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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________

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

For the quarterly period ended June 30, 2023
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 Number: 001-33093
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware | 77-0160744
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
3911 Sorrento Valley Boulevard, Suite 110 |
San Diego |
CA | 92121
(Address of principal executive offices) | (Zip Code)

(858) 550-7500
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class: | Trading symbol: | Name of each exchange on which registered:
Common Stock, par value $0.001 per share | LGND | The Nasdaq Global Market

________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”

and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer | ☒ |  | Accelerated Filer | ☐
Non-Accelerated Filer | ☐ |  | Smaller Reporting Company | ☐
Emerging Growth Company | ☐ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2023, the registrant had 17,355,257 shares of common stock outstanding.

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

PART I. FINANCIAL INFORMATION |
| ITEM 1. Condensed Consolidated Financial Statements (unaudited) | 4
| Condensed Consolidated Balance Sheets | 4
| Condensed Consolidated Statements of Operations | 4
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 6
| Condensed Consolidated Statements of Stockholders' Equity | 7
| Condensed Consolidated Statements of Cash Flows | 8
| Notes to Condensed Consolidated Financial Statements | 9
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 21
| ITEM 3. Quantitative and Qualitative Disclosures about Market Risk | 27
| ITEM 4. Controls and Procedures | 27
PART II. OTHER INFORMATION |
| ITEM 1. Legal Proceedings | 27
| ITEM 1A. Risk Factors | 27
| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | 27
| ITEM 3. Defaults Upon Senior Securities | 27
| ITEM 4. Mine Safety Disclosures | 27
| ITEM 5. Other Information | 28
| ITEM 6. Exhibits | 30
| SIGNATURE | 30

2

GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation | Definition
2022 Annual Report | Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023
2023 Notes | $750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
APAC | Avista Public Acquisition Corp. II (prior to its domestication in Delaware and change of name to OmniAb, Inc.)
ASC | Accounting Standards Codification
ASU | Accounting Standards Update
Company | Ligand Pharmaceuticals Incorporated, including subsidiaries
CVR | Contingent value right
CyDex | CyDex Pharmaceuticals, Inc.
ESPP | Employee Stock Purchase Plan, as amended and restated
FASB | Financial Accounting Standards Board
GAAP | Generally accepted accounting principles in the United States
Ligand | Ligand Pharmaceuticals Incorporated, including subsidiaries
Merger Agreement | Agreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub
Merger Sub | Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC
Metabasis | Metabasis Therapeutics, Inc.
NDA | New Drug Application
New OmniAb | OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II and after it domestication in Delaware)
OmniAb | OmniAb Operations, Inc. (formerly known as OmniAb, Inc. and prior to being spun off by the Company)
OmniAb Business | Ligand's antibody discovery business (prior to being spun off by the Company)
Pfenex | Pfenex Inc.
Q2 2022 | The Company's fiscal quarter ended June 30, 2022
Q2 2023 | The Company's fiscal quarter ended June 30, 2023
SBC | Share-based compensation expense
SEC | Securities and Exchange Commission
Separation Agreement | Separation and Distribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb
Travere | Travere Therapeutics, Inc.
Viking | Viking Therapeutics, Inc.
YTD | Year-to-date

3

PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value)

| June 30, 2023 |  | December 31, 2022
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 28,445 |  |  | $ | 45,006 |
Short-term investments | 190,596 |  |  | 166,864 |
Accounts receivable, net | 27,994 |  |  | 30,424 |
Inventory | 26,906 |  |  | 13,294 |
Income taxes receivable | — |  |  | 4,614 |
Other current assets | 2,770 |  |  | 3,399 |
Total current assets | 276,711 |  |  | 263,601 |
Deferred income taxes, net | 8,530 |  |  | 8,530 |
Intangible assets, net | 325,377 |  |  | 342,455 |
Goodwill | 105,673 |  |  | 105,673 |
Commercial license rights, net | 10,783 |  |  | 10,182 |
Property and equipment, net | 11,382 |  |  | 12,482 |
Operating lease right-of-use assets | 11,392 |  |  | 10,914 |
Financing lease right-of-use assets | 3,762 |  |  | 4,095 |
Other assets | 4,495 |  |  | 4,736 |
Total assets | $ | 758,105 |  |  | $ | 762,668 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 9,582 |  |  | $ | 5,307 |
Accrued liabilities | 7,291 |  |  | 15,681 |
Income taxes payable | 11,387 |  |  | — |
Current operating lease liabilities | 680 |  |  | 670 |
2023 convertible senior notes, net | — |  |  | 76,695 |
Other current liabilities | 448 |  |  | 457 |
Total current liabilities | 29,388 |  |  | 98,810 |
Long-term contingent liabilities | 3,505 |  |  | 3,456 |
Deferred income taxes, net | 27,665 |  |  | 30,615 |
Long-term operating lease liabilities | 10,991 |  |  | 10,336 |
Other long-term liabilities | 21,664 |  |  | 21,966 |
Total liabilities | 93,213 |  |  | 165,183 |
Commitments and contingencies |  |  |
Stockholders' equity: |  |  |
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at June 30, 2023 and December 31, 2022 | — |  |  | — |
Common stock, $0.001 par value; 60,000 shares authorized; 17,352 and 16,951 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 17 |  |  | 17 |
Additional paid-in capital | 170,741 |  |  | 147,590 |
Accumulated other comprehensive loss | (967) |  |  | (984) |
Retained earnings | 495,101 |  |  | 450,862 |
Total stockholders' equity | 664,892 |  |  | 597,485 |
Total liabilities and stockholders' equity | $ | 758,105 |  |  | $ | 762,668 |

See accompanying notes to unaudited condensed consolidated financial statements.
4

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Revenues: |  |  |  |  |  |  |
Royalties | $ | 20,430 |  |  | $ | 17,820 |  |  | $ | 37,584 |  |  | $ | 31,252 |
Captisol | 5,220 |  |  | 29,545 |  |  | 15,842 |  |  | 41,667 |
Contract revenue | 716 |  |  | 2,761 |  |  | 16,919 |  |  | 13,723 |
Total revenues | 26,366 |  |  | 50,126 |  |  | 70,345 |  |  | 86,642 |
Operating costs and expenses: |  |  |  |  |  |  |
Cost of Captisol | 1,669 |  |  | 12,361 |  |  | 5,386 |  |  | 17,060 |
Amortization of intangibles | 8,539 |  |  | 8,550 |  |  | 17,078 |  |  | 17,130 |
Research and development | 6,854 |  |  | 8,467 |  |  | 13,517 |  |  | 17,646 |
General and administrative | 11,287 |  |  | 12,086 |  |  | 22,142 |  |  | 24,011 |
Total operating costs and expenses | 28,349 |  |  | 41,464 |  |  | 58,123 |  |  | 75,847 |
Operating (loss) income from continuing operations | (1,983) |  |  | 8,662 |  |  | 12,222 |  |  | 10,795 |
Other income (expense): |  |  |  |  |  |  |
Gain (loss) from short-term investments | 3,991 |  |  | (1,909) |  |  | 43,524 |  |  | (14,786) |
Interest income | 2,320 |  |  | 298 |  |  | 3,755 |  |  | 432 |
Interest expense | (284) |  |  | (438) |  |  | (524) |  |  | (1,227) |
Other (loss) income, net | (873) |  |  | 2,048 |  |  | (270) |  |  | 4,303 |
Total other income (expense), net | 5,154 |  |  | (1) |  |  | 46,485 |  |  | (11,278) |
Income (loss) before income taxes from continuing operations | 3,171 |  |  | 8,661 |  |  | 58,707 |  |  | (483) |
Income tax (expense) benefit | (881) |  |  | 3,938 |  |  | (12,803) |  |  | 153 |
Net income (loss) from continuing operations | 2,290 |  |  | 12,599 |  |  | 45,904 |  |  | (330) |
Net loss from discontinued operations | — |  |  | (13,494) |  |  | (1,665) |  |  | (15,950) |
Net income (loss) | $ | 2,290 |  |  | $ | (895) |  |  | $ | 44,239 |  |  | $ | (16,280) |
Basic net income (loss) from continuing operations per share | $ | 0.13 |  |  | $ | 0.75 |  |  | $ | 2.67 |  |  | $ | (0.02) |
Basic net loss from discontinued operations per share | $ | — |  |  | $ | (0.80) |  |  | $ | (0.10) |  |  | $ | (0.95) |
Basic net income (loss) per share | $ | 0.13 |  |  | $ | (0.05) |  |  | $ | 2.58 |  |  | $ | (0.97) |
Shares used in basic per share calculation | 17,276 |  |  | 16,868 |  |  | 17,170 |  |  | 16,846 |
Diluted net income (loss) from continuing operations per share | $ | 0.13 |  |  | $ | 0.74 |  |  | $ | 2.57 |  |  | $ | (0.02) |
Diluted net loss from discontinued operations per share | $ | — |  |  | $ | (0.79) |  |  | (0.09) |  |  | $ | (0.95) |
Diluted net income (loss) per share | $ | 0.13 |  |  | $ | (0.05) |  |  | 2.48 |  |  | $ | (0.97) |
Shares used in diluted per share calculation | 17,730 |  |  | 17,058 |  |  | 17,851 |  |  | 16,846 |

See accompanying notes to unaudited condensed consolidated financial statements.
5

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Net income (loss) | $ | 2,290 |  |  | $ | (895) |  |  | $ | 44,239 |  |  | $ | (16,280) |
Unrealized net gain (loss) on available-for-sale securities, net of tax | (32) |  |  | (35) |  |  | 17 |  |  | (149) |
Comprehensive income (loss) | $ | 2,258 |  |  | $ | (930) |  |  | $ | 44,256 |  |  | $ | (16,429) |

See accompanying notes to unaudited condensed consolidated financial statements.
6

LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)

| Common Stock | Additional paid in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total stockholders' equity
| Shares | Amount
Balance at December 31, 2022 | 16,951 |  | $ | 17 |  | $ | 147,590 |  | $ | (984) |  | $ | 450,862 |  | $ | 597,485 |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 183 |  | — |  | (762) |  | — |  | — |  | (762) |
Share-based compensation | — |  | — |  | 5,931 |  | — |  | — |  | 5,931 |
Unrealized net gain on available-for-sale securities, net of tax | — |  | — |  | — |  | 49 |  | — |  | 49 |
Final distribution of OmniAb | — |  | — |  | 1,665 |  | — |  |  | 1,665 |
Net income | — |  | — |  | — |  | — |  | 41,949 |  | 41,949 |
Balance at March 31, 2023 | 17,134 |  | $ | 17 |  | $ | 154,424 |  | $ | (935) |  | $ | 492,811 |  | $ | 646,317 |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 218 |  | — |  | 9,110 |  | — |  | — |  | 9,110 |
Share-based compensation | — |  | — |  | 7,207 |  | — |  | — |  | 7,207 |
Unrealized net loss on available-for-sale securities, net of deferred tax | — |  | — |  | — |  | (32) |  | — |  | (32) |
Net income | — |  | — |  | — |  | — |  | 2,290 |  | 2,290 |
Balance at June 30, 2023 | 17,352 |  | $ | 17 |  | $ | 170,741 |  | $ | (967) |  | $ | 495,101 |  | $ | 664,892 |

| Common Stock | Additional paid in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity |  |  |  |  |
| Shares | Amount |  |  |  |  |
Balance at December 31, 2021 | 16,767 |  | $ | 17 |  | $ | 372,969 |  | $ | (917) |  | $ | 449,090 |  | $ | 821,159 |  |  |  |  |  |
ASU 2020-06 adoption, net of tax (Note 1) |  |  | (51,130) |  |  | 35,133 |  | (15,997) |  |  |  |  |  |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 94 |  | — |  | (5,515) |  | — |  | — |  | (5,515) |  |  |  |  |  |
Share-based compensation | — |  | — |  | 9,044 |  | — |  | — |  | 9,044 |  |  |  |  |  |
Unrealized net loss on available-for-sale securities, net of tax | — |  | — |  | — |  | (114) |  | — |  | (114) |  |  |  |  |  |
Net loss | — |  | — |  | — |  | — |  | (15,385) |  | (15,385) |  |  |  |  |  |
Balance at March 31, 2022 | 16,861 |  | $ | 17 |  | $ | 325,368 |  | $ | (1,031) |  | $ | 468,838 |  | $ | 793,192 |  |  |  |  |  |
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes | 21 |  | — |  | 604 |  | — |  | — |  | 604 |  |  |  |  |  |
Share-based compensation | — |  | — |  | 9,499 |  | — |  | — |  | 9,499 |  |  |  |  |  |
Unrealized net loss on available-for-sale securities, net of tax | — |  | — |  | — |  | (35) |  | — |  | (35) |  |  |  |  |  |
Net loss | — |  | — |  | — |  | — |  | (895) |  | (895) |  |  |  |  |  |
Balance at June 30, 2022 | 16,882 |  | $ | 17 |  | $ | 335,471 |  | $ | (1,066) |  | $ | 467,943 |  | $ | 802,365 |  |  |  |  |  |

See accompanying notes to unaudited condensed consolidated financial statements.
7

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

| Six months ended
| June 30,
| 2023 |  | 2022
Cash flows from operating activities: |  |  |
Net (loss) income | $ | 44,239 |  |  | $ | (16,280) |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |  |
Change in estimated fair value of contingent liabilities | 108 |  |  | (1,266) |
Depreciation and amortization of intangible assets | 18,994 |  |  | 26,921 |
Amortization of premium on investments, net | (659) |  |  | 44 |
Amortization of debt discount and issuance fees | 159 |  |  | 501 |
Amortization of commercial license rights | (814) |  |  | (190) |
Gain on debt extinguishment | — |  |  | (3,326) |
Share-based compensation | 13,138 |  |  | 18,543 |
Deferred income taxes | (1,246) |  |  | (12,925) |
(Gain) loss from short-term investments | (43,524) |  |  | 14,786 |
Lease amortization expense | 897 |  |  | 3,054 |
Other | 153 |  |  | (67) |
Changes in operating assets and liabilities: |  |  |
Accounts receivable, net | 2,476 |  |  | 23,208 |
Inventory | (10,966) |  |  | 9,740 |
Accounts payable and accrued liabilities | (4,960) |  |  | (4,357) |
Income tax receivable and payable | 16,001 |  |  | 9,011 |
Other assets and liabilities | (130) |  |  | (3,508) |
Net cash provided by operating activities | 33,866 |  |  | 63,889 |
Cash flows from investing activities: |  |  |
Purchase of short-term investments | (88,989) |  |  | (38,472) |
Proceeds from sale of short-term investments | 88,832 |  |  | 177,554 |
Proceeds from maturity of short-term investments | 20,666 |  |  | 24,830 |
Cash paid for equity method investment | — |  |  | (750) |
Purchase of property and equipment | (2,617) |  |  | (11,463) |
Proceeds from commercial license rights | 213 |  |  | — |
Other | — |  |  | 33 |
Net cash provided by investing activities | 18,105 |  |  | 151,732 |
Cash flows from financing activities: |  |  |
Repayment at maturity/repurchase of 2023 Notes | (76,854) |  |  | (223,303) |
Net proceeds from stock option exercises and ESPP | 12,535 |  |  | 1,011 |
Taxes paid related to net share settlement of equity awards | (4,187) |  |  | (5,922) |
Payments to CVR Holders | — |  |  | (1,416) |
Payments for OmniAb transaction costs | — |  |  | (206) |
Other | (26) |  |  | (27) |
Net cash used in financing activities | (68,532) |  |  | (229,863) |
Net decrease in cash, cash equivalents and restricted cash | (16,561) |  |  | (14,242) |
Cash, cash equivalents and restricted cash at beginning of period | 45,006 |  |  | 19,522 |
Cash, cash equivalents and restricted cash at end of period | $ | 28,445 |  |  | $ | 5,280 |

Supplemental disclosure of cash flow information: |  |  |
Interest paid | $ | 288 |  |  | $ | 1,038 |
Taxes paid | $ | — |  |  | $ | 20 |
Supplemental schedule of non-cash activity: |  |  |
Accrued fixed asset purchases | $ | 532 |  |  | $ | 3,800 |
Accrued inventory purchases | $ | 2,646 |  |  | $ | 9,161 |
Unrealized gain (loss) on AFS investments, net of tax | $ | 17 |  |  | $ | (149) |

See accompanying notes to unaudited condensed consolidated financial statements.
8

LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Business
On November 1, 2022, we completed the separation (the “Separation”) of our antibody discovery business and certain related assets and liabilities (the “OmniAb Business”) through a spin-off of OmniAb to Ligand’s shareholders of record as of October 26, 2022 on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of a separate public company, OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II (“New OmniAb”)), in a Reverse Morris Trust transaction pursuant to the Agreement and Plan of Merger, dated as of March 23, 2022 (the “Merger Agreement”), and the Separation and Distribution Agreement, dated as of March 23, 2022 (the “Separation Agreement”) (the Merger Agreement and Separation Agreement, collectively with the other related transaction documents, the “Transaction Agreements”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc.
After the spin-off of our OmniAb antibody discovery business, Ligand is a revenue-generating biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. We operate in one business segment: development and licensing of biopharmaceutical assets.
Basis of Presentation
Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 2022 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.
Discontinued Operations
The Company determined that the spin-off of the OmniAb Business in November 2022 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). Accordingly, the accompanying condensed consolidated financial statements have been updated to present the results of all discontinued operations reported as a separate component of loss in the condensed consolidated statements of operations and comprehensive loss (see Note 2, Spin-off of OmniAb). All disclosures have been adjusted to reflect continuing operations.
Significant Accounting Policies
We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2022 Annual Report.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Revenue
Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, and contract revenue for services, license fees and development, regulatory and sales based milestone payments.
We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Royalties
9

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under contractual agreements. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a royalty to be recorded no sooner than the underlying sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues, which have not been material, are adjusted in the period in which they become known, typically the following quarter.
Captisol Sales
Revenue from Captisol sales is recognized when control of Captisol material is transferred or intellectual property license rights are granted to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products or rights. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. For Captisol material or intellectual property license rights, we consider our performance obligation satisfied once we have transferred control of the product or granted the intellectual property rights, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost of freight and shipping when control over Captisol material has transferred to the customer as an expense in Cost of Captisol. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.
Contract Revenue
Our contracts with customers often include variable consideration in the form of contingent milestone payments. We include contingent milestone payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone payment is based on sales, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval.
Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services. In general, for R&D services, which has not been significant, we recognize revenue over time and measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation.
Some customer contracts are sublicenses which require that we make payments to an upstream licensor related to license fees, milestones and royalties which we receive from customers. In such cases, we evaluate the determination of gross revenue as a principal versus net revenue as an agent reporting based on each individual agreement.
Deferred Revenue
Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue and certain service revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry any contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue, which has not been significant.
Disaggregation of Revenue
The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):
10

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Royalties |  |  |  |  |  |  |
Kyprolis | $ | 8,097 |  |  | $ | 7,127 |  |  | $ | 14,325 |  |  | $ | 11,749 |
Evomela | 2,357 |  |  | 2,394 |  |  | 4,907 |  |  | 5,095 |
Teriparatide injection | 3,613 |  |  | 5,502 |  |  | 7,113 |  |  | 8,413 |
Rylaze | 3,028 |  |  | 2,317 |  |  | 5,637 |  |  | 3,966 |
Other | 3,335 |  |  | 480 |  |  | 5,602 |  |  | 2,029 |
| $ | 20,430 |  |  | $ | 17,820 |  |  | $ | 37,584 |  |  | $ | 31,252 |
Captisol |  |  |  |  |  |  |
Captisol - Core | $ | 5,220 |  |  | $ | 3,325 |  |  | $ | 15,842 |  |  | $ | 9,551 |
Captisol - COVID(1) | — |  |  | 26,220 |  |  | — |  |  | 32,116 |
| $ | 5,220 |  |  | $ | 29,545 |  |  | $ | 15,842 |  |  | $ | 41,667 |
Contract revenue |  |  |  |  |  |  |
License Fees | 508 |  |  | 558 |  |  | 622 |  |  | 2,639 |
Milestone | — |  |  | — |  |  | 15,300 |  |  | 5,993 |
Other | 208 |  |  | 2,203 |  |  | 997 |  |  | 5,091 |
| $ | 716 |  |  | $ | 2,761 |  |  | $ | 16,919 |  |  | $ | 13,723 |
Total | $ | 26,366 |  |  | $ | 50,126 |  |  | $ | 70,345 |  |  | $ | 86,642 |

(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.
11

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

June 30, 2023 | Amortized cost |  |  | Gross unrealized gains |  |  | Gross unrealized losses |  |  | Estimated fair value
Bank deposits | $ | 36,327 |  |  |  | $ | 7 |  |  |  | $ | (22) |  |  |  | $ | 36,312 |
Bond fund | 83,695 |  |  |  | — |  |  |  | (808) |  |  |  | 82,887 |
Commercial paper | 18,582 |  |  |  | 1 |  |  |  | (8) |  |  |  | 18,575 |
Corporate bonds | 6,197 |  |  |  | 1 |  |  |  | (39) |  |  |  | 6,159 |
Corporate equity securities | 5,775 |  |  |  | — |  |  |  | (3,436) |  |  |  | 2,339 |
Municipal bonds | 1,016 |  |  |  | — |  |  |  | (10) |  |  |  | 1,006 |
US government securities | 6,916 |  |  |  | 1 |  |  |  | (17) |  |  |  | 6,900 |
Warrants | — |  |  |  | 278 |  |  |  | — |  |  |  | 278 |
| $ | 158,508 |  |  |  | $ | 288 |  |  |  | $ | (4,340) |  |  |  | $ | 154,456 |
Viking common stock |  |  |  |  |  |  |  |  |  | 36,140 |
Total short-term investments |  |  |  |  |  |  |  |  |  | $ | 190,596 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |
Bank deposits | $ | 5,012 |  |  |  | $ | 2 |  |  |  | $ | (34) |  |  |  | $ | 4,980 |
Bond fund | 81,815 |  |  |  | — |  |  |  | (1050) |  |  |  | 80,765 |
Commercial paper | 7,211 |  |  |  | 3 |  |  |  | — |  |  |  | 7,214 |
Corporate bonds | 6,701 |  |  |  | 13 |  |  |  | (58) |  |  |  | 6,656 |
Corporate equity securities | 5,807 |  |  |  | 262 |  |  |  | (4,239) |  |  |  | 1,830 |
U.S. government securities | 2,232 |  |  |  | — |  |  |  | (70) |  |  |  | 2,162 |
Warrants | — |  |  |  | 135 |  |  |  | — |  |  |  | 135 |
| $ | 108,778 |  |  |  | $ | 415 |  |  |  | $ | (5,451) |  |  |  | $ | 103,742 |
Viking common stock |  |  |  |  |  |  |  |  |  | 63,122 |
Total short-term investments |  |  |  |  |  |  |  |  |  | $ | 166,864 |

During the three months ended June 30, 2023, we sold 1.3 million shares of Viking common stock and recognized a realized gain of $16.6 million in total. During the six months ended June 30, 2023, we sold 4.5 million shares of Viking common stock and recognized a realized gain of $37.2 million in total.
Gain (loss) from short-term investments in our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.
Allowances are recorded for available-for-sale debt securities with unrealized losses. This limits the amount of credit losses that can be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The provisions of the credit losses standard did not have a material impact on our available-for-sale debt securities during the three and six months ended June 30, 2023.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):

| June 30, 2023
| Amortized Cost |  | Fair Value
Within one year | $ | 89,245 |  |  | $ | 89,187 |
After one year through five years | 5,846 |  |  | 5,816 |
Total | $ | 95,091 |  |  | $ | 95,003 |

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 65 investments which were in an unrealized loss position with a total of $0.1 million unrealized losses as of June 30, 2023. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities and it is not more-likely-than-not that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the three and six months ended June 30, 2023.
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Accounts Receivable and Allowance for Credit Losses
Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three and six months ended June 30, 2023, we considered the current and expected future economic and market conditions and concluded a decrease of $0.09 million and an increase of $0.05 million of allowance for credit losses, respectively.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the specific identification method.
We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write-downs recorded against inventory for the three and six months ended June 30, 2023 and 2022. In addition to finished goods, as of June 30, 2023 inventory consists of Captisol prepayments of $5.3 million, and as of December 31, 2022 inventory consists of Captisol prepayments of $5.9 million.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):

| June 30, |  | December 31,
| 2023 |  | 2022
Indefinite-lived intangible assets |  |  |
Goodwill | $ | 105,673 |  |  | $ | 105,673 |
Definite lived intangible assets |  |  |
Complete technology | 55,211 |  |  | 55,211 |
Less: accumulated amortization | (24,339) |  |  | (22,560) |
Trade name | 2,642 |  |  | 2,642 |
Less: accumulated amortization | (1,644) |  |  | (1,577) |
Customer relationships | 29,600 |  |  | 29,600 |
Less: accumulated amortization | (18,416) |  |  | (17,670) |
Contractual relationships | 362,000 |  |  | 362,000 |
Less: accumulated amortization | (79,677) |  |  | (65,191) |
Total goodwill and other identifiable intangible assets, net | $ | 431,050 |  |  | $ | 448,128 |

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

|  | June 30, 2023 |  | December 31, 2022
|  | Gross |  | Adjustments(1) |  | Net |  | Gross |  | Adjustments(2) |  | Net
Aziyo and CorMatrix |  | $ | 17,696 |  |  | $ | (8,691) |  |  | $ | 9,005 |  |  | $ | 17,696 |  |  | $ | (9,538) |  |  | $ | 8,158 |
Selexis and Dianomi |  | 10,602 |  |  | (8,824) |  |  | 1,778 |  |  | 10,602 |  |  | (8,578) |  |  | 2,024 |
Total |  | $ | 28,298 |  |  | $ | (17,515) |  |  | $ | 10,783 |  |  | $ | 28,298 |  |  | $ | (18,116) |  |  | $ | 10,182 |

(1) Amounts represent accumulated amortization to principal of $11.0 million and credit loss adjustments of $6.5 million as of June 30, 2023.
(2) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of December 31, 2022.
Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis, S.A. (Selexis) in April 2013 and April 2015, CorMatrix Cardiovascular, Inc. (CorMatrix) in May 2016, which was later acquired by Aziyo in 2017, and Dianomi Therapeutics, Inc. in January 2019. Commercial license rights acquired are accounted for as financial assets in accordance with ASC 310, Receivables, as further discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2022 Annual Report.
We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk
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associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the three and six months ended June 30, 2023, we further considered the current and expected future economic and market conditions and concluded no further adjustment was needed on the allowance for credit losses as of June 30, 2023.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):

| June 30, |  | December 31,
| 2023 |  | 2022
Compensation | $ | 2,343 |  |  | $ | 6,201 |
Subcontractor | 1,756 |  |  | 1,756 |
Professional fees | 807 |  |  | 662 |
Customer deposit | 621 |  |  | 621 |
Supplier | 268 |  |  | 634 |
Royalties owed to third parties | 180 |  |  | 12 |
Amounts owed to former licensees | 45 |  |  | 3,989 |
Other | 1,271 |  |  | 1,806 |
Total accrued liabilities | $ | 7,291 |  |  | $ | 15,681 |

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

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022(a) |  | 2023 |  | 2022(a)
SBC - Research and development expenses | $ | 2,016 |  |  | $ | 2,447 |  |  | $ | 3,723 |  |  | $ | 4,643 |
SBC - General and administrative expenses | 5,191 |  |  | 4,554 |  |  | 9,415 |  |  | 9,467 |
| $ | 7,207 |  |  | $ | 7,001 |  |  | $ | 13,138 |  |  | $ | 14,110 |

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Risk-free interest rate | 3.9% |  | 3.0% |  | 4.1% |  | 3.0%
Dividend yield | — |  | — |  | — |  | —
Expected volatility | 49.4% |  | 50.0% |  | 52.6% |  | 50.0%
Expected term (years) | 4.8 |  | 4.8 |  | 5.3 |  | 4.8

A limited amount of performance-based restricted stock units (PSUs) contain a market condition based on our relative total shareholder return ranked on a percentile basis against the NASDAQ Biotechnology Index over a three year performance period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation cost for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the performance conditions.
Net Income (Loss) Per Share
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Basic net income (loss) per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted net loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. Although we paid off the 2023 Notes in May 2023, it wound have a dilutive impact when the average market price of our common stock exceeds the maximum conversion price during the three and six months ended June 30, 2023. It was our intent and policy to settle conversions through combination settlement, which involved payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards. See Note 4, Debt and Note 6, Stockholders’ Equity.
In accordance with ASC 260, Earnings per Share, if a company had a discontinuing operation, the company uses income from continuing operations, adjusted for preferred dividends and similar adjustments, as its control number to determine whether potential common shares are dilutive. The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):

| Three months ended |  | Six months ended
| June 30, |  | June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Weighted average shares outstanding: | 17,276 |  |  | 16,868 |  |  | 17,170 |  |  | 16,846 |
Dilutive potential common shares: |  |  |  |  |  |  |
Restricted stock | 83 |  |  | 26 |  |  | 85 |  |  | — |
Stock options | 371 |  |  | 164 |  |  | 356 |  |  | — |
2023 convertible senior notes | — |  |  | — |  |  | 240 |  |  | — |
Shares used to compute diluted income per share | 17,730 |  |  | 17,058 |  |  | 17,851 |  |  | 16,846 |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 4,862 |  |  | 6,794 |  |  |  |  | 6,400 |

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2. Spin-off of OmniAb
On March 23, 2022, we entered into the Separation Agreement to separate our OmniAb Business and the Merger Agreement, pursuant to which APAC would combine with OmniAb, and acquire Ligand's OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). In connection with the execution of the Merger Agreement, we made organizational changes to better align our organizational structure with our strategy and operations, and management reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operated the following two reportable segments: (1) OmniAb Business and (2) Ligand core business. The OmniAb Business segment was focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb Business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines.
After the closing date of the Transactions on November 1, 2022, the historical financial results of OmniAb have been reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution. Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. Immediately following the Distribution, Merger Sub merged with and into OmniAb, with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of New OmniAb. The entire transaction was completed on November 1, 2022, and following the Merger, New OmniAb is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.” After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after November 1, 2022.
Discontinued operations
In connection with the Merger, the Company determined its antibody discovery business qualified for discontinued operations accounting treatment in accordance with ASC 205-20. We recognized a $1.7 million tax provision adjustment related to deferred taxes during the six months ended June 30, 2023 that was attributable to the discontinued operations. There was no revenue or expenses attributable to the discontinued operations during the three months ended June 30, 2023. The following table summarizes revenue and expenses of the discontinued operations for the three and six months ended June 30, 2022 (in thousands):

| Three months ended June 30, 2022 |  | Six months ended June 30, 2022
Revenues: |  |  |
Royalties | $ | 139 |  |  | $ | 402 |
Contract revenue | 7,154 |  |  | 16,068 |
Total revenues | 7,293 |  |  | 16,470 |
Operating costs and expenses: |  |  |
Amortization of intangibles | 3,274 |  |  | 6,507 |
Research and development | 10,651 |  |  | 21,779 |
General and administrative | 2,499 |  |  | 8,754 |
Total operating costs and expenses | 16,424 |  |  | 37,040 |
Loss from operations | (9,131) |  |  | (20,570) |
Other income (expense): |  |  |
Other income (expense), net | (166) |  |  | 277 |
Total other income (expense), net | (166) |  |  | 277 |
Loss before income tax | (9,297) |  |  | (20,293) |
Income tax (expense) benefit | (4,197) |  |  | 4,343 |
Net loss | $ | (13,494) |  |  | $ | (15,950) |

The following table summarizes the significant non-cash items, capital expenditures of the discontinued operations, and financing activities that are included in the consolidated statements of cash flows for the six months ended June 30, 2022 (in thousands):
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| Six months ended
| June 30, 2022
Operating activities: |
Change in fair value of contingent consideration | $ | (277) |
Depreciation and amortization | 8,132 |
Stock-based compensation expense | 4,433 |
Investing activities: |
Purchase of property, plant and equipment | (7,005) |
Financing activities: |
Payments to CVR Holders | $ | (1,416) |
Supplemental cash flow disclosures: |
Purchases of property, plant and equipment included in accounts payable and accrued expenses | $ | 3,601 |

3. Fair Value Measurements
Assets and Liabilities Measured on a Recurring Basis
The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):

|  | June 30, 2023 |  | December 31, 2022
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments, excluding Viking(1) |  | $ | 9,239 |  |  | $ | 144,939 |  |  | $ | 278 |  |  | $ | 154,456 |  |  | $ | 3,992 |  |  | $ | 99,615 |  |  | $ | 135 |  |  | $ | 103,742 |
Investment in Viking common stock |  | 36,140 |  |  | — |  |  | — |  |  | 36,140 |  |  | 63,122 |  |  | — |  |  | — |  |  | 63,122 |
Total assets |  | $ | 45,379 |  |  | $ | 144,939 |  |  | $ | 278 |  |  | $ | 190,596 |  |  | $ | 67,114 |  |  | $ | 99,615 |  |  | $ | 135 |  |  | $ | 166,864 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
CyDex contingent liabilities |  | $ | — |  |  | $ | — |  |  | $ | 85 |  |  | $ | 85 |  |  | $ | — |  |  | $ | — |  |  | $ | 84 |  |  | $ | 84 |
Metabasis contingent liabilities(2) |  | — |  |  | 3,487 |  |  | — |  |  | 3,487 |  |  | — |  |  | 3,429 |  |  | — |  |  | 3,429 |
Amounts owed to former licensor |  | — |  |  | — |  |  | — |  |  | — |  |  | 44 |  |  | — |  |  | — |  |  | 44 |
Total liabilities |  | $ | — |  |  | $ | 3,487 |  |  | $ | 85 |  |  | $ | 3,572 |  |  | $ | 44 |  |  | $ | 3,429 |  |  | $ | 84 |  |  | $ | 3,557 |

1.Excluding our investment in Viking, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in bond funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black-Scholes value estimated by management on the last day of the period.
2.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. During the three and six months ended June 30, 2023, we adjusted the balance of the Metabasis CVR liability by increasing $0.7 million and $0.1 million to mark to market, respectively.
A reconciliation of the level 3 financial instruments as of June 30, 2023 is as follows (in thousands):
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Fair value of level 3 financial instruments as of December 31, 2022 | $ | 84 |
Payments to CVR holders and other contingent payments | (50) |
Fair value adjustments to contingent liabilities | 51 |
Fair value of level 3 financial instruments as of June 30, 2023 | $ | 85 |

Assets Measured on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.
We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.
There was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the three and six months ended June 30, 2023 and June 30, 2022.
4. Debt
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750.0 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million.
In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees, and is being amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. The effective interest rate for the three and six months ended June 30, 2023 is 0.5%. During the three months ended June 30, 2023 we recognized a total of $0.3 million in interest expense which includes $0.2 million in contractual interest expense and $0.1 million in amortized issuance costs. During the six months ended June 30, 2023 we recognized a total of $0.6 million in interest expense which includes $0.4 million in contractual interest expense and $0.2 million in amortized issuance costs.
On May 15, 2023, the 2023 Notes maturity date, we paid the remaining $76.9 million principal amount and $0.3 million accrued interest in cash.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we were required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $206.65 per share and were exercisable when and if the 2023 Notes were converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock had been above the exercise price of the convertible bond hedges, the counterparties would have delivered shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants did not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.
In January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to
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the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.
During the year ended December 31, 2021, in connection with the repurchases of $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,559,254.
In August 2022, in connection with the repurchases of $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million made during the six months ended June 30, 2022, we entered into Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes.
5. Income Tax
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for continuing operations for the three and six months ended June 30, 2023 and 2022 was 27.8% and (45.5)%, and 21.8% and 31.7%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2023 was primarily due to Internal Revenue Code Section 162(m) limitation on deduction for officer compensation, non-deductible incentive stock option (ISO) related stock compensation expense, which were partially offset by foreign derived intangible income tax benefit during the period. The variance from the U.S. federal tax rate of 21% for the three and six months ended June 30, 2022 was primarily due to the tax deductions related to foreign derived intangible income tax benefit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation during the period.
6. Stockholders’ Equity
We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 9, Stockholders’ Equity, of the Notes to Consolidated Financial Statements in our 2022 Annual Report.
The following is a summary of our stock option and restricted stock activity and related information:

| Stock Options |  | Restricted Stock Awards
| Shares |  | Weighted-Average Exercise Price |  | Shares |  | Weighted-Average Grant Date Fair Value
Balance as of December 31, 2022 | 2,991,473 |  |  | $ | 61.31 |  |  | 348,453 |  |  | $ | 75.60 |
Granted | 447,487 |  |  | $ | 74.45 |  |  | 201,467 |  |  | $ | 83.67 |
Options exercised/RSUs vested | (297,166) |  |  | $ | 42.37 |  |  | (164,772) |  |  | $ | 75.27 |
Forfeited | (78,943) |  |  | $ | 63.37 |  |  | (12,635) |  |  | $ | 59.84 |
Balance as of June 30, 2023 | 3,062,851 |  |  | $ | 65.02 |  |  | 372,513 |  |  | $ | 80.64 |

As of June 30, 2023, outstanding options to purchase 1.8 million shares were exercisable with a weighted average exercise price per share of $63.57.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Amended Employee Stock Purchase Plan, or ESPP, is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As of June 30, 2023, 32,363 shares were available for future purchases under the ESPP.
At-the Market Equity Offering Program
On September 30, 2022, we filed a registration statement on Form S-3 (the “Shelf Registration Statement”), which became automatically effective upon filing, covering the offering of common stock, preferred stock, debt securities, warrants and units.
On September 30, 2022, we also entered into an At-The-Market Equity Offering Sales Agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Agent”), under which we may, from time to time, sell shares of our
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common stock having an aggregate offering price of up to $100.0 million in “at the market” offerings through the Agent (the “ATM Offering”). The Shelf Registration Statement included a prospectus covering the offering, issuance and sale of up to $100.0 million of our common stock from time to time through the ATM Offering. The shares to be sold under the Sales Agreement may be issued and sold pursuant to the Shelf Registration Statement. To date, we have not issued any shares of common stock in the ATM Offering.
Share Repurchases
Our Board of Directors has approved a stock repurchase program authorizing, but not requiring, the repurchase of up to $50.0 million of our common stock from time to time through April 2026. We expect to acquire shares, if at all, primarily through open-market transactions in accordance with all applicable requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 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. Authorization to repurchase $50.0 million of our common stock remained available as of June 30, 2023.
7. Commitment and Contingencies
Legal Proceedings
We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.
On October 31, 2019, we received three civil complaints filed in the U.S. District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned more than one thousand civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the Company and no individualized factual allegations have been advanced against us in any of the 3 complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.
From time to time, we may also become subject to other legal proceedings or claims arising in the ordinary course of our business. We currently believe that none of the claims or actions pending against us is likely to have, individually or in aggregate, a material adverse effect on our business, financial condition or results of operations. Given the unpredictability inherent in litigation, however, we cannot predict the outcome of these matters.
Operating Leases
During the six months ended June 30, 2023, we entered into an amendment to the lease agreement for our headquarters office located in San Diego, California, which resulted in a $1.1 million increase in both operating lease assets and operating lease liabilities at lease commencement.
8. Subsequent Events
Novan
On July 17, 2023, we entered into an agreement with Novan, Inc. (“Novan”) to acquire its assets for $15.0 million in cash (which agreement contemplated Novan filing for bankruptcy relief) (the “Stalking Horse Agreement”) and provide them up to $15.0 million in debtor-in-possession financing inclusive of a $3.0 million bridge loan funded on the same day. On July 17, 2023, Novan announced that it had filed for Chapter 11 reorganization and its entry into the Stalking Horse Agreement. The Stalking Horse Agreement is subject to approval by the bankruptcy court. If the Stalking Horse Agreement is approved, and our bid is the successful bid in the anticipated bankruptcy sale and auction process, we will acquire the Novan assets and will seek to out license or sell the existing development programs and commercial business assets of Novan.
20

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Part II, Item 1A. Risk Factors. This outlook represents our current judgment on the future direction of our business. These statements include those related to our future results of operations and financial position, Captisol-related revenues and Kyprolis and other product royalty revenues and milestones under license agreements, product development, and product regulatory filings and approvals, and the timing thereof. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Kyprolis, Captisol and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market. In addition, ongoing or future arbitration, litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
We use our trademarks, trade names and services marks in this report as well as trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this report appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trade marks and trade names.
References to “Ligand Pharmaceuticals Incorporated,” “Ligand,” the “Company,” “we” or “our” include Ligand Pharmaceuticals Incorporated and our wholly-owned subsidiaries.
Overview
Our business is focused on acquiring or funding programs and technologies that life science companies use to discover and develop medicines. Our business model provides 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 and diversified manner.
Our business model is focused on funding mid to late-stage drug development in return for economic rights and out licensing our technology platforms to help partners discover and develop medicines. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) ultimately to generate our revenue. Our Captisol platform technology is a chemically modified cyclodextrin with a structure designed to optimize the solubility and stability of drugs. Our Pelican Expression Technology is a validated, cost-effective and scalable platform for recombinant protein production that is especially well-suited for complex, large-scale protein production where traditional systems are not. We have established multiple alliances, licenses and other business relationships with the world’s leading pharmaceutical companies including Amgen, Merck, Pfizer, Jazz, Gilead Sciences and Baxter International.
Our revenue consists of three primary elements: royalties from commercialized products, sales of Captisol material, and contract revenue from license, milestone and other service payments. We selectively pursue acquisitions and drug development funding opportunities that address high unmet clinical needs to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.
OmniAb Separation and Spin-Off
On March 23, 2022, we entered into the Merger Agreement, by and among our company, APAC (which later became New OmniAb), OmniAb and Merger Sub, pursuant to which New OmniAb combined with OmniAb, our then-antibody discovery business, in a Reverse Morris Trust transaction. Pursuant to the Separation Agreement, we transferred the OmniAb Business, including certain of our related subsidiaries, to OmniAb and, in connection therewith, distributed (the Distribution) to Ligand stockholders 100% of the common stock of OmniAb. Immediately following the Distribution on November 1, 2022, in accordance with and subject to the terms and conditions of the Merger Agreement, Merger Sub merged with and into OmniAb (the Merger), with OmniAb continuing as the surviving company in the Merger and as a wholly-owned subsidiary of New OmniAb. After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after October 31, 2022. As a result, OmniAb's historical financial results are reflected in our consolidated financial statements as discontinued operations.
21

Business Updates
On July 14, 2023 we made a $3 million bridge loan to Novan, Inc. (Nasdaq: NOVN) in contemplation of Novan filing for bankruptcy relief. On July 17th Novan filed for bankruptcy relief and Ligand entered into an agreement with Novan to purchase its assets for $15 million in cash and provide them up to $15 million in debtor-in-possession financing, inclusive of the $3 million bridge loan. The purchase is subject to approval by the bankruptcy court. Novan’s assets include Berdazimer gel, which is in development for molluscum contagiosum infection, and has an NDA with the FDA and an assigned PDUFA goal date of January 5, 2024. If the purchase agreement is approved, and our bid is successful in the anticipated bankruptcy sale and auction process, we will acquire the Novan assets and consistent with our business model, will seek to outlicense or sell the existing development programs and commercial business assets of Novan.
On July 17, 2023, Travere Therapeutics (Nasdaq: TVTX) announced that 417 new patient start forms (PSFs) were received in the second quarter and a total of 563 PSFs have been received since the accelerated approval of FILSPARI was obtained in the first quarter of 2023. Travere also announced the sale of its bile acid product portfolio to Mirum Pharmaceuticals for $210 million upfront and up to $235 million in additional sales based milestones. The sale enables Travere to further focus its efforts on the ongoing launch of FILSPARI for IgA nephropathy and pursing a potential regulatory path forward in FSGS.
Viking Therapeutics, Inc. (Nasdaq: VKTX) announced its Phase 2b clinical trial of VK2809 in patients with biopsy-confirmed non-alcoholic steatohepatitis (NASH) achieved its primary endpoint, with patients receiving VK2809 experiencing statistically significant reductions in liver fat content from baseline to Week 12 as compared with placebo. The median relative change from baseline in liver fat as assessed by magnetic resonance imaging, proton density fat fraction (MRI-PDFF) ranged from 38% to 55% for patients receiving VK2809. Additionally, VK2809-treated patients demonstrated statistically significant reductions in low-density lipoprotein cholesterol (LDL-C), triglycerides, and atherogenic lipoproteins compared with placebo.
Merck (NYSE: MRK) announced its Phase 3 clinical trial of V116, an investigational 21-valent pneumococcal conjugate vaccine, met key immunogenicity and safety endpoints in two Phase 3 trials. If approved, V116 would be the first pneumococcal conjugate vaccine specifically designed for adults. Results from the STRIDE-3 trial demonstrated statistically significant immune responses compared to PCV20 (pneumococcal 20-valent conjugate vaccine) in vaccine-naïve adults for serotypes common to both vaccines. Positive immune responses were also observed for serotypes unique to V116. Additionally, results from STRIDE-6 demonstrated that V116 was immunogenic for all 21 pneumococcal serotypes in the vaccine among adults who previously received a pneumococcal vaccine at least one year prior to the study. In both studies, V116 had a safety profile comparable to the comparator in the studies.
Jazz Pharmaceuticals plc (Nasdaq: JAZZ) announced that the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP) adopted a positive opinion recommending the European Commission marketing authorization of JZP458 (approved as Rylaze in the U.S.) for use as a component of a multi-agent chemotherapeutic regimen for the treatment of acute lymphoblastic leukemia (ALL) and lymphoblastic lymphoma (LBL) in adult and pediatric patients (1 month and older) who developed hypersensitivity or silent inactivation to E. coli-derived asparaginase.
Verona Pharma Plc (Nasdaq: VRNA) submitted an NDA to the FDA for approval of ensifentrine for the maintenance treatment of patients with chronic obstructive pulmonary disease (COPD). Verona also published results from its Phase 3 ENHANCE trials in the American Journal of Respiratory and Critical Care Medicine demonstrating improvements in lung function, symptoms and quality of life measures, a substantial reduction in the rate and risk of COPD exacerbations and a favorable safety profile.
Palvella Therapeutics announced a planned pivotal Phase 3 study design of QTORIN rapamycin for the treatment of Microcystic Lymphatic Malformations, following previously announced positive Phase 2 results. Additionally, Palvella announced QTORIN rapamycin did not show a treatment effect when compared to placebo in the pivotal Phase 3 trial in Pachyonychia Congenita and will no longer continue development in that indication.
Gilead Sciences, Inc. (Nasdaq: GILD) received FDA approval of Veklury (remdesivir) for COVID-19 treatment in patients with severe renal impairment, including those on dialysis. With this approval, Veklury is now the first and only approved antiviral COVID-19 treatment that can be used across all stages of renal disease. The U.S. approval follows the European Commission decision to extend the approved use of Veklury to treat COVID-19 in people with severe renal impairment, including those on dialysis.
Xintong Pharmaceuticals made an NDA submission of pradefovir for hepatitis B virus (HBV) in China and received Priority Review.
Aldeyra Therapeutics, Inc. (Nasdaq: ALDX) announced positive top-line results from its Phase 3 clinical trial of reproxalap in patients with allergic conjunctivitis. The clinical trial successfully achieved statistical significance for the primary and all secondary endpoints.
22

Results of Operations
Revenue

(Dollars in thousands) | Q2 2023 |  | Q2 2022(a) |  | Change |  | % Change |  | YTD 2023 |  | YTD 2022(a) |  | Change |  | % Change
Royalties | $ | 20,430 |  |  | $ | 17,820 |  |  | $ | 2,610 |  |  | 15 | % |  | $ | 37,584 |  |  | $ | 31,252 |  |  | $ | 6,332 |  |  | 20 | %
Captisol - Core | 5,220 |  |  | 3,325 |  |  | 1,895 |  |  | 57 | % |  | 15,842 |  |  | 9,551 |  |  | 6,291 |  |  | 66 | %
Captisol - COVID | — |  |  | 26,220 |  |  | (26,220) |  |  | (100) | % |  | — |  |  | 32,116 |  |  | (32,116) |  |  | (100) | %
Contract revenue | 716 |  |  | 2,761 |  |  | (2,045) |  |  | (74) | % |  | 16,919 |  |  | 13,723 |  |  | 3,196 |  |  | 23 | %
Total revenue | $ | 26,366 |  |  | $ | 50,126 |  |  | $ | (23,760) |  |  | (47) | % |  | $ | 70,345 |  |  | $ | 86,642 |  |  | $ | (16,297) |  |  | (19) | %

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
Q2 2023 vs. Q2 2022
Total revenue decreased by $23.8 million, or 47%, to $26.4 million in Q2 2023 compared to $50.1 million in Q2 2022 primarily due to no Captisol sales related to COVID-19 in Q2 2023, compared to $26.2 million for the same period in 2022. Royalty revenue increased by $2.6 million, or 15%, to $20.4 million in Q2 2023 compared to $17.8 million in Q2 2022 primarily due to the increase of Kyprolis sales and sales of drugs using the Pelican platform. Core Captisol sales increased by $1.9 million, or 57%, to $5.2 million in Q2 2023 primarily due to the timing of customer orders. Contract revenue decreased by $2.0 million, or 74%, to $0.7 million in Q2 2023 compared to $2.8 million in Q2 2022 primarily due to the timing of CMR197 sales.
YTD 2023 vs. YTD 2022
Total revenue decreased by $16.3 million, or 19%, to $70.3 million in YTD 2023 compared to $86.6 million in YTD 2022 primarily due to no Captisol sales related to COVID-19 in YTD 2023, compared to $32.1 million for the same period in 2022. Royalty revenue increased by $6.3 million, or 20%, to $37.6 million in YTD 2023 compared to $31.3 million in YTD 2023 primarily due to the increase of Kyprolis, Evomela, Rylaze, and Pneumosil sales. Core Captisol sales increased by $6.3 million, or 66%, to $15.8 million in YTD 2023 primarily due to the timing of customer orders.
Royalty revenue is a function of our partners’ product sales and the applicable royalty rate. Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being 3%. Evomela has a fixed royalty rate of 20%. Teriparatide injection has a tiered royalty between 25% and 40% on sales that have been adjusted for certain deductible items as defined in the respective license agreement. The Rylaze royalty rate is in the low single digits. Contract revenue includes service revenue, license fees and development, regulatory and sales based milestone payments.
The following table represents royalty revenue by program (in millions):

(in millions) | Q2 2023 Estimated Partner Product Sales | Effective Royalty Rate | Q2 2023 Royalty Revenue |  | Q2 2022 Estimated Partner Product Sales(a) | Effective Royalty Rate(a) | Q2 2022 Royalty Revenue(a)
Kyprolis | $ | 372.4 |  | 2.2 | % | $ | 8.1 |  |  | $ | 330.0 |  | 2.2 | % | $ | 7.1 |
Evomela | 12.0 |  | 20.0 | % | 2.4 |  |  | 12.0 |  | 20.0 | % | 2.4 |
Teriparatide injection(b) | 11.5 |  | 31.3 | % | 3.6 |  |  | 15.1 |  | 36.4 | % | 5.5 |
Rylaze | 98.0 |  | 3.1 | % | 3.0 |  |  | 73.0 |  | 3.2 | % | 2.3 |
Other | 256.7 |  | 1.3 | % | 3.3 |  |  | 50.4 |  | 1.0 | % | 0.5 |
Total | $ | 750.6 |  |  | $ | 20.4 |  |  | $ | 480.5 |  |  | $ | 17.8 |
(in millions) | YTD 2023 Estimated Partner Product Sales | Effective Royalty Rate | YTD 2023 Royalty Revenue |  | YTD 2022 Estimated Partner Product Sales(a) | Effective Royalty Rate(a) | YTD 2022 Royalty Revenue(a)
Kyprolis | $ | 749.4 |  | 1.9 | % | $ | 14.3 |  |  | $ | 628.6 |  | 1.9 | % | $ | 11.7 |
Evomela | 24.5 |  | 20.0 | % | 4.9 |  |  | 25.5 |  | 20.0 | % | 5.1 |
Teriparatide injection(1) | 23.2 |  | 30.6 | % | 7.1 |  |  | 24.8 |  | 33.9 | % | 8.4 |
Rylaze | 181.0 |  | 3.1 | % | 5.6 |  |  | 127.2 |  | 3.1 | % | 4.0 |
Other | 413.9 |  | 1.4 | % | 5.7 |  |  | 126.7 |  | 1.7 | % | 2.1 |
Total | $ | 1,392.0 |  |  | $ | 37.6 |  |  | $ | 932.8 |  |  | $ | 31.3 |

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
(b) Teriparatide injection sales have been adjusted for certain deductible items as defined in the respective license agreement.
23

Operating Costs and Expenses

(Dollars in thousands) | Q2 2023 |  | % of Revenue |  | Q2 2022(a) |  | % of Revenue |  | YTD 2023 |  | % of Revenue |  | YTD 2022(a) |  | % of Revenue
Cost of Captisol | $ | 1,669 |  |  |  |  | $ | 12,361 |  |  |  |  | $ | 5,386 |  |  |  |  | $ | 17,060 |  |  |
Amortization of intangibles | 8,539 |  |  |  |  | 8,550 |  |  |  |  | 17,078 |  |  |  |  | 17,130 |  |  |
Research and development | 6,854 |  |  |  |  | 8,467 |  |  |  |  | 13,517 |  |  |  |  | 17,646 |  |  |
General and administrative | 11,287 |  |  |  |  | 12,086 |  |  |  |  | 22,142 |  |  |  |  | 24,011 |  |  |
Total operating costs and expenses | $ | 28,349 |  |  | 108% |  | $ | 41,464 |  |  | 83% |  | $ | 58,123 |  |  | 83% |  | $ | 75,847 |  |  | 88%

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
Q2 2023 vs. Q2 2022
Total operating costs and expenses decreased by $13.1 million, or 32%, to $28.3 million in Q2 2023 compared to $41.5 million in Q2 2022.
Cost of Captisol decreased by $10.7 million, or 86%, to $1.7 million in Q2 2023 compared to $12.4 million in Q2 2022, with the decrease primarily due to the lower Captisol sales this quarter.
Amortization of intangibles remained steady in Q2 2023 compared to the same period in 2022 as there has been no change to the gross balance of intangible assets over these periods.
At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. Research and development expense was $6.9 million for Q2 2023, compared with $8.5 million for the same period of 2022, with the decrease primarily due to lower share-based compensation, employee-related expenses and lab supply expenses.
General and administrative expense was $11.3 million for Q2 2023, compared to $12.1 million for the same period in 2022, with the decrease primarily due to a decrease in legal expenses in connection with a Cydex intellectual property arbitration in 2022.
YTD 2023 vs. YTD 2022
Total operating costs and expenses decreased by $17.7 million, or 23%, to $58.1 million in YTD 2023 compared to $75.8 million in YTD 2022.
Cost of Captisol decreased by $11.7 million, or 68%, to $5.4 million in YTD 2023 compared to $17.1 million in YTD 2022, with the decrease primarily due to the lower Captisol sales in YTD 2023.
Amortization of intangibles remained steady in YTD 2023 compared to the same period in 2022 as there have been no change to the gross balance of intangible assets over these periods.
At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. Research and development expense was $13.5 million for YTD 2023, compared with $17.6 million for the same period of 2022, with the decrease primarily due to lower share-based compensation, employee-related expenses and lab supply expenses.
General and administrative expense was $22.1 million for YTD 2023, compared to $24.0 million for the same period in 2022, with the decrease primarily due to a decrease in legal expenses in connection with the OmniAb spin-off and a Cydex intellectual property arbitration in 2022.
Other Income (Expense)

(Dollars in thousands) | Q2 2023 |  | Q2 2022(a) |  | Change |  | YTD 2023 |  | YTD 2022(a) |  | Change
Gain (loss) from short-term investments | $ | 3,991 |  |  | $ | (1,909) |  |  | $ | 5,900 |  |  | $ | 43,524 |  |  | $ | (14,786) |  |  | $ | 58,310 |
Interest income | 2,320 |  |  | 298 |  |  | 2,022 |  |  | 3,755 |  |  | 432 |  |  | 3,323 |
Interest expense | (284) |  |  | (438) |  |  | 154 |  |  | (524) |  |  | (1,227) |  |  | 703 |
Other income (expense), net | (873) |  |  | 2,048 |  |  | (2,921) |  |  | (270) |  |  | 4,303 |  |  | (4,573) |
Total other income (expense), net | $ | 5,154 |  |  | $ | (1) |  |  | $ | 5,155 |  |  | $ | 46,485 |  |  | $ | (11,278) |  |  | $ | 57,763 |

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
Q2 2023 vs. Q2 2022
24

The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and other equity security investments, which contributed an unrealized loss of $12.7 million in Q2 2023 as compared to an unrealized loss of $1.9 million in Q2 2022. In addition, during Q2 2023 we sold 1.3 million shares of Viking contributing to realized gains of $16.6 million compared to no Viking shares sold in Q2 2022.
Interest income consists primarily of interest earned on our short-term investments. The increase over the prior year was due to the increase in interest rates, partially offset by the decrease in our short-term investment balance.
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 cost) on our 2023 Notes in both Q2 2023 and Q2 2022. The decrease in interest expense was primarily due to the lower average debt outstanding balance in Q2 2023 as compared to Q2 2022. See Note 4, Debt.
Other income (expense), net, in Q2 2023 decreased by $2.9 million as compared to Q2 2022, primarily due to no debt extinguishment gain or loss in Q2 2023 compared to a $1.8 million gain on extinguishment of debt during Q2 2022. See Note 4, Debt.
YTD 2023 vs. YTD 2022
The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and other equity security investments, which contributed an unrealized gain of $6.3 million in YTD 2023 as compared to an unrealized loss of $14.5 million in YTD 2022. In addition, during YTD 2023 we sold 4.5 million shares of Viking contributing to realized gains of $37.2 million compared to no Viking shares sold in YTD 2022.
Interest income consists primarily of interest earned on our short-term investments. The increase over the prior year was due to the increase in interest rates, partially offset by the decrease in our short-term investment balance.
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 cost) on our 2023 Notes in both YTD 2023 and YTD 2022. The decrease in interest expense was primarily due to the lower average debt outstanding balance in YTD 2023 as compared to YTD 2022. See Note 4, Debt.
Other income (expense), net, in YTD 2023 decreased by $4.6 million as compared to YTD 2022, primarily due to no debt extinguishment gain or loss in YTD 2023 compared to a $3.3 million gain on extinguishment of debt during YTD 2022. See Note 4, Debt.
Income Tax Benefit (Expense)

(Dollars in thousands) | Q2 2023 |  | Q2 2022(a) |  | Change |  | YTD 2023 |  | YTD 2022(a) |  | Change
Income (loss) before income taxes | $ | 3,171 |  |  | $ | 8,661 |  |  | $ | (5,490) |  |  | $ | 58,707 |  |  | $ | (483) |  |  | $ | 59,190 |
Income tax benefit | (881) |  |  | 3,938 |  |  | (4,819) |  |  | (12,803) |  |  | 153 |  |  | (12,956) |
Income (loss) from operations | $ | 2,290 |  |  | $ | 12,599 |  |  | $ | (10,309) |  |  | $ | 45,904 |  |  | $ | (330) |  |  | $ | 46,234 |
Effective tax rate | 27.8 | % |  | (45.5) | % |  |  |  | 21.8 | % |  | 31.7 | % |  |

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
We compute our income tax provision by applying the estimated annual effective tax rate to income from operations and adding the effects of any discrete income tax items specific to the period. The effective tax rate for the three and six months ended June 30, 2023 and 2022 was 27.8% and (45.5)%, and 21.8% and 31.7%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and six months ended June 30, 2023 was primarily due to the Internal Revenue Code Section 162(m) limitation on deduction for officer compensation, non-deductible incentive stock option (ISO) related stock compensation expense, which were partially offset by foreign derived intangible income tax benefit during the period. The variance from the U.S. federal tax rate of 21% for the three and six months ended June 30, 2022 was primarily due to the tax deductions related to foreign derived intangible income tax benefit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation during the period.
Net Loss from Discontinued Operations
Net loss from discontinued operations for Q2 2023 and Q2 2022 was zero and $13.5 million, respectively. Net loss from discontinued operations for YTD 2023 and YTD 2022 was $1.7 million and $16.0 million, respectively. See additional information in “Item 1. Condensed Consolidated Financial Statements —Notes to Condensed Consolidated Financial Statements—Note (2), Spin-off of OmniAb.”
25

Liquidity and Capital Resources
As of June 30, 2023, our cash, cash equivalents, and short-term investments totaled $219.0 million, which increased by $7.2 million from the end of 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 short-term investments, 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, bond 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 2.2 million shares of common stock in Viking.
In May 2018, we issued an aggregate principal amount of $750.0 million of the 2023 Notes. On May 15, 2023, the 2023 Notes maturity date, we paid off the remaining $76.9 million principal amount and $0.3 million accrued interest in cash.
On September 30, 2022, we entered into the Sales Agreement with the Agent, under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $100.0 million in “at the market” offerings through the Agent. Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent. The Agent will receive a commission from the Company of up to 3.0% of the gross proceeds of any shares of common stock sold under the Sales Agreement. The shares will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-267678), including the sales agreement prospectus contained therein, which automatically became effective upon filing with the SEC on September 30, 2022.
Our Board of Directors has approved a stock repurchase program authorizing, but not requiring, the repurchase of up to $50.0 million of our common stock from time to time through April 2026. We expect to acquire shares, if at all, primarily through open-market transactions in accordance with all applicable requirements of Rule 10b-18 of the Exchange Act. 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. Authorization to repurchase $50.0 million of our common stock remained available as of June 30, 2023.
On July 17, 2023, we entered into an agreement with Novan, Inc. (“Novan”) to acquire its assets for $15.0 million in cash (which agreement contemplated Novan filing for bankruptcy relief) (the “Stalking Horse Agreement”) and provide them up to $15.0 million in debtor-in-possession financing inclusive of a $3.0 million bridge loan funded on the same day. On July 17, 2023, Novan announced that it had filed for Chapter 11 reorganization and its entry into the Stalking Horse Agreement. The Stalking Horse Agreement is subject to approval by the bankruptcy court. If the Stalking Horse Agreement is approved, and our bid is the successful bid in the anticipated bankruptcy sale and auction process, we will acquire the Novan assets and will seek to out license or sell the existing development programs and commercial business assets of Novan.
We believe that our existing funds, cash generated from operations and existing sources of and access to financing are adequate to fund our need for working capital, capital expenditures, 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.
As of June 30, 2023, we had $3.5 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.
Cash Flow Summary

(Dollars in thousands) | YTD 2023 |  | YTD 2022 |  |  |  |  |  |
Net cash provided by (used in): |  |  |  |  |  |  |  |  |
Operating activities | $ | 33,866 |  |  | $ | 63,889 |  |  |  |  |  |  |
Investing activities | $ | 18,105 |  |  | $ | 151,732 |  |  |  |  |  |  |
Financing activities | $ | (68,532) |  |  | $ | (229,863) |  |  |  |  |  |  |

During the six months ended June 30, 2023, we generated cash from operations primarily due to net income. We generated cash from investing activities primarily from sale and maturity of short-term investments including Viking shares.
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During the six months ended June 30, 2023, we repaid the remaining $76.9 million principal amount upon maturity of the 2023 Notes and $0.3 million accrued interest in cash.
During the six months ended June 30, 2022, we repurchased $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million.
Critical Accounting Policies and Estimates
Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2022 Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to our market risks in the six months ended June 30, 2023, when compared to the disclosures in Item 7A of our 2022 Annual Report.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of June 30, 2023 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information that updates the disclosures set forth under Part I. Item 3. Legal Proceedings in our 2022 Annual Report, refer to Note 7, Commitment and Contingencies: Legal Proceedings, to the Condensed Consolidated Financial Statements contained in Part I. Item 1. of this report.
Item 1A. Risk Factors
We do not believe that there have been any material changes to the risk factors disclosed in Part I, Item 1A of our 2022 Annual Report. The risk factors described in our 2022 Annual Report are not the only risks we face. Factors we currently do not know, factors that we currently consider immaterial or factors that are not specific to us, such as general economic conditions, may also materially adversely affect our business or our consolidated operating results, financial condition or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Arrangements
From time to time, our officers (as defined in Rule 16a–1(f) of the Exchange Act) and directors may enter into Rule 10b5-1 or non-Rule 10b5-1 trading arrangements (as each such term is defined in Item 408 of Regulation S-K). During the three months ended June 30, 2023, none of our officers or directors adopted or terminated any such trading arrangements.
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Item 6. Exhibits

|  | Incorporated by Reference |
Exhibit Number | Description of Exhibit | Form | File Number | Date of Filing | Exhibit Number | Filed Herewith
10.1# | Director Compensation and Stock Ownership Policy, as amended and restated effective August 4, 2023. |  |  |  |  | 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statement of Comprehensive Income, (iv) Consolidated Condensed Statements of Stockholders' Equity, (v) Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements. |  |  |  |  | X
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL and contained in Exhibit 101. |  |  |  |  | X

# Indicates management contract or compensatory plan.
* These certifications are deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: | August 9, 2023 |  | By: | /s/ Octavio Espinoza
|  |  |  | Octavio Espinoza
|  |  |  | Chief Financial Officer
|  |  |  | Duly Authorized Officer and Principal Financial Officer

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