provided.
The final purchase consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and cash equivalents | $ | 34,286 |
Restricted cash | 2,836 |
Other assets | 6,383 |
Accounts payable and accrued liabilities | (3,479) |
Restructuring and product reserves | (9,241) |
Deferred revenue | (746) |
Intangibles assets with finite life - core technologies | 7,000 |
Goodwill | 5,939 |
| $ | 42,978 |

None of the goodwill is deductible for tax purposes. The fair value of the core technologies was based on the discounted cash flow method that estimated the present value of the hypothetical royalty/milestone streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 34.0%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of approximately nine years.
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Crystal Acquisition
On October 6, 2017, we acquired all of the assets and liabilities of Crystal. Crystal is a biotechnology company focused in avian genetics and the generation of fully-human therapeutic engineering of animals for the generation of fully-human therapeutic antibodies through its OmniChicken® technology. Under the terms of the agreement, we were to pay Crystal selling shareholders $27.2 million in cash including a $2.2 million working capital adjustment, and up to an additional $10.5 million of cash consideration based on Crystal’s achievement of certain research and business milestones prior to December 31, 2019. In addition, Crystal’s selling shareholders will receive 10% of revenues realized by Ligand above $15 million between the closing date and December 31, 2022 from existing collaboration agreements between Crystal and three of its collaborators, and Crystal’s selling shareholders will receive 20% of revenues above $1.5 million generated between the closing date and December 31, 2022 pursuant to a fourth existing collaboration agreement with a large pharmaceutical company. As of December 31, 2019, $0.02 million of the initial $27.2 million of cash consideration remained outstanding.
At the closing of the acquisition, we recorded an $8.4 million contingent liability for amounts potentially due to Crystal shareholders. The initial fair value of the liability was determined using a probability weighted income approach incorporating the estimated future cash flows from potential milestones and revenue sharing. These cash flows were then discounted to present value using discount rates based on our estimated corporate credit rating, and averaged to approximately 4.6%. Refer to Note 5 Fair Value Measurement for further discussion. The liability has been periodically assessed based on events and circumstances related to the underlying milestones, and any changes in fair value are recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability. For additional information, see “Note (8), Balance Sheet Account Details.”
The final aggregate acquisition consideration was determined to be $35.7 million, consisting of (in thousands):

Cash paid to Crystal shareholders | $ | 26,877 |
Cash payable to Crystal Shareholders | 336 |
Assumed liabilities | 129 |
Fair value of contingent consideration | 8,401 |
Total consideration | $ | 35,743 |

The acquisition consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):

Cash and cash equivalents | $ | 224 |
Accounts receivable | 2,513 |
Prepaid expenses and other assets | 201 |
Property and equipment, net | 589 |
Current liabilities assumed | (354) |
Deferred revenue | (4,624) |
Deferred tax liabilities, net | (9,503) |
Intangible asset with finite life - core technology | 36,000 |
Goodwill | 10,697 |
Total consideration | $ | 35,743 |

The fair value of the core technology, or OmniChicken technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniChicken technology. These projected cash flows were discounted to present value using a discount rate of 10.8%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.
The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed was $10.7 million and was recorded as goodwill, which is not deductible for tax purposes and is primarily attributable to Crystal’s potential revenue growth from combining the Crystal and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.
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5. Fair Value Measurement
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. We establish 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 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions
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, 2019 and 2018 (in thousands):

Fair Value Measurements at Reporting Date Using |  |  |  |  |  |  |
December 31, 2019 |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
| Total |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |
Short-term investments (1) | $ | 939,989 |  |  | $ | 3,073 |  |  | $ | 936,791 |  |  | $ | 125 |
Investment in Viking common stock | 48,425 |  |  | 48,425 |  |  | — |  |  | — |
Investment in Viking warrants (2) | 9,910 |  |  | 9,910 |  |  | — |  |  | — |
Total assets | $ | 998,324 |  |  | $ | 61,408 |  |  | $ | 936,791 |  |  | $ | 125 |
Liabilities: |  |  |  |  |  |  |
Contingent liabilities - Crystal (3) | $ | 2,659 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,659 |
Contingent liabilities - Cydex | 348 |  |  | — |  |  | — |  |  | 348 |
Contingent liabilities - Metabasis (4) | 5,935 |  |  | — |  |  | 5,935 |  |  | — |
Liability for amounts owed to a former licensor | 75 |  |  | 75 |  |  | — |  |  | — |
Total liabilities | $ | 9,017 |  |  | $ | 75 |  |  | $ | 5,935 |  |  | $ | 3,007 |

Fair Value Measurements at Reporting Date Using |  |  |  |  |  |  |
December 31, 2018 |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
| Total |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets: |  |  |  |  |  |  |
Short-term investments (1) | $ | 601,217 |  |  | $ | 1,326 |  |  | $ | 599,891 |  |  | $ | — |
Investment in Viking common stock | 46,191 |  |  | 46,191 |  |  | — |  |  | — |
Investment in Viking warrants (2) | 9,257 |  |  | 9,257 |  |  | — |  |  | — |
Total assets | $ | 656,665 |  |  | $ | 56,774 |  |  | $ | 599,891 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Contingent liabilities - Crystal (3) | $ | 6,477 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,477 |
Contingent liabilities - Cydex | 514 |  |  | — |  |  | — |  |  | 514 |
Contingent liabilities - Metabasis (4) | 5,551 |  |  | — |  |  | 5,551 |  |  | — |
Liability for amounts owed to a former licensor | 199 |  |  | 199 |  |  | — |  |  | — |
Total liabilities | $ | 12,741 |  |  | $ | 199 |  |  | $ | 5,551 |  |  | $ | 6,991 |

(1) Short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as
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short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on black scholes value estimated by management as of December 31, 2019.
(2) Investment in Viking warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, is classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in “Gain (loss) from Viking” in our consolidated statement of operations. See further discussion in “Note (3), Investment in Viking.”
(3) The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. During the twelve months ended December 31, 2019, we paid $3.0 million contingent liability on development milestones to former Crystal shareholders. At December 31, 2019, $1.8 million of the development and regulatory milestones were considered to be achieved and will be paid to former Crystal shareholders during the first half of 2020.
(4) In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially differ than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.”
A reconciliation of the level 3 financial instruments as of December 31, 2019 is as follows (in thousands):

Liabilities |
Fair value of level 3 financial instruments as of December 31, 2018 | $ | 6,991 |
Payments to CVR holders and other contingency payments | (3,050) |
Fair value adjustments to contingent liabilities | (934) |
Fair value of level 3 financial instruments as of December 31, 2019 | $ | 3,007 |

Assets Measured on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets, and long-lived assets.
We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.
Other than a reduction in the value of our Selexis commercial license right disclosed in “Note (1), Basis of Presentation and Summary of Significant Accounting Policies - Commercial license and other economic rights” and a GRA intangible asset, there were no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the twelve months ended December 31, 2019.
Fair Value of Financial Instruments
In August 2014 and May 2018, we issued the 2019 Notes and 2023 Notes, respectively. We use quoted market rates in an inactive market, which are classified as a Level 2 input, to estimate the current fair value of our 2019 and 2023 Notes. The carrying value of the notes does not reflect the market rate. See “Note (7), Convertible Senior Notes” for additional information related to the fair value.
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6. Leases
We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to seven years, some of which include options to extend the leases for up to seven years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are immaterial.
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Operating Lease Assets and Liabilities (in thousands):

| December 31, 2019 |  | Balance Sheet Classification
Lease assets | $ | 10,353 |  |  | Operating lease right-of-use assets
Current lease liabilities | $ | (1,242) |  |  | Accrued liabilities
Non-current lease liabilities | (9,970) |  |  | Long-term operating lease liabilities
Total lease liabilities | $ | (11,212) |  |  |

During the twelve months ended December 31, 2019, we entered into several new lease agreements including our San Diego headquarter expansion, opening new Las Vegas office and a new United Kingdom office lease, which resulted an increase in lease assets and liabilities of $6.1 million and $6.0 million, respectively.
Maturity of Operating Lease Liabilities (in thousands):

Maturity Dates |  | December 31, 2019
2020 |  | $ | 1,914 |
2021 |  | 2,221 |
2022 |  | 2,261 |
2023 |  | 1,988 |
2024 |  | 1,989 |
Thereafter |  | 3,493 |
Total lease payments |  | 13,866 |
Less imputed interest |  | (2,654) |
Present value of lease liabilities |  | $ | 11,212 |

As of December 31, 2019, our operating leases have a weighted-average remaining lease term of 6 years and a weighted-average discount rate of 6%. Cash paid for amounts included in the measurement of operating lease liabilities was $1.8 million for the twelve months ended December 31, 2019. Operating lease expense was $2.1 million (net of sublease income of $0.7 million) for the twelve months ended December 31, 2019, respectively.
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7. Convertible Senior Notes
0.75% Convertible Senior Notes due 2019
In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes, resulting in net proceeds of $239.3 million. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83%. The 2019 Notes are convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes bear cash interest at a rate of 0.75% per year, payable semi-annually.
Holders of the 2019 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if,
for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
On May 22, 2018, we entered into a supplemental indenture whereby we made an irrevocable election to settle the entire 2019 Notes in cash. As such, we would have been required to deliver cash to settle the principal and any premium due upon conversion. As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option (a derivative) fair value of $341.6 million. In accordance with ASC 815, Derivatives and Hedging, the derivative was adjusted to its fair value as of December 31, 2018 to $23.4 million with the resulting $118.7 million increase, net of payments made, reflected in other expense, net, in our consolidated statements of operations for the year ended December 31, 2018.
In March and April 2018, we received notices for conversion of $21.8 million of principal amount of the 2019 Notes which were settled in May and June 2018. We paid the noteholders the conversion value of the notes in cash, up to the principal amount of the 2019 Notes. The excess of the conversion value over the principal amount, totaling $31.6 million, was paid in shares of common stock. In July and August 2018, we received notices for conversion of $195.9 million of principal amount of the 2019 Notes which were settled in October and November 2018. We paid the noteholders the $195.9 million principal amount and the excess of conversion value over the principal amount, totaling $439.6 million, in cash. The equity dilution and cash conversion premium payment upon conversion of the 2019 Notes was offset by the reacquisition of the shares and cash under the convertible bond hedge transactions entered into in connection with the offering of the 2019 Notes. As a result of the conversions, we recorded a $3.2 million loss on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the 2019 Notes as of the settlement dates. To measure the fair value of the converted 2019 Notes as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation.
In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. As a result, we paid the noteholders (1) the $1.0 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $0.5 million in cash.
On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount and $11.9 million bond premium, which was classified as a derivative liability, in cash. We recorded the decrease in fair value of the derivative liability of $11.0 million in other expense, net, in our consolidated statements of operations for the twelve months ended December 31, 2019.
Convertible Bond Hedge and Warrant Transactions
In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we were required to make in excess of the principal amount upon conversion of the 2019 Notes.
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The convertible bond hedges had an exercise price of $75.05 per share and are exercisable when and if the 2019 Notes were converted. If upon conversion of the 2019 Notes, the price of our common stock was above the exercise price of the convertible bond hedges, the counterparties would have delivered shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below were separate transactions entered into by us and were not part of the terms of the 2019 Notes. Holders of the 2019 Notes and warrants did not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.
As a result of the irrevocable cash election, conversion notices received relating to the 2019 Notes after May 22, 2018 must be fully settled in cash and amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the convertible bond hedge. We have accounted for the bond hedge as a derivative asset and market it to market at the end of each reporting period. We reclassified from equity to derivative asset the remaining bond hedge fair value of $340.0 million and marked it to market as of December 31, 2018 to $22.6 million with the resulting $119.4 million increase, net of $471.2 million in payments received, reflected in other expense, net, in our consolidated statements of operations for the twelve months ended December 31, 2018. Upon the 2019 Notes payoff on August 15, 2019, the bond hedge was settled, with the remaining $10.2 million fair value decrease reflected in other expense, net, in our consolidated statement of operations for the twelve months ended December 31, 2019.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire 3,264,643 shares of common stock with an exercise price of $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital.
In November 2018, we modified agreements with one of the bond hedge counterparties to cash settle a total of 525,000 warrants. As the modifications required the warrants to be cash settled, the fair value of the warrants was reclassified from stockholders’ equity to a derivative liability on the modification dates, resulting in a $28.3 million deduction to additional paid-in-capital during 2018. We settled these repurchases for total consideration of $30.1 million and recorded a $1.8 million loss during 2018 on the change in the fair value of the derivative liabilities between their modification and settlement dates, which was included in other expense, net in the consolidated statement of operations for the twelve months ended December 31, 2018. As of December 31, 2019 and 2018, 1,890,359 and 2,739,643 warrants remain outstanding, respectively.
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
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(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
At the May 22, 2018 issuance date of the 2023 Notes, we did not have the necessary number of authorized but unissued shares of our common stock available to settle the conversion option of the 2023 Notes in shares. Therefore, in accordance with guidance found in ASC 815-15 – Embedded Derivatives, the conversion option of the Notes was deemed an embedded derivative requiring bifurcation from the 2023 Notes (host contract) and separate accounting as a derivative liability. The fair value of the conversion option derivative liability at May 22, 2018 was $144.0 million, which was recorded as a reduction to the carrying value of the debt. This debt discount is amortized to interest expense over the term of the debt using the effective interest method. Up to the date in which we received shareholder approval on June 19, 2018 to increase the authorized number of shares of our common stock, the conversion option was accounted for as a liability with the resulting change in fair value of $13.5 million during that period reflected in other expense, net, in our consolidated statements of operations for the twelve months ended December 31, 2018. As of December 31, 2019, the debt discount remains and continues to be amortized to interest expense.
The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of December 31, 2019, the “if-converted value” did not exceed the principal amount of the 2023 Notes.
In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the conversion option totaling $3.2 million was recorded as interest expense for the twelve months ended December 31, 2018. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes.
It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering 3,018,327 shares of common stock with an exercise price of $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.
For the period from May 22, 2018, the issuance date of the bond hedge and warrant transactions, to June 19, 2018, the date shareholders approved an increase in our authorized shares of common stock, the bond hedges and warrants required cash settlement and were accounted for as a derivative asset and liability, respectively, with the resulting increase in fair value of $19.2 million and $7.5 million reflected in other expense, net, in our consolidated statements of operations for twelve months ended December 31, 2018.
The following table summarizes information about the equity and liability components of the 2019 Notes and 2023 Notes (in thousands).
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| December 31, 2019 |  | December 31, 2018
Principle amount of 2019 Notes outstanding | $ | — |  |  | $ | 27,326 |
Unamortized discount (including unamortized debt issuance cost) | — |  |  | (893) |
Total current portion of notes payable | $ | — |  |  | $ | 26,433 |
Principle amount of 2023 Notes outstanding | $ | 750,000 |  |  | $ | 750,000 |
Unamortized discount (including unamortized debt issuance cost) | (111,041) |  |  | (140,136) |
Total long-term portion of notes payable | $ | 638,959 |  |  | $ | 609,864 |
Carrying value of equity component of 2023 Notes | $ | 101,422 |  |  | $ | 127,997 |
Fair value of convertible senior notes outstanding (Level 2) | $ | 647,280 |  |  | $ | 713,533 |

As of December 31, 2019, there were no events of default or violation of any covenants under our financing obligations.
8. Balance Sheet Account Details
Short-term Investments
The following table summarizes the various investment categories at December 31, 2019 and 2018 (in thousands):

| Cost |  | Gross unrealized gains |  | Gross unrealized losses |  | Estimated fair value
December 31, 2019 |  |  |  |  |  |  |
Short-term investments |  |  |  |  |  |  |
Bank deposits | $ | 411,690 |  |  | $ | 188 |  |  | $ | (3) |  |  | $ | 411,875 |
Corporate bonds | 63,818 |  |  | 161 |  |  | — |  |  | 63,979 |
Corporate equity securities | 4,506 |  |  | 416 |  |  | (1,850) |  |  | 3,072 |
Commercial paper | 210,525 |  |  | 43 |  |  | (16) |  |  | 210,552 |
Warrants | — |  |  | 125 |  |  | — |  |  | 125 |
Mutual fund | 250,635 |  |  | — |  |  | (249) |  |  | 250,386 |
| $ | 941,174 |  |  | $ | 933 |  |  | $ | (2,118) |  |  | $ | 939,989 |
December 31, 2018 |  |  |  |  |  |  |
Short-term investments |  |  |  |  |  |  |
Bank deposits | $ | 311,066 |  |  | $ | 26 |  |  | $ | (29) |  |  | $ | 311,063 |
Corporate bonds | 53,223 |  |  | 1 |  |  | (45) |  |  | 53,179 |
Corporate equity securities | 135 |  |  | 1,191 |  |  | — |  |  | 1,326 |
Commercial paper | 225,731 |  |  | 8 |  |  | (76) |  |  | 225,663 |
U.S. Government bonds | 7,982 |  |  | — |  |  | (9) |  |  | 7,973 |
Municipal bonds | 2,017 |  |  | — |  |  | (4) |  |  | 2,013 |
| $ | 600,154 |  |  | $ | 1,226 |  |  | $ | (163) |  |  | $ | 601,217 |

Property and equipment are stated at cost and consists of the following (in thousands):

| December 31, |  |
| 2019 |  | 2018
Lab and office equipment | $ | 6,307 |  |  | $ | 4,183 |
Leasehold improvements | 2,729 |  |  | 2,418 |
Computer equipment and software | 999 |  |  | 936 |
| 10,035 |  |  | 7,537 |
Less accumulated depreciation and amortization | (2,850) |  |  | (2,165) |
| $ | 7,185 |  |  | $ | 5,372 |

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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 of $1.5 million, $0.9 million, and $0.4 million was recognized for the twelve months ended ended December 31, 2019, 2018, and 2017, respectively, and was included in operating expenses.
Goodwill and identifiable intangible assets consist of the following (in thousands):

| As of December 31, |  |
| 2019 |  | 2018
Indefinite lived intangible assets |  |  |
Goodwill | $ | 95,229 |  |  | $ | 86,646 |
Definite lived intangible assets |  |  |
Complete technology | 242,813 |  |  | 235,413 |
Less: Accumulated amortization(1) | (50,203) |  |  | (35,070) |
Trade name | 2,642 |  |  | 2,642 |
Less: Accumulated amortization | (1,180) |  |  | (1,048) |
Customer relationships | 29,600 |  |  | 29,600 |
Less: Accumulated amortization | (13,224) |  |  | (11,744) |
Total goodwill and other identifiable intangible assets, net | $ | 305,677 |  |  | $ | 306,439 |

(1) Accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
Amortization of finite lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of 20 years. Amortization expense of $16.9 million, $15.8 million, and $12.1 million was recognized for the years ended December 31, 2019 and 2018, and 2017, respectively. Estimated amortization expense for the years ending December 31, 2020 through 2024 is $14.1 million per year. For each of the years ended December 31, 2019, 2018, and 2017, there was no material impairment of intangible assets with finite lives.
Accrued liabilities consist of the following (in thousands):

| December 31, |  |
| 2019 |  | 2018
Compensation | $ | 1,986 |  |  | $ | 4,045 |
Legal | 1,135 |  |  | 942 |
Amounts owed to former licensees | 381 |  |  | 428 |
Royalties owed to third parties | — |  |  | 1,025 |
Payments due to broker for share repurchases | — |  |  | 4,613 |
Return reserve | 3,027 |  |  | 3,590 |
Restructuring | — |  |  | 1,093 |
Current operating lease liabilities | 1,242 |  |  | — |
Other | 2,065 |  |  | 3,464 |
| $ | 9,836 |  |  | $ | 19,200 |

Contingent liabilities:
In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. 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 connection with the acquisition of Metabasis in January 2010, we entered into four CVR agreements with Metabasis shareholders. The CVRs entitle the holders to cash payments as frequently as every six months as proceeds are received by us
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upon the sale or licensing of any of the Metabasis drug development programs and upon the achievement of specified milestones.
In connection with the acquisition of Crystal in October 2017, we entered into contingent liabilities based on achievement of certain research and business milestones as well as certain revenue goal. See “Note (4), Business Combinations” for more information.
The following table summarizes rollfoward of contingent liabilities as of December 2019 and 2018 (in thousands):

| December 31, 2017 | Payments | Fair Value Adjustment |  |  | December 31, 2018 | Payments | Fair Value Adjustment | Repurchases | December 31, 2019
Cydex | $ | 1,589 |  | $ | (25) |  | $ | (1,050) |  |  |  | $ | 514 |  | $ | (50) |  | $ | (116) |  | $ | — |  | $ | 348 |
Metabasis | 3,971 |  | (3,860) |  | 5,440 |  |  |  | 5,551 |  | — |  | 904 |  | (520) |  | 5,935 |
Crystal | 8,401 |  | (1,000) |  | (924) |  |  |  | 6,477 |  | (3,000) |  | (818) |  | — |  | 2,659 |
Total | $ | 13,961 |  | $ | (4,885) |  | $ | 3,466 |  |  |  | $ | 12,542 |  | $ | (3,050) |  | $ | (30) |  | $ | (520) |  | $ | 8,942 |

9. Stockholders’ Equity
Share-based Compensation Expense
The following table summarizes share-based compensation expense (in thousands):

| December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Share-based compensation expense as a component of: |  |  |  |  |
Research and development expenses | $ | 9,641 |  |  | $ | 8,352 |  |  | $ | 14,235 |
General and administrative expenses | 14,874 |  |  | 12,494 |  |  | 10,680 |
| $ | 24,515 |  |  | $ | 20,846 |  |  | $ | 24,915 |

Stock Plans
In June 2019, our 2002 Stock Incentive Plan was amended to increase the number of shares available for issuance by 0.8 million shares. As of December 31, 2019, there were 0.9 million shares available for future option grants or direct issuance under the Amended 2002 Plan.
Following is a summary of our 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 at December 31, 2018 | 1,736,304 |  |  | $ | 66.71 |  |  | 5.47 |  | $ | 125,858 |
Granted | 338,617 |  |  | $ | 116.69 |  |  |  |  |
Exercised | (112,011) |  |  | $ | 23.65 |  |  |  |  |
Forfeited | (6,531) |  |  | $ | 139.37 |  |  |  |  |
Balance at December 31, 2019 | 1,956,379 |  |  | $ | 77.54 |  |  | 5.45 |  | 72,002 |
Exercisable at December 31, 2019 | 1,454,726 |  |  | $ | 61.82 |  |  | 4.42 |  | 70,345 |
Options vested and expected to vest as of December 31, 2019 | 1,956,379 |  |  | $ | 77.54 |  |  | 5.45 |  | $ | 72,002 |

The weighted-average grant-date fair value of all stock options granted during 2019, 2018 and 2017 was $48.65, $58.85 and $53.17 per share, respectively. The total intrinsic value of all options exercised during 2019, 2018 and 2017 was approximately $10.4 million, $51.9 million and $13.3 million, respectively.
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Cash received from options exercised, net of fees paid, in 2019, 2018 and 2017 was $2.6 million, $19.8 million and $4.7 million, respectively.
Following is a further breakdown of the options outstanding as of December 31, 2019:

Range of exercise prices | Options outstanding |  | Weighted average remaining life in years |  | Weighted average exercise price |  | Options exercisable |  | Weighted average exercise price
$9.96 - $12.81 | 195,148 |  |  | 1.01 |  | $10.25 |  |  | 195,148 |  |  | $10.25 |
$14.47 | 212,116 |  |  | 2.11 |  | $14.47 |  |  | 198,116 |  |  | $14.47 |
$21.92 | 195,955 |  |  | 3.13 |  | $21.92 |  |  | 195,955 |  |  | $21.92 |
$32.00 - $74.42 | 374,059 |  |  | 4.43 |  | $63.72 |  |  | 374,059 |  |  | $63.72 |
$85.79 - $100.38 | 301,459 |  |  | 6.66 |  | $93.41 |  |  | 239,220 |  |  | $92.25 |
$101.15 - $113.76 | 98,112 |  |  | 7.98 |  | $109.91 |  |  | 46,066 |  |  | $107.65 |
$117.97 | 272,687 |  |  | 9.12 |  | $117.97 |  |  | 56,830 |  |  | $117.97 |
$119.30 - $159.01 | 282,475 |  |  | 8.01 |  | $151.55 |  |  | 129,541 |  |  | $149.80 |
$159.81 - $171.28 | 7,050 |  |  | 8.52 |  | $166.40 |  |  | 2,473 |  |  | $164.90 |
$195.91 | 17,318 |  |  | 8.47 |  | $195.91 |  |  | 17,318 |  |  | $195.91 |
| 1,956,379 |  |  | 5.45 |  | $77.54 |  |  | 1,454,726 |  |  | $61.82 |

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average grant date fair value per share of options granted:

| Year Ended December 31, |  |  |  |  |
| 2019 |  | 2018 |  | 2017 |
Risk-free interest rate | 1.4%-2.6% |  | 2.7%-3.0% |  | 2.0%-2.2% |
Expected volatility | 40%-49% |  | 33%-36% |  | 43%-47% |
Expected term | 4.6 to 5.9 years |  | 5.1 to 5.8 years |  | 6.5 to 6.8 years |

As of December 31, 2019, there was $23.2 million of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted average period of 2.4 years.
Restricted Stock Activity
The following is a summary of our restricted stock activity and related information:

| Shares |  | Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2018 | 132,273 |  |  | $130.63 |
Granted | 118,498 |  |  | $115.90 |
Vested | (102,846) |  |  | $121.55 |
Forfeited | (666) |  |  | $134.36 |
Outstanding at December 31, 2019 | 147,259 |  |  | $125.11 |

As of December 31, 2019, unrecognized compensation cost related to non-vested stock awards amounted to $11.2 million. That cost is expected to be recognized over a weighted average period of 1.5 years.
Employee Stock Purchase Plan
As of December 31, 2019, 59,263 shares of our common stock are available for future issuance under the Amended Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase up to 1,250 shares of Ligand common stock per calendar year at a discount through payroll deductions. The price at which stock is purchased under the ESPP is equal to
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85% of the fair market value of the common stock on the first of a six month offering period or purchase date, whichever is lower. There were 4,745, 3,386 and 3,061 shares issued under the ESPP in 2019, 2018 and 2017, respectively.
Share Repurchases
In May 2018, in conjunction with our 2023 Notes debt offering, we repurchased 260,000 shares of our common stock at a cost of $191.14 per share. In September 2018, the board of directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years (the “Repurchase Program”). On January 23, 2019, the board of directors elected to increase the Repurchase Program, authorizing us to repurchase up to a maximum of $350.0 million of our outstanding common stock under the Repurchase Program.
On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and have entered into a Rule 10b5-1 trading plan, and may enter into additional Rule 10b5-1 trading plans in the future, to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. Our prior $350.0 million stock repurchase program mentioned above was terminated in connection with the approval of the new stock repurchase program. Authorization to repurchase $326.8 million of our common stock remained available as of December 31, 2019.
During the twelve months ended December 31, 2019, 2018 and 2017, we repurchased 4,122,133 shares for $448.4 million, 782,248 shares for $127.5 million, and 14,000 shares for $2.0 million, respectively.
10. Commitment and Contingencies: Legal Proceedings
We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.
On July 27, 2018, AG Oncon, LLC, AG Ofcon, Ltd., Calamos Market Neutral Income Fund, Capital Ventures International, Citadel Equity Fund Ltd., Opti Opportunity Master Fund, Polygon Convertible Opportunity Master Fund, Wolverine Flagship Fund Trading Limited, as plaintiffs, filed a complaint in the Court of Chancery of the State of Delaware (AG Oncon, LLC v. Ligand Pharmaceuticals Inc.) alleging claims for violation of the Trust Indenture Act, breach of contract, and others against us. On May 24, 2019, the Court granted our motion to dismiss and the Delaware Supreme Court subsequently affirmed the decision of the Court of Chancery dismissing this case with prejudice.
In November 2017, CyDex, our wholly-owned subsidiary, received a Paragraph IV certification Notice Letter from Teva stating that Teva had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of U.S. Patent Nos. 8,410,077 (“the ’077 patent”); 9,200,088 (“the ’088 patent”), or 9,493,582 (“the ’582 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or will not be infringed by Teva’s ANDA product. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that the filing of Teva’s ANDA constitutes infringement of each of the ’077 patent, the ’088 patent, and the ’582 patent. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On October 31, 2019, CyDex, Teva, and Acrotech Biopharma L.L.C. (the holder of the NDA for EVOMELA®) entered into a Confidential Settlement Agreement, settling this patent litigation. As a result of the settlement, Teva will be permitted to market a generic version of EVOMELA® in the United States on June 1, 2026 or earlier under certain circumstances. The terms of the settlement agreement are otherwise confidential.
On April 9, 2019, CyDex received a Paragraph IV certification Notice Letter from Alembic Global Holdings SA (“Alembic”) stating that Alembic had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. On July
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29, 2019, Alembic filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on August 19, 2019, CyDex filed an answer to Alembic’s counterclaims. On December 16, 2019, the Court entered a Scheduling Order, setting October 2, 2020, as the fact discovery cut off, March 5, 2021, as the close of expect discovery, and May 17, 2021, as the first day of a five to six day bench trial.
On September 16, 2019, CyDex received a Paragraph IV certification Notice Letter from Lupin Ltd. (“Lupin”) stating that Lupin had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin. Lupin filed an answer on December 11, 2019 and counterclaimed for declaratory judgments of invalidity and non-infringement as to all four patents and CyDex filed its answer to Lupin's counterclaims on January 2, 2020.
On October 31, 2019, we received three civil complaints filed in the US District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned several hundred civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the company and no individualized factual allegations have been advanced against us in any of the three complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.
11. Income Taxes
The Tax Act was enacted on December 22, 2017 and includes a number of changes to existing tax laws that impact us, most notably it reduces the US federal corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The Tax Act made modifications to allowable tax depreciation, the deductability of compensation for officers, the deductibility of meals and entertainment expenses, and the deductibility of interest expense.
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Current expense (benefit): |  |  |  |  |
Federal | $ | 89,471 |  |  | $ | — |  |  | $ | — |
State | 3,103 |  |  | 424 |  |  | 111 |
Foreign | (66) |  |  | (158) |  |  | 261 |
| 92,508 |  |  | 266 |  |  | 372 |
Deferred expense (benefit): |  |  |  |  |
Federal | 74,627 |  |  | 29,928 |  |  | 44,075 |
State | 202 |  |  | (185) |  |  | 228 |
| $ | 167,337 |  |  | $ | 30,009 |  |  | $ | 44,675 |

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A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows (in thousands):

| Year Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | 2017
Tax at federal statutory rate | $ | 167,294 |  |  | $ | 36,400 |  |  | $ | 20,031 |
State, net of federal benefit | 2,466 |  |  | 1,635 |  |  | 622 |
Contingent liabilities | 18 |  |  | 948 |  |  | 903 |
Share-based compensation | (819) |  |  | (8,131) |  |  | (4,019) |
FDII | (402) |  |  | — |  |  | — |
Research and development credits | (879) |  |  | (2,758) |  |  | (2,821) |
Change in uncertain tax positions | 441 |  |  | 858 |  |  | 1,308 |
Rate change for changes in federal or state law | (210) |  |  | 178 |  |  | 32,429 |
Change in valuation allowance | (1,193) |  |  | (4,225) |  |  | (4,169) |
Expired NOLs and credits | — |  |  | 3,054 |  |  | — |
Change in derivatives | — |  |  | 615 |  |  | — |
Other | 621 |  |  | 1,435 |  |  | 391 |
| $ | 167,337 |  |  | $ | 30,009 |  |  | $ | 44,675 |

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018 are shown below. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. Our evaluation of evidence resulted in management concluding that the majority of our deferred tax assets will be realized. However, we maintain a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2019, 2018 and 2017. The valuation allowance increased $136.9 million in 2019, decreased $2.5 million in 2018 and decreased $8.4 million in 2017.
We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them on our consolidated balance sheet as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets (liabilities) are comprised of the following:
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| December 31, |  |
| 2019 |  | 2018
| (in thousands) |  |
Deferred tax assets: |  |  |
Net operating loss carryforwards | $ | 150,727 |  |  | $ | 57,181 |
Research credit carryforwards | 14,843 |  |  | 31,101 |
Fixed assets and intangibles | 419 |  |  | 1,637 |
Accrued expenses | 171 |  |  | 657 |
Deferred revenue | — |  |  | 957 |
Other | 17,960 |  |  | 11,430 |
| 184,120 |  |  | 102,963 |
Valuation allowance for deferred tax assets | (141,338) |  |  | (4,476) |
Net deferred tax assets | $ | 42,782 |  |  | $ | 98,487 |
Deferred tax liabilities: |  |  |
Retrophin fair value adjustment | (18) |  |  | (179) |
Convertible debt | — |  |  | (2,905) |
Identified intangibles | (41,664) |  |  | (44,643) |
Identified indefinite lived intangibles | (1,040) |  |  | (1,759) |
Investment in Viking | (2,937) |  |  | (2,480) |
Deferred revenue | (3,488) |  |  | — |
Other | (964) |  |  | — |
Net deferred tax liabilities | $ | (50,111) |  |  | $ | (51,966) |
Deferred income taxes, net | $ | (7,329) |  |  | $ | 46,521 |

As of December 31, 2019, we had federal net operating loss carryforwards set to expire through 2037 of $31.5 million and $119.1 million of state net operating loss carryforwards that begin to expire in 2028. We also have $0.6 million of federal research and development credit carryforwards, which expire through 2038. We have $22.9 million of California research and development credit carryforwards that have no expiration date. In addition, we have approximately $713.8 million of non-U.S. net operating loss carryovers and approximately $14.6 million of non-U.S. capital loss carryovers that have no expiration date. We have a full valuation allowance against these non-U.S. tax attributes.
Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2019 are net of any previous limitations due to Section 382 and 383.
We account for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.
A reconciliation of the amount of unrecognized tax benefits at December 31, 2019, 2018 and 2017 is as follows (in thousands):

| December 31, |  |  |  |  |
| 2019 |  | 2018 |  | 2017
Balance at beginning of year | $ | 30,289 |  |  | $ | 29,363 |  |  | $ | 38,770 |
Additions based on tax positions related to the current year | 543 |  |  | 1,247 |  |  | 1067 |
Additions for tax positions of prior years | (54) |  |  | 336 |  |  | 109 |
Reductions for tax positions of prior years | (2,042) |  |  | (657) |  |  | (10,583) |
Balance at end of year | $ | 28,736 |  |  | $ | 30,289 |  |  | $ | 29,363 |

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Included in the balance of unrecognized tax benefits at December 31, 2019 is $27.1 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019 and December 31, 2018, we recognized an immaterial amount of interest and penalties. We file income tax returns in the United States, various state jurisdictions, United Kingdom, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2016 tax year to the present. The state income tax returns generally remain open for the 2015 tax year through the present. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized.
We are subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of December 31, 2019, we are no longer subject to state, local or foreign examinations by tax authorities for tax years before 2015 and we are no longer subject to U.S. federal income or payroll tax examinations for tax years before 2017. No tax returns are currently under examination by any tax authorities. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years.
12. Summary of Unaudited Quarterly Financial Information
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. Summarized quarterly data for 2019 and 2018 are as follows (in thousands, except per share amounts):

| First Quarter* |  | Second Quarter |  | Third Quarter |  | Fourth Quarter
2019 |  |  |  |  |  |  |
Total revenues | $ | 43,484 |  |  | $ | 24,987 |  |  | $ | 24,808 |  |  | $ | 27,003 |
Total operating costs and expenses | 29,738 |  |  | 29,117 |  |  | 29,966 |  |  | 37,182 |
Income tax (expense) benefit | (176,376) |  |  | 3,609 |  |  | 4,620 |  |  | 810 |
Net income (loss) | 666,337 |  |  | (14,419) |  |  | (15,251) |  |  | (7,365) |
Basic per share amounts: |  |  |  |  |  |  |
Net income (loss) | $ | 32.59 |  |  | $ | (0.74) |  |  | $ | (0.81) |  |  | $ | (0.43) |
Diluted per share amounts: |  |  |  |  |  |  |
Net income (loss) | $ | 31.32 |  |  | $ | (0.74) |  |  | $ | (0.81) |  |  | $ | (0.43) |
Weighted average shares—basic | 20,447 |  | 19,558 |  | 18,770 |  | 17,243
Weighted average shares—diluted | 21,277 |  | 19,558 |  | 18,770 |  | 17,243
*includes pre-tax gain from sale of Promacta license of $812,797. |  |  |  |  |  |  |
| First Quarter |  | Second Quarter |  | Third Quarter |  | Fourth Quarter
2018 |  |  |  |  |  |  |
Total revenues | $ | 56,157 |  |  | $ | 90,043 |  |  | $ | 45,663 |  |  | $ | 59,590 |
Total operating costs and expenses | 19,116 |  |  | 19,868 |  |  | 22,301 |  |  | 26,441 |
Income tax (expense) benefit | (10,033) |  |  | (22,419) |  |  | (11,864) |  |  | 14,307 |
Net income (loss) | 45,279 |  |  | 73,160 |  |  | 67,362 |  |  | (42,482) |
Basic per share amounts: |  |  |  |  |  |  |
Net income (loss) | $ | 2.13 |  |  | $ | 3.45 |  |  | $ | 3.19 |  |  | $ | (2.02) |
Diluted per share amounts: |  |  |  |  |  |  |
Net income (loss) | $ | 1.83 |  |  | $ | 2.99 |  |  | $ | 2.80 |  |  | $ | (2.02) |
Weighted average shares—basic | 21,209 |  | 21,212 |  | 21,148 |  | 21,071
Weighted average shares—diluted | 24,800 |  | 24,438 |  | 24,052 |  | 21,071

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13. Subsequent Event
On February 11, 2020, we announced the signing of an agreement to acquire the core assets, partnered programs and ion channel technology from Icagen for $15 million in cash. Icagen will also be entitled to receive up to an additional $25 million of cash payments based on certain revenue achievements. The transaction is subject to certain closing conditions, including a vote of Icagen stockholders, and is expected to close in April 2020.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. | Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures
We are responsible for maintaining disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As of the end of the period covered by this Annual Report on Form 10-K, we have 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 our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, and have concluded our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2019.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with our management and directors; and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in the 2013 Internal Control-Integrated Framework. Based on our evaluation under the 2013 framework in Internal Control - Integrated Framework, management concluded that our internal controls over financial reporting were effective as of December 31, 2019.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K and has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting as of December 31, 2019.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ligand Pharmaceuticals Incorporated
Opinion on Internal Control Over Financial Reporting
We have audited Ligand Pharmaceuticals Incorporated’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ligand Pharmaceuticals Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 27, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 27, 2020
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Item 9B. | Other Information

None.
Part III

Item 10. | Directors, Executive Officers and Corporate Governance

Code of Conduct
The Board of Directors has adopted a Code of Conduct and Ethics Policy (“Code of Conduct”) that applies to all officers, directors and employees. The Company will promptly disclose (1) the nature of any amendment to the Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our Code of Conduct that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future. The Code of Conduct can be accessed via our website (http://www.ligand.com), Corporate Overview page. You may also request a free copy by writing to: Investor Relations, Ligand Pharmaceuticals Incorporated, 3911 Sorrento Valley Blvd, Suite 110, San Diego, CA 92121.
The other information under Item 10 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2019.

Item 11. | Executive Compensation

Item 11 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2019.

Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2019.

Item 13. | Certain Relationships and Related Transactions, and Director Independence

Item 13 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2019.

Item 14. | Principal Accountant Fees and Services

Item 14 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2019.
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PART IV

Item 15. | Exhibits and Financial Statement Schedule

(a) The following documents are included as part of this Annual Report on Form 10-K.
(1) Financial statements

Index to Consolidated Financial Statements | 49
Report of Independent Registered Public Accounting Firm | 50
Consolidated Balance Sheets | 51
Consolidated Statements of Operations | 52
Consolidated Statements of Comprehensive Income | 53
Consolidated Statements of Stockholders’ Equity | 55
Consolidated Statements of Cash Flows | 55
Notes to Consolidated Financial Statements | 57

(2) Schedules not included herein have been omitted because they are not applicable or the required information is in the consolidated financial statements or notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.

|  | Incorporated by Reference |  |  |  |
Exhibit Number | Description of Exhibit | Form | File Number | Date of Filing | Exhibit Number | Filed Herewith
2.1 | Agreement and Plan of Merger, dated as of December 17, 2015, by and among Ligand Pharmaceuticals Incorporated, Open Monoclonal Technology, Inc., OMT, LLC, Schrader 1 Acquisition, Inc., Schrader 2 Acquisition, Inc. and Fortis Advisors LLC | 8-K | 001-33093 | December 18, 2015 | 2.1 |
2.2 | Rule 2.7 Announcement issued by Ligand Holdings UK Ltd., dated August 9, 2018 | 8-K | 001-33093 | August 9, 2018 | 2.1 |
2.3 | Asset Purchase Agreement, dated March 5, 2019, by and among Ligand Pharmaceuticals Incorporated and RPI Financial Trust | 8-K | 001-33093 | March 5, 2019 | 2.1 |
3.1 | Amended and Restated Certificate of Incorporation of the Company. | S-4 | 333-58823 | July 9, 1998 | 3.1 |
3.2 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 14, 2000 | 10-K | 0-20720 | March 29, 2001 | 3.5 |
3.3 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 30, 2004 | 10-Q | 0-20720 | August 5, 2004 | 3.6 |
3.4 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated November 17, 2010 | 8-K | 001-33093 | November 19, 2010 | 3.1 |
3.5 | Certificate of Amendment of the Amended and Restated Certification of Incorporation of the Company, dated June 19, 2018 | S-8 | 333-233130 | August 8, 2019 | 3.6 |
3.6 | Third Amended and Restated Bylaws of the Company | 8-K | 001-33093 | September 10, 2015 | 3.1 |
4.1 | Specimen stock certificate for shares of the common stock of the Company | 10-K | 001-33093 | March 1, 2018 | 4.1 |
4.2 | Indenture, dated as of May 22, 2018, between the Company and Wilmington Trust, National Association, as trustee, including the form of 0.75% Convertible Senior Notes due 2023 | 8-K | 001-33093 | May 22, 2018 | 4.1 |
4.3 | Description of Registered Securities |  |  |  |  | X
10.1# | 2002 Stock Incentive Plan (as amended and restated through June 6, 2019) | DEF | 001-33093 | April 24, 2019 | Appendix A |

90

10.2# | 2002 Employee Stock Purchase Plan (as amended and restated effective June 6, 2019) | DEF | 001-33093 | April 24, 2019 | Appendix B |
10.3# | Form of Stock Option Grant Notice and Stock Option Agreement under the Company’s 2002 Stock Incentive Plan | 10-K | 001-33093 | February 24, 2014 | 10.5 |
10.4# | Form of Stock Issuance Agreement for non-employee directors under the Company’s 2002 Stock Incentive Plan | S-1 | 333-131029 | January 13, 2006 | 10.289 |  |
10.5# | Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Company’s 2002 Stock Incentive Plan | 10-K | 001-33093 | March 1, 2018 | 10.6 |  |
10.6# | Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Company’s 2002 Stock Incentive Plan - Performance-Based RSU Form | 10-K | 001-33093 | March 1, 2018 | 10.7 |  |
10.7# | Form of Executive Officer Change in Control Severance Agreement | 8-K | 001-33093 | August 22, 2007 | 10.1 |
10.8# | Amended and Restated Severance Plan, dated December 20, 2008 | 8-K | 001-33093 | December 24, 2008 | 10.2 |
10.9# | Amended and Restated Director Compensation and Stock Ownership Policy, effective March 28, 2019 |  |  |  |  | X
10.1 0 | TR Beta Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC | 8-K | 001-33093 | January 28, 2010 | 10.2 |
10.1 1 | Glucagon Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC | 8-K | 001-33093 | January 28, 2010 | 10.3 |
10.1 2 | General Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC | 8-K | 001-33093 | January 28, 2010 | 10.4 |
10.1 3 | Amendment of General Contingent Value Rights Agreement, dated January 26, 2011, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC | 8-K | 001-33093 | January 31, 2011 | 10.1 |
10.14 | Amendment of General Contingent Value Rights Agreement dated May 20, 2014 among the Company, Metabasis Therapeutics, Inc., David F. Hale and Computershare Inc. | 8-K | 001-33093 | May 22, 2014 | 10.1 |
10.15 | Amendment of TR Beta Contingent Value Rights Agreement dated May 20, 2014 among the Company, Metabasis Therapeutics, Inc., David F. Hale and Computershare, Inc. | 8-K | 001-33093 | May 22, 2014 | 10.2 |
10.1 6† | Captisol® Supply Agreement, dated December 20, 2002, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited | 10-K | 001-33093 | March 3, 2011 | 10.1 |
10.1 7† | 1st Amendment to Captisol® Supply Agreement, dated July 29, 2005, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited | 10-K | 001-33093 | March 3, 2011 | 10.101 |
10.18 | 2nd Amendment to Captisol® Supply Agreement, dated March 1, 2007, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited, and Hovione International Limited | 10-K | 001-33093 | March 3, 2011 | 10.102 |
10.19† | 3rd Amendment to Captisol® Supply Agreement, dated January 25, 2008, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited, and Hovione International Limited | 10-K | 001-33093 | March 3, 2011 | 10.103 |
10.2 0† | 4th Amendment to Captisol® Supply Agreement, dated September 28, 2009, among CyDex Pharmaceuticals, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited | 10-K | 001-33093 | March 3, 2011 | 10.104 |

91

10.2 1† | License Agreement, dated September 3, 1993, between CyDex L.C. and The University of Kansas | 10-K | 001-33093 | March 3, 2011 | 10.105 |
10.22 | First Amendment to License Agreement, dated August 4, 2004, between CyDex, Inc. and The University of Kansas | 10-K | 001-33093 | March 3, 2011 | 10.106 |
10.2 3† | Second Amendment to License Agreement, dated August 4, 2004, between CyDex, Inc. and The University of Kansas | 10-K | 001-33093 | March 3, 2011 | 10.107 |
10.2 4† | Acknowledgement Agreement, dated February 22, 2008, between CyDex, Inc. and The University of Kansas | 10-K | 001-33093 | March 3, 2011 | 10.111 |
10.2 5† | Exclusive License Agreement, dated June 4, 1996, between Pfizer, Inc. and The University of Kansas | 10-K | 001-33093 | March 3, 2011 | 10.108 |
10.2 6† | Addendum to Nonexclusive License Agreement, dated December 11, 2001, between CyDex, Inc. and Pfizer, Inc. | 10-K | 001-33093 | March 3, 2011 | 10.11 |
10.2 7† | Amendment to License Agreement, dated May 12, 2006, between CyDex, Inc. and Prism Pharmaceuticals, Inc. | 10-K | 001-33093 | March 3, 2011 | 10.113 |
10.28† | Supply Agreement, dated March 5, 2007, between CyDex, Inc. and Prism Pharmaceuticals, Inc. | 10-K | 001-33093 | March 3, 2011 | 10.114 |
10.29† | License and Supply Agreement, dated October 12, 2005, between CyDex Pharmaceuticals, Inc. and Proteolix, Inc. | 10-K | 000-28298 | February 23, 2010 | 10.22 |
10.3 0† | Supply Agreement, dated June 13, 2011 by and between CyDex Pharmaceuticals, Inc. and Merck Sharp & Dohme Corporation | 10-Q/A | 001-33093 | November 2, 2017 | 10.26 |  |
10.3 1† | License Agreement, by and between CyDex Pharmaceuticals, Inc. and Spectrum Pharmaceuticals, Inc., dated as of March 8, 2013 | 10-Q | 001-33093 | May 8, 2013 | 10.2 |
10.3 2† | Supply Agreement, by and between CyDex Pharmaceuticals, Inc. and Spectrum Pharmaceuticals, Inc., dated as of March 8, 2013 | 10-Q | 001-33093 | May 8, 2013 | 10.3 |
10.3 3† | Royalty Stream and Milestone Payments Purchase Agreement, dated April 29, 2013, between the Company and Selexis S.A. | 10-Q | 001-33093 | August 1, 2013 | 10.2 |
10.3 4† | Master License Agreement dated May 21, 2014 among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc. | 10-Q | 001-33093 | August 5, 2014 | 10.2 |
10.3 5 | Letter Agreement, dated as of August 12, 2014, between Bank of America, N.A. and the Company regarding the Base Issuer Warrant Transaction | 8-K | 001-33093 | August 18, 2014 | 10.2 |
10.3 6 | Letter Agreement, dated as of August 12, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Base Issuer Warrant Transaction | 8-K | 001-33093 | August 18, 2014 | 10.4 |
10.3 7 | Letter Agreement, dated as of August 14, 2014, between Bank of America, N.A. and the Company regarding the Additional Issuer Warrant Transaction | 8-K | 001-33093 | August 18, 2014 | 10.6 |
10.38 | Letter Agreement, dated as of August 14, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Additional Issuer Warrant Transaction | 8-K | 001-33093 | August 18, 2014 | 10.8 |
10.39† | First Amendment to Master License Agreement dated September 6, 2014 among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc. | 10-Q | 001-33093 | October 31, 2014 | 10.9 |
10.4 0† | Second Amendment to Master License Agreement, dated April 8, 2015, among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc. | 10-Q | 001-33093 | August 5, 2015 | 10.1 |
10.4 1† | Development Funding and Royalties Agreement, dated December 13, 2018, by and between Ligand Pharmaceuticals Incorporated and Palvella Therapeutics, Inc. | 10-K | 001-33093 | February 28, 2019 | 10.48 |

92

10.42† | Sublicense Agreement between the Company, Pharmacopeia, Inc. and Retrophin LLC dated as of February 16, 2012, as amended through Amendment No. 5 to Sublicense Agreement, dated March 20, 2018. |  |  |  |  | X
10.4 3† | Lease, dated November 3, 2015, between the Company and 3911/3931 SVB, LLC | 8-K | 001-33093 | November 10, 2015 | 10.1 |
10.4 4† | Interest Purchase Agreement, dated May 3, 2016, between the Company and CorMatrix Cardiovascular, Inc. | 8-K/A | 001-33093 | May 9, 2016 | 10.1 |
10.4 5 | Amended and Restated Interest Purchase Agreement, dated May 31, 2017, between the Company and CorMatrix Cardiovascular, Inc. | 10-Q | 001-033093 | August 9, 2017 | 10.2 |
10.4 6 | License Agreement, dated March 5, 2018, between the Company and Roivant Sciences GmbH | 10-Q | 001-33093 | May 9, 2018 | 10.2 |
10.4 7 | Letter Agreement, dated as of May 17, 2018, between Barclays Capital Inc. and the Company regarding the Base Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.1 |
10.4 8 | Letter Agreement, dated as of May 17, 2018, between Barclays Capital Inc. and the Company regarding the Base Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.2 |
10.4 9 | Letter Agreement, dated as of May 17, 2018, between Deutsche Bank AG and the Company regarding the Base Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.3 |
10.5 0 | Letter Agreement, dated as of May 17, 2018, between Deutsche Bank AG and the Company regarding the Base Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.4 |
10.5 1 | Letter Agreement, dated as of May 17, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Base Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.5 |
10.5 2 | Letter Agreement, dated as of May 17, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Base Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.6 |
10.5 3 | Letter Agreement, dated as of May 18, 2018, between Barclays Capital Inc. and the Company regarding the Additional Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.7 |
10.5 4 | Letter Agreement, dated as of May 18, 2018, between Barclays Capital Inc. and the Company regarding the Additional Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.8 |
10.5 5 | Letter Agreement, dated as of May 18, 2018, between Deutsche Bank AG and the Company regarding the Additional Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.9 |
10.5 6 | Letter Agreement, dated as of May 18, 2018, between Deutsche Bank AG and the Company regarding the Additional Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.10 |
10.5 7 | Letter Agreement, dated as of May 18, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Additional Convertible Note Hedge Transaction | 8-K | 001-00393 | May 22, 2018 | 10.11 |
10.5 8 | Letter Agreement, dated as of May 18, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Additional Warrant Transaction | 8-K | 001-00393 | May 22, 2018 | 10.12 |
10.5 9† | Platform License Agreement, dated March 23, 2015, by and between Open Monoclonal Technology, Inc. and WuXi AppTec Biopharmaceuticals Co., Ltd. | 10-Q | 001-33093 | August 8, 2018 | 10.13 |

93

10.6 0† | Amendment Number 1 to Platform License Agreement, dated June 11, 2017, by and between Open Monoclonal Technology, Inc. and WuXi Biologics (Hong Kong) Limited (as successor-in-interest to WuXi AppTec Biopharmaceuticals Co., Ltd.) | 10-Q | 001-33093 | August 8, 2018 | 10.14 |
10.6 1† | Amendment Number 2 to Platform License Agreement, dated June 25, 2018, by and between Open Monoclonal Technology, Inc. and WuXi Biologics Ireland Limited (as successor-in-interest to WuXi Biologics (Hong Kong) Limited). | 10-Q | 001-33093 | August 8, 2018 | 10.15 |
10.6 2# | Form of Indemnification Agreement between the Company and each of its directors | 10-K | 001-33093 | March 1, 2018 | 10.60 |
10.6 3# | Form of Indemnification Agreement between the Company and each of its officers | 10-K | 001-33093 | March 1, 2018 | 10.60 |
10.6 4† | Addendum, dated May 22, 2019, by and among Ligand Pharmaceuticals Incorporated, CyDex Pharmaceuticals, Inc., and Acrotech Biopharma LLC (as successor-in-interest to Spectrum Pharmaceuticals, Inc.), to that certain License Agreement between Ligand Pharmaceuticals Incorporated and Spectrum Pharmaceuticals, Inc., dated March 8, 2013 | 10-Q | 001-33093 | August 8, 2019 | 10.1 |
21.1 | Subsidiaries of the Company |  |  |  |  | X
23.1 | Consent of Independent Registered Public Accounting Firm |  |  |  |  | X
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. |  |  |  |  | X
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. |  |  |  |  | X
32.1 | Certifications by Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |  |  |  | X
101 | The following financial information from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. |  |  |  |  | X
104 | The cover page from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted in Inline XBRL and contained in Exhibit 101. |  |  |  |  | X

† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission.
# Indicates management contract or compensatory plan.

Item 16. | Form 10-K Summary

None
94

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

LIGAND PHARMACEUTICALS INCORPORATED |
By: | /S/ J OHN L. H IGGINS
| John L. Higgins,
| Chief Executive Officer

Date: February 27, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ J OHN L. H IGGINS |  | Chief Executive Officer and Director (Principal Executive Officer) |  | February 27, 2020
John L. Higgins |  |  |  |
/s/ MATTHEW KORENBERG |  | Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |  | February 27, 2020
Matthew Korenberg |  |  |  |
/s/ JOHN W. KOZARICH |  | Director and Chairman of the Board |  | February 27, 2020
John W. Kozarich |  |  |  |
/s/ JASON M. ARYEH |  | Director |  | February 27, 2020
Jason M. Aryeh |  |  |  |
/s/ SARAH BOYCE |  | Director |  | February 27, 2020
Sarah Boyce |  |  |  |
/s/ TODD C. DAVIS |  | Director |  | February 27, 2020
Todd C. Davis |  |  |  |
/s/ NANCY R. GRAY |  | Director |  | February 27, 2020
Nancy R. Gray |  |  |  |
/s/ JOHN L. LAMATTINA |  | Director |  | February 27, 2020
John L. LaMattina |  |  |  |
/s/ SUNIL PATEL |  | Director |  | February 27, 2020
Sunil Patel |  |  |  |
/s/ STEPHEN L. SABBA |  | Director |  | February 27, 2020
Stephen L. Sabba |  |  |  |

95