Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 2017 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.
Reclassifications
Certain amounts in the prior period combined financial statements have been reclassified to conform with the current period presentation. See detail in
Accounting Standards Recently Adopted
subsection below for further information.
Significant Accounting Policies
We have described our significant accounting policies in Note 1 to the financial statements in Item 8 of our 2017 Annual Report.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Accounting Standards Recently Adopted
Revenue Recognition
- In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. We adopted this new standard as of January 1, 2018, by using the modified-retrospective method. See
Revenue
,
Royalties, Licenses Fees and Milestones
,
Material Sales
, and
Disaggregation of Revenue
subsections below for further information.
Financial Instruments
- In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), which requires equity investments (other than those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. We have strategic investments, including Viking, that fall under this guidance update. We have adopted ASU 2016-01 effective January 1, 2018 as a cumulative-effect adjustment and reclassified $2.6 million unrealized gains on equity investments, net of tax, from accumulated other comprehensive income to accumulated deficit on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments. See
Viking
subsection below for further information on the Viking investment.
Statement of Cash Flows
- In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard was effective January 1, 2018. We adopted ASU 2016-15 effective January 1, 2018. We have updated our presentation
of payments to CVR holders and other contingency payments from investing activities to operating activities to conform to the standard and have revised our prior year cash flows accordingly. In addition, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The standard requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017. We adopted this standard retrospectively, effective January 1, 2018 and included restricted cash amount as of September 30, 2018 in the accompanying condensed consolidated statement of cash flows. We did not have any restricted cash as of December 31, 2017.
Accounting Standards Not Yet Adopted
Leases
- In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The ASU becomes effective for public companies for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. The FASB recently issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented. We will adopt this standard in the first quarter of 2019 and plan to apply the optional transition method and may elect to apply optional practical expedients. While we are currently evaluating the impact of this standard, the adoption will result in an increase to our consolidated balance sheet for lease liabilities and right-of-use assets, which we do not expect to have a material impact on our consolidated financial statements.
Financial Instruments
- In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. ASU 2016-13 is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
Fair Value Measurement
- In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
Revenue
Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, license fees and development, regulatory and sales based milestone payments.
On January 1, 2018, we adopted ASC 606 which amends the guidance for recognition of revenue from contracts with customers by using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. The results for reporting periods beginning January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. See Note 1, Summary of significant accounting policies, to the consolidated financial statements in our 2017 Annual Report for the accounting associated with revenue prior to the adoption of ASC 606.
Upon adoption, we recorded a net decrease of $25.4 million to accumulated deficit due to the cumulative impact of adopting the new standard, with the impact related primarily to the acceleration of royalty revenue, net of related deferred tax impact. See additional information in
Disaggregation of Revenue
subsection below. Our accounting policies under the new standard were applied prospectively and are noted below.
Royalties, License Fees and Milestones
We receive royalty revenue on sales by our partners of products covered by patents that we own. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.
Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when there is a basis to reasonably estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon or after the development milestone or regulatory approval.
Material Sales
We recognize revenue when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We 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.
Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of sales.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset or contract liability balance.
We have revenue sharing arrangements whereby certain revenue proceeds are shared with a third party. The revenue standard requires an entity to determine whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. We received a $4.6 million milestone payment from a license partner in the first nine months of 2018 of which $3.0 million was paid to a third-party in-licensor. We recorded net revenue of $1.6 million as we believe we are an agent in the transaction. We record amounts due to third-party in-licensors as general and administrative expenses when we are the principal in the transaction.
Disaggregation of Revenue
Under ASC 605, the legacy revenue standard, we would have reported total royalty revenue of $31.6 million in the third quarter of 2018, disaggregated as follows: Promacta $24.8 million, Kyprolis $5.2 million, Evomela $1.1 million, and Other $0.5 million. In 2017 royalty revenue continues to be reported in accordance with ASC 605 and was $21.9 million for the third quarter of 2017 or disaggregated as follows: Promacta $15.6 million, Kyprolis $4.0 million, Evomela $1.9 million and Other $0.4 and $60.4 million for the first nine months of 2017 or disaggregated as follows: Promacta $41.9 million, Kyprolis $11.6
million, Evomela $5.1 million, and Other $1.8 million. Under ASC 606, royalty revenue was $36.1 million in the third quarter of 2018 or disaggregated as follows: Promacta $27.8 million, Kyprolis $6.3 million, Evomela $1.3 million and Other $0.7 million and $88.3 million the first nine months of 2018 or disaggregated as follows: Promacta $68.2 million, Kyprolis $14.4 million, Evomela $4.1 million and Other $1.6 million.
The following table represents disaggregation of Material Sales and License fees, milestone and other (in thousands):
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|
Three months ended
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|
Nine months ended
|
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|
September 30,
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|
September 30,
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|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
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|
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|
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|
|
Material Sales
|
|
|
|
|
|
|
|
|
|
Captisol
|
$
|
7,027
|
|
$
|
7,664
|
|
$
|
19,030
|
|
$
|
14,336
|
License fees, milestones and other
|
|
|
|
|
|
|
|
|
|
License Fees
|
$
|
265
|
|
$
|
738
|
|
$
|
75,201
|
|
$
|
4,276
|
|
Milestone
|
1,308
|
|
2,059
|
|
6,052
|
|
7,564
|
|
Other
|
936
|
|
983
|
|
3,237
|
|
4,090
|
|
|
$
|
2,509
|
|
$
|
3,780
|
|
$
|
84,490
|
|
$
|
15,930
|
|
|
|
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Short-term Investments
Our investments consist of the following at September 30, 2018 and December 31, 2017 (in thousands):
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|
September 30, 2018
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|
|
December 31, 2017
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|
|
Amortized cost
|
|
Gross unrealized gains
|
|
Gross unrealized losses
|
|
Estimated fair value
|
|
Amortized cost
|
|
Gross unrealized gains
|
|
Gross unrealized losses
|
|
Estimated fair value
|
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|
Short-term investments
|
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|
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|
Bank deposits
|
$
|
411,166
|
|
$
|
98
|
|
$
|
(17)
|
|
$
|
411,247
|
|
$
|
80,095
|
|
$
|
6
|
|
$
|
(42)
|
|
$
|
80,059
|
Corporate bonds
|
76,961
|
|
4
|
|
(52)
|
|
76,913
|
|
55,335
|
|
—
|
|
(96)
|
|
55,239
|
Commercial paper
|
288,549
|
|
3
|
|
(72)
|
|
288,480
|
|
27,933
|
|
—
|
|
(20)
|
|
27,913
|
U.S. Government bonds
|
110,834
|
|
—
|
|
(25)
|
|
110,809
|
|
8,939
|
|
—
|
|
(10)
|
|
8,929
|
Agency bonds
|
—
|
|
—
|
|
—
|
|
—
|
|
4,991
|
|
—
|
|
(1)
|
|
4,990
|
Municipal bonds
|
2,008
|
|
—
|
|
(13)
|
|
1,995
|
|
2,028
|
|
—
|
|
(13)
|
|
2,015
|
Corporate equity securities
|
135
|
|
1,549
|
|
—
|
|
1,684
|
|
207
|
|
1,689
|
|
—
|
|
1,896
|
|
$
|
889,653
|
|
$
|
1,654
|
|
$
|
(179)
|
|
$
|
891,128
|
|
$
|
179,528
|
|
$
|
1,695
|
|
$
|
(182)
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|
$
|
181,041
|
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or market value. We determine cost using the first-in, first-out method.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
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|
|
September 30,
|
|
December 31,
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|
2018
|
|
2017
|
Indefinite lived intangible assets
|
|
|
|
IPR&D
|
$
|
—
|
|
$
|
7,923
|
Goodwill
|
85,961
|
|
85,959
|
Definite lived intangible assets
|
|
|
|
Complete technology
|
228,413
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|
222,900
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Less: accumulated amortization
|
(31,990)
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|
(23,301)
|
Trade name
|
2,642
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|
2,642
|
Less: accumulated amortization
|
(1,015)
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|
(916)
|
Customer relationships
|
29,600
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|
29,600
|
Less: accumulated amortization
|
(11,374)
|
|
(10,264)
|
Total goodwill and other identifiable intangible assets, net
|
$
|
302,237
|
|
$
|
314,543
|
Commercial License Rights
Commercial license rights consist of the following (in thousands):
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|
September 30,
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|
December 31,
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|
2018
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|
2017
|
Aziyo and CorMatrix
|
$
|
17,696
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|
$
|
17,696
|
Selexis
|
8,602
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|
8,602
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|
$
|
26,298
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|
$
|
26,298
|
Less: accumulated amortization
|
(5,364)
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|
(6,772)
|
Total commercial rights, net
|
$
|
20,934
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|
$
|
19,526
|
Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015 and CorMatrix in May 2016. Individual commercial license rights acquired are carried at allocated cost and approximate fair value. In May 2017, we entered into a Royalty Agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. We account for the Aziyo commercial license right as a financial asset in accordance with ASC 310, Receivables, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the Royalty Agreement with Aziyo as of September 30, 2018 is 26%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.
Viking
Our equity ownership interest in Viking decreased in the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in other current assets in our condensed consolidated balance sheets at fair value of $24.3 million and $3.8 million at September 30, 2018 and December 31, 2017, respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
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|
|
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|
|
September 30,
|
|
December 31,
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|
|
2018
|
|
2017
|
Compensation
|
|
$
|
4,249
|
|
$
|
4,085
|
Professional fees
|
|
594
|
|
430
|
Amounts owed to former licensees
|
|
481
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|
396
|
Royalties owed to third parties
|
|
74
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|
954
|
Other
|
|
3,869
|
|
1,512
|
Total accrued liabilities
|
|
$
|
9,267
|
|
$
|
7,377
|
Share-Based Compensation
Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. 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):
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|
|
Three months ended
|
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|
|
Nine months ended
|
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|
|
September 30,
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|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Share-based compensation expense as a component of:
|
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|
|
|
|
|
|
Research and development expenses
|
$
|
2,257
|
|
$
|
2,394
|
|
$
|
6,120
|
|
$
|
8,260
|
General and administrative expenses
|
3,213
|
|
2,854
|
|
8,717
|
|
7,657
|
|
$
|
5,470
|
|
$
|
5,248
|
|
$
|
14,837
|
|
$
|
15,917
|
No options were granted during the third quarter of 2018. 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:
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|
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|
|
|
|
|
|
Three months ended
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Risk-free interest rate
|
N/A
|
|
|
2%
|
|
|
2.8%
|
|
|
2.1%
|
|
Dividend yield
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Expected volatility
|
N/A
|
|
|
47%
|
|
|
34%
|
|
|
47%
|
|
Expected term
|
N/A
|
|
|
6.5
|
|
5.7
|
|
6.8
|
Derivatives
In May 2018, we issued $750 million aggregate principal amount of 0.75% convertible senior notes (the “2023 Notes”) as further described in “Footnote 3. Convertible Senior Notes.” Concurrently with the issuance of the notes, we entered into a series of convertible note hedge and warrant transactions which in combination are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the notes. The conversion option associated with the 2023 Notes temporarily met the criteria for an embedded derivative liability which required bifurcation and separate accounting. In addition, the note hedge and warrants were also temporarily classified as a derivative asset and liability, respectively, on our condensed consolidated balance sheet. As a result of shareholder approval to increase the number of authorized shares of our common stock on June 19, 2018, as discussed in “Footnote 3. Convertible Senior Notes,” the derivative asset and liabilities were reclassified to additional paid-in capital. Changes in the fair value of these derivatives prior to being classified in equity were reflected in other expense, net, in our condensed consolidated statements of operations.
The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of the assets and the inputs and assumptions used in the Binomial model to calculate the fair value of the derivative liabilities associated with the 2023 Notes:
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|
|
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|
|
|
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|
|
|
|
As of May 22, 2018
|
As of June 19, 2018
|
Common stock price
|
|
$187.09
|
$195.91
|
Exercise price, conversion premium and bond hedge
|
|
$248.48
|
$248.48
|
Exercise price, warrant
|
|
$315.38
|
$315.38
|
Risk-free interest rate
|
|
2.9%
|
|
2.8%
|
|
Volatility
|
|
30%-35%
|
30%-35%
|
Dividend yield
|
|
—
|
|
—
|
|
Annual coupon rate
|
|
0.75%
|
|
0.75%
|
|
Remaining contractual term (in years)
|
|
5.00
|
4.98
|
In addition, on May 22, 2018, we amended our 2019 Notes making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount will be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our condensed consolidated statements of operations.
The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of the derivative assets and the inputs and assumptions used in the Binomial model to calculate the fair value of the derivative liability associated with the 2019 Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 22, 2018
|
As of September 30, 2018
|
Common stock price
|
|
$187.09
|
$274.49
|
Exercise price, conversion premium and bond hedge
|
|
$75.05
|
$75.05
|
Risk-free interest rate
|
|
2.47%
|
|
2.59%
|
|
Volatility
|
|
30%-35%
|
30%-35%
|
Dividend yield
|
|
—
|
|
—
|
|
Annual coupon rate
|
|
0.75%
|
|
0.75%
|
|
Remaining contractual term (in years)
|
|
1.25
|
0.89
|
Income Per Share
Basic income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under the 2023 Notes, warrants associated with the 2019 Notes and 2023 Notes, stock options and restricted stock. The 2023 Notes have a dilutive impact when the average market price our common stock exceeds the applicable conversion price of the notes. The 2019 Notes were amended to require cash settlement of the conversion premium for conversion notices received after May 22, 2018 and therefore do not have a dilutive impact subsequent to May 22, 2018. The warrants have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants. 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, proceeds from exercise of stock options and the average amount of unrecognized compensation expense for restricted stock are assumed to be used to repurchase shares.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average shares outstanding:
|
21,148,080
|
|
21,070,678
|
|
21,188,938
|
|
21,006,718
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
Restricted stock
|
83,427
|
|
79,222
|
|
68,997
|
|
140,340
|
Stock options
|
1,247,940
|
|
1,019,342
|
|
1,166,777
|
|
980,461
|
2019 Convertible Senior Notes
|
—
|
|
1,334,357
|
|
923,650
|
|
1,118,456
|
Warrants
|
1,572,969
|
|
47,646
|
|
1,081,209
|
|
15,882
|
Shares used to compute diluted income per share
|
24,052,416
|
|
23,551,245
|
|
24,429,571
|
|
23,261,857
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect
|
3,125,815
|
|
255,101
|
|
1,788,709
|
|
2,531,219
|
|
|
|
|
|
|
|
|
2. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
(1)
|
|
$
|
106,866
|
|
$
|
889,445
|
|
$
|
—
|
|
$
|
996,311
|
|
$
|
1,896
|
|
$
|
179,145
|
|
$
|
—
|
|
$
|
181,041
|
Note receivable Viking
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,877
|
|
3,877
|
Investment in warrants
(2)
|
|
24,284
|
|
—
|
|
—
|
|
24,284
|
|
3,846
|
|
—
|
|
—
|
|
3,846
|
Total assets
|
|
$
|
131,150
|
|
$
|
889,445
|
|
$
|
—
|
|
$
|
1,020,595
|
|
$
|
5,742
|
|
$
|
179,145
|
|
$
|
3,877
|
|
$
|
188,764
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal contingent liabilities
(3)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,401
|
|
$
|
7,401
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,401
|
|
8,401
|
CyDex contingent liabilities
(4)
|
|
—
|
|
—
|
|
514
|
|
514
|
|
—
|
|
—
|
|
1,589
|
|
1,589
|
Metabasis contingent liabilities
(5)
|
|
—
|
|
4,816
|
|
—
|
|
4,816
|
|
—
|
|
3,971
|
|
—
|
|
3,971
|
Total liabilities
|
|
$
|
—
|
|
$
|
4,816
|
|
$
|
7,915
|
|
$
|
12,731
|
|
$
|
—
|
|
$
|
3,971
|
|
$
|
9,990
|
|
$
|
13,961
|
1. Investments in equity securities, which we received from Viking and another licensee as upfront and event-based payments, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable debt securities with maturities greater than 90 days 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.
2. Investment in warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in Gain (loss) from Viking in our condensed consolidated statement of operations.
3. The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. At September 30, 2018, most of the development and regulatory milestones were estimated to be highly probable of being achieved between 2018 and 2019. Changes in these estimates may materially affect the fair value.
4. The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach. To the extent the estimated future income may vary significantly given the long-term nature of the estimate, we utilize a Monte Carlo model. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders.
5. 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 the Company 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, Ligand may be entitled to up to $375 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10 million payment upon initiation of a Phase 3 clinical trial. Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.” Ligand may be entitled to up to $529 million in milestone payments and royalties.
For the three months ended September 30, 2018, we reduced the contingent liabilities associated with CyDex by $1.1 million based on management's estimates of timing and probability of achievement of certain revenue thresholds, and there was no change to the fair value of the contingent liabilities associated with Crystal. We made $3.8 million payment to the former shareholders of Metabasis and $1.0 million payment to the former shareholders of Crystal during the third quarter and first quarter of 2018, respectively.
Assets Measured on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.
We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.
Other than certain indefinite-lived intangible asset, there were no triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the nine months ended September 30, 2018 and September 30, 2017.
3. Convertible Senior Notes
0.75% Convertible Senior Notes due 2019
In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83% and are convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of 2019 Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes bear cash interest at a rate of 0.75% per year, payable semi-annually.
Holders of the 2019 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
As of September 30, 2018, our last reported sale price has exceeded the 130% threshold described above and accordingly the 2019 Notes have been classified as a current liability as of September 30, 2018. Upon conversion, we must deliver cash to settle the principal and may deliver cash or shares of common stock, at our option, to settle any premium due upon conversion for any conversion notices received prior to May 22, 2018. And, as per a supplemental indenture entered into on May 22, 2018, we made an irrevocable election to settle the entire note in cash. As such, we must deliver cash to settle the principal and any premium due upon conversion for any conversion notices received on or after May 22, 2018.
As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option fair value of $341.6 million. In accordance with ASC 815, Derivatives and Hedging, the derivative was adjusted to its fair value as of September 30, 2018 to $563.2 million with the resulting $161.9 million and $221.6 million increase reflected in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively.
In March and April 2018, we received notices for conversion of $21.8 million of principal amount of the 2019 Notes which were settled in May and June 2018. We paid the noteholders the conversion value of the notes in cash, up to the principal amount of the 2019 Notes. The excess of the conversion value over the principal amount, totaling $31.6 million, was paid in shares of common stock. This equity dilution upon conversion of the 2019 Notes was offset by the reacquisition of the shares under the convertible bond hedge transactions entered into in connection with the offering of the 2019 Notes as further discussed below. As a result of the conversions, we recorded a $0.6 million loss on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the 2019 Notes as of the settlement dates. To measure the fair value of the converted 2019 Notes as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation.
During the third quarter of 2018, we received notices for conversion of $195.9 million in principal of 2019 Convertible Senior Notes which settled in the fourth quarter of 2018.
Convertible Bond Hedge and Warrant Transactions
In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2019 Notes.
The convertible bond hedges have an exercise price of $75.05 per share and are exercisable when and if the 2019 Notes are converted. If upon conversion of the 2019 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value 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 2019 Convertible Senior Notes. Holders of the 2019 Convertible Senior Notes and warrants will not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.
Conversion notices received after May 22, 2018 relating to the 2019 Notes must be fully settled in cash and amounts paid in excess of the principal amount will be offset by an equal receipt of cash under the convertible bond hedge. As a result of the irrevocable cash election, on May 22, 2018, we reclassified from equity to derivative asset the remaining bond hedge fair value of $340.0 million and marked it to market as of September 30, 2018 to $561.4 million with the resulting $162.0 million and $221.4 million increase reflected in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby it sold warrants to acquire approximately 3,264,643 shares of common stock with an exercise price of approximately $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital. In the third quarter of 2018, we received $52.1 million in bond hedge settlement proceeds associated with a portion of the conversion notices received during the third quarter of 2018, which was recorded as a reduction against derivative assets. This amount, plus additional conversion premium due upon settlement of the redeemed 2019 Convertible Senior Notes, will be paid in the fourth quarter of 2018.
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750 million aggregate principal amount of 0.75% convertible senior notes. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
At the May 22, 2018 issuance date of the 2023 Notes, we did not have the necessary number of authorized but unissued shares of its common stock available to settle the conversion option of the 2023 Notes in shares. Therefore, in accordance with guidance found in ASC 815-15 – Embedded Derivatives, the conversion option of the Notes was deemed an embedded derivative requiring bifurcation from the 2023 Notes (host contract) and separate accounting as a derivative liability. The fair value of the conversion option derivative liability at May 22, 2018 was $144.0 million, which was recorded as a reduction to the carrying value of the debt. This debt discount is amortized to interest expense over the term of the debt using the effective interest method. Up to the date in which we received shareholder approval on June 19, 2018 to increase the authorized number of shares of our common stock, the conversion option was accounted for as a liability with the resulting change in fair value of $13.5 million during that period reflected in other expense, net, in our condensed consolidated statements of operations for the nine months ended September 30, 2018. As of September 30, 2018, the debt discount remains and continues to be amortized to interest expense.
The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of September 30, 2018, the “if-converted value” did not exceed the principal amount of the 2023 Notes.
In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the conversion option totaling $3.2 million was recorded as interest expense for the nine months ended September 30, 2018. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes.
It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of its common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby it 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.
For the period from May 22, 2018, the issuance date of the bond hedge and warrant transactions, to June 19, 2018, the date shareholders approved an increase in our authorized shares of common stock, the bond hedges and warrants required cash settlement and were accounted for as a derivative asset and liability, respectively, with the resulting increase in fair value of $19.2 million and $7.5 million during that period reflected in other expense, net, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively.
The following table summarizes information about the equity and liability components of the 2019 Notes and 2023 Notes (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Principal amount of 2019 Notes outstanding
|
$
|
223,215
|
|
$
|
245,000
|
Unamortized discount (including unamortized debt issuance cost)
|
(10,071)
|
|
(20,471)
|
Total current portion of notes payable
|
$
|
213,144
|
|
$
|
224,529
|
|
|
|
|
Principal amount of 2023 Notes outstanding
|
$
|
750,000
|
|
$
|
—
|
Unamortized discount (including unamortized debt issuance cost)
|
(147,161)
|
|
—
|
Total long-term portion of notes payable
|
$
|
602,839
|
|
$
|
—
|
Carrying value of equity component of 2023 Notes
|
$
|
143,986
|
|
$
|
—
|
Fair value of convertible senior notes outstanding (Level 2)
|
$
|
1,729,179
|
|
$
|
446,360
|
|
|
|
|
|
|
|
|
4. Income Tax
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three and nine months ended September 30, 2018 was 15% and 19%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2018 was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items as well as the release of a valuation allowance relating to our investment in Viking. The effective tax rate for the three and nine months ended September 30, 2017 was 30% and 26%, respectively. The variance from the U.S. federal statutory tax rate of 35% was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items in the quarter.
We continue to evaluate the impact of the U.S. Tax Cuts and Jobs Act (Tax Act) and have not adjusted our provisional tax estimates related to the Tax Act that it recorded in the fourth quarter of 2017. Our accounting remains incomplete as of
September 30, 2018, and will be refined and, if necessary, adjusted by the end of 2018 as required by SEC Staff Accounting Bulletin No. 118 ("SAB 118").
5. 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 8, Stockholders' Equity, of Notes to Consolidated Financial Statements in our 2017 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, 2017
|
1,876,332
|
|
$
|
53.17
|
|
133,294
|
|
$
|
91.60
|
Granted
|
224,312
|
|
161.83
|
|
62,033
|
|
169.91
|
Options exercised/RSUs vested
|
(318,653)
|
|
58.64
|
|
(60,135)
|
|
83.95
|
Forfeited
|
(12,228)
|
|
104.54
|
|
(1,165)
|
|
125.16
|
Balance as of September 30, 2018
|
1,769,763
|
|
$
|
65.60
|
|
134,027
|
|
$
|
130.99
|
As of September 30, 2018, outstanding options to purchase 1.3 million shares were exercisable with a weighted average exercise price per share of $43.98.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Amended ESPP is equal to 0.85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As of September 30, 2018, 65,007 shares were available for future purchases under the Amended ESPP.
6. 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 the our estimates of potential liability could materially impact its results of operations.
On July 27, 2018, AG Oncon, LLC, AG Ofcon, Ltd., Calamos Market Neutral Income Fund, Capital Ventures International, Citadel Equity Fund Ltd., Opti Opportunity Master Fund, Polygon Convertible Opportunity Master Fund, Wolverine Flagship Fund Trading Limited, as plaintiffs, filed a complaint in the Court of Chancery of the State of Delaware (AG Oncon, LLC v. Ligand Pharmaceuticals Inc.) alleging claims for violation of the Trust Indenture Act, breach of contract, damages and a declaratory judgment that the Supplemental Indenture, dated as of February 20, 2018, entered into by us and Wilmington Trust, National Association, as trustee, is invalid. On October 1, 2018, we filed a motion to dismiss the plaintiffs’ complaint. The hearing on our motion is currently scheduled for December 6, 2018. We believe the allegations are completely without merit, reject all claims raised by the plaintiffs and intend to vigorously defend this matter.
In November 2017, CyDex, our wholly owned subsidiary, received a paragraph IV certification from Teva alleging that certain of our patents related to Captisol were invalid, unenforceable and/or will not be infringed by Teva’s ANDA related to Spectrum Pharmaceuticals’ NDA for Evomela. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that Teva’s ANDA would infringe our patents. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On July 24, 2018, the U.S. District Court entered a Scheduling Order, setting a hearing on Claim Construction for April 1, 2019, and a five to six day bench trial to begin on January 27, 2020. Fact discovery is proceeding.
7. Subsequent Event
Acquisition of Vernalis
In October 2018, we acquired Vernalis, a structure-based drug discovery biotechnology company for $43.0 million. The acquisition of Vernalis increases our overall portfolio of shots on goal. The acquisition was funded using cash on hand, which was previously deposited in an escrow account designated for the acquisition. Therefore, such amount was recorded as restricted cash on the accompanying condensed consolidated balance sheet as of September 30, 2018. We are currently evaluating the accounting impact of this transaction as it relates to our adoption of ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.