Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ligand Pharmaceuticals Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ligand Pharmaceuticals Incorporated (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes, (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Impairment assessment of finite-lived intangibles |
Description of the Matter | | At December 31, 2021, the Company’s finite-lived intangible assets totaled $551.0 million. As discussed in Note 1 to the consolidated financial statements, the Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the finite-lived intangibles are not expected to be recovered through future undiscounted cash flows. The Company did not identify indicators of impairment for its finite-lived intangibles at December 31, 2021. Auditing management’s assessment of impairment is challenging due to the high degree of subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment and the related assessment of the severity of such indicators in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the asset. A high degree of auditor judgment was required to evaluate the significant inputs used in the assessment for potential triggering events which included market conditions, industry and economic trends, changes in regulations, clinical success and historical and forecasted financial results. These possible triggering events could have a significant effect on the Company’s impairment assessment and the determination of whether further quantitative analysis of finite-lived intangible impairment was required.
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How We Addressed the Matter in Our Audit | | We obtained an understanding of management’s process to identify indicators of impairment, including the qualitative analysis and related inputs and assumptions used in performing the analyses. We evaluated the design and tested the operating effectiveness of the controls that address the identification of indicators of impairment. For example, we tested controls over management’s assessment of indicators of impairment. To test the Company’s evaluation of indicators of impairment for finite-lived intangibles, our audit procedures included, among others, assessing the methodologies and testing the completeness and accuracy of the Company’s analysis of events or changes in circumstances. As part of our evaluation, we considered market conditions, industry and economic trends, changes in regulations, clinical success and historical and forecasted financial results, in assessing whether an indicator of impairments exists.
|
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2016.
San Diego, California
February 28, 2022
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 19,522 | | | $ | 47,619 | |
Short-term investments | 321,586 | | | 363,567 | |
Accounts receivable, net | 85,453 | | | 56,847 | |
Inventory | 27,326 | | | 26,487 | |
Income taxes receivable | 6,193 | | | 2,217 | |
Other current assets | 4,671 | | | 3,822 | |
Total current assets | 464,751 | | | 500,559 | |
Deferred income taxes, net | 34,482 | | | 24,320 | |
Intangible assets, net | 551,040 | | | 595,330 | |
Goodwill | 181,206 | | | 189,662 | |
Commercial license and other economic rights | 10,110 | | | 10,979 | |
Property and equipment, net | 20,511 | | | 14,434 | |
Operating lease assets | 16,542 | | | 6,892 | |
Finance lease assets | 16,207 | | | 15,842 | |
Other assets | 2,741 | | | 4,267 | |
Total assets | $ | 1,297,590 | | | $ | 1,362,285 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 8,403 | | | $ | 3,784 | |
Accrued liabilities | 17,579 | | | 18,530 | |
Current contingent liabilities | 2,588 | | | 39,884 | |
Deferred revenue | 10,996 | | | 29,435 | |
Current operating lease liabilities | 2,053 | | | 1,885 | |
Current finance lease liabilities | 46 | | | 6,593 | |
Total current liabilities | 41,665 | | | 100,111 | |
2023 convertible senior notes, net | 320,717 | | | 442,293 | |
Long-term contingent liabilities | 8,483 | | | 9,249 | |
Deferred income taxes, net | 59,095 | | | 64,598 | |
Long-term operating lease liabilities | 15,494 | | | 5,643 | |
Other long-term liabilities | 30,977 | | | 30,866 | |
Total liabilities | 476,431 | | | 652,760 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at December 31, 2021 and 2020 | — | | | — | |
Common stock, $0.001 par value; 60,000 shares authorized; 16,767 and 16,080 shares issued and outstanding at December 31, 2021 and 2020, respectively | 17 | | | 16 | |
Additional paid-in capital | 372,969 | | | 318,358 | |
Accumulated other comprehensive loss | (917) | | | (801) | |
Retained earnings | 449,090 | | | 391,952 | |
Total stockholders’ equity | 821,159 | | | 709,525 | |
Total liabilities and stockholders’ equity | $ | 1,297,590 | | | $ | 1,362,285 | |
See accompanying notes to these consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenues: | | | | | |
Royalties | $ | 48,927 | | | $ | 33,796 | | | $ | 46,976 | |
Captisol | 164,250 | | | 109,959 | | | 31,489 | |
Contract revenue | 63,956 | | | 42,664 | | | 41,817 | |
Total revenues | 277,133 | | | 186,419 | | | 120,282 | |
Operating costs and expenses: | | | | | |
Cost of Captisol | 62,176 | | | 30,419 | | | 11,347 | |
Amortization of intangibles | 47,167 | | | 23,442 | | | 16,864 | |
Research and development | 69,012 | | | 59,392 | | | 55,908 | |
General and administrative | 57,483 | | | 64,435 | | | 41,884 | |
Other operating income | (37,600) | | | — | | | — | |
Total operating costs and expenses | 198,238 | | | 177,688 | | | 126,003 | |
Gain from sale of Vernalis R&D | — | | | 17,114 | | | — | |
Gain from sale of Promacta license | — | | | — | | | 812,797 | |
Income from operations | 78,895 | | | 25,845 | | | 807,076 | |
Other income (expense): | | | | | |
Gain (loss) from short-term investments | (3,997) | | | (16,933) | | | 1,049 | |
Interest income | 886 | | | 8,078 | | | 28,430 | |
Interest expense | (19,626) | | | (27,420) | | | (35,745) | |
Other expense, net | (8,860) | | | (108) | | | (4,171) | |
Total other expense, net | (31,597) | | | (36,383) | | | (10,437) | |
Income (loss) before income tax | 47,298 | | | (10,538) | | | 796,639 | |
Income tax benefit (expense) | 9,840 | | | 7,553 | | | (167,337) | |
Net income (loss) | 57,138 | | | (2,985) | | | 629,302 | |
| | | | | |
Basic net income (loss) per share | $ | 3.44 | | | $ | (0.18) | | | $ | 33.13 | |
Shares used in basic per share calculation | 16,630 | | | 16,185 | | | 18,995 | |
| | | | | |
Diluted net income (loss) per share | $ | 3.31 | | | $ | (0.18) | | | $ | 31.85 | |
Shares used in diluted per share calculation | 17,246 | | | 16,185 | | | 19,757 | |
See accompanying notes to these consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income (loss) | $ | 57,138 | | | $ | (2,985) | | | $ | 629,302 | |
Unrealized net gain (loss) on available-for-sale securities, net of tax | (116) | | | (162) | | | 200 | |
Foreign currency translation adjustment | — | | | (423) | | | 608 | |
Comprehensive income (loss) | $ | 57,022 | | | $ | (3,570) | | | $ | 630,110 | |
See accompanying notes to these consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Retain earnings (accumulated deficit) | | Total stockholders’ equity |
| Shares | | Amount | |
Balance at December 31, 2018 | 20,766 | | | $ | 21 | | | $ | 791,114 | | | $ | (1,024) | | | $ | (229,197) | | | $ | 560,914 | |
Issuance of common stock under employee stock compensation plans, net | 180 | | | — | | | (1,421) | | | — | | | — | | | (1,421) | |
Share-based compensation | — | | | — | | | 24,515 | | | — | | | — | | | 24,515 | |
Repurchase of common stock | (4,122) | | | (4) | | | (448,429) | | | — | | | — | | | (448,433) | |
Unrealized net gain on available-for-sale securities, net of deferred tax | — | | | — | | | — | | | 200 | | | — | | | 200 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 608 | | | — | | | 608 | |
Other tax adjustments | — | | | — | | | 1,547 | | | — | | | — | | | 1,547 | |
Net income | — | | | — | | | — | | | — | | | 629,302 | | | 629,302 | |
Balance at December 31, 2019 | 16,824 | | | 17 | | | 367,326 | | | (216) | | | 400,105 | | | 767,232 | |
Issuance of common stock under employee stock compensation plans, net | 190 | | | — | | | 1,535 | | | — | | | — | | | 1,535 | |
Share-based compensation | — | | | — | | | 30,727 | | | — | | | — | | | 30,727 | |
Repurchase of common stock | (934) | | | (1) | | | (77,997) | | | — | | | — | | | (77,998) | |
Unrealized net loss on available-for-sale securities, net of deferred tax | — | | | — | | | — | | | (162) | | | — | | | (162) | |
Foreign currency translation adjustment | — | | | — | | | — | | | (423) | | | — | | | (423) | |
Reacquisition of equity due to 2023 debt extinguishment, net of tax | — | | | — | | | (3,236) | | | — | | | — | | | (3,236) | |
Cumulative-effect adjustment from adoption of ASU 2016-13, net of tax | — | | | — | | | — | | | — | | | (5,168) | | | (5,168) | |
Other tax adjustments | — | | | — | | | 3 | | | — | | | — | | | 3 | |
Net loss | — | | | — | | | — | | | — | | | (2,985) | | | (2,985) | |
Balance at December 31, 2020 | 16,080 | | | 16 | | | 318,358 | | | (801) | | | 391,952 | | | 709,525 | |
Issuance of common stock under employee stock compensation plans, net | 687 | | | 1 | | | 27,744 | | | — | | | — | | | 27,745 | |
Share-based compensation | — | | | — | | | 38,783 | | | — | | | — | | | 38,783 | |
| | | | | | | | | | | |
Unrealized net loss on available-for-sale securities, net of deferred tax | — | | | — | | | — | | | (116) | | | — | | | (116) | |
Reacquisition of equity due to 2023 debt extinguishment, net of tax | — | | | — | | | (12,407) | | | — | | | — | | | (12,407) | |
Warrant and bond hedge unwind transactions | — | | | — | | | 491 | | | — | | | — | | | 491 | |
Net income | — | | | — | | | — | | | — | | | 57,138 | | | 57,138 | |
Balance at December 31, 2021 | 16,767 | | | $ | 17 | | | $ | 372,969 | | | $ | (917) | | | $ | 449,090 | | | $ | 821,159 | |
See accompanying notes to these consolidated financial statements.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Operating activities | | | | | |
Net income (loss) | $ | 57,138 | | | $ | (2,985) | | | $ | 629,302 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Gain from sale of Promacta license | — | | | — | | | (812,797) | |
Gain from sale of Vernalis R&D | — | | | (17,114) | | | — | |
Change in estimated fair value of contingent liabilities | (36,962) | | | 963 | | | (30) | |
Depreciation of fixed assets and amortization of intangible assets | 51,071 | | | 25,691 | | | 18,361 | |
Loss (gain) short-term investments | 3,997 | | | 16,933 | | | (1,049) | |
Amortization/accretion of premium (discount) on investments, net | 111 | | | 1,479 | | | (10,274) | |
Amortization of debt discount and issuance fees | 16,692 | | | 23,077 | | | 29,988 | |
Loss on debt extinguishment | 7,303 | | | 2,466 | | | — | |
Amortization of commercial license and other economic rights | (125) | | | 2,275 | | | 25,370 | |
Share-based compensation | 38,783 | | | 30,727 | | | 24,515 | |
Deferred income taxes, net | (8,618) | | | (19,053) | | | 74,829 | |
Other | 1,572 | | | 191 | | | (3,498) | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable, net | (28,616) | | | (26,061) | | | 25,463 | |
Inventory | (427) | | | (17,799) | | | (2,061) | |
Accounts payable and accrued liabilities | 2,810 | | | (1,245) | | | (6,664) | |
Income taxes receivable | (3,976) | | | 9,144 | | | (11,219) | |
Other economic rights | — | | | — | | | (12,000) | |
Deferred revenue | (17,870) | | | 29,236 | | | (1,147) | |
Other | (4,085) | | | (3,339) | | | 3,575 | |
Net cash provided by (used in) operating activities | 78,798 | | | 54,586 | | | (29,336) | |
Investing activities | | | | | |
Proceeds from sale of Promacta license | — | | | — | | | 812,797 | |
| | | | | |
Cash paid for acquisition, net of cash and restricted cash acquired | — | | | (404,884) | | | (11,840) | |
Purchases of property and equipment | (8,761) | | | (4,458) | | | (2,553) | |
Purchases of short-term investments | (181,325) | | | (422,523) | | | (2,356,545) | |
Proceeds from commercial license rights | 494 | | | 1,358 | | | — | |
Proceeds from sale of short-term investments | 154,230 | | | 394,539 | | | 535,877 | |
Proceeds from maturity of short-term investments | 67,105 | | | 644,155 | | | 1,494,851 | |
| | | | | |
Cash paid for equity method investment | — | | | (500) | | | (1,000) | |
Proceeds on sale of Vernalis R&D, net | — | | | 22,061 | | | — | |
Other, net | (1,220) | | | 1,900 | | | (4,669) | |
Net cash provided by investing activities | 30,523 | | | 231,648 | | | 466,918 | |
Financing activities | | | | | |
Repayment of debt | (155,760) | | | (222,209) | | | (27,323) | |
Payments under finance lease obligations | (9,188) | | | (9,549) | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from bond hedge settlement | 18,938 | | | — | | | 12,401 | |
Payments to convert holders for bond conversion | — | | | — | | | (12,401) | |
Net proceeds from stock option exercises and ESPP | 33,763 | | | 3,017 | | | 2,997 | |
Taxes paid related to net share settlement of equity awards | (6,018) | | | (1,481) | | | (4,418) | |
Share repurchases | — | | | (77,998) | | | (453,048) | |
Repurchase of warrants | (18,446) | | | — | | | (380) | |
Payments to CVR Holders | (1,050) | | | (2,325) | | | (3,000) | |
Net cash used in financing activities | (137,761) | | | (310,545) | | | (485,172) | |
Net decrease in cash, cash equivalents, and restricted cash | (28,440) | | | (24,311) | | | (47,590) | |
Effect of exchange rate changes on cash | — | | | — | | | 83 | |
Cash, cash equivalents and restricted cash at beginning of year | 47,962 | | | 72,273 | | | 119,780 | |
Cash, cash equivalents and restricted cash at end of year | $ | 19,522 | | | 47,962 | | | 72,273 | |
| | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | |
Cash paid during the year: | | | | | |
Interest paid | $ | 3,028 | | | $ | 4,463 | | | $ | 5,827 | |
Taxes paid | $ | 3,722 | | | $ | 2,130 | | | $ | 103,817 | |
Restricted cash in other current assets | $ | — | | | $ | 343 | | | $ | 730 | |
Supplemental schedule of non-cash investing and financing activities | | | | | |
Accrued inventory purchases | $ | 1,974 | | | $ | 1,562 | | | $ | 170 | |
Unrealized (loss) gain on available-for-sale investments | $ | (221) | | | $ | (212) | | | $ | 256 | |
Purchase of fixed assets recorded in accounts payable | $ | 1,567 | | | $ | 249 | | | $ | 495 | |
See accompanying notes to these consolidated financial statements.
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Business
We are a biopharmaceutical company 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.
Principles of Consolidation
The accompanying consolidated financial statements include Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of our parent company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Concentrations of Business Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and investments. We invest excess cash principally in United States government debt securities, investment grade corporate debt securities, mutual funds and certificates of deposit. We maintain some cash and cash equivalents balances with financial institutions that are in excess of the Federal Deposit Insurance Corporation insurance limits. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.
Revenue from significant partners, which is defined as 10% or more of our total revenue, was as follows: | | | | | | | | | | | | | | | | | |
| Year-ended December 31, |
| 2021 | | 2020 | | 2019 |
Partner A | 41% | | 45% | | N/A |
Partner B | 14% | | 17% | | 27% |
Partner C | <10% | | <10% | | 13% |
We obtain Captisol primarily from two sites related to a single supplier, Hovione. If this supplier were not able to supply the requested amounts of Captisol from each site, and if our safety stocks of material were depleted, we would be unable to continue to derive revenues from the sale of Captisol until we obtained material from an alternative source, which could take a considerable length of time.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less from the date of acquisition.
Short-term Investments
Short-term investments primarily consist of investments in debt and equity securities. We classify our short-term investments as “available-for-sale”. Such investments are carried at fair value, with unrealized gains and losses on debt securities included in the statement of comprehensive income (loss), net of tax, and unrealized gains and losses on equity securities included the consolidated statement of operations. We determine the cost of investments based on the specific identification method. We determine the realized gains or losses on the sale of available-for-sale securities using the specific identification method and includes net realized gains and losses as a component of other income or expense within the consolidated statements of operations.
Debt securities consist of certificates of deposit, corporate debt securities, and securities of government-sponsored entities have effective maturities greater than three months and less than twelve months from the date of acquisition. Debt securities securities available-for-sale in an unrealized loss position are assessed for the current expected credit losses methodology. We start by assessing whether we intend to sell the security, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes in interest rates, and any changes to the rating of the security by a rating agency, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income or loss, as applicable.
Equity securities are mutual funds, investments in privately held companies (non-marketable equity securities), and companies that have completed initial public offerings (marketable equity securities). Mutual funds are valued at their publicly quoted net asset value (NAV) price on the last day of the period. Our non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Our marketable equity securities are measured at fair value. Equity investments are classified as short-term investments, or non-current other assets, based on the nature of the securities and their availability for use in current operations.
Accounts Receivable
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.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method. We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write downs related to obsolete inventory recorded for the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021 and 2020, inventory consist of Captisol prepayments of $24.6 million and $26.1 million, respectively.
Property and Equipment
Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, which generally range from three to ten years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating income or expense.
Acquisitions
We first determine whether a set of assets acquired constitute a business and should be accounted for as a business combination. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Business combinations are accounted for by using the acquisition method of accounting which requires us to use significant estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill.
Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, including contingent consideration and all contractual contingencies, generally at the acquisition date fair value. Contingent purchase consideration to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in statement of operations. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred.
Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements in the period of change, if any.
Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
Contingent Liabilities
In connection with the acquisition of Pfenex in October 2020, we entered into a CVR agreement pursuant to which former equity holders of Pfenex received one nontransferable contractual right entitling such holder to receive $2.00 per share (or approximately $77.8 million total) in the event that Pfenex’s teriparatide injection product received notice from the FDA that such product is therapeutically equivalent with respect to FORTEO® (teriparatide injection) on or before December 31, 2021. The FDA did not provide notice of such event prior to the CVR expiration date and as a result, the Pfenex CVRs expired without payment.
In connection with the acquisition of Icagen in April 2020, Icagen selling shareholders will be entitled to receive up to an additional $25 million of cash payments based on certain revenue achievements.
In connection with the acquisition of CyDex in January 2011, we recorded a contingent liability for amounts potentially due to holders of the CyDex CVRs and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales.
In connection with the acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs for each Metabasis share. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement.
Any change in fair value is recorded in our consolidated statement of operations. For additional information, see “Note (5), Fair Value Measurement and Note (8), Balance Sheet Account Details.”
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. We operate in one reporting unit. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to perform the quantitative assessment. We will then evaluate goodwill for impairment by comparing the estimated fair value of the reporting unit to its carrying value, including the associated goodwill. To determine the fair value, we generally use a combination of market approach based on Ligand and comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. We may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the quantitative assessment for the goodwill impairment test. We performed the annual assessment for goodwill impairment during the fourth quarter of 2021, noting no impairment.
Our identifiable intangible assets are typically composed of acquired core technologies, licensed technologies, contractual relationships, customer relationships and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives. We regularly perform reviews to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. Factors that may indicate potential impairment include market conditions, industry and economic trends, changes in regulations, clinical success, historical and forecasted financial results, market capitalization, significant changes in the ability of a particular asset to generate positive cash flows, and the pattern of utilization of a particular asset. We did not identify indicators of impairment for the finite-lived intangibles at December 31, 2021.
Commercial license and other economic rights
As of December 31, 2021 and 2020, commercial license and other economic rights consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Gross | | Adjustments(1) | | Net | | Gross | | Adjustments(2) | | Net |
Aziyo and CorMatrix | | $ | 17,696 | | | $ | (9,461) | | | $ | 8,235 | | | $ | 17,696 | | | $ | (9,588) | | | $ | 8,108 | |
Selexis and Dianomi | | 10,602 | | | (8,727) | | | 1,875 | | | 10,602 | | | (7,731) | | | 2,871 | |
Total | | $ | 28,298 | | | $ | (18,188) | | | $ | 10,110 | | | $ | 28,298 | | | $ | (17,319) | | | $ | 10,979 | |
(1) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of December 31, 2021.
(2) Amounts represent accumulated amortization to principal of $11.3 million and credit loss adjustments of $6.0 million as of December 31, 2020.
Commercial license and other economic rights as of December 31, 2021 represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, and Dianomi in January 2019. Commercial license rights acquired are accounted for as financial assets, and other economic rights are accounted for as funded research and developments as further discussed below.
In May 2019, we entered into a development funding and royalties agreement with Novan, pursuant to which we would receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization
of SB206. Pursuant to the agreement, we would receive up to $20.0 million of milestone payments upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition to the milestone payments, Novan will pay us tiered royalties from 7.0% to 10.0% based on aggregate annual net sales of SB206 or any other Novan Molluscum Product in North America.
In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we will receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congenita. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on aggregate annual worldwide net sales of any PTX-022 products, if approved, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We made an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for development or commercialization of PTX-022.
We determined the economic rights related to Novan and Palvella should be characterized as a funded research and development arrangement, thus we account for them in accordance with ASC 730-20, Research and Development Arrangement, and reduce our asset as the funds are expended by Novan and Palvella. As of December 31, 2019, Novan had used up the $12.0 million upfront payment provided by us. As such, our other economic rights related to Novan had been fully amortized as of December 31, 2019. As of December 31, 2020, the fund has been fully expended by Palvella and our cost basis for the asset has been reduced to zero, and therefore we will recognize milestones and royalties as revenue when earned. During 2020, we recorded a $3.0 million milestone from Palvella under contract revenue, which has been included in our consolidated statement of operations for the year ended December 31, 2020.
In May 2017, we entered into a royalty agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. Pursuant to the agreement, we received $10.0 million in 2017 from Aziyo to buydown the royalty rates on the products CorMatrix sold to Aziyo. The agreement closed on May 31, 2017, in connection with the closing of the asset sale from CorMatrix to Aziyo (the “CorMatrix Asset Sale”). Per the agreement, we will receive a 5% royalty on the products Aziyo acquired in the CorMatrix Asset Sale, reduced from the original 20% royalty from CorMatrix pursuant to the previously disclosed interest purchase agreement, dated May 3, 2016 (the “Original Interest Purchase Agreement”) between CorMatrix and us. In addition, Aziyo has agreed to pay us up to $10.0 million of additional milestones tied to cumulative net sales of the products Aziyo acquired in the CorMatrix Asset Sale and to extend the term on these royalties by one year. The royalty agreement will terminate on May 31, 2027. In addition, in May 2017, we entered into an amended and restated interest purchase agreement (the “Amended Interest Purchase Agreement”) with CorMatrix, which supersedes in its entirety the Original Interest Purchase Agreement. Other than removing the commercial products sold to Aziyo in the CorMatrix Sale, the terms of the Amended Interest Purchase Agreement remain unchanged with respect to the CorMatrix developmental pipeline products, including the royalty rate of 5% on such pipeline products. The Amended Interest Purchase Agreement will terminate 10 years from the date of the first commercial sale of such products.
We account for the Aziyo commercial license right as a financial asset in accordance with ASC 310, Receivables, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the royalty agreement with Aziyo as of December 31, 2021 is 21.6%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in 2021 were accordingly allocated between revenue and the amortization of the commercial license rights.
Prior to 2020, we accounted for commercial license rights related to developmental pipeline products such as Selexis and Dianomi on a non-accrual basis. These developmental pipeline products are non-commercialized, non-approved products that require FDA or other regulatory approval, and thus have uncertain cash flows. The developmental pipeline products are on a non-accrual basis as we are not yet able to forecast future cash flows given their pre-commercial stages of development. We will prospectively update the yield model under the effective interest method once the underlying products are commercialized and we can reliably forecast expected cash flows. Income will be calculated by multiplying the carrying value of the commercial license right by the effective interest rate. We regularly perform reviews to determine if any event has occurred that may indicate the carrying value of these commercial license rights are potentially impaired. If the affected commercial license rights are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. During 2020, given the expected cash flow from the Selexis program, we started to account for the Selexis commercial license right as a financial asset in accordance with ASC 310, 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 Selexis as of December 31, 2021 is 21%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in the year ended December 31, 2021 and 2020 were allocated
accordingly between revenue and the amortization of the commercial license rights. We still accounted for commercial license rights related to Dianomi on a non-accrual basis as of December 31, 2021.
For commercial license rights, we have elected a prospective approach to account for changes in estimated cash flows and selected a method for determining when an impairment would be recognized and how to measure that impairment. In circumstances where our new estimate of expected cash flows is greater than previously expected, we will update our yield prospectively. In circumstances where our new estimate of expected cash flows is less than previously expected and below our original estimated yield we record an impairment. Impairment is recognized by reducing the financial asset to an amount that represents the present value of our most recent estimate of expected cash flows discounted by the original effective interest rate. In circumstances where our new estimate of expected cash flows is less than previously expected, but not below our original estimated yield, we update our yield prospectively.
As a result of adopting ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit losses on Financial Instruments (Topic 326), we now recognize an allowance for current expected credit losses on the commercial license rights subject to credit risk. We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the standard on January 1, 2020. 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 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 twelve months ended December 31, 2021 and 2020, we further considered the current and expected future economic and market conditions surrounding novel coronavirus (COVID-19) pandemic, along with other factors, and recorded an additional $0.5 million each year, for credit losses in other expense, net, in our consolidated statements of operations.
Revenue Recognition
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
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 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. 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, we consider our performance obligation is satisfied at a point in time, once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost 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 will include variable consideration in the form of contingent milestone-based payments. We include contingent milestone based 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 based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services.
For R&D services we recognize revenue over time and we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time it will take us to complete the activities, or the costs we may incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
We occasionally have sub-license obligations related to arrangements for which we receive license fees, milestones and royalties. We evaluate the determination of gross as a principal versus net as an agent reporting based on each individual agreement.
Deferred Revenue
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.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the twelve months ended December 31, 2021, the amount recognized as revenue that was previously deferred at December 31, 2020 was $30.1 million. During the twelve months ended December 31, 2020, the amount recognized as revenue that was previously deferred at December 31, 2019 was $0.9 million.
Disaggregation of Revenue
Royalty revenue for 2021, 2020 and 2019 are reported as below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Kyprolis | | $ | 27,472 | | | $ | 25,164 | | | $ | 25,046 | |
Evomela | | 10,079 | | | 6,377 | | | 5,171 | |
Other | | 11,376 | | | 2,255 | | | 2,566 | |
Promacta | | N/A | | N/A | | 14,193 | |
| | $ | 48,927 | | | $ | 33,796 | | | $ | 46,976 | |
The following table represents disaggregation of Captisol and Contract Revenue (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
Captisol | | $ | 164,250 | | | $ | 109,959 | | | $ | 31,489 | |
| | | | | | |
Contract | | | | | | |
Service Revenue | | 23,712 | | | 21,803 | | | 16,776 | |
License Fees | | 5,084 | | | 4,378 | | | 6,199 | |
Milestone | | 28,748 | | | 11,516 | | | 17,173 | |
Other | | 6,412 | | | 4,967 | | | 1,669 | |
| | $ | 63,956 | | | $ | 42,664 | | | $ | 41,817 | |
Research and Development Expenses
Research and development expense consists of labor, material, equipment, and allocated facilities costs of our scientific staff who are working pursuant to our collaborative agreements and other research and development projects. Also included in research and development expenses are third-party costs incurred for our research programs including in-licensing costs, CRO costs and costs incurred by other research and development service vendors. We expense these costs as they are incurred. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided.
Share-Based Compensation
We incur share-based compensation expense related to restricted stock, ESPP, and stock options.
Restricted stock unit (RSU) and performance stock unit (PSU) are all considered restricted stock. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. We recognize share-based compensation expense based on the fair value on a straight-line basis over the requisite service periods of the awards, taking into consideration of forfeitures as they occur. PSU generally represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any expense change resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment. A limited amount of PSUs contain a market condition dependent upon the Company’s relative and absolute total stockholder return over a three-year period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation expense for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the market conditions.
The Black-Scholes-Merton option-pricing model is used to estimate the fair value of stock purchases under our ESPP and stock options granted. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. We look to historical and implied volatilities of our stock to determine the expected volatility. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
We grant options, RSUs and PSUs to employees and non-employee directors. Non-employee directors are accounted for as employees. Options and RSUs granted to certain non-employee directors typically vest one year from the date of grant. Options granted to employees typically vest 1/8 on the six month anniversary of the date of grant, and 1/48 each month thereafter for forty-two months. RSUs and PSUs granted to employees vest over three years. All option awards generally expire ten years from the date of grant.
Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests.
Derivatives
In May 2018, we issued $750.0 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually, as further described in “Note (7), Convertible Senior Notes.” Concurrently with the issuance of the notes, we entered into a series of convertible note hedge and warrant transactions which in combination are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the notes. The conversion option associated with the 2023 Notes temporarily met the criteria for an embedded derivative liability which required bifurcation and separate accounting. In addition, the note hedge and warrants were also temporarily classified as a derivative asset and liability, respectively, on our consolidated balance sheet. As a result of shareholder approval to increase the number of authorized shares of our common stock on June 19, 2018, as discussed in “Note (7), Convertible Senior Notes,” the derivative asset and liabilities were reclassified to additional paid-in capital.
In connection with our 2019 Notes, which we issued in August 2014 for $245.0 million aggregate principal amount, on May 22, 2018, we amended it making an irrevocable election to settle the entire note in cash. As a result, we reclassified from equity to derivative liability the fair value of the conversion premium as of May 22, 2018. Amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our consolidated statements of operations.
In connection with the payoff of the 2019 Notes in August 15, 2019, the bond hedge was settled and accordingly, the derivative asset and derivative liability were settled to zero. See detail in “Note (7), Convertible Senior Notes.”
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating the ability to recover deferred tax assets within the jurisdiction which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.
Potentially dilutive common shares consist of shares issuable under 2023 convertible senior notes, stock options and restricted stock. 2023 convertible senior notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for stock options and restricted stock. In loss periods, basic net loss per
share and diluted net loss per share are identical since the effect of otherwise dilutive potential common shares is anti-dilutive and therefore excluded.
For the twelve months ended December 31, 2020, all of the 0.6 million weighted average shares of outstanding equity awards as of December 31, 2020 were anti-dilutive due to the net loss for the period.
The following table presents the calculation of weighted average shares used to calculate basic and diluted income (loss) per share (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Weighted average shares outstanding: | 16,630 | | | 16,185 | | | 18,995 | |
Dilutive potential common shares: | | | | | |
Restricted stock | 96 | | | — | | | 43 | |
Stock options | 520 | | | — | | | 719 | |
| | | | | |
| | | | | |
Shares used to compute diluted income (loss) per share | 17,246 | | | 16,185 | | | 19,757 | |
Potentially dilutive shares excluded from calculation due to anti-dilutive effect | 4,793 | | | 8,458 | | | 8,926 | |
Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale debt securities, foreign currency translation adjustments, and reclassification adjustments for realized gains or losses included in net income (loss). The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Income (Loss).
Foreign Currency Translation
The British Pound Sterling was the functional currency of our subsidiary, Vernalis, which was sold in fourth quarter of the year ended December 31, 2020. For the years ended December 31, 2020 and 2019 the corresponding financial statements have been translated into U.S. Dollars in accordance with ASC 830-30, Translation of Financial Statements. Assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activity took place. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss).
Impact of COVID-19 Pandemic
To date, we have not experienced material disruptions in our business operations or financial impacts as a result of the COVID-19 pandemic. While it is not possible at this time to estimate the impact that COVID-19 could have on our business in the future, the continued spread of COVID-19 and variants of the virus, the rate of vaccinations regionally and globally and the measures taken by the government authorities, and any future epidemic disease outbreaks, could: disrupt the supply chain and the manufacture or shipment of products and supplies for use by us in our discovery activities and by our partners for their discovery and development activities; delay, limit or prevent us or our partners’ from continuing research and development activities; impede our negotiations with partners and potential partners; impede testing, monitoring, data collection and analysis and other related activities, by us and our partners; interrupt or delay the operations of the FDA or other regulatory authorities, which may impact review and approval timelines for initiation of clinical trials or marketing; impede the launch or commercialization of any approved products; any of which could delay our partnership programs, increase our operating costs, and have a material adverse effect on our business, financial condition and results of operations. In addition, if COVID-19 infects our genetically modified animals, which form the basis of our platform, or if there is an outbreak among our employees who maintain and care for these animals, we and our partners may be unable to produce antibodies for development.
Some of our partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead for Veklury (remdesivir), the first FDA-approved treatment for COVID-19 for the treatment of patients with COVID-19 requiring hospitalization and, as a result, we have extended our Captisol supply agreement with Gilead until September 2030 and worked to increase our manufacturing of Captisol to meet this increased demand. In addition, certain of our OmniAb and other license partners have initiated antibody discovery programs for the potential treatment of COVID-19.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, the businesses of our partners, our results of operations and our financial condition will depend on future developments that are highly uncertain and cannot be
accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, including the timing and extent of governments reopening or further restricting activities, and the economic impact on local, regional, national and international markets.
Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU is effective for public entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Effective January 1, 2022, we will adopt ASU 2020-06. We are finalizing our analysis of certain assumptions that will be utilized at the transition and expects the effect of adopting ASU 2020-06 will result in an increase to retained earnings, a decrease to additional paid-in capital, and an increase to the convertible senior notes. We expect that interest expense recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
2. Sale of Vernalis R&D and Promacta License
Vernalis R&D
On October 11, 2020, we entered into an Agreement for the Sale and Purchase of the Entire Issued Share Capital of Vernalis (R&D) Limited (the “Purchase and Sale Agreement”) with HitGen UK Ltd (“Buyer”). Under the terms of the Purchase and Sale Agreement, we transferred certain intellectual property on completed collaboration licenses to Ligand UK Limited, which is a subsidiary of the Company, which we retain rights and interest to and are entitled to receive future milestones and royalties. Under the Purchase and Sale Agreement, we are also entitled to a share of the economic rights on current research collaboration contracts. In addition, Vernalis will continue to support certain existing Ligand partnerships. On December 2, 2020, we completed the sale. Pursuant to the terms of the Purchase and Sale Agreement, at the closing of the transaction, Buyer paid $26.7 million in cash, following adjustment for debt, cash and net working capital. As Vernalis R&D has the input, process and output elements defined in ASC 805, Business Combinations, we concluded the sale qualifies as a sale of business. Net assets sold, net of working capital adjustment, was $6.1 million, goodwill allocated to the selling business that was written off was $3.5 million, resulting in a $17.1 million gain from sale of Vernalis R&D recorded to income from operations.
Promacta License
On March 5, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RPI Finance Trust (“RPI”), doing business as “Royalty Pharma”, who is not an affiliate. Under the Asset Purchase Agreement, we sold, transferred, assigned and conveyed to RPI, and RPI purchased, acquired and accepted from us, all of our rights, title and interest in and to the Purchased Assets, which include among other things the intellectual property and related know-how generated by us in connection with the license agreement (collectively, the “Purchased Assets”), dated December 29, 1994, by and between Novartis (as successor in interest to SmithKline Beecham Corporation) and Ligand, which allowed us to receive a royalty on net sales of Promacta. We concluded the sale does not qualify as a sale of a business, but as a sale of a non-financial asset. At the closing on March 6, 2019, RPI paid us $827.0 million in cash and we do not have any remaining performance obligations related to Novartis or RPI for Promacta. The carrying value of our Promacta asset as of March 6, 2019 was zero. Of the total cash proceeds from the sale, $14.2 million was recorded to revenue related to the Promacta royalty for the period between January 1, 2019 and March 6, 2019, and the remaining $812.8 million was recorded to income from operations in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.
3. Short-term Investments: Investment in Viking
Our ownership in Viking was approximately 8.6% as of December 31, 2021, and we account for it as an investment in available-for-sale equity securities, which is measured at fair value, with changes in fair value recognized in net income. Viking is considered a related party as we maintain a seat on Viking's board of directors and we do not exert significant influence over Viking.
As of December 31, 2021, we have zero Viking warrants outstanding. As of December 31, 2021 and December 31, 2020, we recorded our common stock in Viking in “short-term investments” at fair value of $30.9 million and $32.8 million, respectively.
At December 31, 2020, we owned warrants to purchase up to 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share, and during the year ended December 31, 2021 we exercised all outstanding Viking warrants. As of December 31, 2021, we have zero Viking warrants outstanding. During the year ended December 31, 2021, we also sold 0.6 million Viking shares. We recorded the warrants in “Short-term investments” in our consolidated balance sheet at fair value of $6.3 million at December 31, 2020. See further discussion in “Note (5), Fair Value Measurement.”
4. Acquisitions
As set forth below, we completed five acquisitions from January 1, 2019 through December 31, 2021, of which three (Pfenex, Icagen and Ab Initio) were accounted for as business combinations and two (Taurus and xCella) were accounted for as asset acquisitions. For business combinations, we applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. Except for the Pfenex acquisition, for all other acquisitions, we did not incur any material acquisition related costs.
Pfenex Acquisition
On October 1, 2020, we acquired Pfenex, which develops next-generation and novel protein therapeutics to improve existing therapies and create new therapies for biological targets linked to critical, unmet diseases using a protein expression technology platform.
The purchase price of $465.1 million included $429.6 million cash consideration paid upon acquisition, and a contingent CVR payment of up to $77.8 million in cash based on a certain specified milestone with an estimated initial fair value of $37.0 million. The CVR will only be paid in full if the milestone is achieved by December 31, 2021. The amount of the CVR included in purchase price was reduced by $1.5 million which was determined to be post-combination expense. The fair value of the CVR liability was determined using a probability adjusted income approach. These cash flows were then discounted to present value using a discount rate based on market participants' cost of debt reflective of the Company, which was 7.1%. The liability is periodically assessed based on events and circumstances related to the underlying milestone, and any change in fair value is recorded in our consolidated statements of operations. During the year ended December 31, 2021, we wrote off the entire CVR liability of $37.6 million to other operation income, primarily due to not achieving the specific development and regulatory milestone by December 31, 2021 as defined by Pfenex CVR.
In connection with the acquisition, a portion of Pfenex's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remaining amount was considered our post-combination expense. We paid $17.3 million in cash for equity compensation, which is attributable to pre-combination services and is reflected as a component of the total purchase price paid of $429.6 million. In addition, the fair value of equity compensation attributable to the post-combination service period was $8.7 million. These amounts were associated with the accelerated vesting of stock options previously granted to Pfenex employees and were fully paid in cash, which was recognized as general and administrative expenses during the fourth quarter of 2020.
We recorded $20.7 million of acquisition-related costs for legal, severance and other costs in connection with the acquisition within operating expenses in our consolidated statement of operations for 2020. The following table sets forth an allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):
| | | | | |
Cash | $ | 51,407 | |
Restricted cash | 200 | |
Accounts and unbilled receivables | 1,359 | |
Property and equipment, net | 7,823 | |
Right-of-use asset | 3,070 | |
Other assets | 1,338 | |
Intangibles acquired | 385,000 | |
Goodwill(1) | 82,303 | |
Accounts payable | (6,814) | |
Accrued liabilities | (9,606) | |
Deferred revenue | (3,908) | |
Lease liabilities | (3,070) | |
Other liabilities | (1,382) | |
Deferred tax liabilities, net | (42,622) | |
Total consideration | $ | 465,098 | |
(1) Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Pfenex and expected synergies. None of the goodwill is deductible for tax purposes.
The intangibles acquired and their weighted average useful life are as follows (in thousands, except useful lives):
| | | | | | | | |
| Approximate Fair Value | Estimated useful life (in years) |
Contractual Relationships: | | |
Alvogen | $ | 114,000 | | 12 |
Merck | 117,000 | | 12 |
Jazz | 80,000 | | 17 |
SII | 49,000 | | 10 |
Arcellx | 2,000 | | 17 |
Acquired Technologies | 23,000 | | 10-19 |
| $ | 385,000 | | |
The fair values of the contractual relationships were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones and collaboration revenue streams derived from the licensing of the related technologies over the estimated contractual relationship period. The fair values of the acquired technologies were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated useful lives. These projected cash flows were discounted to present value using discount rate, which varies from 12% to 15%. The intangible assets acquired are being amortized on a straight-line basis over the estimated useful life.
Approximately $2.0 million of revenue and $19.3 million of loss before income taxes of Pfenex were included in the consolidated statement of operations for the year ended December 31, 2020. The following summary presents our unaudited pro forma consolidated results of operations for the years ended December 31, 2020 and December 31, 2019 as if the Pfenex acquisition had occurred on January 1, 2019, which gives effect to certain transaction accounting adjustments, including amortization of acquired intangibles and stock based compensation expense for retained Pfenex employees. The transaction accounting adjustments do not include non-recurring adjustments related to Pfenex's executive salary, board of director compensation, and salary of Pfenex employees involved in the reduction of force as part of the acquisition, estimated to be $7.1 million in 2020 and $4.8 million in 2019. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as if the date indicated, nor is it necessarily indicative of future operating results (in thousands, except per share amounts):
| | | | | | | | |
| Year Ended December 31, |
(Unaudited) | 2020 | 2019 |
Revenue | $ | 189,203 | | $ | 170,608 | |
Net Income (loss) | $ | (60,059) | | $ | 594,941 | |
Net income (loss) per common share: | | |
Basic | $ | (3.71) | | $ | 31.32 | |
Diluted | $ | (3.71) | | $ | 30.11 | |
Taurus Acquisition
On September 9, 2020, we acquired Taurus, which discovers and develops novel antibodies from immunized cows and cow-derived libraries. These antibodies feature some of the longest CDR3s of any species, with unique genetic and structural diversity that can enable binding to challenging antigens with application in therapeutics, diagnostics and research.
The purchase price of $5.1 million included $4.6 million in cash, and a $0.5 million holdback to satisfy indemnification obligations which will be settled by September 2021. We also issued nontransferable CVRs for up to $4.5 million tied to partnered and internal research and development and for up to $25.0 million as a 25% share of post-clinical Taurus product revenues (including milestone payments) received by us. We accounted for this transaction as an asset acquisition as we concluded that substantially all of the fair value of the gross assets acquired was concentrated in the acquired core technology.
The allocation of the consideration was allocated to the acquisition date fair values of acquired assets as follows (in thousands)
| | | | | |
Cash | $ | 47 | |
Intangibles assets with finite-life - core technologies | 5,005 | |
| $ | 5,052 | |
The core technology is being amortized on a straight-line basis over the estimated useful life of 10 years. We account for the CVRs in accordance with ASC 450, Contingencies, when the contingency is resolved and the liability becomes payable. None of the CVRs are recognized as of the acquisition date.
xCella Acquisition
On September 8, 2020, we acquired xCella, an antibody discovery company. xCella's xPloration platform is a proprietary microcapillary platform that can screen single B cells for specificity and bioactivity and will increase Ligand’s antibody discovery throughput and efficiency.
We paid $7.1 million in cash (including a $0.5 million holdback to satisfy indemnification obligations which will be settled by September 2021), and issued earnout rights for up to $5.0 million tied to our use of the xCella technology for partnered research and development and for up to $25.75 million as a 25% share of any future milestone payments we received under a certain existing xCella partner arrangement. We evaluated this acquisition in accordance with ASC 805, Business Combinations, to discern whether the assets and operations of xCella met the definition of a business. We accounted for this transaction as an asset acquisition as we concluded that substantially all of the fair value of the gross assets acquired was concentrated in the acquired core technology.
The allocation of the consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):
| | | | | |
Cash and other assets | $ | 240 | |
Accrued liabilities | (142) | |
Deferred tax liabilities, net | (604) | |
Intangibles assets with finite-life - core technology | 7,582 | |
| $ | 7,076 | |
The core technology is being amortized on a straight-line basis over the estimated useful life of 15 years. We account for the earnout rights in accordance with ASC 450, Contingencies, when the contingency is resolved and the liability becomes payable. None of the earnout rights are recognized as of the acquisition date.
Icagen Acquisition
On April 1, 2020, we acquired the core assets, including its partnered programs and ion channel technology from Icagen and certain of its affiliates.
The purchase price of $19.9 million included $15.1 million cash consideration paid upon acquisition, and a CVR of up to $25.0 million of cash payments based on certain revenue milestones with an estimated fair value of $4.8 million. The fair value of the earn-out liability was determined using a probability weighted income approach incorporating the estimated future cash flows from expected future milestones. These cash flows were then discounted to present value using a discount rate based on the market participants' cost of debt reflective of the Company, which was 5.5%. The liability is periodically assessed based on events and circumstances related to the underlying milestones, and any change in fair value is recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amount paid may be materially different than the carrying amount of the liability. As the acquisition is not considered significant, pro forma information has not been provided. The results of Icagen have been included in our results of operations since the date of acquisition.
The allocation of the consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):
| | | | | |
Property and equipment, net | $ | 1,173 | |
Prepaids and other assets | 588 | |
Liabilities assumed | (812) | |
Deferred revenue | (3,685) | |
Deferred tax assets, net | 861 | |
Acquired intangibles | 12,800 | |
Goodwill(1) | 9,015 | |
| $ | 19,940 | |
(1) Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Icagen and expected synergies.
The majority of the goodwill is deductible for tax purposes. Acquired intangibles include $11.1 million of customer relationships and $1.7 million of core technology. The fair values of the customer relationships were based on a discounted cash flow analysis incorporating the estimated future cash flows from these relationships during the contractual term. These cash flows were then discounted to present value using a discount rate of 17%. The fair value of the customer relationships is being amortized on a straight-line basis over the weighted average estimated useful life of 9.6 years. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 17%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 10 years. The total acquired intangibles are being amortized on a straight-line basis over the estimated useful life of 9.7 years.
Ab Initio Acquisition
On July 23, 2019, we acquired privately-held Ab Initio, an antigen-discovery company located in South San Francisco, California. Ab Initio has a patented antigen technology that is synergistic with the OmniAb® therapeutic antibody discovery platform, providing our current and potential new partners enhanced capabilities for the discovery of therapeutic antibodies against difficult-to-access cellular targets. Ab Initio has a collaboration agreement with Pfizer to discover novel therapeutic antibodies against an undisclosed target in the GPCR superfamily.
The purchase price of $12.0 million included $11.9 million cash consideration paid upon acquisition, net of cash acquired, and $0.15 million cash holdback for potential indemnification claims. As the acquisition is not considered significant, pro forma information has not been provided.
The final purchase consideration was allocated to the acquisition date fair values of acquired assets and assumed liabilities as follows (in thousands):
| | | | | |
Cash and other assets | $ | 28 | |
Accounts payable and accrued liabilities | (83) | |
Deferred tax liabilities, net | (146) | |
Intangibles assets with finite-life - core technologies | 7,400 | |
Goodwill(1) | 4,812 | |
| $ | 12,011 | |
(1) Goodwill represents the excess of the purchase price over the fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Ab Initio and expected synergies.
None of the goodwill is deductible for tax purposes. The fair value of the core technologies was determined based on the discounted cash flow method that estimated the present value of the hypothetical royalty/ milestone streams from the licensing of the antigen-discovery technology and collaboration agreement. These projected cash flows were discounted to present value using a discount rate of 12.0%. The fair value of the core technologies is being amortized on a straight-line basis over the weighted average estimated useful life of approximately 20 years.
5. Fair Value Measurement
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. We establish a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions
The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Fair Value Measurements at Reporting Date Using |
December 31, 2021 | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets: | | | | | | | |
Short-term investments (1) | $ | 290,697 | | | $ | 9,735 | | | $ | 280,553 | | | $ | 409 | |
Investment in Viking common stock | 30,889 | | | 30,889 | | | — | | | — | |
Total assets | $ | 321,586 | | | $ | 40,624 | | | $ | 280,553 | | | $ | 409 | |
Liabilities: | | | | | | | |
| | | | | | | |
Contingent liabilities - Cydex | 349 | | | — | | | — | | | 349 | |
Contingent liabilities - Metabasis (4) | 3,358 | | | — | | | 3,358 | | | — | |
Contingent liabilities - Icagen (5) | 7,364 | | | — | | | — | | | 7,364 | |
| | | | | | | |
Liability for amounts owed to a former licensor | 86 | | | 86 | | | — | | | — | |
Total liabilities | $ | 11,157 | | | $ | 86 | | | $ | 3,358 | | | $ | 7,713 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Fair Value Measurements at Reporting Date Using |
December 31, 2020 | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets: | | | | | | | |
Short-term investments (1) | $ | 324,478 | | | $ | 3,438 | | | $ | 320,647 | | | $ | 393 | |
Investment in Viking common stock | 32,763 | | | 32,763 | | | — | | | — | |
Investment in Viking warrants (2) | 6,326 | | | 6,326 | | | — | | | — | |
Total assets | $ | 363,567 | | | $ | 42,527 | | | $ | 320,647 | | | $ | 393 | |
Liabilities: | | | | | | | |
Contingent liabilities - Crystal (3) | $ | 800 | | | $ | — | | | $ | — | | | $ | 800 | |
Contingent liabilities - Cydex | 508 | | | — | | | — | | | 508 | |
Contingent liabilities - Metabasis (4) | 3,821 | | | — | | | 3,821 | | | — | |
Contingent liabilities - Icagen (5) | 6,404 | | | — | | | — | | | 6,404 | |
Contingent liabilities - Pfenex (6) | 37,600 | | | — | | | — | | | 37,600 | |
Liability for amounts owed to a former licensor | 60 | | | 60 | | | — | | | — | |
Total liabilities | $ | 49,193 | | | $ | 60 | | | $ | 3,821 | | | $ | 45,312 | |
(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 mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as 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) Investment in Viking warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, is classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in “gain (loss) from short-term investments” in our consolidated statement of operations. See further discussion in “Note (3), Short-term Investments: Investment in Viking.”
(3) The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. During the twelve months ended December 31, 2020, we paid $1.8 million contingent liability on development milestones to former Crystal shareholders.
(4) In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially differ than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial.
(5) The fair value of Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on certain revenue milestones as defined in the asset purchase agreement with Icagen. 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. Changes in these estimates may materially affect the fair value. During the year-end December 31, 2021, we paid a $1.1 million contingent liability based on revenue milestones to Icagen.
(6) The fair value of the Pfenex contingent liability was determined using a probability adjusted income approach. These cash flows were then discounted to present value using a discount rate based on the market participants' cost of debt reflective of the Company. During the year-end December 31, 2021, we reduced the contingent liability by $37.6 million primarily due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR. See further detail on Pfenex CVR in Note 4, Acquisitions.
A reconciliation of the level 3 financial instruments as of December 31, 2021 is as follows (in thousands):
| | | | | |
Liabilities | |
Fair value of level 3 financial instruments as of December 31, 2020 | $ | 45,312 | |
Payments to CVR holders and other contingency payments | (1,770) | |
Fair value adjustments to contingent liabilities | (36,549) | |
Contingent liabilities from xCella asset acquisition | 720 | |
Fair value of level 3 financial instruments as of December 31, 2021 | $ | 7,713 | |
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 twelve months ended December 31, 2021.
Fair Value of Financial Instruments
In August 2014 and May 2018, we issued the 2019 Notes and 2023 Notes, respectively. We use quoted market rates in an inactive market, which are classified as a Level 2 input, to estimate the fair value of our 2019 and 2023 Notes. The carrying value of the notes does not reflect the market rate. See “Note (7), Convertible Senior Notes” for additional information related to the fair value.
In addition, our accounts receivable, accounts payable, accrued liabilities, current 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.
6. Leases
Finance lease
In May 2020 and January 2021, we entered into an agreement and the first amendment with Hovione, our third-party manufacturer, to increase our manufacturing of Captisol, respectively. The agreements are considered to include an embedded finance lease under ASC 842, Leases, as it provides the Company the right to use the underlying equipment to exclusively
manufacture Captisol. As of December 31, 2021, we have fully paid consideration of $69.1 million for prepaid inventory and capacity ramp-up fee. We allocated consideration in the agreements between lease and non-lease components using relative standalone prices. Since the inception of the agreements, we have allocated $50.2 million of the consideration paid to the non-lease component which is accounted for as prepaid inventory and being amortized to cost of Captisol based on the usage. As of December 31, 2021 the Hovione finance lease has no remaining lease liability and the right of use asset balance is $16.1 million. The right of use asset is to be amortized straight-line over the remaining seven year lease term.
Operating lease
We lease certain office facilities and equipment primarily under various operating leases. Our operating leases have remaining contractual terms up to ten years, some of which include options to extend the leases for up to ten years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities.
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
During the year ended December 31, 2021, we entered into several new lease agreements including our Emeryville headquarter and animal facility expansion and a new Icagen office lease, which resulted in an increase in operating lease right of use assets of $12.7 million and lease liabilities of $13.2 million as of December 31, 2021 for the portion of the lease with a starting accounting lease commencement date during the period.
Operating and Finance Lease Assets and Liabilities (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Assets | | | |
Operating lease assets | $ | 16,542 | | | $ | 6,892 | |
Finance lease assets | 16,207 | | | 15,842 | |
Total lease assets | $ | 32,749 | | | $ | 22,734 | |
| | | |
Liabilities | | | |
Current operating lease liabilities | $ | 2,053 | | | $ | 1,885 | |
Current finance lease liabilities | 46 | | | 6,593 | |
| 2,099 | | | 8,478 | |
Long-term operating lease liabilities | 15,494 | | | 5,643 | |
Long-term finance lease liabilities | 58 | | | 112 | |
Total lease liabilities | $ | 17,651 | | | $ | 14,233 | |
Maturity of Operating and Finance Lease Liabilities as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
Maturity Dates | | Operating Leases | | Finance Leases |
2022 | | $ | 3,653 | | | $ | 56 | |
2023 | | 3,414 | | | 49 | |
2024 | | 2,716 | | | 4 | |
2025 | | 2,614 | | | — | |
2026 | | 2,670 | | | — | |
Thereafter | | 10,832 | | | — | |
Total lease payments | | 25,899 | | | 109 | |
Less tenant improvement allowance | | (4,327) | | | — | |
Less imputed interest | | (4,025) | | | (5) | |
Present value of lease liabilities | | $ | 17,547 | | | $ | 104 | |
As of December 31, 2021, our operating leases have a weighted-average remaining lease term of 8.1 years and a weighted-average discount rate of 4.1%. As of December 31, 2020, our operating leases have a weighted-average remaining lease term of 4.4 years and a weighted-average discount rate of 5.7%. Cash paid for amounts included in the measurement of operating lease liabilities was $2.6 million and $2.4 million for the twelve months ended December 31, 2021 and 2020, respectively. Operating lease expense was $2.6 million (net of sublease income of $0.4 million) and $2.1 million (net of sublease income of $0.3 million) for the twelve months ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, our finance leases have a weighted-average remaining lease term of 7.0 years and a weighted-average discount rate of 3.0%. As of December 31, 2020, our finance leases have a weighted-average remaining lease term of 7.9 years and a weighted-average discount rate of 3.5%. Cash paid for amounts included in the measurement of these finance lease liabilities was $9.3 million and $9.7 million for the twelve months ended December 31, 2021 and 2020, respectively. Finance lease expense was $2.3 million and 0.2 million for the twelve months ended December 31, 2021 and 2020, respectively.
7. Convertible Senior Notes
0.75% Convertible Senior Notes due 2019
In August 2014, we issued $245.0 million aggregate principal amount of 2019 Notes, resulting in net proceeds of $239.3 million. The implied estimated effective rate of the liability component of the 2019 Notes was 5.83%. The 2019 Notes are convertible into common stock at an initial conversion rate of 13.3251 shares per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $75.05 per share of common stock. The notes bear cash interest at a rate of 0.75% per year, payable semi-annually.
Holders of the 2019 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding May 15, 2019, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2014, if,
for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
On May 22, 2018, we entered into a supplemental indenture whereby we made an irrevocable election to settle the entire 2019 Notes in cash. As such, we would have been required to deliver cash to settle the principal and any premium due upon conversion. As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option (a derivative) fair value of $341.6 million. In accordance with ASC 815, Derivatives and Hedging, the derivative was adjusted to its fair value as of December 31, 2018 to $23.4 million with the resulting $118.7 million increase, net of payments made, reflected in other expense, net, in our consolidated statements of operations for the year ended December 31, 2018.
In March and April 2018, we received notices for conversion of $21.8 million of principal amount of the 2019 Notes which were settled in May and June 2018. We paid the noteholders the conversion value of the notes in cash, up to the principal amount of the 2019 Notes. The excess of the conversion value over the principal amount, totaling $31.6 million, was paid in shares of common stock. In July and August 2018, we received notices for conversion of $195.9 million of principal amount of the 2019 Notes which were settled in October and November 2018. We paid the noteholders the $195.9 million principal amount and the excess of conversion value over the principal amount, totaling $439.6 million, in cash. The equity dilution and cash conversion premium payment upon conversion of the 2019 Notes was offset by the reacquisition of the shares and cash under the convertible bond hedge transactions entered into in connection with the offering of the 2019 Notes. As a result of the conversions, we recorded a $3.2 million loss on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the 2019 Notes as of the settlement dates. To measure the fair value of the converted 2019 Notes as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation.
In June 2019, we received notices for conversion of $1.0 million of principal amount of the 2019 Notes, which were settled in cash upon the 2019 Notes' maturity date in August 2019. As a result, we paid the noteholders (1) the $1.0 million principal amount, and (2) the excess of conversion value over the principal portion in an amount of $0.5 million in cash.
On August 15, 2019, the 2019 Notes maturity date, we paid the noteholders the remaining $26.3 million principal amount and $11.9 million bond premium, which was classified as a derivative liability, in cash. We recorded the decrease in fair value of the derivative liability of $11.0 million in other expense, net, in our consolidated statements of operations for the twelve months ended December 31, 2019.
Convertible Bond Hedge and Warrant Transactions
In August 2014, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we were required to make in excess of the principal amount upon conversion of the 2019 Notes.
The convertible bond hedges had an exercise price of $75.05 per share and are exercisable when and if the 2019 Notes were converted. If upon conversion of the 2019 Notes, the price of our common stock was above the exercise price of the convertible bond hedges, the counterparties would have delivered shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below were separate transactions entered into by us and were not part of the terms of the 2019 Notes. Holders of the 2019 Notes and warrants did not have any rights with respect to the convertible bond hedges.
As a result of the irrevocable cash election, conversion notices received relating to the 2019 Notes after May 22, 2018 must be fully settled in cash and amounts paid in excess of the principal amount would be offset by an equal receipt of cash under the convertible bond hedge. Upon the 2019 Notes payoff on August 15, 2019, the bond hedge was settled, with the remaining $10.2 million fair value decrease reflected in other expense, net, in our consolidated statement of operations for the twelve months ended December 31, 2019.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire 3,264,643 shares of common stock with an exercise price of $125.08 per share, subject to certain adjustments. The warrants had expired between November 13, 2019 and April 22, 2020. 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, as measured under the terms of the warrant transactions.
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of December 31, 2021, 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 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.
During 2020, we repurchased $254.7 million in principal of the 2023 Notes for $222.8 million in cash, including accrued interest of $0.6 million. We accounted for the repurchase as a debt extinguishment, which resulted (1) a loss of $2.5 million reflected in other expense, net, in our consolidated statement of operations for the year ended December 31, 2020; (2) a $35.0 million reduction in debt discount, and (3) a $3.2 million reduction to additional paid-in-capital, net of tax, related to the reacquisition of the equity component in our condensed consolidated balance sheet as of December 31, 2020.
During 2021, we repurchased $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million. We accounted for the repurchase as a debt extinguishment, which resulted in (1) a loss of $7.3 million reflected in other expense, net, in our condensed consolidated statement of operations for the year ended December 31, 2021, (2) a $13.7 million reduction in debt discount, and (3) a $10.2 million reduction to additional paid in capital, net of tax, related to the reacquisition of the equity component in our condensed consolidated balance sheet as of December 31, 2021. After the repurchases, approximately $343.3 million in principal amount of the 2023 Notes remain outstanding.
During February 2022, we repurchased $125.5 million in principal of the 2023 Notes for $123.9 million in cash, including accrued interest of $0.3 million.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering 3,018,327 shares of common stock with an exercise price of $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to
February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.
In April 2020, in connection with the repurchases of $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million, during the quarter ended March 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to 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.
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 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. We received $18.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 598,021. These unwind transactions resulted in a $0.5 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of December 31, 2021.
The following table summarizes information about the equity and liability components of the 2023 Notes (in thousands). | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Principal amount of 2023 Notes outstanding | $ | 343,301 | | | $ | 495,280 | |
Unamortized discount (including unamortized debt issuance cost) | (22,584) | | | (52,987) | |
Total long-term portion of notes payable | $ | 320,717 | | | $ | 442,293 | |
Carrying value of equity component of 2023 Notes | $ | 20,627 | | | $ | 48,397 | |
Fair value of convertible senior notes outstanding (Level 2) | $ | 341,801 | | | $ | 466,053 | |
As of December 31, 2021, there were no events of default or violation of any covenants under our financing obligations.
8. Balance Sheet Account Details
Short-term Investments
Excluding our investments in Viking, the following table summarizes the various investment categories at December 31, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
December 31, 2021 | | | | | | | |
Short-term investments | | | | | | | |
Mutual Fund | $ | 152,136 | | | $ | — | | | $ | (249) | | | $ | 151,887 | |
Bank deposits | 63,389 | | | 13 | | | (21) | | | 63,381 | |
Commercial paper | 36,008 | | | 2 | | | (12) | | | 35,998 | |
Corporate bonds | 29,308 | | | 17 | | | (38) | | | 29,287 | |
Corporate equity securities | 5,807 | | | 402 | | | (2,027) | | | 4,182 | |
U.S. government securities | 5,577 | | | — | | | (23) | | | 5,554 | |
Warrants | — | | | 408 | | | — | | | 408 | |
| $ | 292,225 | | | $ | 842 | | | $ | (2,370) | | | $ | 290,697 | |
December 31, 2020 | | | | | | | |
Short-term investments | | | | | | | |
Mutual fund | $ | 151,512 | | | 386 | | | $ | — | | | $ | 151,898 | |
Bank deposits | 84,120 | | | 35 | | | (1) | | | $ | 84,154 | |
Commercial paper | 45,459 | | | 27 | | | (1) | | | $ | 45,485 | |
Corporate bonds | 30,512 | | | 99 | | | (1) | | | $ | 30,610 | |
Agency bonds | 4,499 | | | 2 | | | — | | | $ | 4,501 | |
Corporate equity securities | 4,466 | | | 360 | | | (1,388) | | | $ | 3,438 | |
Treasury bills | 3,999 | | | — | | | — | | | $ | 3,999 | |
Warrants | — | | | 393 | | | — | | | $ | 393 | |
| $ | 324,567 | | | $ | 1,302 | | | $ | (1,391) | | | $ | 324,478 | |
Gain (loss) from short-term investments on our consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities, and realized gain (loss) from available-for-sale debt securities.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands): | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Fair Value |
Within one year | $ | 111,334 | | | $ | 111,315 | |
After one year through five years | 24,952 | | | 24,909 | |
After five years | — | | | — | |
Total | $ | 136,286 | | | $ | 136,224 | |
The following table summarizes our available-for-sale debt securities in an unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or greater | | Total |
| Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value |
December 31, 2021 | | | | | | | | | | | |
Bank deposits | $ | (13) | | | $ | 20,008 | | | $ | — | | | $ | — | | | $ | (13) | | | $ | 20,008 | |
Corporate bonds | (15) | | | 27,252 | | | (5) | | | 2,996 | | | (20) | | | 30,248 | |
Commercial paper | (6) | | | 6,689 | | | (32) | | | 10,125 | | | (38) | | | 16,814 | |
U.S. Government Securities | — | | | — | | | (23) | | | 5,553 | | | (23) | | | 5,553 | |
Total | $ | (34) | | | $ | 53,949 | | | $ | (60) | | | $ | 18,674 | | | $ | (94) | | | $ | 72,623 | |
| | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | |
Bank deposits | $ | (1) | | | $ | 14,013 | | | $ | — | | | $ | — | | | $ | (1) | | | $ | 14,013 | |
Corporate bonds | (1) | | | 4,526 | | | — | | | — | | | (1) | | | 4,526 | |
Commercial paper | (1) | | | 7,693 | | | — | | | — | | | (1) | | | 7,693 | |
Total | $ | (3) | | | $ | 26,232 | | | $ | — | | | $ | — | | | $ | (3) | | | $ | 26,232 | |
Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 55 positions which were in an unrealized loss position as of December 31, 2021. 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 nor do we believe 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 twelve months ended December 31, 2021.
Property and equipment are stated at cost and consists of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Lab and office equipment | $ | 20,183 | | | $ | 14,666 | |
Leasehold improvements | 7,983 | | | 3,519 | |
Computer equipment and software | 1,056 | | | 1056 | |
| 29,222 | | | 19,241 | |
Less accumulated depreciation and amortization | (8,711) | | | (4,807) | |
| $ | 20,511 | | | $ | 14,434 | |
Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets which ranges from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Depreciation expense of $3.9 million, $1.8 million, and $1.5 million was recognized for the twelve months ended December 31, 2021, 2020, and 2019, respectively, and was included in operating expenses.
Goodwill and identifiable intangible assets consist of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Indefinite-lived intangible assets | | | |
Goodwill | $ | 181,206 | | | $ | 189,662 | |
Definite-lived intangible assets | | | |
Complete technology | 280,617 | | | 277,740 | |
Less: Accumulated amortization | (78,991) | | | (63,600) | |
Trade name | 2,642 | | | 2,642 | |
Less: Accumulated amortization | (1,444) | | | (1,312) | |
Customer relationships | 40,700 | | | 40,700 | |
Less: Accumulated amortization | (18,267) | | | (15,597) | |
Contractual relationships | 362,000 | | | 362,000 | |
Less: Accumulated amortization | (36,217) | | | (7,243) | |
Total goodwill and other identifiable intangible assets, net | $ | 732,246 | | | $ | 784,992 | |
| | | |
Amortization of finite-lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of up to 20 years. Amortization expense of $47.2 million, $23.4 million, and $16.9 million was recognized for the years ended December 31, 2021, 2020, and 2019, respectively. Estimated amortization expense for the years ending December 31, 2022 through 2026 is $47.0 million per year. For each of the years ended December 31, 2021, 2021, and 2019, there was no material impairment of intangible assets with finite lives.
Accrued liabilities consist of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Compensation | $ | 6,532 | | | $ | 8,810 | |
Professional fees | 2,046 | | | 977 | |
Amounts owed to former licensees | 630 | | | 421 | |
Royalties owed to third parties | 149 | | | 693 | |
Return reserve and customer refunds | 2,420 | | | 687 | |
Acquisition related liabilities | 1,000 | | | 1,500 | |
Subcontractor | 1,759 | | | 733 | |
Supplier | 848 | | | 604 | |
Other | 2,195 | | | 4,105 | |
| $ | 17,579 | | | $ | 18,530 | |
Contingent liabilities:
In connection with the acquisition of Crystal in October 2017, we entered into contingent liabilities based on achievement of certain research and business milestones as well as certain revenue goal.
In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. We may be required to make additional payments upon achievement of certain clinical and regulatory milestones to the CyDex shareholders and former license holders.
In connection with the acquisition of Metabasis in January 2010, we entered into four CVR agreements with Metabasis shareholders. The CVRs entitle the holders to cash payments as frequently as every six months as proceeds are received by us upon the sale or licensing of any of the Metabasis drug development programs and upon the achievement of specified milestones.
For CVRs associated with the Pfenex and Icagen acquisitions, see “Note (4), Acquisitions” for more information.
The following table summarizes roll-forward of contingent liabilities as of December 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Additional Contingent Liabilities | Payments | Fair Value Adjustment | Repurchases | December 31, 2020 | | | Payments | Fair Value Adjustment | Repurchases | December 31, 2021 |
Cydex | $ | 348 | | $ | — | | $ | — | | $ | 160 | | $ | — | | $ | 508 | | | | $ | (50) | | $ | (108) | | $ | — | | $ | 350 | |
Metabasis | 5,935 | | — | | — | | (1,867) | | (247) | | 3,821 | | | | — | | (464) | | — | | 3,357 | |
Crystal | 2,659 | | — | | (1,800) | | (59) | | — | | 800 | | | | — | | (800) | | — | | — | |
Icagen | — | | 4,800 | | (525) | | 2,129 | | — | | 6,404 | | | | (1,050) | | 2,010 | | — | | 7,364 | |
Pfenex | — | | 37,000 | | — | | 600 | | — | | 37,600 | | | | — | | (37,600) | | — | | — | |
xCella | — | | — | | — | | — | | — | | — | | | | (720) | | 720 | | — | | — | |
Total | $ | 8,942 | | $ | 41,800 | | $ | (2,325) | | $ | 963 | | $ | (247) | | $ | 49,133 | | | | $ | (1,820) | | $ | (36,242) | | $ | — | | $ | 11,071 | |
9. Stockholders’ Equity
Share-based Compensation Expense
The following table summarizes non-cash share-based compensation expense (in thousands): | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Share-based compensation expense as a component of: | | | | | |
Research and development expenses | $ | 17,436 | | | $ | 13,497 | | | $ | 9,641 | |
General and administrative expenses | 21,347 | | | 17,230 | | | 14,874 | |
| $ | 38,783 | | | $ | 30,727 | | | $ | 24,515 | |
Stock Plans
In December 2020, our 2002 Stock Incentive Plan was amended to increase the number of shares available for issuance by 1.1 million shares. As of December 31, 2021, there were 0.7 million shares available for future option grants or direct issuance under the Amended 2002 Plan.
Following is a summary of our stock option plan activity and related information:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value (In thousands) |
Balance at January 1, 2019 | 1,736,304 | | | $ | 66.71 | | | 5.47 | | $ | 125,858 | |
Granted | 338,617 | | | $ | 116.69 | | | | | |
Exercised | (112,011) | | | $ | 23.65 | | | | | |
Forfeited | (6,531) | | | $ | 139.37 | | | | | |
Balance at December 31, 2019 | 1,956,379 | | | $ | 77.54 | | | 5.45 | | 72,002 | |
Exercisable at December 31, 2019 | 1,454,726 | | | $ | 61.82 | | | 4.42 | | 70,345 | |
Options vested and expected to vest as of December 31, 2019 | 1,956,379 | | | $ | 77.54 | | | 5.45 | | $ | 72,002 | |
Granted | 806,300 | | | $ | 92.93 | | | | | |
Exercised | (156,845) | | | $ | 21.26 | | | | | |
Forfeited | (44,012) | | | $ | 91.30 | | | | | |
Balance at December 31, 2020 | 2,561,822 | | | $ | 85.59 | | | 6.09 | | 59,033 | |
Exercisable at December 31, 2020 | 1,611,830 | | | $ | 76.05 | | | 4.54 | | 53,286 | |
Options vested and expected to vest as of December 31, 2020 | 2,561,822 | | | $ | 85.59 | | | 6.09 | | $ | 59,033 | |
Granted | 393,589 | | | $ | 159.12 | | | | | |
Exercised | (619,731) | | | $ | 54.28 | | | | | |
Forfeited | (136,082) | | | $ | 110.83 | | | | | |
Balance at December 31, 2021 | 2,199,598 | | | $ | 106.00 | | | 6.34 | | 113,302 | |
Exercisable at December 31, 2021 | 1,391,952 | | | $ | 98.16 | | | 5.12 | | 80,849 | |
Options vested and expected to vest as of December 31, 2021 | 2,199,598 | | | $ | 106.00 | | | 6.34 | | $ | 113,302 | |
The weighted-average grant-date fair value of all stock options granted during 2021, 2020 and 2019 was $80.08, $41.39 and $48.65 per share, respectively. The total intrinsic value of all options exercised during 2021, 2020 and 2019 was approximately $77.3 million, $11.9 million and $10.4 million, respectively.
Cash received from options exercised, net of fees paid, in 2021, 2020 and 2019 was $33.0 million, $2.5 million and $2.6 million, respectively.
Following is a further breakdown of the options outstanding as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Range of exercise prices | Options outstanding | | Weighted average remaining life in years | | Weighted average exercise price | | Options exercisable | | Weighted average exercise price |
$12.53-$56.26 | 253,824 | | | 1.94 | | $ | 37.55 | | | 239,824 | | | $ | 38.90 | |
$67.53-$74.42 | 278,281 | | | 4.04 | | $ | 72.10 | | | 217,587 | | | $ | 73.17 | |
$82.90-$95.35 | 159,988 | | | 5.06 | | $ | 86.11 | | | 132,963 | | | $ | 86.24 | |
$95.68 | 266,263 | | | 8.12 | | $ | 95.68 | | | 109,154 | | | $ | 95.68 | |
$98.20-$100.38 | 294,772 | | | 7.33 | | $ | 99.10 | | | 160,120 | | | $ | 99.79 | |
$101.07-$117.58 | 159,204 | | | 7.45 | | $ | 111.26 | | | 99,488 | | | $ | 111.18 | |
$117.97 | 237,292 | | | 7.12 | | $ | 117.97 | | | 158,958 | | | $ | 117.97 | |
$119.08-$159.01 | 299,585 | | | 7.00 | | $ | 149.40 | | | 205,098 | | | $ | 152.50 | |
$159.81-$171.28 | 6,881 | | | 6.51 | | $ | 166.28 | | | 5,828 | | | $ | 165.62 | |
$177.50-$195.91 | 243,508 | | | 8.91 | | $ | 178.62 | | | 62,932 | | | $ | 181.84 | |
| 2,199,598 | | | 6.34 | | $ | 106.00 | | | 1,391,952 | | | $ | 98.16 | |
The assumptions used for the specified reporting periods and the resulting estimates of weighted-average grant date fair value per share of options granted:
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 | |
Risk-free interest rate | 0.4%-1.2% | | 0.2%-1.4% | | 1.4%-2.6% | |
Expected volatility | 47%-63% | | 47%-71% | | 40%-49% | |
Expected term | 4.7 to 6.3 years | | 4.7 to 5.1 years | | 4.6 to 5.9 years | |
| | | | | | |
As of December 31, 2021, there was $40.7 million of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted average period of 2.4 years.
Restricted Stock Activity
The following is a summary of our restricted stock activity and related information:
| | | | | | | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value |
|
Outstanding at January 1, 2019 | 132,273 | | | $ | 130.63 | |
Granted | 118,498 | | | $ | 115.90 | |
Vested | (102,846) | | | $ | 121.55 | |
Forfeited | (666) | | | $ | 134.36 | |
Outstanding at December 31, 2019 | 147,259 | | | $ | 125.11 | |
Granted | 111,306 | | | $ | 89.73 | |
Vested | (52,363) | | | $ | 121.69 | |
Forfeited | — | | | $ | — | |
Outstanding at December 31, 2020 | 206,202 | | | $ | 106.88 | |
Granted | 167,292 | | | $ | 169.63 | |
Vested | (98,501) | | | $ | 125.59 | |
Forfeited | (10,850) | | | $ | 141.85 | |
Outstanding at December 31, 2021 | 264,143 | | | $ | 138.21 | |
As of December 31, 2021, unrecognized compensation cost related to non-vested stock awards amounted to $20.6 million. That cost is expected to be recognized over a weighted average period of 1.6 years.
Employee Stock Purchase Plan
As of December 31, 2021, 44,360 shares of our common stock are available for future issuance under the Amended Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase up to 1,250 shares of Ligand common stock per calendar year at a discount through payroll deductions. The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first of a six month offering period or purchase date, whichever is lower. There were 8,448, 6,455 and 4,745 shares issued under the ESPP in 2021, 2020 and 2019, respectively.
Share Repurchases
On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and have entered into a Rule 10b5-1 trading plan, and may enter into additional Rule 10b5-1 trading plans in the future, to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. Our prior $350.0 million stock repurchase program was terminated in connection with the approval of the new stock repurchase program. Authorization to repurchase $248.8 million of our common stock remained available as of December 31, 2021.
During the twelve months ended December 31, 2021, we did not repurchase any common stock. During the twelve months ended December 31, 2020 and 2019, we repurchased 934,079 shares for $78.0 million, and 4,122,133 shares for $448.4 million, respectively.
10. Commitment and Contingencies: Legal Proceedings
We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.
On April 9, 2019, CyDex, our wholly-owned subsidiary, received a Paragraph IV certification Notice Letter from Alembic Global Holdings SA (“Alembic”) stating that Alembic had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. The parties entered into a settlement agreement on June 1, 2021 and the lawsuit has been dismissed.
On September 16, 2019, CyDex received a Paragraph IV certification Notice Letter from Lupin Ltd. (“Lupin”) stating that Lupin had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging that these patents, each of which relates to Captisol, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin. Lupin filed an answer on December 11, 2019 and counterclaimed for declaratory judgments of invalidity and non-infringement as to all four patents and CyDex filed its answer to Lupin’s counterclaims on January 2, 2020. The parties entered into a settlement agreement on April 26, 2021 and the lawsuit has been dismissed.
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 three complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.
On January 12, 2021, Abvivo submitted a JAMS arbitration demand naming the Company as respondent. Abvivo claimed that the Company was in violation of the assignment provision of that certain Commercial Platform License and Services Agreement (“CPLSA”), dated October 9, 2019, by and among OMT and Crystal, on the one hand, and Abvivo, on the other hand because the Company allegedly withheld its consent to a proposed assignment required for Abvivo to negotiate a discovery and development alliance with certain third parties. On January 26, 2021, we submitted a response to the demand, denying all claims and alleging counterclaims against Abvivo and Brian Lundstrom, a Company employee and the sole owner of Abvivo. We alleged that Mr. Lundstrom breached his fiduciary duty of loyalty to the Company and that Abvivo and Mr. Lundstrom fraudulently induced the Company, OMT and Crystal into certain business transactions and contracts. Abvivo and Mr. Lundstrom’s response to these counterclaims was due on February 9, 2021, but they did not submit a response. Under JAMS rules, the counterclaims were deemed denied. On February 22, 2021, Abvivo submitted documents to JAMS which indicated that it sought to dismiss its claim without prejudice. On February 25, 2021, we submitted additional counterclaims against Abvivo and Mr. Lundstrom. These counterclaims alleged that Abvivo and Mr. Lundstrom made false promises regarding the CPLSA, Abvivo’s breach of and failure to perform under the CPLSA, and Abvivo’s infringement of certain Ligand trademarks. On March 11, 2021, Abvivo and Mr. Lundstrom submitted an answer to our amended counterclaims denying all of the claims and asserting various affirmative defenses. On June 21, 2021, the parties executed a confidential settlement agreement that settled all claims in this arbitration. On June 29, 2021, the parties jointly submitted to JAMS a dismissal with prejudice of all claims by all parties in the arbitration.
CyDex and Baxter Healthcare Corp. (“Baxter”) are parties to a license agreement relating to Ligand’s Captisol technology and, more specifically, relating to Captisol-enabled Nexterone (amiodarone HCl premixed injection). Baxter contends that it has
overpaid royalties for several years, and seeks both refunds of those overpayment and a reduced royalty going forward. CyDex contends that Baxter has not paid the royalties due to CyDex under the terms of the license agreement. On April 6, 2021, Baxter initiated an arbitration with the American Arbitration Association pursuant to the arbitration provision of the license agreement. On April 21, 2021, CyDex filed an Answering Statement and Counterdemand. On May 5, 2021, Baxter filed an Answering Statement in response to CyDex’s Counterdemand. On June 30, 2021, the parties held a Preliminary Hearing before the arbitrator. The parties have completed fact discovery and have exchanged expert witness statements; depositions of the expert witnesses will be completed by the end of March 2022. The arbitration hearing is currently scheduled for May 2022.
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 the 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.
11. Income Taxes
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current expense (benefit): | | | | | |
Federal | $ | (1,190) | | | $ | 10,889 | | | $ | 89,471 | |
State | (32) | | | 589 | | | 3,103 | |
Foreign | — | | | 23 | | | (66) | |
| (1,222) | | | 11,501 | | | 92,508 | |
Deferred expense (benefit): | | | | | |
Federal | (7,355) | | | (15,672) | | | 74,627 | |
State | (1,263) | | | (3,382) | | | 202 | |
| (8,618) | | | (19,054) | | | 74,829 | |
Total income tax expense (benefit) | $ | (9,840) | | | $ | (7,553) | | | $ | 167,337 | |
A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Tax at federal statutory rate | $ | 9,932 | | | $ | (2,213) | | | $ | 167,294 | |
State, net of federal benefit | (408) | | | (1,456) | | | 2,466 | |
Contingent liabilities | (8,161) | | | (278) | | | 18 | |
Share-based compensation | (11,919) | | | (362) | | | (819) | |
FDII | (637) | | | (1,652) | | | (402) | |
Research and development credits | (2,692) | | | (699) | | | (879) | |
Change in uncertain tax positions | 586 | | | (650) | | | 441 | |
Rate change for changes in federal, foreign or state law | (7,963) | | | (173) | | | (210) | |
Provision to return adjustments | (617) | | | (4,803) | | | (184) | |
Foreign tax differential on income/loss of foreign subsidiaries | (114) | | | (3,839) | | | 57 | |
Change in valuation allowance | 11,410 | | | (121,876) | | | (1,193) | |
Sale of Vernalis R&D | — | | | 127,372 | | | — | |
| | | | | |
| | | | | |
Other | 743 | | | 3,076 | | | 748 | |
| $ | (9,840) | | | $ | (7,553) | | | $ | 167,337 | |
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Significant components of our deferred tax assets and liabilities as of December 31, 2021 and 2020 are shown below. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to
use the existing deferred tax assets. Our evaluation of evidence resulted in management concluding that the majority of our deferred tax assets will be realized. However, we maintain a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2021, 2020 and 2019. The valuation allowance increased $11.4 million in 2021, decreased $116.5 million in 2020 and increased $136.9 million in 2019.
We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them on our consolidated balance sheet as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets (liabilities) are comprised of the following: | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (in thousands) |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 64,352 | | | $ | 64,147 | |
Research credit carryforwards | 27,797 | | | 19,623 | |
Stock compensation | 11,374 | | | 11,994 | |
Other | 19,668 | | | 13,120 | |
| 123,191 | | | 108,884 | |
Valuation allowance for deferred tax assets | (36,283) | | | (24,858) | |
Net deferred tax assets | $ | 86,908 | | | $ | 84,026 | |
| | | |
Deferred tax liabilities: | | | |
Identified intangibles | (102,221) | | | (119,381) | |
Other | (9,300) | | | (4,923) | |
Net deferred tax liabilities | $ | (111,521) | | | $ | (124,304) | |
| | | |
Deferred income taxes, net | $ | (24,613) | | | $ | (40,278) | |
As of December 31, 2021, we had federal net operating loss carryforwards set to expire through 2037 of $119.6 million and $176.3 million of state net operating loss carryforwards that begin to expire in 2032. We also have $9.8 million of federal research and development credit carryforwards, which expire through 2041. We have $29.7 million of California research and development credit carryforwards that have no expiration date. In addition, we have approximately $101.6 million of non-U.S. net operating loss carryovers and approximately $17.5 million of non-U.S. capital loss carryovers that have no expiration date. At December 31, 2020 we had approximately $110.1 million of non-U.S. net operating loss carryovers and approximately $17.6 million of non-U.S. capital loss carryovers. We have a full valuation allowance against these non-U.S. tax attributes. The year over year decrease in non-U.S. deferred tax assets was attributable to the sale of Vernalis in December 2020. The remaining non-U.S. deferred tax assets as of December 31, 2021 were attributable to the portion of the Vernalis business that we did not sell. We have a full valuation allowance against these non-U.S. tax attributes. See detail in “Note (2), Sale of Vernalis R&D and Promacta License.”
Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2021 are net of any previous limitations due to Section 382 and 383.
We account for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.
A reconciliation of the amount of unrecognized tax benefits at December 31, 2021, 2020 and 2019 is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 31,871 | | | $ | 28,736 | | | $ | 30,289 | |
Additions based on tax positions related to the current year | 252 | | | 3,911 | | | 543 | |
Additions for tax positions of prior years | 945 | | | 179 | | | — | |
Reductions for tax positions of prior years | (3,072) | | | (955) | | | (2,096) | |
Balance at end of year | $ | 29,996 | | | $ | 31,871 | | | $ | 28,736 | |
Included in the balance of unrecognized tax benefits at December 31, 2021 is $28.1 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and December 31, 2020, we recognized an immaterial amount of interest and penalties. We file income tax returns in the United States, various state jurisdictions, United Kingdom, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2018 tax year to the present. The state income tax returns generally remain open for the 2017 tax year through the present. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized. No tax returns are currently under examination by any tax authorities. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years.