Fair Value Measurement

12 Months Ended

Dec. 31, 2023

We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. We establish a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:

Level 1 - Observable inputs such as quoted prices in active markets

Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions

The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023 and 2022 (in thousands):


Fair Value Measurements at Reporting Date Using
December 31, 2023			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Short-term investments, excluding Viking(1)	$	115,170	$	7,291	$	107,879	$	—
Investment in Viking common stock	32,185		32,185		—		—
Derivative assets(2)	3,531		—		—		3,531
Total assets	$	150,886	$	39,476	$	107,879	$	3,531
Liabilities:
Contingent liabilities - CyDex	$	320	$	—	$	—	$	320
Contingent liabilities - Metabasis(3)	2,878		—		2,878		—

Total liabilities	$	3,198	$	—	$	2,878	$	320


Fair Value Measurements at Reporting Date Using
December 31, 2022			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Short-term investments, excluding Viking (1)	$	103,742	$	3,992	$	99,615	$	135
Investment in Viking common stock	63,122		63,122		—		—
Total assets	$	166,864	$	67,114	$	99,615	$	135
Liabilities:
Contingent liabilities - CyDex	$	84	$	—	$	—	$	84
Contingent liabilities - Metabasis(3)	3,429		—		3,429		—
Liability for amounts owed to a former licensor	44		44		—		—
Total liabilities	$	3,557	$	44	$	3,429	$	84

(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 the Purchase and Sale Agreement with Primrose Bio, we received 50% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. The considerations were recognized as derivative assets included under other

long-term asset in our consolidated balance sheet. They are recognized as derivative assets under ASC 815, Derivatives and Hedging, as they have two underlyings (development and commercial milestones) and (i) the commercial milestones are dependent on the development milestones and (ii) the commercial milestone underlying is not determined to be predominate. The fair value of the derivative assets was determined using a discounted cash flow approach using a discount rate in line with the stages of the underlying contracts.

(3) 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.

A reconciliation of the level 3 financial instruments as of December 31, 2023 is as follows (in thousands):


Assets
Fair value of level 3 financial instruments as of December 31, 2022	$	135
Fair value adjustments to equity security warrants	(135)
Fair value of derivative assets	3,531
Fair value of level 3 financial instruments as of December 31, 2023	$	3,531

Liabilities
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	286
Fair value of level 3 financial instruments as of December 31, 2023	$	320

A reconciliation of the level 3 financial instruments as of December 31, 2022 is as follows (in thousands):


Assets
Fair value of level 3 financial instruments as of December 31, 2021	$	409
Fair value adjustments to equity security warrants	(274)
Fair value of level 3 financial instruments as of December 31, 2022	$	135

Liabilities
Fair value of level 3 financial instruments as of December 31, 2021	$	349

Fair value adjustments to contingent liabilities	(265)
Fair value of level 3 financial instruments as of December 31, 2022	$	84

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 year ended December 31, 2023. Other than the finance lease equipment discussed in “Note (7), Leases”, there was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the year ended and December 31, 2022. There was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the year ended December 31, 2021.

Fair Value of Financial Instruments

Our cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued liabilities, deferred revenue, current operating lease liabilities, current financing lease liabilities are financial instruments and are recorded at cost in the consolidated balance sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature.

Financial Assets Not Measured at Fair Value

Commercial license rights are measured and carried on the balance sheet at amortized cost using the effective interest method or on a non-accrual basis. Management calculates the fair value of commercial license rights using a forecasted royalty receipts. The projected future cash flows derive from royalty payments and milestones, then discounted using appropriate individual discount rates. The fair value of commercial license and other economic rights assets is classified as Level 3 within the fair value hierarchy since it is determined based upon inputs that are both significant and unobservable. The estimated fair value and related carrying values of commercial license rights as of December 31, 2023 were $75.9 million and $62.3 million, respectively. The estimated fair value and related carrying value of the commercial license rights as of December 31, 2022 were $13.1 million and $10.2 million, respectively.