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

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .

Commission File No. 001-33093

LGND-20181231_G1.GIF
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 77-0160744
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
3911 Sorrento Valley Boulevard, Suite 110
San Diego, CA
92121 
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (858) 550-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share The Nasdaq Global Market of The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.    Yes  o    No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
Accelerated Filer  o
Non-accelerated Filer  o
Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).    Yes  o    No  x



The aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates was approximately $3.6 billion based on the last sales price of the Registrant’s Common Stock on the Nasdaq Global Market of the Nasdaq Stock Market LLC on June 29, 2018. For purposes of this calculation, shares of Common Stock held by directors, officers and 10% stockholders known to the Registrant have been deemed to be owned by affiliates which should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant.

As of February 25, 2019, the Registrant had 20,445,407 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2019 Annual Meeting of Stockholders to be filed with the Commission within 120 days of December 31, 2018 are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.




Table of Contents
 
Part I
Item 1.
5
Item 1A.
23
Item 1B.
32
Item 2.
32
Item 3.
33
Item 4.
33
Part II
Item 5.
33
Item 6.
34
Item 7.
36
Item 7A.
44
Item 8.
45
Item 9.
82
Item 9A.
82
Item 9B.
82
Part III
Item 10.
85
Item 11.
85
Item 12.
85
Item 13.
85
Item 14.
85
Part IV
Item 15.
86
Item 16.
86
91






















GLOSSARY OF TERMS AND ABBREVIATIONS 
Abbreviation  Definition 
2019 Notes  $245.0 million aggregate principal amount of convertible senior unsecured notes due 2019 
2023 Notes  $750.0 million aggregate principal amount of convertible senior unsecured notes due 2023 
AACR  American Association for Cancer Research 
ADHF  Acute decompensated heart failure 
Amended Interest Purchase Agreement
Amended and Restated Interest Purchase Agreement, dated May 31, 2017, between the Company and CorMatrix Cardiovascular, Inc.
Aldeyra Aldeyra Therapeutics, Inc. 
AMD Age-related macular degeneration 
Amgen Amgen, Inc. 
ANDA  Abbreviated New Drug Application 
API  Active pharmaceutical ingredient
Apricus Apricus Biosciences, Inc.
Aptevo Aptevo Therapeutics 
Arcus Arcus Biosciences, Inc.
ASC Accounting Standards Codification 
ASCO American Society of Clinical Oncology 
ASCT Autologous Stem Cell Transplantation
ASH  American Society of Hematology 
ASU  Accounting Standards Update  
Aziyo  Aziyo Med, LLC 
Azure  Azure Biotech, Inc. 
Baxter  Baxter International, Inc. 
BiTE
Bispecific T cell engager
BMS  Bristol Myers Squibb 
C-Stone
CStone Pharmaceuticals Co., Ltd.
CASI  CASI Pharmaceuticals, Inc.
Cardioxyl  Cardioxyl Pharmaceuticals, Inc.
Code of Conduct
Code of Conduct and Ethics Policy
Coherus Coherus Biosciences, Inc.
CoM Composition of Matter
Company  Ligand Pharmaceuticals Incorporated, including subsidiaries 
Convertible Note
Senior Convertible Promissory Note
COPD  Chronic obstructive pulmonary disease  
Cormatrix 
Cormatrix Cardiovascular Inc.
Cormatrix Asset Sale
Asset sale from CorMatrix to Aziyo
Corvus  Corvus Pharmaceuticals, Inc. 
COSO  Committee of Sponsoring Organizations of the Treadway Commission 
CRO  Contract Research Organization 
Crystal Crystal Bioscience, Inc.
CStone CStone Pharmaceuticals
CURx CURx Pharmaceuticals, Inc.
CVR  Contingent value right 
CyDex CyDex Pharmaceuticals, Inc.
Daiichi Sankyo
Daiichi Sankyo Company, LTD


Dianomi  Dianomi Therapeutics 
DMF  Drug Master File 
Eisai
Eisai Inc.
Eli Lilly Eli Lilly and Company
EMC Extracellular matrix
EPOR Erythropoietin receptor
ESPP Employee Stock Purchase Plan, as amended and restated 
EU  European Union 
Exelixis
Exelixis, Inc.
FASB  Financial Accounting Standards Board 
FDA  Food and Drug Administration 
Fred Hutch  The Fred Hutchinson Cancer Research Center 
FSGS  Focal segmental glomerulosclerosis 
GAAP Generally accepted accounting principles in the United States
GCSF Granulocyte-colony stimulating factor
GRA  Glucagon receptor antagonist
HanAll
HanAll Biopharma Co., Ltd.
Harbour  Harbour BioMed
HCO  Heavy-chain-only
HNO  Nitroxyl
Hovione  Hovione FarmCiencia
IPR&D  In-Process Research and Development 
IRAK4 Interleukin-1 Receptor Associated Kinase-4
IRS  Internal Revenue Service 
ITP  Chronic immune (idiopathic) thrombocytopenic purpura 
IV  Intravenous 
iMBP  iMetabolic Biopharma Corporation  
Immunovant 
Immunovant Sciences GmbH
IND  Investigational New Drug 
Original Interest Purchase Agreement
Interest Purchase Agreement, dated May 3, 2016, between the Company and CorMatrix Cardiovascular, Inc.
KSQ Therapeutics  KSQ Therapeutics, Inc. 
Ligand  Ligand Pharmaceuticals Incorporated, including subsidiaries 
Loan and Security Agreement
Loan and Security Agreement, dated May 21, 2014, between the Company and Viking, as amended by the First Amendment to Loan and Security Agreement, dated April 8, 2015, and the Second Amendment to Loan and Security Agreement, dated January 22, 2016
LTP  Liver-targeted prodrug 
Lundbeck  Lundbeck A/S 
Marinus
Marinus Pharmaceuticals, Inc. 
MCM  Mineral Coated Microparticle 
MDS  Myelodysplastic syndromes 
Melinta  Melinta Therapeutics, Inc. 
Merck  Merck & Co., Inc.
Merrimack Merrimack Pharmaceuticals, Inc.
Metabasis  Metabasis Therapeutics, Inc. 
Metavant
Metavant Sciences 
MLA  Master License Agreement 
MRSA  Methicillin-resistant Staphylococcus aureu 


NASH  Non-alcoholic steatohepatitis
NDA  New Drug Application 
NOLs  Net Operating Losses 
Novartis Novartis AG
OMT  Open Monoclonal Technology, Inc.
Omthera  Omthera Pharmaceuticals, Inc. 
Ono  Ono Pharmaceutical Co., Ltd.
Orange Book  Publication identifying drug products approved by the FDA based on safety and effectiveness
Palvella  Palvella Therapeutics, Inc. 
Par  Par Pharmaceutical, Inc. 
PDUFA Prescription Drug User Fee Act
Pfizer Pfizer Inc.
Pharmacopeia Pharmacopeia, Inc.
Phoenix Tissue Phoenix Tissue Repair
PPD Post-Partum Depression
PSU Performance stock unit
Retrophin  Retrophin Inc. 
Roivant  Roivant Sciences GMBH 
RSU   Restricted stock unit 
SAA  Severe Aplastic Anemia 
SAGE  Sage Therapeutics, Inc. 
SARM  Selective Androgen Receptor Modulator 
SEC  Securities and Exchange Commission 
Sedor  Sedor Pharmaceuticals, Inc., or RODES, Inc. 
Seelos  Seelos Therapeutics, Inc. 
Selexis  Selexis, SA 
Sermonix Sermonix Pharmaceuticals, LLC
Spectrum  Spectrum Pharmaceuticals, Inc. 
Sunshine Lake Pharma Sunshine Lake Pharma Co., Ltd.
Syros   Syros Pharmaceuticals, Inc.  
Takeda Takeda Pharmaceuticals Company Limited
Tax Act The Tax Cuts and Jobs Act
Teva Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd. and Actavis, LLC
TG Therapeutics  TG Therapeutics, Inc. 
TPE  Third-party evidence 
TR-Beta Thyroid hormone receptor beta
VDP
Vernalis Design Platform
VentiRx VentiRx Pharmaceuticals Inc.
Vernalis  Vernalis plc 
Verona  Verona Pharma plc 
Viking  Viking Therapeutics
Vireo Vireo Health
WuXi  WuXi Biologics Ireland Limited 
WuXi Agreement
The Platform License Agreement, dated March 23, 2015, by and between Ligand and WuXi, as amended
X-ALD  X-linked adrenoleukodystrophy 
Zydus Cadila Zydus Cadila Healthcare Ltd



PART I


Cautionary Note Regarding Forward-Looking Statements:
You should read the following report together with the more detailed information regarding our company, our common stock and our financial statements and notes to those statements appearing elsewhere in this document.

This report contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, these forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.

Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “plan,” “intends,” “estimates,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as those related to our future results of operations and financial position, royalties and milestones under license agreements, Capitsol material sales, product development, and product regulatory filings and approvals, and the timing thereof, as well as other statements that are not historical. You should be aware that the occurrence of any of the events discussed under the caption “Risk Factors” could negatively affect our results of operations and financial condition and the trading price of our stock.

The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.

References to “Ligand Pharmaceuticals Incorporated,” “Ligand,” the “Company,” “we,” “our” and “us” include Ligand Pharmaceuticals Incorporated and our wholly-owned subsidiaries.

Partner Information

Information regarding partnered products and programs comes from information publicly released by our partners and licensees.

Trademarks

Our trademarks, trade names and service marks referenced herein include Ligand®, Captisol®, Captisol-enabled™, LTP technology™, OmniAb®, OmniMouse®, OmniRat®, OmniFlic® and OmniChickenTM which are protected under applicable intellectual property laws and are our property. All other trademarks, trade names and service marks including BaxdelaTM, CarnexivTM, Conbriza®, Duavee®, Evomela®,Kyprolis®, Promacta®, Revolade®, SUREtechnology Platform™, Viviant®, Vivitra®, Bryxta®, and Exemptia® are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this report may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to such trademarks, trade names and service marks. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, us by the trademark or trade dress owners.












Item 1. Business

Overview
We are a biopharmaceutical company focused on developing and acquiring technologies that help pharmaceutical companies discover and develop medicines. Over our more than 30 year history, we have employed research technologies such as nuclear receptor assays, high throughput computer screening, formulation science, liver targeted pro-drug technologies and antibody discovery technologies to assist companies in their work toward securing prescription drug approvals. We currently have partnerships and license agreements with over 110 pharmaceutical and biotechnology companies. Over 200 different programs under license with us are currently in various stages of commercialization and development. We have contributed novel research and technologies for approved medicines that treat cancer, osteoporosis, fungal infections and low blood platelets, among others. Our partners have programs currently in clinical development targeting seizure, coma, cancer, diabetes, cardiovascular disease, muscle wasting, liver disease, and kidney disease, among others. We have over 1,200 issued patents worldwide.
We have assembled our large portfolio of fully-funded programs either by licensing our own proprietary drug development programs, licensing our platform technologies such as Captisol or OmniAb to partners for use with their proprietary programs, or acquiring existing partnered programs from other companies. Fully-funded programs, which we refer to as "shots on goal," are those for which our partners pay all of the development and commercialization costs. For our internal programs, we generally plan to advance drug candidates through early-stage drug development or clinical proof-of-concept and then seek partners to continue development and potential commercialization.

Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development.
Our revenue consists of three primary elements: royalties from commercialized products, license and milestone payments and sale of Captisol material. In addition to discovering and developing our own proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.
2018 and Recent Major Business Highlights
Acquisitions and Other Business Development

•In October 2018, we acquired Vernalis, a structure-based drug discovery biotechnology company with a broad pipeline of partnered programs and ongoing collaborations for $43 million in cash. The acquisition of Vernalis provided us with more than eight fully-funded shots on goal, a 70-person research and development team based in Cambridge, England working on a portfolio of collaborations that have the potential to create additional shots on goal, a compound library of unpartnered programs for potential development and out-licensing, and England-based operations that provide a platform to help efficiently pursue investment and acquisition activities in Europe and the United Kingdom.
•In December 2018, we announced the acquisition of economic rights to PTX-022 from Palvella for $10 million in cash. We will receive a tiered net sales royalty in the mid-to-upper single digits on any net sales of PTX-022, as well as regulatory and financing milestones. PTX-022 is a novel, orphan-indicated, topical formulation of rapamycin in Phase 2/3 development for the treatment of pachyonychia congenita, a rare skin disorder with no FDA-approved treatment.
•In January 2019, we announced an investment in Dianomi, paying a total of $3 million in exchange for a tiered royalty of 2%-3% based on net sales for the first five products to be approved using Dianomi’s patented MCM technology and a loan convertible into $1 million of equity at Dianomi’s next qualified financing.
•In March 2018, we announced the signing of a license agreement granting Roivant exclusive global rights to develop and commercialize LGD-6972 (now named RVT-1502), the GRA which we developed through a successful Phase 2 clinical trial. Under the terms of the agreement, we received a $20 million upfront license fee, and are eligible to receive up to an additional $528.8 million of milestone payments and tiered royalties ranging from low double digits to the mid-teens, with the top tier applying to annual net sales above $3 billion. Roivant is responsible for all costs related to the program.
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•We expanded the distribution capacity on Captisol. In addition to shipping commercial and clinical material out of our contract manufacturing sites in both Portugal and Ireland last year, we also established a new distribution capability in Ireland in 2018.


Selected Late-Stage Clinical Developments

•Retrophin announced that the first patient was dosed in a global, pivotal Phase 3 clinical trial evaluating the long-term nephroprotective potential of sparsentan for the treatment of IgA nephropathy.
•Retrophin presented new data examining the long-term effects of sparsentan in FSGS at the American Society of Nephrology Kidney Week 2018, and announced that the Journal of the American Society of Nephrology published online the positive results from Retrophin’s Phase 2 DUET study of sparsentan for the treatment of FSGS.
•Retrophin announced that the United States Patent and Trademark Office issued a new patent providing coverage for the use of sparsentan in the treatment of IgAN and broadening the existing coverage to include all doses of sparsentan between 200 and 800 mg/day. The patent has a stated expiration date of March 30, 2030.
•Melinta Therapeutics announced positive topline results from its Phase 3 trial of Baxdela™ for the treatment of adult patients with community-acquired bacterial pneumonia.
•Viking presented positive results from a 12-week Phase 2 study of VK2809 in patients with non-alcoholic fatty liver disease in an oral late-breaker presentation at the AASLD’s annual meeting in San Francisco, CA.
•Viking presented positive results from its Phase 2 study of VK5211 in patients recovering from hip fracture at the American Society for Bone and Mineral Research 2018 annual meeting.
•Aldeyra announced enrollment of the first patient in a Phase 3 clinical trial of topical ocular reproxalap for the treatment of allergic conjunctivitis.
•Aldeyra also announced that the last patient has been dosed in a Phase 2b clinical trial of topical ocular reproxalap in dry eye disease.
•Sermonix announced FDA acceptance of its IND application and the initiation of a 100-patient Phase 2 trial of oral lasofoxifene for the treatment of metastatic breast cancer. Sermonix also announced the presentation of three posters for oral lasofoxifene in metastatic breast cancer at the 2018 San Antonio Breast Cancer Symposium.
•Verona announced enrollment of the last patient in its Phase 2 clinical trial evaluating the effect of nebulized ensifentrine (RPL554) as an add-on to dual therapy using long-acting anti-muscarinic / long-acting beta2-agonists and triple therapy in the maintenance treatment of patients with moderate to severe COPD.
•Verona announced initiation of a Phase 2 clinical trial to evaluate the pharmacokinetic profile, efficacy and safety of a dry powder inhaler formulation of ensifentrine in patients with moderate-to-severe COPD.
•Merrimack announced a poster presentation related to seribantumab at the 2018 ASCO Annual Meeting.
•Marinus announced positive results from its Phase 2 clinical trial evaluating ganaxolone IV in women with postpartum depression.
•Opthea reported that the last patient was enrolled in its ongoing Phase 2b trial of OPT-302 for wet age-related macular degeneration.

Selected Regulatory Developments

•Novartis announced that the FDA expanded the label for Promacta (eltrombopag) to include first-line treatment for adults and pediatric patients two years and older with SAA in combination with standard immunosuppressive therapy.
•Novartis announced results of a retrospective, real-world evidence study in patients with ITP treated with Promacta/Revolade (eltrombopag), compared with other second-line therapies, demonstrating that patients experienced better clinical outcomes with Promacta in terms of fewer bleeding episodes.
•On October 1, 2018, Amgen announced that the FDA approved the supplemental NDA to expand the prescribing information for Kyprolis to include a once-weekly dosing option in combination with dexamethasone for patients with relapsed or refractory multiple myeloma.
•CASI Pharmaceuticals announced that it received National Medical Products Administration (formerly, the China FDA) approval of EVOMELA for use as a high-dose conditioning treatment prior to hematopoietic progenitor (stem) cell transplantation in patients with multiple myeloma, and the palliative treatment of patients with multiple myeloma for whom oral therapy is not appropriate.
•Daiichi Sankyo announced receipt of marketing approval in Japan for MINNEBRO (esaxerenone) for the treatment of hypertension.
•SAGE announced that the FDA Psychopharmacologic Drugs Advisory Committee and Drug Safety and Risk Management Advisory Committee jointly voted that data support the favorable benefit-risk profile of Zulresso injection for the treatment of postpartum depression. SAGE also announced on November 20, 2018 that the PDUFA action date for the NDA for ZULRESSO is March 19, 2019.

2

Disclosed Licensing Deals Entered into or Expanded

OmniAb Technology

•We announced receipt of a $47 million payment as a result of signing an amendment related to our OmniAb platform license agreement with WuXi. Under the amended agreement, we will continue to be eligible to earn royalties at the same rate and terms as the previous agreement and the predefined contract payments have been eliminated. With this new business relationship, WuXi believes it will be able to increase the number of OmniAb antibodies it discovers for its clients in China and around the world.
•Worldwide license agreements with venBio Partners, Ferring Pharmaceuticals and Glenmark Pharmaceuticals to use the OmniAb platform technologies to discover fully human antibodies. The agreement with venBio permits the venture capital firm’s portfolio companies to enter into worldwide OmniAb platform agreements under previously agreed-upon terms. We are eligible to receive annual access payments, milestone payments and royalties on future net sales of any antibodies discovered under these licenses.
•We entered into OmniChicken license expansions with FivePrime and Amgen, allowing the companies to use the OmniChicken technology.
•Worldwide license agreement with iMBP to use the OmniAb platform technologies to discover fully human antibodies. iMBP is an early-stage company with experienced leadership and proprietary research based on functional preservation of key natural enzymes responsible for lipid metabolism. Their discovery-stage programs target obesity and related diseases, with a primary focus on hyperlipidemia. We are eligible to receive a tiered royalty on future sales of up to 6%. As part of the agreement, we will fund and facilitate select early antibody discovery activities, and in return will receive an equity ownership position in iMBP.
•OmniAb platform license agreement with Fred Hutch to use the OmniAb rodent platform technologies to discover fully human antibodies. We are eligible to receive a defined share of revenue received by Fred Hutch from companies that commercialize products incorporating any such OmniAb-derived antibody.
•Research and development agreement with Janssen Pharmaceuticals for the development by Ligand of a HCO version of OmniChicken, for which we are eligible to earn defined milestone payments. Upon completion of the project, we will be able to make the HCO OmniChicken available to other commercial partners.
 
Captisol Technology

•Captisol clinical use license agreements with Sunshine Lake Pharmaceuticals, Merck KGaA and reVision Therapeutics.

Additional Pipeline and Partner Developments

•CStone announced two pivotal Phase 2 studies exploring the efficacy and safety of OmniAb-derived CS1001 in patients with natural killer cell/T-cell lymphoma and classical Hodgkin's lymphoma have been initiated and have each enrolled and dosed the first patient.
•CStone announced a collaboration agreement with Blueprint Medicines to initiate a proof-of-concept clinical trial in China evaluating BLU-554 in combination with OmniAb-derived CS1001.
•CStone also announced the completion of a $260 million series B financing that will primarily fund clinical development of OmniAb-derived CS1001.
•Aptevo announced that the first patient was dosed in a Phase 1/1b clinical trial of APVO436, a novel anti-CD123 by anti-CD3 bispecific antibody, which is being developed for the treatment of patients with acute myeloid leukemia and high-grade myelodysplastic syndrome.
•Aptevo presented new data for APVO436 at the AACR 2018 Annual Meeting.
•Corvus announced updated clinical and biomarker data from its ongoing Phase 1/1b study of CPI-444 in patients with treatment-refractory renal cell carcinoma, which demonstrated an overall survival of 88% at more than 20 months follow-up with CPI-444 administered in combination with atezolizumab.
•Corvus announced the publication of results of preclinical studies of CPI-444 demonstrating that it induces dose-dependent antitumor responses as a monotherapy and in combination with anti-PD-1, anti-PD-L1 and anti-CTLA-4 therapies.
•On December 3, 2018, Amgen announced the first clinical results from a study evaluating investigational novel BiTE immunotherapy AMG 330. In a Phase 1 dose-escalation study, AMG 330, which targets CD33, provided early evidence of tolerability and anti-tumor activity in patients with relapsed and/or refractory multiple myeloma and relapsed or refractory acute myeloid leukemia.
•Seelos closed a reverse merger with Apricus Biosciences and is now publicly traded on the Nasdaq Capital Market under the trading symbol “SEEL”. In conjunction with the reverse merger transaction, Seelos raised gross proceeds of $18 million in a private financing.
3

•OmniAb-derived RVT-1401 (previously HL 161) have formed the foundation of a new company called Immunovant during 2018.
•Nucorion Pharmaceuticals presented preclinical data for its novel liver-targeting prodrug technology program, CO1010, for the treatment of hepatitis B at the European Association for the Study of the Liver’s International Liver Congress.
•Syros Pharmaceuticals announced new preclinical data on SY-1365, its first-in-class selective CDK7 inhibitor, showing that it inhibits tumor cell growth in HR-positive breast cancer cell lines that are resistant to treatment with CDK4/6 inhibitors and that it has synergistic activity in combination with fulvestrant in these treatment-resistant cells.
•OmniAb partner Arcus announced that abstracts relating to its portfolio were presented at the Society for Immunotherapy of Cancer Annual Meeting.
•Arcus announced that the FDA cleared the IND application for OmniAb-derived AB122 and the company presented a poster on AB122 at the AACR 2018 Annual Meeting.
•Arcus also announced a collaboration agreement with Infinity Pharmaceuticals to evaluate AB122 with IPI549, an immuno-oncology candidate that selectively inhibits PI3K-gamma.
•MEI Pharma announced a poster presentation related to ME-344 at the 2018 ASCO Annual Meeting.


Internal Pipeline Highlights

•We have continued to make progress on our Captisol-enabled (CE) iohexol program, including deepening the preclinical dataset significantly, which is designed to further illustrate the differentiating features of our product. We are in final preparations for making our Clinical Trial Application submission to the health authorities in Canada where our first in-human trial will be run this year. We've manufactured our clinical batches of CE-iohexol and are expecting to initiate the clinical trial this quarter and we plan to have Phase 1 bioavailability data on CE-iohexol in the third quarter of 2019.
•We now have five internal antibody-related programs that we initiated in 2018. The programs are focused on targets for which biology is known, centered in the oncology and inflammation therapy areas.

Technologies

A variety of technology platforms that enable elements of drug discovery or development form the basis of our portfolio of fully-funded shots on goal. Platform technologies or individual drugs discovered by Ligand are related to a broad estate of intellectual property that includes over 1,200 patents issued worldwide.

OmniAb Technologies

Our OmniAb technology includes our OmniRat, OmniMouse, OmniFlic and OmniChicken technology platforms for use in discovering fully human antibodies. The OmniRat, OmniMouse, and OmniFlic platforms consist of genetically-engineered transgenic animals that produce a broadly diversified repertoire of antibodies and enable novel fully-human antibody drug discovery and development by our OmniAb partners. Fully-human OmniAb antibodies provide advantages to our partners in that fully-human antibodies have reduced immunogenicity, streamlined development timelines and costs, and accelerated novel antibody discovery. The OmniChicken platform consists of genetically-engineered transgenic chickens which enable the generation of novel antibodies against targets that are not immunogenic in mammals like mice and rats. Currently, more than 40 partners are utilizing OmniAb animals in their drug discovery and development efforts. We acquired these technologies through the acquisition of OMT in January 2016 and Crystal in October 2017.

Vernalis Design Platform (VDP)

The VDP technology leverages our leadership in structure-guided drug discovery in which protein structure, drug fragment screening and modeling are integrated with medicinal chemistry to enable the rapid discovery of novel drugs. The VDP approach establishes structural information via x-ray crystallography and NMR methods and develops reliable assay systems to test biophysical, functional and cellular properties. The VDP has proven success with highly-challenging pharmaceutical targets and has generated a broad portfolio, with over 5,000 novel drug/target complexes determined and over 400 granted and pending patents. We acquired the VDP technology through our acquisition of Vernalis in October of 2018, and maintain state-of-the-art laboratories in Cambridge, UK.

Captisol Technology

Captisol is our patented, uniquely-modified cyclodextrin that is specifically designed to maximize safety, while improving the solubility, stability and bioavailability of APIs. Captisol can enable faster and more efficient development paths for our partners, given its known regulatory acceptance. We maintain both Type IV and Type V DMFs with the FDA. These DMFs contain manufacturing and safety information relating to Captisol that our licensees can reference when developing
4

Captisol-enabled drugs. We also filed a DMF in Japan in 2015. Captisol-enabled drugs are marketed in more than 60 countries, and over 40 partners have Captisol-enabled drugs in development.

LTP Technology Platform

The LTP Technology platform is a novel prodrug technology designed to selectively deliver a broad range of pharmaceutical agents to the liver. A prodrug is a biologically inactive compound that can be metabolized in the body to produce an active drug. The LTP Technology works by chemically modifying biologically active molecules into an inactive prodrug, which will be administered to a patient and later activated by specific enzymes in the liver. The technology can be used to improve the safety and/or activity of existing drugs, develop new agents to treat certain liver-related diseases, and treat diseases caused by imbalances of circulating molecules that are controlled by the liver. The technology is especially applicable to metabolic and cardiovascular indications, among others. Currently 3 programs are utilizing the LTP Technology or related platform(s).

SUREtechnology Platform (owned by Selexis)

We acquired economic rights to over 30 SUREtechnology Platform programs from Selexis in two separate transactions in 2013 and 2015, granting us rights to downstream economics on novel biologics and biosimilars programs. The SUREtechnology Platform, developed and owned by Selexis, is a novel technology that improves the way that cells are utilized in the development and manufacturing of recombinant proteins and drugs. The technology is based on novel DNA-based elements that control the dynamic organization of chromatin within mammalian cells and allow for higher and more stable expression of recombinant proteins. The technology creates advantages over traditional approaches including accelerated development and manufacturing times, high yields and increased compound stability.


5

Partners and Licensees
We currently have partnerships and license agreements with over 110 pharmaceutical and biotechnology companies. In addition to the table below, we also have more than 10 undisclosed partners and licensees.
Big Pharma Ticker Generics  Ticker  Biotech, continued  Ticker 
AbbVie  ABBV  Alvogen  Private  Immunovant  Private 
AstraZeneca  AZN  Avion  Private  J-Pharma  Private 
Baxter  BAX  BioCad  Private  Marinus  MRNS 
Boehringer Ingelheim  Private  Coherus  CHRS  MEI  MEIP 
BMS  BMY  Gedeon Richter  GEDSF  Melinta  MLNT 
Daiichi Sankyo  DSKY  Zydus Cadila  CADILAHC  Menarini  Private 
Eli Lilly  LLY  Meridian Labs  Private 
Eisai  4523  Metavant  Private 
GSK  GSK  Biotech Ticker Merrimack  MACK 
Janssen  JNJ  ABBA  Private  Novogen  NVGN 
Merck  MRK  AiCuris  Private  Nucorion  Private 
Merck KGaA  MRK  Aldeyra  ALDX  Opthea  OPT 
Novartis  NVS  Amgen  AMGN  Outlook  OTLK 
Ono  4528  Arcus  RCUS  Palvella  Private 
Otsuka  4768  ARMO  Private  Phoenix Tissue  Private 
Pfizer  PFE  Asahi Kasei  3407  Precision Biologics  Private 
Sanofi  SNY  Azure  Private  Retrophin  RTRX 
Takeda  4502  bluebird bio  BLUE  Revision Therapeutics  Private 
Cantex  Private  SAGE  SAGE 
Celgene  CELG  Seattle Genetics  SGEN 
Specialty Pharma Ticker Corvus  CRVS  Seelos  SEEL 
Achaogen  AKAO  C-Stone  2616.HK  Servier  Private 
Aytu Bioscience  AYTU  CURx  Private  Sunshine Lake  Private 
Aziyo  Private  Aptevo  APVO  Symphogen  Private 
Beloteca  Private  Exelixis  EXEL  Teneobio  Private 
CorMatrix  Private  Five Prime  FRPX  TG Therapeutics  TGTX 
CTI Biopharma  CTIC  F-Star  Private  Tizona  Private 
Cuda  Private  Genmab  GEN  Vaxxas  Private 
Ferring  Private  Genagon  Private  Vega  Private 
Gloria  2437  Genekey Biotech  Private  VentiRx  Private 
Lundbeck  LUN  Glenmark  GLENMARK  Verona  VRNA 
Sedor  Private  Gilead Sciences  GILD  Vertex  VRTX 
Sermonix  Private  HanAll  9420  Viking  VKTX 
Shire  SHPG  Harbour  Private  Xi'an Xintong  Private 
Spectrum  SPPI  iMetabolic  Private  XTL Bio  XTLB 
Teijin  TINLF  WuXi  Private 
Vireo Health  Private 
Upsher-Smith  Private 
6

Portfolio
We have a large portfolio of current and future potential revenue-generating programs, including over 200 fully-funded by our partners. In addition to the table below, we also have more than 60 undisclosed programs.
Approved
Blood Disorders Cardiovascular CNS
Novartis Promacta Baxter Nexterone Lundbeck Carnexiv
Exelixis/Daiichi-Sankyo Minnebro Menarini Frovatriptan
Cancer Medical Device/Cardiology
Amgen Kyprolis Zydus Cadila Vivitra Aziyo Base Business Aziyo
Spectrum Evomela Zydus Cadila Bryxta
 
Infectious Disease Inflammatory/Metabolic
Alvogen Voriconazole Aytu Tuzistra Biocad Interferon beta-1a
Melinta Baxdela Pfizer Viviant/Conbriza
Hikma Voriconazole Par Pharmaceuticals Posaconazole Pfizer Duavee
Merck Noxafil-IV Pfizer Vfend-IV Zydus Cadila Exemptia
Phase 3 or Regulatory Submission Stage
Blood Disorders Severe and Rare Inflammatory/Metabolic
Biocad BCD-066 Retrophin Sparsentan Coherus CHS-0214
Bioverativ Sutimlimab
   
Cancer CNS
Oncobiologics ONS-3010 Takeda Pevonedistat SAGE Brexanolone
Oncobiologics ONS-1045 Sedor CE-Fosphenytoin
Sunshine Lake Vilazodone
Other / Undisclosed
Aldeyra Therapeutics Reproxalap
Phase 2
Blood Disorders Infectious Disease CNS
Novartis KLM465 Gilead GS-5734 CurX IV Topiramate
Xi'an Xintong Pradefovir Marinus Pharma Ganaxalone IV
Seelos Aplindore
Cancer
C-Stone CS1001 Eli Lilly Merestinib J-Pharma JPH-203
Cantex CX-01 Eli Lilly Prexasertib Precision Biologics NPC-1C
CTI Biopharma Tosedostat Gloria GLS010 VentiRx Pharma VTX-2337
Sermonix Lasofoxifene
Cardiovascular Other / Undisclosed Severe and Rare
Cardioxyl / BMS BMS986231 Opthea Ltd OPT-302 Palvella PTX-022
XTL Bio hCDR1
Inflammatory and Metabolic
Azure Lasofoxifene Verona Ensifentrine
Metavant RT-1502 Viking VK5211
Novartis ECF843 Viking VK2809/VK0214
Sedor CE-Budesonide Viking VK0612

7

Phase 1
Cancer
Amgen AMG-330 IBC Generium Deplera Servier S55746/S64315
Aptevo APVO436 Janssen JNJ64007957 Symphogen SYM022
Arcus AB122 MEI Pharma ME-344 Symphogen SYM023
Corvus CPI-444 Meridian ML-061 Upsher-Smith CXCR4
F-Star FS-102 Novartis MIK-665 VentiRx Pharma VTX-1463
Gedeon Richter Bevacizumab Novartis BCL-201 Xi'an Xintong MB07133
Infectious Disease Severe and Rare Other / Undisclosed
Vaxxas Nanopatch IBC Generium GNR-008 Phoenix Tissue PTR-01
Takeda TAK-925
Inflammatory and Metabolic
Gedeon Richter RGB-03 HanAll/Harbour HL161
Genekey Biotech PCSK-9 Immunovant RVT-1401
Takeda TAK-020

Pre-Clinical
Other / Undisclosed
ABBA OmniAb Electra OmniAb Ono Pharmaceuticals OmniAb
AbbVie OmniAb F-Star OmniAb Pfizer OmniAb
Achaogen OmniAb Ferring OmniAb Revision Therapeutics CvZ001
Amgen OmniAb Fred Hutchinson OmniAb Seattle Genetics OmniAb
ARMO Biosciences OmniAb Genmab OmniAb Symphogen OmniAb
Avion CE programs Gilead CE-program Teneobio OmniAb
Beloteca CE-Ziprasidone Glenmark OmniAb Teva OmniAb
Boehringer Ingelheim OmniAb HanAll OmniAb Tizona OmniAb
Celgene OmniAb iMetabolic OmniAb Vega OmniAb
Celgene Vipadenant Janssen OmniAb VenBio OmniAb
Covagen OmniAb KSQ Therapeutics OmniAb Wuxi OmniAb
Five Prime OmniAb Merck KGaA OmniAb
Inflammatory and Metabolic
Sedor CE-Meloxicam Seelos SLS-010 Vireo Health CE-Cannabinoids
Seelos SLS-008 Viking DGAT-1 Inhibitor
Infectious Disease CNS
Nucorion NUC-101 Cuda Cudafol SAGE SAGE-689
Nucorion NUC-202 CURx Pharma IV Lamotrigine Seelos SLS-012
Cancer Blood Disorders Medical Device/Cardiology
Nucorion NUC-404 Viking EPOR Agonist CorMatrix CorMatrix Pipeline
Oncobiologics Rituximab
Oncobiologics ONS-1050
TG Therapeutics IRAK4

8

Selected Commercial Programs
We have multiple programs under license with other companies that have products that are already being commercialized. The following programs represent components of our current portfolio of revenue-generating assets and potential for near-term growth in royalty and other revenue. For information about the royalties owed to us for these programs, see “Royalties” later in this business section.
Promacta (Novartis)
We are party to a license agreement with Novartis related to Promacta, which is an oral medicine that increases the number of platelets in the blood. Platelets are one of the three components of blood and facilitate clotting in the blood. Individuals with low platelets can be at significant risk of bleeding or death. Because of the importance of having a sufficient number of platelets, Promacta has broad potential applicability to a number of medical situations where low platelets exist.

Promacta is currently approved for four indications: (1) the treatment of thrombocytopenia in adult and pediatric patients 1 year and older with ITP who have had an insufficient response to corticosteroids, immunoglobulins or splenectomy; (2) thrombocytopenia in patients with chronic hepatitis C to allow the initiation and maintenance of interferon-based therapy; (3) in combination with standard immunosuppressive therapy for the first-line treatment of adult and pediatric patients 2 years and older with SAA; and (4) patients with SAA who have had an insufficient response to immunosuppressive therapy. Promacta was initially approved in 2008, and the product has been generating royalty revenue for Ligand since 2009. Promacta is known as Revolade in the EU and other non-US markets.
Novartis has been and continues to pursue globalization of the brand and currently markets Promacta in multiple countries for the approved indications. Specifically, Promacta is currently approved for ITP in more than 100 countries, for the Hepatitis C-related indication in more than 50 countries, and for post-immunosuppressive therapy SAA indication in more than 45 counties. Approval of Promacta in the U.S. for the first-line treatment of SAA was obtained in November of 2018.
Beyond the currently-approved indications, Novartis has also disclosed that is performing or supporting development activities to expand the brand into new indications, including as a counter measure for the hematopoietic effects of acute radiation syndrome (H-ARS), and has been granted FDA Breakthrough Therapy designation. As of January 2019, there are 46 open clinical trials related to Promacta (listed as recruiting or open, and not yet recruiting) on the clinicaltrials.gov website.
Promacta (Novartis)
< $100 million 4.7%   
$100 to $200 million 6.6%   
$200 to $400 million 7.5%   
$400 million to $1.5 billion 9.4%   
>$1.5 billion 9.3%   
We are entitled to receive royalties related to Promacta during the life of the relevant patents or following patent expiry, at a reduced rate for ten years from the first commercial sale, whichever is longer, on a country-by-country basis. Novartis has listed a patent in the FDA’s Orange Book for Promacta with an expiration date in 2028, and absent early termination for bankruptcy or material breach, the term of the agreement expires upon expiration of the obligation to pay royalties. There are no remaining milestones to be paid under the agreement.

9

Kyprolis (Amgen)

Ligand supplies Captisol to Amgen for use with Kyprolis, and granted Amgen an exclusive product-specific license under our patent rights with respect to Captisol. Kyprolis is formulated with Ligand’s Captisol technology and is approved in the United States for the following:

•In combination with dexamethasone or combination with lenalidomide plus dexamethasone for the treatment of patients with relapsed or refractory multiple myeloma who have received one to three lines of therapy.
•As a single agent for the treatment of patients with relapsed or refractory multiple myeloma who have received one or more lines of therapy.
Kyprolis is also approved in multiple countries outside the U.S. and Amgen continues to invest significantly in Kyprolis to further expand its label and geography. Amgen’s obligation to pay royalties does not expire until four years after the expiration of the last-to-expire patent covering Captisol. Our patents and applications relating to the Captisol component of Kyprolis are not expected to expire until 2033.
Kyprolis (Amgen)
< $250 million 1.5%   
$250 to $500 million 2.0%   
$500 to $750 million 2.5%   
>$750 million 3.0%   
Our agreement with Amgen may be terminated by either party in the event of material breach or bankruptcy, or unilaterally by Amgen with prior written notice, subject to certain surviving obligations. Absent early termination, the agreement will terminate upon expiration of the obligation to pay royalties. Under this agreement, we are entitled to receive remaining milestones of up to $1 million, revenue from clinical and commercial Captisol material sales and royalties on annual net sales of Kyprolis.

Evomela (Spectrum and CASI)

Ligand supplies Captisol to Spectrum for use with Evomela, which is a Captisol-enabled melphalan IV formulation. The FDA approved Evomela for use in two indications:
•A high-dose conditioning treatment prior to ASCT in patients with multiple myeloma. 
•For the palliative treatment of patients with multiple myeloma for whom oral therapy is not appropriate.

Evomela has been granted Orphan Designation by the FDA for use as a high-dose conditioning regimen for patients with multiple myeloma undergoing ASCT. The Evomela formulation avoids the use of propylene glycol, which has been reported to cause renal and cardiac side-effects that limit the ability to deliver higher quantities of therapeutic compounds. The use of the Captisol technology to reformulate melphalan is anticipated to allow for longer administration durations and slower infusion rates, potentially enabling clinicians to safely achieve a higher dose intensity of pre-transplant chemotherapy.
Under the terms of the license agreement, we granted an exclusive license to Spectrum under our patent rights to Captisol relating to the product. We are eligible to receive over $50 million in potential milestone payments under this agreement and royalties on global net sales of the Captisol-enabled melphalan product. Spectrum’s obligation to pay royalties will expire at the end of the life of the relevant patents or when a competing product is launched, whichever is earlier, but in no event within ten years of the commercial launch. Our patents and applications relating to the Captisol component of melphalan are not expected to expire until 2033. Absent early termination, the agreement will terminate upon expiration of the obligation to pay royalties. The agreement may be terminated by either party for an uncured material breach or unilaterally by Spectrum by prior written notice.
Spectrum sub-licensed Evomela rights for Greater China to CASI in 2014. In December 2018, CASI announced China marketing approval of Evomela and a plan to launch the drug in China in 2019.
On January 17, 2019, Spectrum announced that they entered into a definitive agreement to sell its portfolio of seven FDA-approved hematology/oncology products including Evomela to Arotech Biopharma L.L.C..

Baxdela IV (Melinta)
Melinta’s Baxdela IV is a Captisol-enabled delafloxacin-IV that was approved by the FDA in June 2017 for the treatment of acute bacterial skin and skin structure infections. Delafloxacin is a novel hospital-focused fluoroquinolone antibiotic with activity against a variety of disease-causing bacteria-gram-positives, gram-negatives, atypicals and anaerobes, including quinolone-resistant MRSA. Under the terms of the agreement, we may be entitled to regulatory milestones, as well as a royalty on potential future sales by Melinta, and revenue from Captisol material sales.
10

Nexterone (Baxter)
We have a license agreement with Baxter, related to Baxter's Nexterone, a Captisol-enabled formulation of amiodarone, which is marketed in the United States and Canada. We supply Captisol to Baxter for use in accordance with the terms of the license agreement under a separate supply agreement. Under the terms of the license agreement we will continue to earn milestone payments, royalties, and revenue from Captisol material sales. We are entitled to earn royalties on sales of Nexterone through early 2033.
Noxafil-IV (Merck)
We have a supply agreement with Merck related to Merck’s NOXAFIL-IV, a Captisol-enabled formulation of posaconazole for IV use. NOXAFIL-IV is marketed in the United States, EU and Canada. We receive our commercial compensation for this program through the sale of Captisol, and we do not receive a royalty on this program.
Duavee or Duavive (bazedoxifene/conjugated estrogens) and Viviant/Conbriza (Pfizer)
Pfizer is marketing bazedoxifene under the brand names Viviant and Conbriza in various territories for the treatment of postmenopausal osteoporosis. Pfizer is responsible for the marketing of bazedoxifene, a synthetic drug specifically designed to reduce the risk of osteoporotic fractures while also protecting uterine tissue. Pfizer has combined bazedoxifene with the active ingredient in Premarin to create a combination therapy for the treatment of post-menopausal symptoms in women. Pfizer is marketing the combination treatment under the brand names Duavee and Duavive in various territories. Net royalties on annual net sales of Viviant/Conbriza and Duavee/Duavive are each payable to us through the life of the relevant patents or ten years from the first commercial sale, whichever is longer, on a country by country basis.
Aziyo Portfolio (Aziyo)
We receive a share of revenue from the currently marketed Aziyo portfolio of commercial pericardial repair and CanGaroo® Envelope ECM products. In addition, Ligand has the potential to receive a share of revenue and potential milestones from the currently marketed CanGaroo® ECM Envelope for cardiac implantable electronic devices. Aziyo’s products are medical devices that are designed to permit the development and regrowth of human tissue.
Exemptia, Vivitra and Bryxta (Zydus Cadila)
Zydus Cadila’s Exemptia (adalimumab biosimilar) is marketed in India for autoimmune diseases. Zydus Cadila uses the Selexis technology platform for Exemptia. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Zydus Cadila’s Vivitra (trastuzumab biosimilar) is marketed in India for breast cancer. Zydus Cadila uses the Selexis technology platform for Vivitra. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Zydus Cadila’s Bryxta (bevacizumab biosimilar) is marketed in India for non-small cell lung cancer. Zydus Cadila uses the Selexis technology platform for Bryxta. We are entitled to earn royalties on sales by Zydus Cadila for ten years following the first commercial sale.
Minnebro (Exelixis)

Daiichi Sankyo announced on January 8, 2019 the receipt of marketing approval in Japan for MINNEBRO Tablets (esaxerenone) for the treatment of hypertension. Our partner, Exelixis, entered into a collaboration agreement with Daiichi Sankyo for the development of esaxerenone, a mineralocorticoid receptor antagonist. Under the terms of the agreement with Exelixis, we are entitled to receive a royalty on future sales.

Summary of Selected Development Stage Programs
We have multiple fully-funded partnered programs that are either in or nearing the regulatory approval process, or given the area of research or value of the license terms we consider particularly noteworthy. We are eligible to receive milestone payments and royalties on these programs. This list does not include all of our partnered programs. For information about the royalties owed to Ligand for these programs, see “Royalties” later in this business section. In the case of Captisol-related programs, we are also eligible to receive revenue for the sale of Captisol material supply.
11

Zulresso-SAGE-547 (SAGE)
Our partner, SAGE, is developing novel medicines to treat life altering central nervous system disorders. SAGE filed an NDA with the FDA in 2018, seeking approval to market and sell Zulresso for the treatment of postpartum depression, or PPD. The NDA is currently under FDA review with a PDUFA date of March 19, 2019. We have the potential to receive milestone payments, royalties and revenue from Captisol material sales for Captisol-enabled programs. SAGE is responsible for all development costs related to the program.
Sparsentan (Retrophin)
Our partner, Retrophin, is developing sparsentan for orphan indications of severe kidney diseases, and has initiated a global pivotal Phase 3 clinical trial to enable an NDA filing for sparsentan for the treatment of FSGS. Additionally, Retrophin initiated a global pivotal Phase 3 clinical trial evaluating the long-term nephroprotective potential of sparsentan for the treatment of IgA nephropathy, a rare, immune complex mediated chronic glomerular disease. Certain patient groups with severely compromised renal function, including those with FSGS and IgA nephropathy, exhibit extreme proteinuria resulting in progression to dialysis and a high mortality rate. Sparsentan, with its unique dual blockade of angiotensin and endothelin receptors, is expected to provide meaningful clinical benefits in mitigating proteinuria in indications where there are no approved therapies.
Under our license agreement with Retrophin, we are entitled to receive potential net milestones of over $70 million and net royalties on future worldwide sales by Retrophin. The royalty term is expected to be 10 years following the first commercial sale. Retrophin is responsible for all development costs related to the program.
Prexasertib- LY2606368 (Eli Lilly)
Our partner, Eli Lilly is conducting Phase 2 clinical trials for prexasertib (Captisol-enabled LY2606368), a checkpoint kinase 1/2, or Chk 1/2, inhibitor for the treatment of solid tumors. Under the terms of the agreement, we may be entitled to regulatory milestones, royalties on potential future sales by Eli Lilly and revenue from Captisol material sales.
BMS-986231 (formerly CXL-1427) (BMS)
Our partner, BMS, is conducting Phase 2 clinical trials for a Captisol-enabled second-generation prodrug that chemically breaks down to produce HNO and an inactive byproduct. HNO is thought to have a dual mode of action, by improving cardiac function and acting as a vasodilator for treating ADHF. Under the terms of the agreement, we may be entitled to development and regulatory milestones, and royalties on potential future sales by BMS and revenue from Captisol material sales.
RVT-1502 (formerly LGD-6972) (Metavant)
Our partner, Metavant, an affiliate of Roivant, is developing RVT-1502, a GRA, which we licensed to Roivant in March 2018. In September 2017, we announced positive results from a Phase 2 clinical study evaluating the efficacy and safety of the compound (formerly known as LGD-6972), as an adjunct to diet and exercise, in subjects with type 2 diabetes mellitis inadequately controlled on metformin monotherapy. Roivant formed Metavant to pursue the development of RVT-1502 and other treatments for cardiometabolic diseases. We are entitled to potential development and regulatory milestones and royalties on potential future sales.

RVT-1401/HL161 (Immunovant, HanAll and Harbour)
Our partner, HanAll has granted Immunovant an exclusive license for the development, manufacture and marketing of RVT-1401 (HL161, an anti-FcRn antibody) for the treatment of pathogenic IgG-mediated autoimmune diseases in the U.S., Canada, Mexico, the EU, the United Kingdom, Switzerland, Latin America, the Middle East and North Africa. Immunovant is currently conducting a Phase 1 clinical trial in healthy volunteers with plans to initiate Phase 2 studies in early 2019 in myasthenia gravis and other inflammatory diseases. Additionally, HanAll and Harbour BioMed, are collaborating to develop HL161 for similar treatment in China and Korea. HanAll retains the rights to HL161 in Korea and Harbour will control the marketing in China. As part of our agreement with HanAll, we are entitled to development and regulatory milestones and royalties on potential future sales from HanAll and sublicense revenues from Immunovant and Harbour based on amounts received by HanAll.
12

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

SARM - VK5211 (Viking)
Our partner, Viking, is developing VK5211, a novel, potentially best-in-class SARM for patients recovering from hip-fracture. SARMs retain the beneficial properties of androgens without undesired side-effects of steroids or other less selective androgens. Viking announced positive results from its Phase 2 trial in patients who suffered hip fracture in the fourth quarter of 2017. Under the terms of the agreement with Viking, we may be entitled to up to $270 million of development, regulatory and commercial milestones as well as tiered royalties on potential future sales.
SARM - VK5211 (Viking)
< $500 million 7.25%   
$500 to $750 million 8.25%   
>$750 million 9.25%   

Lasofoxifene (Sermonix and Azure)
Lasofoxifene is a selective estrogen receptor modulator for osteoporosis treatment and other diseases, discovered through the research collaboration between us and Pfizer. Under the terms of the license agreement with Azure, we retained the rights to the oral formulation of lasofoxifene originally developed by Pfizer.
Our partner, Sermonix has a license for the development of oral lasofoxifene for the United States and additional territories. Under the terms of the agreement, we are entitled to receive over $45 million in potential regulatory and commercial milestone payments as well as royalties on future net sales.
Our partner Azure is developing a novel formulation of lasofoxifene targeting an underserved market in women’s health. Under the terms of our agreement with Azure, we are entitled to receive up to $2.6 million in potential development and regulatory milestones as well as royalties on future net sales through the later of the life of the relevant patents (currently expected to be at least until 2027) or 10 years after regulatory approval. Azure may terminate the license agreement at any time upon six months’ prior notice.
Merestinib- LY2801653 (Eli Lilly)
Our partner, Eli Lilly is conducting Phase 2 clinical trials for Captisol-enabled merestinib (formerly known as LY2801653), a c-Met inhibitor for treatment of cancer. Under the terms of the agreement, we may be entitled to regulatory milestones, royalties on potential future sales by Eli Lilly and revenue from Captisol material sales.
Pevonedistat - TAK-924 (Millennium/Takeda)
Our partner, Millennium/Takeda is currently conducting Phase 3 trials for the development of pevonedistat for the treatment of hematological malignancies and solid tumors. Pevonedistat is a Captisol-enabled Nedd8-Activating Enzyme Inhibitor. Under the terms of the clinical-stage agreement, we may be entitled to development milestones from Millennium/Takeda and revenue from Captisol material sales.
JNJ64007957 (Janssen)

Our partner, Janssen, is developing JNJ64007957, a BCMAxCD3 bispecific antibody discovered in part with the OmniAb platform technology. Janssen is currently conducting a Phase I trial for cancer therapy. We are entitled to earn milestones based on the development of JNJ64007957.
13

AMG-330 (Amgen)
Our licensee, Amgen, is developing AMG 330, a bispecific T-cell engager (BiTE) antibody targeting CD33 and CD3, for use in humans for a wide variety of therapeutic indications. Under the terms of the agreement, we are entitled to milestones and royalties on future sales of AMG 330 formulated with Captisol.
Ganaxalone IV (Marinus)
Our partner, Marinus, is conducting Phase 2 clinical trials with Captisol-enabled ganaxolone IV in patients with PPD and refractory status epilepticus. Marinus has exclusive worldwide rights to Captisol-enabled ganaxolone, a GABAA receptor modulator, for use in humans. We are entitled to development and regulatory milestones, royalties on potential future sales and revenue from Captisol material sales.
APVO436 (Aptevo)
Our partner, Aptevo, is currently conducting a Phase 1 trial of APVO436 for the treatment of acute myeloid leukemia. There is a high unmet medical need for targeted immunotherapies such as APVO436, that can potentially treat patients with relapsed or refractory disease, or patients who cannot tolerate traditional chemotherapy. Under the terms of the agreement with Aptevo, we are entitled to milestones and royalties on future sales.
WuXi Partnership
Pursuant to the WuXi Agreement, we have granted WuXi a non-exclusive license to use our OmniRat, OmniMouse and OmniFlic platforms solely to research, develop and make antibodies, and we have agreed to use commercially reasonable efforts to deliver to WuXi animals from such platforms on a purchase order basis to support WuXi’s licensing rights under the WuXi Agreement. Further, WuXi has the right to out-license antibodies it discovers (whether for itself or at the direction of out-licensees) under the WuXi Agreement to out-licensees worldwide. We are entitled to royalties in the low single digits on net sales of products. Unless earlier terminated, the term of the WuXi Agreement shall continue indefinitely. Either party may terminate the WuXi Agreement upon specified notice of the other party's uncured material breach of the WuXi Agreement. In addition, we have the right to terminate the WuXi Agreement if WuXi or one of its out-licensees challenges the validity of one of our patents covering the platform and WuXi has the right to terminate the WuXi Agreement for convenience following a specified period after notice of termination.
In addition to other earlier stage programs, the following programs have been licensed pursuant to the WuXi Agreement:
AB122/GLS010 (Arcus and Gloria)
Our partner, WuXi, has outlicensed the rights to certain programs using the OmniAb technology to Arcus and Gloria. Arcus, is currently conducting a Phase 1 trial to evaluate the safety and tolerability of AB122 in subjects with advanced solid tumors. Additionally, Gloria, is conducting a Phase 2 trial in China to evaluate the efficacy and safety of GLS-010 injection in the treatment of recurrent or refractory classical Hodgkin’s lymphoma. Under the terms of our agreement with WuXi, we are entitled to royalties on potential future sales.
CS1001 (C-Stone)
Our partner, WuXi, has outlicensed the rights to certain programs using the OmniAb technology to C-Stone. C-Stone, is currently conducting a Phase 2 trial to evaluate the efficacy and safety of CS1001 to treat patients with natural killer cell/T-cell lymphoma and classical Hodgkin’s lymphoma. Under the terms of our agreement with WuXi, we are entitled to royalties on potential future sales.
CPI-444 (Corvus)
Our partner, Corvus, is currently conducting a Phase 1b/2 clinical trial in patients with renal cell carcinoma to evaluate CPI-444, an antagonist of adenosine A2A, in combination with the immunotherapy drug atezolizumab. CPI-444 is also being evaluated in a Phase 1b/2 trial in combination with atezolizumab in patients with non-small cell lung cancer who have failed no more than two prior regimens. Under the terms of our agreement with Corvus, we are entitled to development and regulatory milestones and tiered royalties on potential future sales. The aggregate potential milestone payments from Corvus are approximately $220 million for all indications.
14

Ensifentrine – RPL554 (Verona)
Our partner, Verona, is currently conducting a comprehensive Phase 2 clinical trial for the development of ensifentrine as a maintenance treatment of COPD with nebulized and inhaled formulations. Verona has also completed a positive Phase 2a study evaluating ensifentrine as a treatment for cystic fibrosis. Under the terms of our agreement with Verona, we are entitled to development and regulatory milestones, including a £5.0 million payment upon the first approval of any regulatory authority, and royalties on potential future sales.

ECF843 (Novartis)
Novartis is developing ECF843 for the treatment of dry-eye and other ophthalmic indications. ECF843 has been tested in a Phase 2 trial demonstrating the primary endpoint was met. Novartis uses the Selexis technology platform for ECF843. Under the terms of our agreement with Novartis, we are entitled to development and regulatory milestones and royalties on potential future sales.
Royalties
We have multiple programs under license with other companies that have products that are already being commercialized. In addition to the table below, we have generally described a typical Captisol and OmniAb royalty arrangement as low- to mid-single digit royalties. The following table represents substantially all of the disclosed information about our royalty arrangements:

Royalty Table
Ligand Licenses With Tiered Royalties* 
Program  Licensee  Royalty Rate 
Duavee  Pfizer  0.5% - 2.5% 
Viviant/Conbriza  Pfizer  0.5% - 2.5% 
CE-Lamotrigine  CURx  4.0% - 7.0% 
CE-Topiramate  CURx  6.0% - 7.5% 
CE-Budesonide  Sedor  8.0% - 10.0% 
CE-Meloxicam  Sedor  8.0% - 10.0% 
IRAK4  TG Therapeutics  6.0% - 9.5% 
Lasofoxifene  Sermonix  6.0% - 10.0% 
FBPase Inhibitor (VK0612)  Viking  7.5% - 9.5% 
SARM (VK5211)  Viking  7.25% - 9.25% 
TR Beta (VK2809 and VK0214)  Viking  3.5% - 7.5% 
Oral EPO  Viking  4.5% - 8.5% 
DGAT-1  Viking  3.0% - 7.0% 
Various  Nucorion  4.0% - 9.0% 
Various  Seelos  4.0% - 10.0% 
OmniAb-iMetabolic  iMetabolic  <6% 
OmniAb-Genagon  Genagon  4.0% - 6.0% 
Mineral Coated Microparticle technology  Dianomi  2.0% - 3.0% 
PTX-022  Palvella  5.0% - 9.8% 
RVT-1502  Metavant  Low double digit to mid-teen royalty 
CPI-444  Corvus  Mid single digit to low-teen royalty 
Ensifentrine (RPL554)  Verona  Low to mid-single digit royalty 

15

Ligand Licenses With Fixed Royalties*
Program Licensee Royalty Rate
Evomela Spectrum Pharma 20%   
Baxdela Melinta 2.5%   
Brexalalone (SAGE-547) SAGE 3%   
Sparsentan Retrophin 9%   
CE-Fosphenytoin Sedor 11%   
Pradefovir Xi'an Xintong 9%   
MB07133 Xi'an Xintong 6%   
KLM465 Novartis 14.5% (6.5% in year one)   
Topical lasofoxifene Azure Biotech 5%   
MM-121 Merrimack Pharma <1.0%   
MM-141 Merrimack Pharma <1.0%   
ME-143 MEI Pharma Low single digit royalty   
ME-344 MEI Pharma Low single digit royalty   
Reproxalap Aldeyra Therapeutics Low single digit royalty   
PCSK-9 Genekey Low single digit royalty   
CS1001 C-Stone Low single digit royalty   
Various Gloria Low single digit royalty   
4-1BB Zhilkang Hongyi Low single digit royalty   
AB122 Arcus Low single digit royalty   
OmniAb-KSQ Therapeutics KSQ Therapeutics Single digit royalty   

*Royalty rates are shown net of sublicense payments. Royalty tier references for specific rates notated in the table are for up to and including the dollar amount referenced. Higher tiers are only applicable for the dollar ranges specified in the table.

Contract Payments (Milestones)
Many of our programs under license with our partners will generate contract payments to us if our partners reach certain development, regulatory and commercial milestones. The following table represents the potential maximum value of our contract payment pipeline on milestones by development stage, technology and partner (in thousands):
Technology*  Stage*  Partner* 
OmniAb  > $825,000  Preclinical  > $40,000  Viking  $1,500,000 
Captisol  > $175,000  Clinical  > $500,000  Metavant  $528,750 
Vernalis  > $250,000  Regulatory  > $1,000,000  Janssen  $245,400 
LTP/Hep Direct  > $250,000  Commercial  > $1,660,000  Seelos  $141,800 
NCE/Other  > $2,000,000  Other  > $300,000  Retrophin  $100,750 
Total  > $3,500,000  Total  > $3,500,000  Corvus (Oncology)  $91,500 
Xi'an Xintong  $43,125 
Other  > $848,675 
Total  > $3,500,000 
*All tables exclude our annual access fees and collaboration revenue for development work.
Internal Development Programs 
We have a number of internal development programs focused on a wide-range of indications. Our primary research and development efforts are led by our teams in Emeryville, California and Cambridge, England. The following table represents internal programs eligible for further development or partnership:
16

Program  Development Stage  Indication 
Luminespib/Hsp90 Inhibitor Phase 2 Oncology
FAAH Inhibitor Phase 1 Pain
CE-Sertraline, Oral Concentrate Phase 1 Depression
CE-Iohexol Phase 1 Diagnostics
CCR1 Antagonist Preclinical Oncology
CE-Busulfan Preclinical Oncology
CE-Cetirizine Injection Preclinical Allergy
CE-Silymarin for Topical formulation Preclinical Sun damage
FLT3 Kinase Inhibitors Preclinical Oncology
GCSF Receptor Agonist Preclinical Blood disorders
Liver Specific Glucokinase Activator Preclinical Diabetes
Omnichicken derived antibodies (5 programs) Discovery Multiple
Chk1 Inhibitor Preclinical Oncology
Manufacturing
We contract with a third party manufacturer, Hovione, for Captisol production. Hovione is a global supplier with over 50 years of experience in the development and manufacture of APIs and Drug Product Intermediates. Hovione operates FDA-inspected sites in the United States, Macau, Ireland and Portugal. Manufacturing operations for Captisol are currently performed at two sites, in both of Hovione's Portugal and Ireland facilities with distribution operations also performed from Hovione's Portugal and Ireland sites. Additionally, we also store and distribute Captisol from a subterranean warehouse controlled by us and located in Kansas. We believe we maintain adequate inventory of Captisol to meet our current and future partner needs.
In the event of a Captisol supply interruption, we are permitted to designate and, with Hovione’s assistance, qualify one or more alternate suppliers. If the supply interruption continues beyond a designated period, we may terminate the agreement. In addition, if Hovione cannot supply our requirements of Captisol due to an uncured force majeure event, we may also obtain Captisol from a third party and have previously identified such parties.
The current term of the agreement with Hovione is through December 2024. The agreement will automatically renew for successive two year renewal terms unless either party gives written notice of its intention to terminate the agreement no less than two years prior to the expiration of the initial term or renewal term. In addition, either party may terminate the agreement for the uncured material breach or bankruptcy of the other party or an extended force majeure event. We may terminate the agreement for extended supply interruption, regulatory action related to Captisol or other specified events. We have ongoing minimum purchase commitments under the agreement.

For further discussion of these items, see below under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Competition
Some of the drugs we and our licensees and partners are developing may compete with existing therapies or other drugs in development by other companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish collaborative arrangements with our competitors.
Our Captisol business may face competition from other suppliers of similar cyclodextrin excipients or other technologies that are aimed to increase solubility or stability of APIs. Our OmniAb antibody technology faces competition from suppliers of other transgenic animal systems that are also available for antibody drug discovery.
Our competitive position also depends upon our ability to obtain patent protection or otherwise develop proprietary products or processes. For a discussion of the risks associated with competition, see below under “Item 1A. Risk Factors.”
17

Government Regulation
The research and development, manufacturing and marketing of pharmaceutical products are subject to regulation by numerous governmental authorities in the United States and other countries. We and our partners, depending on specific activities performed, are subject to these regulations. In the United States, pharmaceuticals are subject to regulation by both federal and various state authorities, including the FDA. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of pharmaceutical products and there are often comparable regulations that apply at the state level. There are similar regulations in other countries as well. For both currently marketed and products in development, failure to comply with applicable regulatory requirements can, among other things, result in delays, the suspension of regulatory approvals, as well as possible civil and criminal sanctions. In addition, changes in existing regulations could have a material adverse effect on us or our partners. For a discussion of the risks associated with government regulations, see below under “Item 1A. Risk Factors.”
Patents and Proprietary Rights

We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications to protect technology, inventions and improvements to our inventions that are considered important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position.

Patents are issued or pending for the following key products or product families. The scope and type of patent protection provided by each patent family is defined by the claims in the various patents. The nominal patent expiration dates have been provided. The actual patent term may vary by jurisdiction and depend on a number of factors including potential patent term adjustments, patent term extensions, and terminal disclaimers. For each product or product family, the patents and/or applications referred to are in force in at least the United States, and for most products and product families, the patents and/or applications are also in force in European jurisdictions, Japan and other jurisdictions.

Promacta

Patents covering Promacta are owned by Novartis. The United States patent listed in the FDA’s Orange Book relating to Promacta with the latest expiration date is not expected to expire until 2027. Six months of additional exclusivity to each of the U.S. expiration dates listed in the table has been granted due to pediatric studies conducted by GlaxoSmithKline plc (NYSE:GSK), thereby taking the latest expiration date into 2028. The type of patent protection (e.g., composition of matter or use) and the expiration date for each unexpired patent listed in the Orange Book are provided in the following table. In addition, certain related patents in the commercially important jurisdictions of Europe and Japan are identified in the following table.

Promacta 
United States  Corresponding Foreign 
Type of Protection  U.S. Patent No.  U.S. Expiration Date  Jurisdiction  Patent Number  Expiration Date‡ 
CoM / Use  7,160,870  11/20/2022  EU  1,864,981  5/24/2021 
EU  1,889,838  5/24/2021 
EU  1,294,378  3/14/2025* 
Japan  3,813,875  5/24/2021 
Japan  4,546,919  5/24/2021 
Use  7,332,481  5/24/2021  EU  1,294,378  3/14/2025* 
EU  1,864,981  5/24/2021 
EU  1,889,838  5/24/2021 
Japan  3,813,875  5/24/2021 
Japan  4,546,919  5/24/2021 
CoM / Use  7,452,874  5/24/2021  EU  1,864,981  5/24/2021 
EU  1,889,838  5/24/2021 
Japan  3,813,875  5/24/2021 
Japan  4,546,919  5/24/2021 
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CoM / Use  7,473,686  5/24/2021  EU  1,864,981  5/24/2021 
EU  1,294,378  3/14/2025* 
EU  1,889,838  5/24/2021 
Japan  3,813,875  5/24/2021 
Japan  4,546,919  5/24/2021 
CoM / Use  7,547,719  7/13/2025  EU  1,534,390  5/21/2023 
Japan  4,612,414  5/21/2023 
Use  7,790,704  5/24/2021  EU  1,294,378  3/14/2025* 
EU  1,864,981  5/24/2021 
EU  1,889,838  5/24/2021 
Japan  3,813,875  5/24/2021 
Japan  4,546,919  5/24/2021 
Use  7,795,293  5/21/2023  EU  1,534,390  5/21/2023 
Japan  4,612,414  5/21/2023 
CoM / Use  8,052,993  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 
CoM / Use  8,052,994  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 
CoM / Use  8,052,995  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 
CoM / Use  8,062,665  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 
CoM / Use  8,071,129  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 
CoM / Use  8,828,430  8/1/2027  EU  2,152,237 
8/1/2027⁑
Japan  5,419,866  8/1/2027 
Japan  5,735,078  8/1/2027 
Japan  6,144,713  8/1/2027 

‡Expiration dates of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and may not take into account extensions that are or may be available in these jurisdictions.
⁎Includes extension of term through Supplementary Protection Certificate (SPC)
⁑Revoked; on appeal

Kyprolis
Patents protecting Kyprolis include those owned by Amgen and those owned by us. The United States patent listed in the Orange Book relating to Kyprolis with the latest expiration date is not expected to expire until 2029. Patents and applications owned by Ligand relating to the Captisol component of Kyprolis are not expected to expire until 2033. Amgen has filed suit against several generic drug companies over their applications to make generic versions of Kyprolis, with a trial scheduled for May 2019. The type of patent protection (e.g., composition of matter or use) for each patent listed in the Orange Book and the expiration dates for each patent listed in the Orange Book are provided in the following table. In addition, certain related patents in the commercially important jurisdictions of Europe and Japan are identified in the following table.


19

Kyprolis 
United States  Corresponding Foreign 
Type of Protection  U.S. Patent No.  U.S. Expiration Date  Jurisdiction  Patent Number  Expiration Date‡ 
CoM  7,232,818  4/14/2025  EU  1,745,064  4/14/2025 
EU  1,781,688  8/8/2025 
EU  2,266,999  8/8/2025 
EU  2,270,026  8/8/2025 
EU  3,101,026  8/8/2025 
Japan  4,743,720  8/8/2025 
Japan  5,394,423  4/14/2025 
CoM  7,417,042  7/20/2026  EU  1,781,688  8/8/2025 
EU  2,266,999  8/8/2025 
EU  2,270,026  8/8/2025 
EU  3,101,026  8/8/2025 
Japan  4,743,720  8/8/2025 
Japan  5,394,423  4/14/2025 
Use  7,491,704  4/14/2025  EU  1,745,064  4/14/2025 
EU  1,781,688  8/8/2025 
EU  2,266,999  8/8/2025 
EU  2,270,026  8/8/2025 
EU  3,101,026  8/8/2025 
Japan  4,743,720  8/8/2025 
Japan  5,394,423  4/14/2025 
CoM  7,737,112  12/7/2027  EU  1,819,353  12/7/2025 
EU  2,260,835  12/7/2025 
EU  2,261,236  12/7/2025 
Japan  4,990,155  12/7/2025 
Japan  5,108,509  5/9/2025 
Use  8,129,346  4/14/2025  EU  1,745,064  4/14/2025 
Japan  5,394,423  4/14/2025 
Japan  5,616,569  4/14/2025 
CoM  8,207,125  4/14/2025  EU  1,781,688  8/8/2025 
EU  1,745,064  4/14/2025 
Japan  5,394,423  4/14/2025 
Japan  5,616,569  4/14/2025 
Japan  4,743,720  8/8/2025 
CoM / Use  8,207,126  4/14/2025  EU  1,745,064  4/14/2025 
Japan  5,394,423  4/14/2025 
Japan  5,616,569  4/14/2025 
Use  8,207,127  4/14/2025  EU  1,745,064  4/14/2025 
Japan  5,394,423  4/14/2025 
Japan  5,616,569  4/14/2025 
CoM / Use  8,207,297  4/14/2025  EU  1,745,064  4/14/2025 
Japan  5,394,423  4/14/2025 
Japan  5,616,569  4/14/2025 
CoM  9,493,582  2/27/2023 N/A 
Use  9,511,109  10/21/2029  EU  2,796,134  10/21/2029 
Japan  5,675,629  10/21/2029 
Japan  6,081,964  10/21/2029 

‡Expiration dates of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
20

Captisol
Patents and pending patent applications covering Captisol are owned by us. Other patents and pending patent applications covering methods of making Captisol are owned by us or by Pfizer. The patents covering the Captisol product, if issued, with the latest expiration date would not be set to expire until 2033 (see, e.g., U.S. Patent No. 9,493,582 (expires Feb. 27, 2033)). We have asserted U.S. Patents 8,410,077, 9,200,088, and 9,493,582 against Teva in connection with their attempt to obtain FDA approval to manufacture and sell a generic version of EVOMELA®. We also own several patents and pending patent applications covering drug products containing Captisol as a component. The type of patent protection (e.g., composition of matter or use) and the expiration dates for several issued patents covering Captisol are provided in the following table. In addition, certain related patents and applications in the commercially important jurisdictions of Europe and Japan are listed in the following table.

Captisol
United States Corresponding Foreign 
Type of Protection U.S. Patent No. U.S. Expiration Date Jurisdiction Patent Number Expiration Date‡
CoM 8,114,438  3/19/2028 EU 2,708,225  4/22/2025
Japan 6,141,906  4/22/2025
CoM 10,117,940  4/22/2025 EU 2,708,225  4/22/2025
Japan 6,141,906  4/22/2025
CoM 7,629,331  10/26/2025 EU 1,945,228  10/26/2025
EU 2,335,707  10/26/2025
EU 2,581,078  10/26/2025
Japan 5,465,432  10/26/2026
Use 8,049,003  12/19/2026 EU 2,583,668  10/26/2025
CoM 8,846,901  10/26/2025 EU 1,945,228  10/26/2025
EU 2,335,707  10/26/2025
EU 2,581,078  10/26/2025
Japan 5,465,432  10/26/2026
CoM 8,829,182  10/26/2025 EU 1,945,228  10/26/2025
EU 2,335,707  10/26/2025
EU 2,581,078  10/26/2025
EU 2,952,197  10/26/2025
Japan 5,465,432  10/26/2026
CoM/Use/MoM 9,617,352  3/13/2029 EU 2,952,197  10/26/2025
CoM / Use 7,635,773  3/13/2029 Japan 4,923,144  4/28/2029
Japan 6,039,721  4/28/2029
Japan 6,276,828  4/28/2029
Japan 6,444,548  4/28/2029
CoM 8,410,077  3/13/2029 Japan 4,923,144  4/28/2029
Japan 6,039,721  4/28/2029
Japan 6,276,828  4/28/2029
Japan 6,444,548  4/28/2029
CoM 9,200,088  3/13/2029 Japan 4,923,144  4/28/2029
Japan 6,039,721  4/28/2029
Japan 6,276,828  4/28/2029
Japan 6,444,548  4/28/2029
21

CoM 9,750,822  3/13/2029 Japan 4,923,144  4/28/2029
Japan 6,039,721  4/28/2029
Japan 6,276,828  4/28/2029
Japan 6,444,548  4/28/2029
CoM 10,117,951  3/13/2029 Japan 4,923,144  4/28/2029
Japan 6,039,721  4/28/2029
Japan 6,276,828  4/28/2029
Japan 6,444,548  4/28/2029
MoM 9,751,957  2/14/2033 N/A
CoM 9,493,582  2/27/2033 N/A
CoM/MoM 10,040,872  2/27/2033 N/A
‡ Expiration date of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
Subject to compliance with the terms of the respective agreements, our rights to receive royalty payments under our licenses with our exclusive licensors typically extend for the life of the patents covering such developments. For a discussion of the risks associated with patent and proprietary rights, see below under “Item 1A. Risk Factors.”
OmniAb 
Our OmniAb® therapeutic antibody platforms, including OmniRat®, OmniMouse® and OmniChicken™, produce naturally optimized, fully human antibodies in animals. We have received patent protection on OmniAb antibodies and methods in 30 countries, including the United States, multiple countries throughout Europe, Japan and China (see selected cases listed in the table below) and have 56 patent applications pending in 24 countries worldwide. The patents and applications owned by us are expected to expire between 2028 and 2034 and partners are able to use the OMT patented technology to generate novel antibodies, which may be entitled to additional patent protection.


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

22

OmniAb in OmniChicken
United States Corresponding Foreign
Type of Protection U.S. Patent No. U.S. Expiration Date Jurisdiction Patent Number Expiration Date‡
CoM/Use 8,030,095  12/23/2029 Europe 2,271,657  3/2/2029
MoM 8,415,173  3/2/2029 Japan 5,737,707  3/2/2029
CoM 8,592,644  8/30/2030 Japan 5,756,802  8/11/2030
CoM 9,404,125  12/29/2030 N/A
Use 9,549,538  8/11/2030 N/A
CoM/Use 10,010,058  8/11/2030 N/A
CoM/Use 10,172,334  8/11/2030 N/A
CoM/MoM/Use 8,865,462  5/8/2032 N/A
Com/MoM/Use 9,644,178  1/7/2031 N/A
CoM 9,380,769  5/23/2032 EU 2,713,712  5/23/2032
CoM 9,809,642  5/23/2032 N/A
CoM/Use 9,394,372  10/16/2032 N/A
CoM 9,982,062  10/16/2032 N/A
‡ Expiration date of European and Japanese patents are calculated as 20 years from the earliest nonprovisional filing date to which priority is claimed, and do not take into account extensions that are or may be available in these jurisdictions.
Vernalis
Our acquisition of Vernalis in October 2018 provides us with a portfolio of more than 8 fully-funded shots on goal, including RPL554, a Phase 2, novel treatment for COPD, which is partnered with Verona Pharma; and CPI-444, a Phase 1 adenosine A2A receptor antagonist for treatment of solid tumors, which is partnered with Corvus Pharmaceuticals. Vernalis has a worldwide patent portfolio of over 350 granted patents and over 35 pending applications, spanning over 60 countries.  
Employees
As of February 12, 2019, including our newly acquired Vernalis subsidiary, we have 116 full-time employees, of whom 87 are involved directly in scientific research and development activities.
Investor Information
Financial and other information about us is available on our website at www.ligand.com. We make available on our website copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. In addition, we have previously filed registration statements and other documents with the SEC. Any document we file may be inspected, at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549, or at the SEC’s internet address at www.sec.gov. These website addresses are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended to be a part of this filing. Information related to the operation of the SEC’s public reference room may be obtained by calling the SEC at 800-SEC-0330.


ITEM 1A. RISK FACTORS
The following is a summary description of some of the many risks we face in our business. You should carefully review these risks in evaluating our business, including the businesses of our subsidiaries. You should also consider the other information described in this report. Additional risks not presently known to us or that we currently deem immaterial also may impair our business.

23

Future revenue based on Promacta, Kyprolis and Evomela, as well as sales of our other products, may be lower than expected.

Novartis is obligated to pay us royalties on its sales of Promacta, and we receive revenue from Amgen based on both sales of Kyprolis and purchases of Captisol material for clinical and commercial uses. These payments are expected to be a substantial portion of our ongoing revenues for some time. In addition, we receive revenues based on sales of Evomela and other products. Any setback that may occur with respect to any of our partners' products, and in particular Promacta or Kyprolis, could significantly impair our operating results and/or reduce our revenue and the market price of our stock. Setbacks for the products could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the products, as well as higher than expected total rebates, returns, discounts, or unfavorable exchange rates. These products also are or may become subject to generic competition.

Future revenue from sales of Captisol material to our license partners may be lower than expected.

Revenues from sales of Captisol material to our collaborative partners represent a significant portion of our current revenues. Any setback that may occur with respect to Captisol could significantly impair our operating results and/or reduce the market price of our stock. Setbacks for Captisol could include problems with shipping, distribution, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products and physician or patient acceptance of the products using Captisol.

If products or product candidates incorporating Captisol material were to cause any unexpected adverse events, the perception of Captisol safety could be seriously harmed. If this were to occur, we may not be able to sell Captisol unless and until we are able to demonstrate that the adverse event was unrelated to Captisol, which we may not be able to do. Further, the FDA could require us to submit additional information for regulatory review or approval, including data from extensive safety testing or clinical testing of products using Captisol. This would be expensive and it may delay the marketing of Captisol-enabled products and receipt of revenue related to those products, which could significantly impair our operating results and/or reduce the market price of our stock.

We obtain Captisol from a sole source supplier, and if this supplier were to cease to be able, for any reason, to supply Captisol to us in the amounts we require, or decline to supply Captisol to us, we would be required to seek an alternative source, which could potentially take a considerable length of time and impact our revenue and customer relationships. We maintain inventory of Captisol, which has a five year shelf life, at three geographically dispersed storage locations in the United States and Europe.  If we were to encounter problems maintaining our inventory, such as natural disasters, at one or more of these locations, it could lead to supply interruptions. While we believe we maintain adequate inventory of Captisol to meet our current and expected future partner needs, our estimates and projections for Captisol demand may be wrong and any supply interruptions could materially adversely impact our operating results.

We currently depend on our arrangements with our partners and licensees to sell products using our Captisol technology. These agreements generally provide that our partners may terminate the agreements at will. If our partners discontinue sales of products using Captisol, fail to obtain regulatory approval for products using Captisol, fail to satisfy their obligations under their agreements with us, or choose to utilize a generic form of Captisol should it become available, or if we are unable to establish new licensing and marketing relationships, our financial results and growth prospects would be materially affected. Furthermore, we maintain significant accounts receivable balances with certain customers purchasing Captisol materials, which may result in the concentration of credit risk. We generally do not require any collateral from our customers to secure payment of these accounts receivable. If any of our major customers were to default in the payment of their obligations to us, our business, operating results and cash flows could be adversely affected.

Further, under most of our Captisol outlicenses, the amount of royalties we receive will be reduced or will cease when the relevant patent expires. Our low-chloride patents and foreign equivalents are not expected to expire until 2033, our high purity patents and foreign equivalents, are not expected to expire until 2029 and our morphology patents and foreign equivalents, are not expected to expire until 2025, but the initially filed patents relating to Captisol expired starting in 2010 in the United States and in 2016 in most countries outside the United States. If our other intellectual property rights are not sufficient to prevent a generic form of Captisol from coming to market and if in such case our partners choose to terminate their agreements with us, our Captisol revenue may decrease significantly.

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Third party intellectual property may prevent us or our partners from developing our potential products; our and our partners’ intellectual property may not prevent competition; and any intellectual property issues may be expensive and time consuming to resolve.

The manufacture, use or sale of our potential products or our licensees' products or potential products may infringe the patent rights of others. If others obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.

Generally, our success will depend on our ability and the ability of our partners to obtain and maintain patents and other intellectual property rights for our and their potential products.  Our patent position is uncertain and involves complex legal and technical questions for which legal principles are unresolved.  Even if we or our partners do obtain patents, such patents may not adequately protect the technology we own or have licensed. 

We permit our partners to list our patents that cover their branded products in the Orange Book. If a third party files an NDA or ANDA for a generic drug product that relies in whole or in part on studies contained in our partner’s NDA for their branded product, the third party will have the option to certify to the FDA that, in the opinion of that third party, the patents listed in the Orange Book for our partner’s branded product are invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the third party’s generic drug product. A third party certification that a new product will not infringe Orange Book-listed patents, or that such patents are invalid, is called a paragraph IV patent certification. If the third party submits a paragraph IV patent certification to the FDA, a notice of the paragraph IV patent certification must be sent to the NDA owner and the owner of the patents that are subject to the paragraph IV patent certification notice once the third-party’s NDA or ANDA is accepted for filing by the FDA. A lawsuit may then be initiated to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of the receipt of notice of a paragraph IV patent certification automatically prevents the FDA from approving the generic NDA or ANDA until the earlier of the expiration of a 30-month period, the expiration of the patents, the entry of a settlement order stating that the patents are invalid or not infringed, a decision in the infringement case that is favorable to the NDA or ANDA applicant, or such shorter or longer period as the court may order. If a patent infringement lawsuit is not initiated within the required 45-day period, the third-party’s NDA or ANDA will not be subject to the 30-month stay.

Several third-parties have challenged, and additional third parties may challenge, the patents covering our partner’s branded products, including Promacta, Kyprolis and Evomela, which could result in the invalidation or unenforceability of some or all of the relevant patent claims. We may from time to time become party to litigation or other proceedings as a result of Paragraph IV certifications. For example, in November 2017, CyDex, our wholly owned subsidiary, received a paragraph IV certification from Teva alleging that certain of our patents related to Captisol were invalid, unenforceable and/or will not be infringed by Teva’s ANDA related to Spectrum Pharmaceuticals’ NDA for Evomela. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that Teva’s ANDA would infringe our patents. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On July 24, 2018, the U.S. District Court entered a Scheduling Order, setting a hearing on Claim Construction for April 1, 2019, and a five to six day bench trial to begin on January 27, 2020. Fact discovery is proceeding.

In addition, we cannot assure you that all of the potentially relevant prior art-information that was or is deemed available to a person of skill in the relevant art prior to the priority date of the claimed invention-relating to our and our partners’ patents and patent applications has been found. If such prior art exists, it can invalidate a patent or prevent a patent from issuing from a pending patent application, and we or our partners may be subject to a third party pre-issuance submission of prior art to the United States Patent and Trademark Office. Even if patents do successfully issue and even if such patents cover our or our partner’s products or potential products, third parties may an initiate litigation or opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices, or similar proceedings challenging the validity, enforceability or scope of such patents, which may result in the patent claims being narrowed or invalidated, may allow third parties to commercialize our or our partners’ products and compete directly with us and our partners, without payment to us or our partners, or limit the duration of the patent protection of our and our partners’ technology and products. For example, we are aware that a third party has requested a reexamination of U.S. Patent No. 8,703,485 related to OmniAb on the basis of certain prior art documents. If the United States Patent and Trademark Office grants the request, we will have an opportunity to respond, but we cannot assure you that this patent will be held to be valid.

Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with our partner’s products.
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Any adverse outcome of such litigation or other proceedings could result in one or more or our patents being held invalid or unenforceable, which could adversely affect our ability to successfully execute our business strategy and negatively impact our financial condition and results of operations. However, given the unpredictability inherent in litigation, we cannot predict or guarantee the outcome of these matters or any other litigation. Regardless of how these matters are ultimately resolved, these matters may be costly, time-consuming and distracting to our management, which could have a material adverse effect on our business.

In addition, periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and or applications will be due to the U.S. and various foreign patent offices at various points over the lifetime of our and our licensees’ patents and/or applications. We have systems in place to remind us to pay these fees, and we rely on our outside patent annuity service to pay these fees when due. Additionally, the U.S. and various foreign patent offices require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, it could have a material adverse effect on our business.

Any conflicts with the patent rights of others could significantly reduce the coverage of our patents or limit our ability to obtain meaningful patent protection. For example, our European patent related to Agglomerated forms of Captisol was limited during an opposition proceeding, and the rejection of our European patent application related to High Purity Captisol was upheld on appealed. In addition, any determination that our patent rights are invalid may result in early termination of our agreements with our license partners and could adversely affect our ability to enter into new license agreements. We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, licensees and others to sign confidentiality agreements when they begin their relationship with us. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.

We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others' rights. If this occurs, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor's rights. In addition, if any of our competitors have filed patent applications in the United States which claim technology we also have invented, the United States Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.

The occurrence of any of the foregoing problems could be time-consuming and expensive and could adversely affect our financial position, liquidity and results of operations.

We rely heavily on licensee relationships, and any disputes or litigation with our partners or termination or breach of any of the related agreements could reduce the financial resources available to us, including milestone payments and future royalty revenues.

Our existing collaborations may not continue or be successful, and we may be unable to enter into future collaborative arrangements to develop and commercialize our unpartnered assets. Generally, our current collaborative partners also have the right to terminate their collaborations at will or under specified circumstances. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully (for example, by not making required payments when due, or at all), our product development under these agreements will be delayed or terminated. Disputes or litigation may also arise with our collaborators (with us and/or with one or more third parties), including those over ownership rights to intellectual property, know-how or technologies developed with our collaborators. For example, we are asserting our rights to receive payment against one of our collaborative partners which could harm our relationship with such partner. Such disputes or litigation could adversely affect our rights to one or more of our product candidates and could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, create uncertainty as to ownership rights of intellectual property, or could result in litigation or arbitration. In addition, a significant downturn or deterioration in the business or financial condition of our collaborators or partners could result in a loss of expected revenue and our expected returns on investment. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.

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Our product candidates, and the product candidates of our partners, face significant development and regulatory hurdles prior to partnering and/or marketing which could delay or prevent licensing, sales-based royalties and/or milestone revenue.

Before we or our partners obtain the approvals necessary to sell any of our unpartnered assets or partnered programs, we must show through preclinical studies and human testing that each potential product is safe and effective. We and/or our partners have a number of partnered programs and unpartnered assets moving toward or currently awaiting regulatory action. Failure to show any product's safety and effectiveness could delay or prevent regulatory approval of a product and could adversely affect our business. The drug development and clinical trials process is complex and uncertain. For example, the results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a product's safety and effectiveness to the satisfaction of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials. The FDA may also require additional clinical trials after regulatory approvals are received. Such additional trials may be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization of a product.

The speed at which we and our partners complete our scientific studies and clinical trials depends on many factors, including, but not limited to, the ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial and other potential drug candidates being studied. Delays in patient enrollment for our or our partners’ trials may result in increased costs and longer development times. In addition, our partners have rights to control product development and clinical programs for products developed under our collaborations. As a result, these partners may conduct these programs more slowly or in a different manner than expected. Moreover, even if clinical trials are completed, we or our partners still may not apply for FDA or foreign regulatory approval in a timely manner or the FDA or foreign regulatory authority still may not grant approval.

Our drug discovery, early-stage drug development, and product reformulation programs may require substantial additional capital to complete successfully. Our partner's drug development programs may require substantial additional capital to complete successfully, arising from costs to: conduct research, preclinical testing and human studies; establish pilot scale and commercial scale manufacturing processes and facilities; and establish and develop quality control, regulatory, marketing, sales and administrative capabilities to support these programs. While we expect to fund our research and development activities from cash generated from operations to the extent possible, if we are unable to do so, we may need to complete additional equity or debt financings or seek other external means of financing. These financings could depress our stock price. If additional funds are required to support our operations and we are unable to obtain them on terms favorable to us, we may be required to cease or reduce further development or commercialization of our products, to sell some or all of our technology or assets or to merge with another entity.

Our OmniAb antibody platform faces specific risks, including the fact that no drug using antibodies from the platform has yet advanced to late stage clinical trials.

None of our collaboration partners using our OmniAb antibody platform have tested drugs based on the platform in late stage clinical trials and, therefore, none of our OmniAb collaboration partners’ drugs have received FDA approval. If one of our OmniAb collaboration partners’ drug candidates fails during preclinical studies or clinical trials, our other OmniAb collaboration partners may decide to abandon drugs using antibodies generated from the OmniAb platform, whether or not attributable to the platform. All of our OmniAb collaboration partners may terminate their programs at any time without penalty. In addition, our OmniRat and OmniFlic platforms, which we consider the most promising, are covered by two patents within the U.S. and two patents in the European Union and are subject to the same risks as our patent portfolio discussed above, including the risk that our patents may infringe on third party patent rights or that our patents may be invalidated. Further, we face significant competition from other companies selling human antibody-generating rodents, especially mice which compete with our OmniMouse platform, including the VelocImmune mouse, the AlivaMab mouse, the Trianni mouse and the Kymouse. Many of our competitors have greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market competing antibody platforms.

If plaintiffs bring product liability lawsuits against us or our partners, we or our partners may incur substantial liabilities and may be required to limit commercialization of our approved products and product candidates.

As is common in our industry, our partners and we face an inherent risk of product liability as a result of the clinical testing of our product candidates in clinical trials and face an even greater risk for commercialized products. Although we are not currently a party to product liability litigation, if we are sued, we may be held liable if any product or product candidate we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of
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merit or eventual outcome, liability claims may result in decreased demand for any product candidates, partnered products or products that we may develop, injury to our reputation, discontinuation of clinical trials, costs to defend litigation, substantial monetary awards to clinical trial participants or patients, loss of revenue and product recall or withdrawal from the market and the inability to commercialize any products that we develop. We have product liability insurance that covers our clinical trials up to a $10.0 million annual limit. Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. If we are sued for any injury caused by our product candidates, partnered products or any future products, our liability could exceed our total assets.

Market acceptance and sales of any approved product will depend significantly on the availability and adequacy of coverage and reimbursement from third-party payors and may be affected by existing and future healthcare reform measures.

Sales of the products we license to our collaboration partners and the royalties we receive will depend in large part on the extent to which coverage and reimbursement is available from government and health administration authorities, private health maintenance organizations and health insurers, and other healthcare payors. Significant uncertainty exists as to the reimbursement status of healthcare products. Healthcare payors, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products. Even if a product is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover the costs associated with the research, development, marketing and sale of the product. If government and other healthcare payors do not provide adequate coverage and reimbursement levels for any product, market acceptance and any sales could be reduced.

From time to time, legislation is implemented to reign in rising healthcare expenditures. By way of example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, was enacted, which included a number of provisions affecting the pharmaceutical industry, including, among other things, annual, non-deductible fees on any entity that manufactures or imports some types of branded prescription drugs and increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future.

Other legislative changes have been proposed and adopted since the ACA was enacted, including aggregate reductions of Medicare payments to providers of 2% per fiscal year and reduced payments to several types of Medicare providers. Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. We cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect our operations or financial condition.

We and our collaboration partners may be subject to federal and state healthcare laws, including fraud and abuse, false claims, physician payment transparency and health information privacy and security laws. Our operations and those of our collaboration partners are subject to various federal and state fraud and abuse laws, including, without limitation, anti-kickback, false claims and physician payment transparency statutes. These laws may impact, among other things, financial arrangements with physicians, sales, marketing and education programs and the manner in which any of those activities are implemented. In addition, we may be subject to federal and state patient privacy regulations. If our operations or those of our collaboration partners are found to be in violation of any of those laws or any other applicable governmental regulations, we or our collaboration partners may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment, exclusion from government healthcare programs or the curtailment or restructuring of operations, any of which could adversely affect our ability to operate our business and our financial condition.


Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business or the business of our partners.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory,
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and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business or the business of our partners. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. If the timing of FDA’s review and approval of new products is delayed, the timing of our or our partners’ development process may be delayed which would result in delayed milestone revenues and materially harm our operations of business.

Any difficulties from strategic acquisitions could adversely affect our stock price, operating results and results of operations.

We may acquire companies, businesses and products that complement or augment our existing business. We may not be able to integrate any acquired business successfully or operate any acquired business profitably. Integrating any newly acquired business could be expensive and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than we predict. The diversion of our management's attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our ongoing business or inconsistencies in standards and controls that could negatively affect our ability to maintain third-party relationships. Moreover, we may need to raise additional funds through public or private debt or equity financing, or issue additional shares, to acquire any businesses or products, which may result in dilution for stockholders or the incurrence of indebtedness.

As part of our efforts to acquire companies, business or product candidates or to enter into other significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from acquisitions we may consummate in the future or have consummated in the past, whether as a result of unidentified risks, integration difficulties, regulatory setbacks, litigation with current or former employees and other events, our business, results of operations and financial condition could be adversely affected. If we acquire product candidates, we will also need to make certain assumptions about, among other things, development costs, the likelihood of receiving regulatory approval and the market for such product candidates. Our assumptions may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of these transactions.

In addition, we will likely experience significant charges to earnings in connection with our efforts, if any, to consummate acquisitions. For transactions that are ultimately not consummated, these charges may include fees and expenses for investment bankers, attorneys, accountants and other advisors in connection with our efforts. Even if our efforts are successful, we may incur, as part of a transaction, substantial charges for closure costs associated with elimination of duplicate operations and facilities and acquired IPR&D charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods.

Changes or modifications in financial accounting standards, including those related to revenue recognition, may harm our results of operations.

From time to time, the FASB either alone or jointly with other organizations, promulgates new accounting principles that could have an adverse impact on our results of operations. For example, in May 2014, FASB issued a new accounting standard for revenue recognition-Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or ASC 606-that supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The new guidance became effective in fiscal 2018.

This standard has a material impact on our consolidated financial statements by accelerating the timing of revenue recognition for revenues related to royalties, and potentially certain contingent milestone based payments. Our practice has been to book royalties one quarter after our partners report sales of the underlying product. Now, under ASC 606, Ligand estimates and books royalties in the same quarter that our partners report the sale of the underlying product. As a result, we now book royalties one quarter earlier compared to our past practice. We rely on our partners’ earning releases and other information from our partners to determine the sales of our partners’ products and to estimate the related royalty revenues. If our partners report
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incorrect sales, or if our partners delay reporting of their earnings release, our royalty estimates may need to be revised and/or our financial reporting may be delayed.

Any difficulties in implementing this guidance could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Finally, if we were to change our critical accounting estimates, including those related to the recognition of license revenue and other revenue sources, our operating results could be significantly affected.

Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate. 

The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, and significantly affected U.S. tax law, including by changing how the U.S. imposes tax on certain types of income of corporations and by reducing the general U.S. corporate income tax rate. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued.

The Tax Act requires certain complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of certain information not previously required or regularly produced. As a result, we have provided a provisional estimate on the effect of the Tax Act in our financial statements. As additional and other regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.

Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations.

As of December 31, 2018, we had U.S. federal and state net operating loss carryforwards (NOLs) of approximately $229.9 million and $125.3 million, respectively, which expire through 2037, if not utilized. Under the Tax Act, any federal NOLs arising in taxable years ending after December 31, 2017 will carry forward indefinitely. As of December 31, 2018, we had federal and California research and development tax credit carryforwards of approximately $23.0 million and $22.7 million, respectively. The federal research and development tax credit carryforwards expire in various years through 2037, if not utilized. The California research and development credit will carry forward indefinitely. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended (Code) if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its future post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We believe we have experienced certain ownership changes in the past and have reduced our deferred tax assets related to NOLs and research and development tax credit carryforwards accordingly. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result future transactions in our stock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net taxable income that we earn in the event that we attain profitability. Furthermore, under the Tax Act, although the treatment of tax losses generated in tax years beginning before December 31, 2017 has generally not changed, tax losses generated in tax years beginning after December 31, 2017 may only offset 80% of our taxable income. This change may require us to pay federal income taxes in future years despite having potentially generated a loss for federal income tax purposes in prior years. Any such limitations on the ability to use our NOLs and other tax assets could adversely impact our business, financial condition and operating results.

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We rely on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively.

Our business is increasingly dependent on critical, complex and interdependent information technology systems, including internet-based systems, to support business processes as well as internal and external communications. Despite the implementation of security measures, our internal computer systems and those of our partners are vulnerable to damage from cyber-attacks, computer viruses, security breaches, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our operations, could lead to the loss of trade secrets or other intellectual property, could lead to the public exposure of personal information of our employees and others, and could result in a material disruption of our clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our business and financial condition could be harmed.

The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose key data which could cause us to curtail or cease operations.

We are vulnerable to damage and/or loss of vital data from natural disasters, such as earthquakes, tornadoes, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any disaster were to occur, our ability to operate our business could be seriously impaired. We have property, liability, and business interruption insurance which may not be adequate to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and prospects.

Conversion of our outstanding convertible notes may result in losses, result in the dilution of existing stockholders, create downward pressure on the price of our common stock, and restrict our ability to take advantage of future opportunities.

In August 2014, we issued $245.0 million principal amount of the 2019 Notes and in May 2018, we issued $750.0 million principle amount of the 2023 Notes. The sale of the 2019 Notes and 2023 Notes may affect our earnings per share figures, as accounting procedures require that we include in our calculation of earnings per share the number of shares of our common stock into which the 2019 Notes and 2023 Notes are convertible. The convertible notes may be converted into cash and shares of our common stock, if any (subject to our right or obligation to pay cash in lieu of all or a portion of such shares). If shares of our common stock are issued to the holders of the convertible notes upon conversion, there will be dilution to our shareholders equity and the market price of our shares may decrease due to the additional selling pressure in the market. Any downward pressure on the price of our common stock caused by the sale or potential sale of shares issuable upon conversion of the convertible notes could also encourage short sales by third parties, creating additional selling pressure on our stock. Upon the occurrence of certain circumstances, holders of the convertible notes may require us to purchase all or a portion of their notes for cash, which may require the use of a substantial amount of cash. In addition, we must use cash to settle the principal and any premium due upon conversion of the 2019 Notes for any conversion notices received on or after May 22, 2018. If such cash is not available, we may be required to sell other assets or enter into alternate financing arrangements at terms that may or may not be desirable. The existence of the convertible notes and the obligations that we incurred by issuing them may restrict our ability to take advantage of certain future opportunities, such as engaging in future debt or equity financing activities.

As of December 31, 2018, we had $27.3 million aggregate principal amount of 2019 Notes, and $750.0 million aggregate principal amount of 2023 Notes. The notes are convertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the notes to be extinguished and their corresponding net carrying value. The fair value of the notes to be extinguished depends on our current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is lower than the implied interest rate of the notes, we will record a loss in our consolidated statement of income during the period in which the notes are converted.
  
Impairment charges pertaining to goodwill, identifiable intangible assets or other long-lived assets from our mergers and acquisitions could have an adverse impact on our results of operations and the market value of our common stock.

The total purchase price pertaining to our acquisitions in recent years of Vernalis, CyDex, Metabasis, Pharmacopeia, Neurogen, OMT and Crystal have been allocated to net tangible assets, identifiable intangible assets, in-process research and development and goodwill. To the extent the value of goodwill or identifiable intangible assets or other long-lived assets
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become impaired, we will be required to incur material charges relating to the impairment. Any impairment charges could have a material adverse impact on our results of operations and the market value of our common stock.

Our charter documents and concentration of ownership may hinder or prevent change of control transactions.

Provisions contained in our certificate of incorporation and bylaws may discourage transactions involving an actual or potential change in our ownership. In addition, our Board of Directors may issue shares of common or preferred stock without any further action by the stockholders. Our directors and certain of our institutional investors collectively beneficially own a significant portion of our outstanding common stock. Such provisions and issuances may have the effect of delaying or preventing a change in our ownership. If changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our current Board of Directors to be removed and replaced, even if you or our other stockholders believe that such actions are in the best interests of us and our stockholders.

Our stock price has been volatile and could experience a sudden decline in value.

The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has recently experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Continued volatility in the overall capital markets could reduce the market price of our common stock in spite of our operating performance. Further, high stock price volatility could result in higher share-based compensation expense.

Our common stock has experienced significant price and volume fluctuations and may continue to experience volatility in the future. Many factors may have a significant impact on the market price of our common stock, including, but not limited to, the following factors: results of or delays in our preclinical studies and clinical trials; the success of our collaboration agreements; publicity regarding actual or potential medical results relating to products under development by us or others; announcements of technological innovations or new commercial products by us or others; developments in patent or other proprietary rights by us or others; comments or opinions by securities analysts or major stockholders or changed securities analysts' reports or recommendations; future sales or shorting of our common stock by existing stockholders; regulatory developments or changes in regulatory guidance; litigation or threats of litigation; economic and other external factors or other disaster or crises; the departure of any of our officers, directors or key employees; period-to-period fluctuations in financial results; and price and volume fluctuations in the overall stock market.

Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.

Our results of operations could be materially negatively affected by economic conditions generally, both in the United States and elsewhere around the world. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, and the U.S. financial markets have in the past contributed to, and may continue in the future to contribute to, increased volatility and diminished expectations for the economy and the markets. Domestic and international equity markets periodically experience heightened volatility and turmoil. These events may have an adverse effect on us. In the event of a market downturn, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price may further decline. We cannot provide assurance that our investments are not subject to adverse changes in market value. If our investments experience adverse changes in market value, we may have less capital to fund our operations.


Item 1B. Unresolved Staff Comments
None.
 

Item 2. Properties
We currently lease premises consisting of approximately 5,000 square feet of office space in San Diego which serves as our corporate headquarters. The lease expires in April 2023.
We lease approximately 1,500 square feet of laboratory space located at the Bioscience and Technology Business Center in Lawrence, Kansas. The lease expires in December 2020.
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We lease approximately 13,000 square feet of office and laboratory space located in Emeryville, California. The lease expires in August 2021.
In connection with the Vernalis acquisition in October 2018, we lease approximately 28,000 square feet of office and laboratory space located in Cambridge, United Kingdom. The lease expires in September 2019, and we are currently working with the landlord on potential renewal options.


Item 3. Legal Proceedings

See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (9), Commitments and Contingencies—Legal Proceedings.”


Item 4. Mine Safety Disclosures
Not applicable.
PART II
 

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

Our common stock is traded on the Nasdaq Global Market under the symbol “LGND.” As of February 15, 2019, there were approximately 523 holders of record of the common stock.

Except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business, to pay down debt and potentially for share repurchases. Any future determination to pay dividends on common stock will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements and such other factors as the board deems relevant. 

The following table presents information regarding repurchases by us of our common stock during the three months ended December 31, 2018 under the stock repurchase program approved by our board of directors in September 2018, under which we may acquire up to $200 million of our common stock in open market and negotiated purchases for a period of up to three years. 

ISSUER PURCHASES OF EQUITY SECURITIES

      
Total Number of
Shares Purchased
Average Price Paid
Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the 
 Program
(in thousands)
October 1 - October 31, 2018 —  $ —  —  $ 200,000 
November 1 - November 30, 2018 295,210  $ 152.83  295,210  $ 154,883 
December 1 - December 31, 2018 208,038  $ 142.46  208,038  $ 125,246 
Total      503,248    $ 148.54  503,248 
 
On January 23, 2019, the board of directors elected to increase the existing $200 million share repurchase program, authorizing us to repurchase up to a maximum of $350 million of its outstanding common stock under the repurchase program. The repurchase program will expire, as originally scheduled, on September 20, 2021. Since December 31, 2018 and as of February 28, 2019, we acquired 400,177 additional shares during 2019, and the maximum dollar value of shares that may yet be purchased under the repurchase program was $225.9 million.

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In addition, in May 2018, we issued the 2023 Notes with an aggregate principal amount of $750.0 million. A portion of the proceeds from such issuance totaling $49.7 million were used to repurchase 260,000 shares of our common stock.

The information required by Item 201(d) of Regulation S-K is incorporated by reference to the 2019 Annual Meeting Proxy Statement as defined in Item 10 below.

Performance Graph
The graph below shows the five-year cumulative total stockholder return assuming the investment of $100 and is based on the returns of the component companies weighted monthly according to their market capitalizations. The graph compares total stockholder returns of our common stock, of all companies traded on the Nasdaq Stock market, as represented by the Nasdaq Composite® Index, and of the Nasdaq Biotechnology Stock Index, as prepared by The Nasdaq Stock Market Inc.
The stockholder return shown on the graph below is not necessarily indicative of future performance and we will not make or endorse any predictions as to future stockholder returns.
LGND-20181231_G2.JPG
12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018
Ligand $ 100.00  $ 101.16  $ 206.12  $ 193.17  $ 260.32  $ 257.98 
NASDAQ Composite-Total Return $ 100.00  $ 114.75  $ 122.74  $ 133.62  $ 173.22  $ 168.30 
NASDAQ Biotechnology Index $ 100.00  $ 134.40  $ 150.22  $ 118.15  $ 143.74  $ 131.00 














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Item 6. Selected Consolidated Financial Data
The following selected historical consolidated financial and other data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our selected statement of operations data set forth below for each of the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2018, 2017, 2016, 2015 and 2014 are derived from our consolidated financial statements.
 
Year Ended December 31,
2018 2017 2016 2015 2014
Consolidated Statements of Operations Data: (in thousands, except per share amounts)
Royalties $ 128,556  $ 88,685  $ 59,423  $ 38,194  $ 29,994 
Material sales 29,123  22,070  22,502  27,662  28,488 
License fees, milestones, and other revenues 93,774  30,347  27,048  6,058  6,056 
Total revenues 251,453  141,102  108,973  71,914  64,538 
Cost of material sales 6,337  5,366  5,571  5,807  9,136 
Amortization of intangibles 15,792  12,120  10,643  2,375  2,375 
Research and development 27,863  26,887  21,221  11,005  9,747 
General and administrative 37,734  28,653  27,653  25,398  23,654 
Total operating costs and expenses 87,726  73,026  65,088  44,585  44,912 
Income from operations 163,727  68,076  43,885  27,329  19,626 
Income (loss) from continuing operations including noncontrolling interests 143,321  12,556  (2,367) 227,444  10,892 
Loss attributable to noncontrolling interests —  —  —  (2,380) (1,132)
Income (loss) from continuing operations 143,321  12,556  (2,367) 229,824  12,024 
Discontinued operations —  —  731  —  — 
Net income (loss) 143,321  12,556  (1,636) 229,824  12,024 
Basic per share amounts:
Income (loss) from continuing operations $ 6.77  $ 0.60  $ (0.11) $ 11.61  $ 0.59 
Discontinued operations —  —  0.04  —  — 
Net income (loss) $ 6.77  $ 0.60  $ (0.08) $ 11.61  $ 0.59 
Weighted average number of common shares-basic 21,160  21,032  20,831  19,790  20,419 
Diluted per share amounts:
Income (loss) from continuing operations $ 5.96  $ 0.53  $ (0.11) $ 10.83  $ 0.56 
Discontinued operations —  —  0.04  —  — 
Net income (loss) $ 5.96  $ 0.53  $ (0.08) $ 10.83  $ 0.56 
Weighted average number of common shares-diluted 24,067  23,481  20,831  21,228  21,433 


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December 31,
2018 2017 2016 2015 2014
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term investments, restricted cash and investments $ 767,188  208,099  $ 149,393  $ 229,947  $ 168,597 
Working capital (deficit) 788,291  (1,847) (64,076) (8,109) 162,379 
Total assets 1,260,803  671,021  601,585  503,061  258,029 
Other long-term obligations (excludes long-term portions of deferred revenue, net and deferred gain) 7,776  9,981  3,603  3,330  208,757 
Total notes payable, net (including current portion) 636,297  224,529  212,910  201,985  195,908 
Accumulated deficit (229,197) (400,924)   (429,491) (659,315)
Total stockholders’ equity 560,914  399,788  341,290  237,282  26,318 



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

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying consolidated financial statements and notes. This MD&A is organized as follows:
•Results of Operations. Detailed discussion of our revenue and expenses.
•Liquidity and Capital Resources. Discussion of key aspects of our consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.
•Contractual Obligations. Tabular disclosure of known contractual obligations as of December 31, 2018.
•Critical Accounting Policies and Estimates. Discussion of significant changes we believe are important to understand the assumptions and judgments underlying our consolidated financial statements.
•Recent Accounting Pronouncements. For summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”

Results of Operations

Revenue
(Dollars in thousands) 2018 2017 Change % Change 2016 Change % Change
Royalty Revenue $ 128,556  $ 88,685  $ 39,871  45  % $ 59,423  $ 29,262  49  %
Material Sales 29,123  22,070  7,053  32  % 22,502  (432) (2) %
License fees, milestones and other revenue 93,774  30,347  63,427  209  % 27,048  3,299  12  %
Total revenue $ 251,453  $ 141,102  $ 110,351  78  % $ 108,973  $ 32,129  29  %

We adopted ASC 606, the new revenue standard, in the first quarter of 2018 and now recognize royalties on sales of products commercialized by our partners in the quarter the product is sold as opposed to on a one-quarter lag as previously recognized under ASC 605, the legacy revenue standard. The results for the reporting periods beginning after January 1, 2018 are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

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Royalty revenue is a function of our partners' product sales and the applicable royalty rate. Promacta and Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being 9.4% and 3.0%, respectively. Evomela has a fixed royalty rate of 20%.

Total revenue for 2018 increased $110.4 million or 78% compared with 2017 and for 2017 it increased $32.1 million or 29% compared with 2016.

Royalty revenue increased in each year presented primarily due to an increase in sales by our partners of Promacta and Kyprolis. Material sales increased year over year in 2018 due to timing of customer purchases of Captisol for use in clinical trials and in commercialized products. The increase in license fee, milestones and other revenues in 2018 compared to 2017 is primarily driven by a $47.0 million OmniAb platform license fee received from WuXi and $20.0 million received from Roivant upon entering into the GRA license agreement to develop and commercialize RVT-1502 (formerly named LGD-6972). The increase in license fees, milestones and other revenues in 2017 compared to 2016 was primarily due to OmniAb license fees and milestone payments.

The following table represents royalty revenue by program under the new (ASC 606) and prior (ASC 605) revenue standard:

(in millions)  2018 Estimated Partner Product Sales  Effective Royalty Rate  2018 Royalty Revenue under ASC 606  2018 Product Sales reported on quarter lag  Effective Royalty Rate  2018 Royalty Revenue under ASC 605  2017 Product Sales reported on quarter lag  Effective Royalty Rate  2017 Royalty Revenue under ASC 605 
Promacta  $ 1,173.4  8.5  % $ 99.3  $ 1,098.4  8.4  % $ 92.3  $ 787.6  8.0  % $ 62.9 
Kyprolis  980.5  2.2  % 21.7  947.5  2.2  % 20.9  817.0  2.0  % 16.4 
Evomela  28.1  20.0  % 5.7  28.6  20.0  % 5.7  35.8  20.0  % 7.2 
Other  163.5  1.2  % 1.9  162.0  1.3  % 2.1  155.7  1.4  % 2.2 
Total  $ 2,345.5  $ 128.6  $ 2,236.5  $ 121.0  $ 1,796.1  $ 88.7 


Operating Costs and Expenses
(Dollars in thousands) 2018 2017 Change % Change 2016 Change % Change
Cost of material sales $ 6,337  $ 5,366  $ 971  18  % $ 5,571  $ (205) (4) %
Amortization of intangibles 15,792  12,120  3,672  30  % 10,643  1,477  14  %
Research and development 27,863  26,887  976  4  % 21,221  5,666  27  %
General and administrative 37,734  28,653  9,081  32  % 27,653  1,000  4  %
Total operating costs and expenses $ 87,726  $ 73,026  $ 14,700  20  % $ 65,088  $ 7,938  12  %

Total operating costs and expenses for 2018 increased $14.7 million or 20% compared with 2017, while total operating costs and expenses as a percentage of revenue decreased in 2018 as compared to 2017. Cost of material sales increased year over year in 2018 primarily due to higher material sales as a result of timing of customer purchases. Amortization of intangibles increased year over year in 2018 due primarily due to the Crystal acquisition in the fourth quarter of 2017, the Vernalis acquisition in the fourth quarter of 2018 and amortization of previous indefinite lived IPR&D assets that were out-licensed or impaired. General and administrative expenses increased year over year in 2018 primarily due to increased business development activities, an increase in share-based compensation and the Vernalis acquisition.

Total operating costs and expenses for 2017 increased $7.9 million or 12% compared with 2016, while the total operating costs and expenses as a percentage of revenue decreased in 2017 as compared to 2016. Cost of material sales decreased year over year in 2017 primarily due to lower material sales as a result of timing of customer purchases. Amortization of intangibles increased year over year in 2017 due primarily to the acquisition of Crystal in October 2017. Research and development expenses and general and administrative expenses increased year over year in 2017 due primarily to increased business development activities, timing of internal development costs and increased share-based compensation expense and headcount related expenses associated with Crystal.

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We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of research and clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMA, our inability to predict the decisions of our partners, our ability to fund research and development programs, competition from other entities of which we may become aware in future periods, predictions of market potential for products that may be derived from our work, and our ability to recruit and retain personnel or third-party contractors with the necessary knowledge and skills to perform certain research. Refer to “Item 1A. Risk Factors” for additional discussion of the uncertainties surrounding our research and development initiatives.

Other income (expense)
(Dollars in thousands) 2018 2017 Change % Change 2016 Change % Change
Gain (loss) from Viking 50,187  (2,048) 52,235  (2,551) % (23,132) 21,084  (91) %
Interest income 13,999  2,060  11,939  580  % 664  1,396  210  %
Interest expense (48,276) (13,460) (34,816) 259  % (12,842) (618) 5  %
Other (expense) income, net (6,307) 2,603  (8,910) (342) % (615) 3,218  (523) %
Total other income (expense,) net $ 9,603  $ (10,845) $ 20,448  (189) % $ (35,925) $ 25,080  (70) %

In the first quarter of 2018, we discontinued accounting for our ownership interest in Viking common stock under the equity method and now account for Viking as an equity security with changes in the fair value of Viking common stock recorded as "Gain (loss) from Viking." The increase in gain (loss) from Viking is a result of a $42.4 million unrealized gain recorded in 2018. In addition, gain (loss) from Viking in 2018 includes a realized gain of $2.5 million resulting from the sale of Viking shares as well as an unrealized gain relating to an increase in the market value of Viking warrants held by us of $5.4 million. 

In 2017, we recorded a $4.7 million loss from Viking for our proportionate share of Viking’s losses based on our ownership of Viking common stock and a $2.9 million gain on dilution resulting from Viking's financings. In 2016, we recorded a $5.0 million loss from Viking for our proportionate share of Viking’s losses based on our ownership of Viking common stock and $10.7 million for loss on dilution resulting from Viking's financing. Additionally, we recorded an impairment charge in 2016 of $7.4 million relating to our investment in Viking.

Interest income consists primarily of short-term investment transactions and the change in fair market value of the investments. The increase over the prior periods presented is due to the increase in our short-term investment balances which, in the current year, is a result of the 2023 Notes financing on May 22, 2018.

Interest expense includes the 0.75% coupon cash interest expense in addition to the $44.0 million non-cash accretion of discount on our 2019 Notes and 2023 Notes for the year ended December 31, 2018. The increase from prior year is primarily due to the issuance of the 2023 Notes in May 2018 and a $3.2 million loss on debt extinguishment resulting from the settlement of a portion of our 2019 Notes in 2018. See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (6), Convertible Senior Notes.”

The increase in Other income (expense), net, in 2018 as compared to the prior year is due primarily to the increase in the fair value of contingent liabilities associated with our Metabasis acquisition and a net increase in our derivative instrument expense associated with our convertible notes and hedge transactions. See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (6), Convertible Senior Notes.” The year over year variance in Other expense (income), net, in 2017 as compared to 2016 is due to an increase in the fair value of the Viking note receivable and gain on the sale of short-term investments.

Income tax expense
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(Dollars in thousands) 2018 2017 Change % Change 2016 Change % Change
Income before income tax expense $ 173,330  $ 57,231  $ 116,099  203  % $7,960  $ 49,271  619  %
Income tax expense (30,009) (44,675) 14,666  (33) % (10,327) (34,348) 333  %
Income (loss) from operations $ 143,321  $ 12,556  $ 130,765  1,041  % $(2,367) $ 14,923  (630) %
Effective Tax Rate 17  % 78  % 130  %

Our effective tax rate for 2018, 2017 and 2016 was 17%, 78%, and 130%, respectively. Our tax rate is affected by recurring items, such as the U.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the items below had the most significant impact on the difference between our statutory U.S. income tax rate and our effective tax rate.

  
2018

•$8.1 million (5%) decrease due to excess tax benefits from share-based compensation which are recorded as a discrete item within the provision for income tax pursuant to ASU 2016-09
•$4.2 million (2%) decrease due to changes in valuation allowance primarily relating to capital loss carryovers and research and development tax credits.
•$3.1 million (2%) increase from expired NOLs and credits
•$2.8 million (2%) reduction from research and development tax credits
•$0.9 million (1%) increase from non-cash contingent consideration charges that are nondeductible for tax purposes
•$0.9 million (1%) increase from Section 162(m) limitation

2017

•$32.4 million (55%) increase due to the provisional estimated impact of the Tax Act and primarily due to the impact of revaluing our U.S. deferred tax assets and liabilities based on the statutory rates at which they are expected to be recognized in the future, which for federal purposes was reduced from 35% to 21%
•$4.0 million (7%) decrease due to excess tax benefits from share-based compensation which are recorded as a discrete item within the provision for income tax pursuant to ASU 2016-09
•$4.2 million (7%) reduction due to decrease in valuation allowance primarily relating to our Viking deferred tax asset and change in corporate tax rates under the Tax Act
•$2.8 million (5%) reduction from research and development tax credits
•$1.3 million (2%) increase in uncertain tax positions
•$0.9 million (2%) increase from non-cash contingent consideration charges that are nondeductible for tax purposes

2016

•$6.3 million (79%) increase in valuation allowance primarily relating to Viking deferred tax asset
•$1.4 million (18%) increase in uncertain tax positions
•$1.2 million (15%) increase from non-cash contingent consideration charges that are nondeductible for tax purposes
•$1.5 million (19%) reduction from research and development credits

Discontinued operations

In 2006, we entered into a purchase agreement with Eisai pursuant to which Eisai agreed to acquire our Oncology product line which included four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. Certain liabilities were recorded associated with the disposal of the product line. During the year ended December 31, 2016, we recognized a $1.1 million gain due to subsequent changes in certain estimates and liabilities previously recorded. We recorded a provision for income taxes related to the gain of $0.4 million.


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Liquidity and Capital Resource
At December 31, 2018, we had approximately $117.2 million in cash and cash equivalents, of which approximately $7.5 million was held by our foreign subsidiaries. Cash and cash equivalents increased by $96.5 million from last year, due to factors described in the "Cash Flow Summary" below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.

Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. As of December 31, 2018, we had $601.2 million in short-term investments. Our short-term investments include U.S. government debt securities, investment-grade corporate debt securities and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as 6.0 million shares in Viking.

In August 2014, we issued the 2019 Notes with aggregate principal amount of $245.0 million. During 2018, $217.7 million in principal of the 2019 Notes were converted and $27.3 million in principal remained outstanding as of December 31, 2018, which will be paid off in cash upon the due date.

In May 2018, we issued the 2023 Notes with an aggregate principal amount of $750.0 million. A portion of the proceeds from such issuance totaling $49.7 million were used to repurchase 260,000 shares of our common stock. The 2023 Notes were not convertible as of December 31, 2018. 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.

We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities are sufficient to fund our near term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:

•potential early repayment of debt obligations as a result of conversions;
•repurchases of our outstanding common stock;
•the continued advancement of research and development efforts;
•potential strategic acquisitions and investments; and
•the expansion needs of our facilities, including costs of leasing additional facilities.

As of December 31, 2018, we had $12.5 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.

During 2018, we used $77.8 million to repurchase 522,248 of our outstanding shares under the stock repurchase programs authorized by our Board of Directors. As of December 31, 2018, there remains $125.2 million under the authorized program. See “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities.”

Cash Flow Summary
(in thousands) 2018 2017 2016
Net cash provided by (used in):
Operating activities $ 194,059  $ 88,570  $ 60,733 
Investing activities (423,269) (79,179) (134,415)
Financing activities 328,585  (7,523) (4,994)

In 2018, we generated cash from operations, from issuance of the 2023 Notes and associated warrants, and from issuance of common stock under employee stock plans. During the same period we used cash for investing activities, including the acquisition of commercial rights, net purchases of short-term investments, payments made to acquire Vernalis, payments to CVR holders and capital expenditures. We also used cash for financing activities, including principal payments related to
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conversions of the 2019 Notes, payments to purchase the bond hedge associated with the 2023 Notes, payments for taxes related to net share settlement of equity awards and to repurchase shares of our common stock.

In 2017, we generated cash from operations and from issuance of common stock under employee stock plans. During the same period we used cash for investing activities, including net purchases of short-term investments, payments made to acquire Crystal, payments to CVR holders and capital expenditures. We also used cash to pay taxes related to net share settlement of equity awards and to repurchase shares of our common stock.

In 2016, we generated cash from operations and from issuance of common stock under employee stock plans. During the same period we used cash for investing activities, including net purchases of short-term investments, payments made to acquire OMT, commercial license rights from Cormatrix, Viking common stock and shares of an equity method investee, payments to CVR holders and capital expenditures. We also used cash to pay taxes related to net share settlement of equity awards and to repurchase shares of our common stock.
Off-Balance Sheet Arrangements

We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 31, 2018, we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.

We lease our office facilities under operating lease arrangements with varying terms through April 2023. The agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases of 3.0%. We had no off-balance sheet arrangements at December 31, 2018, 2017 and 2016.
Contractual Obligations
As of December 31, 2018, future minimum payments due under our contractual obligations are as follows (in thousands):
 
  Payments Due by Period
  Total Less than 1 year 1-2 years 3-4 years Thereafter
Purchase obligations (1)
$ 12,754  $ 6,164  $ 6,590  $ —  $ — 
Notes payable (2)
$ 803,211  $ 33,758  $ 11,250  $ 758,203  $ — 
Operating lease obligations (3)
$ 2,963  $ 1,620  $ 1,145  $ 198  $ — 

  (1)  Amounts represent our commitments under our supply agreement with Hovione for Captisol purchases.
 (2)  Amounts represent contractual amounts due under our convertible senior notes, including interest based on the fixed rate of 0.75% per year.
 (3)  We lease an office and research facility, which we have fully vacated under operating lease arrangements expiring on June 2019. We sublet these facilities through the end of our lease. As of December 31, 2018, we expect to receive aggregate future minimum lease payments totaling $0.4 million (non-discounted) over the duration of the sublease agreement, which are not included in the table above. 

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

41

Revenue Recognition

On January 1, 2018, we adopted ASC 606, which amends the guidance for recognition of revenue from contracts with customers using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. We apply the following five-stop model in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether
they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under the contractual agreements. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when there is a basis to reasonably estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon or after the development milestone or regulatory approval.

Revenue from material sales is recognized when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales.

We occasionally have sub-license obligations related to arrangements for which we receive license fees, milestones and royalties. We evaluate the determination of gross as a principal versus net as an agent reporting based on each individual agreement.

Intangible Assets and Other Long-Lived Assets — Impairment Assessments

We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. A review of identifiable intangible assets and other long-lived assets is performed when an event occurs indicating the potential for impairment. If indicators of impairment exist, we first assess the impairment evaluation and then assess the recoverability of the affected long-lived assets and compare their fair values to the respective carrying amounts if needed. An impairment evaluation
42

is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of assets and liabilities.

In order to estimate the fair value of identifiable intangible assets and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Contingent Liabilities

In October 2017, we acquired Crystal for total cash consideration of $27.2 million, plus contingent consideration of up to an additional $10.5 million over a five year period following the acquisition date based on certain research milestones and a portion of the payments that we receive from a specified part of the historical Crystal business. The contingent consideration is measured at fair value using an income approach valuation technique, specifically with probability weighted and discounted cash flows. The fair value of the liability is assessed at each reporting date and the change in fair value is recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability. The fair value of the contingent consideration liability as of December 31, 2018 was $8.4 million.

In connection with our acquisition of CyDex in January 2011, we recorded contingent liabilities for amounts potentially due to holders of the CyDex CVRs and certain other contingency payments. The fair value of the liability is assessed at each reporting date using the income approach incorporating the estimated future cash flows from potential milestones and revenue sharing. The change in fair value is recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability.

In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as proceeds are received by us from the sale or partnering of any of the Metabasis drug development programs. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement. Changes in the fair values are reported in the statement of operations as income (decreases) or expense (increases). The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability.

See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (4), Fair Value Measurement.”
Income Taxes  
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.

Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.

43

We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.

Recent Accounting Pronouncements

For the summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from interest rates and equity prices which could affect our results of operations, financial condition and cash flows. We manage our exposure to these market risks through our regular operating and financing activities.

Investment Portfolio Risk

At December 31, 2018, our investment portfolio included investments in available-for-sale equity securities of $601.2 million and investment in Viking common stock of $46.2 million . These securities are subject to market risk and may decline in value based on market conditions.

Equity Price Risk

Our 2019 Notes include conversion and settlement provisions that are based on the price of our common stock at conversion or maturity of the notes, as applicable. The minimum amount of cash we may be required to pay is $245.0 million, but will ultimately be determined by the price of our common stock. The fair values of our 2019 Notes are dependent on the price and volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. In order to minimize the impact of potential dilution to our common stock upon the conversion of the 2019 Notes, we entered into convertible bond hedges covering 3,264,643 shares of our common stock. Concurrently with entering into the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants with an exercise price of approximately $125.08 per share, subject to adjustment. During 2018, we received notices for conversion of $217.7 million, which were all settled as of December 31, 2018. Throughout the term of the 2019 Notes, the notes may have a dilutive effect on our earnings per share to the extent the stock price exceeds the conversion price of the notes. Additionally, the warrants may have a dilutive effect on our earnings per share to the extent the stock price exceeds the strike price of the warrants.

Our 2023 Notes include conversion and settlement provisions that are based on the price of our common stock at conversion or maturity of the notes, as applicable. As of December 31, 2018, the “if-converted value” did not exceed the principal amount of the 2023 Notes. See detail in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (6), Convertible Senior Notes.”

Foreign Currency Risk

Through our licensing and business operations, together with our recent acquisition of Vernalis, we are exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenues and profit translated into U.S. dollars. Our license partners sell our products worldwide in currencies other than the U.S. dollar. Because of this, our revenues from royalty payments are subject to risk from changes in exchange rates.

We purchase Captisol from Hovione, located in Lisbon, Portugal. Payments to Hovione are denominated and paid in U.S. dollars; however, the unit price of Captisol contains an adjustment factor which is based on the sharing of foreign currency risk between the two parties. The effect of an immediate 10% change in foreign exchange rates would not have a material impact on our financial condition, results of operations or cash flows. We do not currently hedge our exposures to foreign currency fluctuations.

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Interest Rate Risk

We are exposed to market risk involving rising interest rates. To the extent interest rates rise, our interest costs could increase. An increase in interest costs of 10% would not have a material impact on our financial condition, results of operations or cash flows.



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Item 8. Consolidated Financial Statements and Supplementary Data



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
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46

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders 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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019 expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for recognizing revenue due to the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-10, and 2016-12, effective January 1, 2018.

Adoption of ASU No. 2016-01

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for financial instruments due to the adoption of Accounting Standards Update (ASU) 2016-01, Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018.

Adoption of ASU No. 2016-09

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share-based payment transactions in 2017 due to the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, effective January 1, 2017.

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.




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/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2016.

San Diego, California
February 28, 2019



48

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
December 31,
2018 2017
ASSETS
Current assets:
Cash and cash equivalents
$ 117,164  $ 20,620 
Short-term investments 601,217  181,041 
Investment in Viking 46,191  — 
Accounts receivable, net 55,850  25,596 
Note receivable from Viking —  3,877 
Inventory 7,124  4,373 
Derivative asset 22,576  — 
Other current assets 20,418  1,514 
Total current assets 870,540  237,021 
Deferred income taxes, net 46,521  84,422 
Investment in Viking —  6,438 
Intangible assets, net 219,793  228,584 
Goodwill 86,646  85,959 
Commercial license rights 31,460  19,526 
Property and equipment, net 5,372  4,212 
Other assets 471  4,859 
Total assets $ 1,260,803  $ 671,021 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 4,183  $ 2,259 
Accrued liabilities 19,200  7,377 
Current contingent liabilities 5,717  4,703 
Deferred revenue   3,286  — 
Derivative liability  23,430  — 
2019 convertible senior notes, net

26,433  224,529 
Total current liabilities 82,249  238,868 
2023 convertible senior notes, net 609,864  — 
Long-term contingent liabilities 6,825  9,258 
Other long-term liabilities 951  4,248 
Total liabilities 699,889  252,374 
Commitments and contingencies
Equity component of currently redeemable convertible notes (Note 6)

—  18,859 
Stockholders’ equity:
Common stock, $0.001 par value; 60,000,000 and 33,333,333 shares authorized; 20,765,533 and 21,148,665 shares issued and outstanding at December 31, 2018 and 2017, respectively
21  21 
Additional paid-in capital 791,114  798,205 
Accumulated other comprehensive income (loss) (1,024) 2,486 
Accumulated deficit (229,197) (400,924)
Total stockholders’ equity 560,914  399,788 
Total liabilities and stockholders’ equity $ 1,260,803  $ 671,021 
See accompanying notes to these consolidated financial statements.





49

LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Year Ended December 31,
2018 2017 2016
Revenues:
Royalties $ 128,556  $ 88,685  $ 59,423 
Material sales 29,123  22,070  22,502 
License fees, milestones and other revenues 93,774  30,347  27,048 
Total revenues 251,453  141,102  108,973 
Operating costs and expenses:
Cost of material sales
6,337  5,366  5,571 
Amortization of intangibles 15,792  12,120  10,643 
Research and development 27,863  26,887  21,221 
General and administrative 37,734  28,653  27,653 
Total operating costs and expenses 87,726  73,026  65,088 
Income from operations 163,727  68,076  43,885 
Other income (expense):
Gain (loss) from Viking 50,187  (2,048) (23,132)
Interest income 13,999  2,060  664 
Interest expense (48,276) (13,460) (12,842)
Other income (expense), net (6,307) 2,603  (615)
Total other income (expense), net 9,603  (10,845) (35,925)
Income before income tax expense 173,330  57,231  7,960 
Income tax expense (30,009) (44,675) (10,327)
Income (loss) from operations 143,321  12,556  (2,367)
Discontinued operations:
Gain on sale of Oncology Product Line before income taxes —  —  1,139 
Income tax expense on discontinued operations —  —  (408)
Income from discontinued operations —  —  731 
Net income (loss): $ 143,321  $ 12,556  $ (1,636)
Basic per share amounts(1):
Income (loss) from continuing operations $ 6.77  $ 0.60  $ (0.11)
Income from discontinued operations —  —  0.04 
Net income (loss) $ 6.77  $ 0.60  $ (0.08)
Diluted per share amounts(1):
Income (loss) from continuing operations $ 5.96  $ 0.53  $ (0.11)
Income from discontinued operations —  —  0.04 
Net income (loss) $ 5.96  $ 0.53  $ (0.08)
Weighted average common shares outstanding:
Basic 21,160  21,032  20,831 
Diluted 24,067  23,481  20,831 
(1) The sum of net income per share amounts may not equal the total due to rounding

See accompanying notes to these consolidated financial statements.







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

Year Ended December 31,
2018 2017 2016
Net income (loss) $ 143,321  $ 12,556  $ (1,636)
Unrealized net gain on available-for-sale securities, net of tax 73  143  93 
Foreign currency translation (921) —  — 
Less: Reclassification of net realized gains included in net income (loss), net of tax —  (400) (2,253)
Comprehensive income (loss) $ 142,473  $ 12,299  $ (3,796)

See accompanying notes to these consolidated financial statements.

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LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
stockholders’
equity
Shares Amount
Balance at January 1, 2016 19,949,012  $ 20  $ 661,850  $ 4,903  $ (429,491) $ 237,282 
Issuance of common stock under employee stock compensation plans, net 210,626  —  5,416  —  —  5,416 
Shares issued in OMT acquisition 790,163  1  77,330  —  —  77,331 
Reclassification of equity component of currently redeemable convertible notes
—  —  10,065  —  —  10,065 
Share-based compensation —  —  18,893  —  —  18,893 
Repurchase of common stock (40,500) —  (3,901) —  —  (3,901)
Other comprehensive loss —  —  —  (2,160) —  (2,160)
Net loss —  —  —  —  (1,636) (1,636)
Balance at December 31, 2016 20,909,301  $ 21  $ 769,653  $ 2,743  $ (431,127) $ 341,290 
Issuance of common stock under employee stock compensation plans, net 253,364  —  (5,558) —  —  (5,558)
Reclassification of equity component of currently redeemable convertible notes

—  —  10,704  —  —  10,704 
Share-based compensation —  —  24,916  —  —  24,916 
Repurchase of common stock (14,000) —  (1,966) —  —  (1,966)
Other comprehensive loss —  —  —  (257) —  (257)
Cumulative-effect adjustment from adoption of ASU 2016-09 —  —  456  —  17,647  —  18,103 
Net income —  —  —  —  12,556  12,556 
Balance at December 31, 2017 21,148,665  $ 21  $ 798,205  $ 2,486  $ (400,924) $ 399,788 
Issuance of common stock under employee stock compensation plans, net
399,116  —  16,417  —  —  16,417 
Reclassification of equity component of currently redeemable convertible notes
—  —  18,859  —  —  18,859 
Share-based compensation
—  —  20,846  —  —  20,846 
Repurchase of common stock
(782,248) —  (127,481) —  —  (127,481)
Other comprehensive income
—  —  —  73  73 
Cumulative-effect adjustment from adoption of ASU 2016-01
—  —  —  (2,662) 2,662  — 
Cumulative-effect adjustment from adoption of ASU 2014-09, net of tax
—  —  —  —  25,581  25,581 
Derivative associated with 2019 Notes and Bond Hedge —  —  (1,559) —  —  (1,559)
Loss on settlement of 2019 Notes —  —  3,187  —  —  3,187 
Warrant repurchase in connection with 2019 Notes —  —  (30,472) —  —  (30,472)
Loss on repurchase of warrants in connection with 2019 Notes —  —  1,792  —  —  1,792 
Tax effect on 2019 Notes transactions —  —  (1,680) —  —  (1,680)
Derivative associated with 2023 Notes and Bond Hedge —  —  (1,807) —  —  (1,807)
Warrant derivative in connection with 2023 Notes —  —  97,805  —  —  97,805 
Tax effect for 2023 Notes transactions —  —  (3,181) —  —  (3,181)
Foreign currency translation adjustment
—  —  —  (921) —  (921)
Other tax adjustments —  —  183  —  163  346 
Net income —  —  —  —  143,321  143,321 
Balance at December 31, 2018
20,765,533  $ 21  $ 791,114  $ (1,024) $ (229,197) $ 560,914 
See accompanying notes to these consolidated financial statements.







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

Year Ended December 31,
2018 2017 2016
(Revised)* (Revised)*
Operating activities
Net income (loss) $ 143,321  $ 12,556  $ (1,636)
Less: income from discontinued operations —  —  731 
Income (loss) from continuing operations 143,321  12,556  (2,367)
Adjustments to reconcile net income to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities 3,448  2,580  3,334 
Realized gain on sale of short-term investment (2,611) (831) (2,352)
Depreciation and amortization 14,718  11,714  11,290 
(Gain) loss on equity investment in Viking (42,346) 2,048  23,132 
Change in fair value of the convertible debt receivable from Viking and warrants (5,411) (4,032) (462)
Amortization of premium (discount) on investments, net

(5,452) (81) 348 
Amortization of debt discount and issuance fees 43,954  11,619  10,925 
Share-based compensation 20,846  24,915  18,893 
Deferred income taxes, net 29,739  44,518  10,697 
Royalties recorded in retained earnings upon adoption of ASC 606 32,707  —  — 
Change in derivative asset and liability fair value 2,931  —  — 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net (29,544) (8,358) (8,525)
Inventory (2,559) (843) (244)
Other current assets (868) 402  526 
Other long term assets 728  —  183 
Accounts payable and accrued liabilities (4,542) (1,713) (2,369)
Contingent liabilities (3,842) (4,998) (2,268)
Deferred revenue (1,158) (926) (8)
Net cash provided by operating activities 194,059  88,570  60,733 
Investing activities
Purchase of commercial license rights (10,000) —  (17,695)
Purchase of Viking common stock and warrant —  —  (700)
Purchase of common stock in equity method investment

—  —  (1,000)
Cash paid for acquisition, net of cash acquired

(5,856) (26,653) (92,502)
Payments to CVR holders and other contingency payments (1,000) —  — 
Purchases of property and equipment (887) (2,156) (1,850)
Purchases of short-term investments (1,434,255) (254,258) (164,438)
Proceeds from sale of short-term investments 131,942  86,985  24,596 
Proceeds from maturity of short-term investments 892,873  109,649  118,874 
Proceeds from commercial license rights

—  7,054  — 
Proceeds received from repayment of Viking note receivable

3,914  200  300 
Net cash used in investing activities (423,269) (79,179) (134,415)
Financing activities
Repayment of debt (217,674) —  — 
Gross proceeds from issuance of 2023 Convertible Senior Notes 750,000  —  — 
Payment of debt issuance costs (16,900) —  — 
Proceeds from issuance of warrants 90,000  —  — 
Purchase of convertible bond hedge (140,250) —  — 
Proceeds from bond hedge settlement 439,559  —  — 
Payments to convert holders for bond conversion (439,581) —  — 
Net proceeds from stock option exercises and ESPP 20,183  4,517  6,415 
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Taxes paid related to net share settlement of equity awards

(3,765) (10,074) (999)
Share repurchases (122,868) (1,966) (3,901)
Repurchase of warrants
(30,094) —  — 
Payments to CVR Holders (25) —  (6,509)
Net cash provided by (used in) financing activities 328,585  (7,523) (4,994)
Effect of exchange rate changes on cash
(215) —  — 
Net increase (decrease) in cash and cash equivalents 99,375  1,868  (78,676)
Cash, cash equivalents and restricted cash at beginning of year 20,620  18,752  97,428 
Cash, cash equivalents and restricted cash at end of year $ 119,780  $ 20,620  $ 18,752 
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest paid $ 1,513  $ 1,838  $ 1,838 
Taxes paid $ 341  $ 157  $ 38 
Supplemental schedule of non-cash investing and financing activities
Stock issued for acquisition, net of issuance cost

$ —  $ —  $ (77,331)
Stock and warrant received for repayment of Viking notes receivable $ —  $ —  $ 1,200 
Accrued inventory purchases $ 2,059  $ 1,007  $ 646 
Unrealized gain on AFS investments $ 48  $ 144  $ (1,109)
*See Note (1) for detail on the revision.
See accompanying notes to these consolidated financial statements.



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Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.

1. Basis of Presentation and Summary of Significant Accounting Policies

Business

Ligand is a biopharmaceutical company with a business model based on developing or acquiring assets which generate royalty, milestone or other passive revenue for the Company using a lean corporate cost structure. We operate in one business segment: development and licensing of biopharmaceutical assets.

Principles of Consolidation

The accompanying consolidated financial statements include Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation
 
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of our parent company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the previously issued statement of operations to conform with the current period presentation. See detail in Accounting Standards Recently Adopted subsection below for further information.

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 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 and certificates of deposit. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.

A relatively small number of partners account for a significant percentage of our revenue. Revenue from significant partners, which is defined as 10% or more of our total revenue, was as follows:
December 31,
2018 2017 2016
Partner A 40  % 46  % 41  %
Partner B 13  % 19  % 14  %
Partner C 20  % < 10%  < 10% 

We obtain Captisol from two sites at a single supplier, Hovione. If this supplier were not able to supply the requested amounts of Captisol from each site, and if our safety stocks of material were depleted, we would be unable to continue to derive revenues from the sale of Captisol until we obtained material from an alternative source, which could take a considerable length of time.

Cash Equivalents & Short Term Investments

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Cash equivalents consist of all investments with maturities of three months or less from the date of acquisition. Short-term investments primarily consist of investments in debt securities that have effective maturities greater than three months and less than twelve months from the date of acquisition. We classify our short-term investments as "available-for-sale". Such investments are carried at fair value, with unrealized gains and losses included in the statement of comprehensive income (loss). We determine the cost of investments based on the specific identification method. 
Accounts Receivable

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms which range from 30 to 90 days. We reserve specific receivables if collectability is no longer reasonably assured. We re-evaluate such reserves on a regular basis and adjust the reserves as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or market value. We determine cost using the first-in, first-out 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, 2018, 2017 and 2016.
Property and Equipment

Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, which generally range from three to ten years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.

Business Combinations

The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination).

Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, including contingent consideration and all contractual contingencies, generally at the acquisition date fair value. Contingent purchase consideration to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in other income (expense), net. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred.

We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. In addition, IPR&D is capitalized and assessed for impairment annually. IPR&D is amortized upon product commercialization or upon out-licensing the underlying intellectual property where we have no active involvement in the licensee's development activities. IPR&D is amortized over the estimated life of the commercial product or licensing arrangement.

Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements in the period of change, if any.

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
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measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
Contingent Liabilities

In connection with the acquisition of Crystal in October 2017, we may be required to pay up to an additional $10.5 million in purchase consideration upon achievement of certain commercial and development milestones to the Crystal shareholders.

In connection with the acquisition of CyDex in January 2011, we recorded a contingent liability for amounts potentially due to holders of the CyDex CVRs and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales. In connection with the acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs for each Metabasis share. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement.

Any change in fair value is recorded in our consolidated statement of operations. For additional information, see “Note (4), Fair Value Measurement and Note (7), 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 two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with the carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, the second step of the goodwill impairment test is performed to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. We may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. We performed the annual assessment for goodwill impairment during the fourth quarter of 2018, noting no impairment.

Our identifiable intangible assets are typically composed of acquired core technologies, licensed technologies, customer relationships and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives. We regularly perform reviews to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to the net book value, significant changes in the ability of a particular asset to generate positive cash flows, and the pattern of utilization of a particular asset.

Commercial license rights

Commercial license rights consist of the following (in thousands):
December 31, December 31,
2018 2017
Aziyo & CorMatrix $ 17,696  $ 17,696 
Palvella 10,000  — 
Selexis 8,602  8,602 
36,298  26,298 
Less: accumulated amortization (4,838) (6,772)
Total commercial license rights, net $ 31,460  $ 19,526 

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Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, and Pavella in December 2018. Individual commercial license rights acquired are accounted for as financial assets further discussed below.

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 regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia, and corporate and financing milestones. 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 paid Palvella an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We will not incur any expenses to develop or commercialize PTX-022. Our director, Todd Davis, is also a director of Palvella, who beneficially owns 2% of Palvella's outstanding equity. Mr. Davis recused himself from all of the board's consideration of the purchase agreement between us and Palvella, including any financial analysis, the terms of the purchase agreement and the vote to approve the purchase agreement and the related transactions.

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 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, 2018 is 26%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in 2018 were accordingly allocated between revenue and the amortization of the commercial license rights.

We 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. While it has not occurred to date, in circumstances where our new estimate of expected cash flows is less than previously expected and below our original estimated yield we will record an impairment. Impairment will be 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 will update our yield prospectively.

We account for commercial license rights related to developmental pipeline products 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.
Revenue Recognition

Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, license fees and development, regulatory and sales based milestone payments.

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On January 1, 2018, we adopted ASC 606 which amends the guidance for recognition of revenue from contracts with customers by using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. The results for reporting periods beginning January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

Upon adoption, we recorded a net decrease of $25.6 million to accumulated deficit due to the cumulative impact of adopting the new standard, with the impact related primarily to the acceleration of royalty revenue, net of related deferred tax impact. See additional information in Disaggregation of Revenue subsection below. Our accounting policies under the new standard were applied prospectively and are noted below.

Royalties, License Fees and Milestones

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under the contractual agreements. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when there is a basis to reasonably estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon or after the development milestone or regulatory approval.

Material Sales

We recognize revenue when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of material sales.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset or deferred revenue balance.

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We have revenue sharing arrangements whereby certain revenue proceeds are shared with a third party. The revenue standard requires an entity to determine whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. We received a $4.6 million milestone payment from a license partner during 2018 of which $3.0 million was paid to a third-party in-licensor. We recorded net revenue of $1.6 million as we believe we are an agent in the transaction. We record amounts due to third-party in-licensors as general and administrative expenses when we are the principal in the transaction.

Disaggregation of Revenue

Under ASC 605, the legacy revenue standard, we would have reported total royalty revenue of $121.0 million during 2018, disaggregated as follows: Promacta $92.3 million, Kyprolis $20.9 million, Evomela $5.7 million, and Other $2.1 million. During 2017, royalty revenue continued to be reported in accordance with ASC 605 and was $88.7 million or disaggregated as follows: Promacta $62.9 million, Kyprolis $16.4 million, Evomela $7.2 million and Other $2.2 million. During 2016, royalty revenue continued to be reported in accordance with ASC 605 and was $59.4 million or disaggregated as follows: Promacta $43.0 million, Kyprolis $12.1 million, Evomela $1.4 million and Other $2.9 million.

Under ASC 606, royalty revenue was $128.6 million during 2018 or disaggregated as follows: Promacta $99.3 million, Kyprolis $21.7 million, Evomela $5.7 million and Other $1.9 million.

The following table represents disaggregation of Material Sales and License fees, milestone and other (in thousands), which are not affected by the adoption of ASC 606:

Year ended December 31, 
2018 2017 2016
Material Sales 
Captisol  $ 29,123  $ 22,070  $ 22,502 
License fees, milestones and other 
License fees  78,195  13,665  10,570 
Milestones  6,577  11,093  16,091 
Other  9,002  5,589  387 
$ 93,774  $ 30,347  $ 27,048 

Preclinical Study and Clinical Trial Accruals

Substantial portions of our preclinical studies and all of our clinical trials have been performed by third-party laboratories, CROs. We account for a significant portion of the clinical study costs according to the terms of our contracts with CROs. The terms of the CRO contracts may result in payment flows that do not match the periods over which services are provided to us under such contracts. Our objective is to reflect the appropriate preclinical and clinical trial expenses in our financial statements in the same period as the services occur. As part of the process of preparing our financial statements, we rely on cost information provided by our CROs. We are also required to estimate certain of our expenses resulting from the obligations under the CRO contracts. Accordingly, our preclinical study and clinical trial accrual is dependent upon the timely and accurate reporting of CROs and other third-party vendors. We periodically evaluate our estimates to determine if adjustments are necessary or appropriate as more information becomes available concerning changing circumstances, and conditions or events that may affect such estimates. No material adjustments to preclinical study and clinical trial accrued expenses have been recognized to date.

Research and Development Expenses

Research and development expense consists of labor, material, equipment, and allocated facilities costs of our scientific staff who are working pursuant to our collaborative agreements and other research and development projects. Also included in research and development expenses are third-party costs incurred for our research programs including in-licensing costs, CRO costs and costs incurred by other research and development service vendors. We expense these costs as they are incurred. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided.

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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. PSU represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any expense change resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment.

We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock purchases under ESPP and stock options granted. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. We look to historical and implied volatilities of our stock to determine the expected volatility. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.

We grant options, RSUs and PSUs to employees and non-employee directors. Non-employee directors are accounted for as employees. Options and RSUs granted to certain non-employee directors vest one year from the date of grant. Options granted to employees 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 “Footnote 6. 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 “Footnote 6. Convertible Senior Notes,” the derivative asset and liabilities were reclassified to additional paid-in capital. Changes in the fair value of these derivatives prior to being classified in equity were reflected in other expense, net, in our consolidated statements of operations.

The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of the assets and the inputs and assumptions used in the Binomial model to calculate the fair value of the derivative liabilities associated with the 2023 Notes:

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As of May 22, 2018  As of June 19, 2018 
Common stock price  $187.09  $195.91 
Exercise price, conversion premium and bond hedge  $248.48  $248.48 
Exercise price, warrant  315.38  315.38 
Risk-free interest rate  2.9%    2.8%   
Volatility  30%-35%  30%-35% 
Dividend yield  —  — 
Annual coupon rate  0.75%    0.75%   
Remaining contractual term (in years)  5.05  4.98 

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 will be offset by an equal receipt of cash under the corresponding convertible bond hedge. As a result, we reclassified from equity to derivative asset the fair value of the bond hedge as of May 22, 2018. Changes in the fair value of these derivatives are reflected in other expense, net, in our condensed consolidated statements of operations.

The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of the derivative assets and the inputs and assumptions used in the Binomial model to calculate the fair value of the derivative liability associated with the 2019 Notes:
 

As of May 22, 2018  As of December 31, 2018 
Common stock price  $187.09  $135.70 
Exercise price, conversion premium and bond hedge  $75.05  $75.05 
Risk-free interest rate  2.47%    2.60%   
Volatility  30%-35%  30%-35% 
Dividend yield  —  — 
Annual coupon rate  0.75%    0.75%   
Remaining contractual term (in years)  1.25  0.63 


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 the 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. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

Discontinued Operations

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In 2006, we entered into a purchase agreement with Eisai pursuant to which Eisai agreed to acquire our Oncology product line which included four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel and Panretin gel. During the year ended December 31, 2016 we recognized a $1.1 million gain due to subsequent changes in certain estimates and liabilities previously recorded. We recorded a provision for income taxes related to the gain of $0.4 million.
Income (loss) Per Share

Basic income (loss) per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under 2019 and 2023 convertible senior notes, stock options and restricted stock. 2019 and 2023 convertible senior notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. In addition, post May 22, 2018, the 2019 Notes can only be settled in cash and therefore there will be no further impact on income (loss) per share of these notes. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for restricted stock. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of otherwise dilutive potential common shares is anti-dilutive and therefore excluded

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):
Year Ended December 31,
  2018 2017 2016
Weighted average shares outstanding: 21,160  21,032  20,831 
Dilutive potential common shares:
Restricted stock 72  141  — 
Stock options 1,125  1,000  — 
Warrants associated with 2019 Notes 1,017  94  — 
2019 Convertible Senior Notes 693  1,214  — 
Shares used to compute diluted income per share 24,067  23,481  20,831 
Potentially dilutive shares excluded from calculation due to anti-dilutive effect 2,845  335  3,544 

Comprehensive Income (Loss)

Comprehensive income (loss) represents net income (loss) adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, and reclassification adjustments for realized gains or losses included in net income (loss). The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Income (Loss).

Foreign Currency Translation

The British Pound Sterling is the functional currency of Vernalis and the corresponding financial statements have been translated into U.S. Dollars in accordance with ASC 830-30, Translation of Financial Statements. Assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activity took place. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss).

Accounting Standards Recently Adopted

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Revenue Recognition - In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-10 and 2016-12, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. We adopted this new standard as of January 1, 2018, by using the modified-retrospective method. See Revenue, Royalties, Licenses Fees and Milestones, Material Sales, and Disaggregation of Revenue subsections mentioned above for further information.

Financial Instruments - In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), which requires equity investments (other than those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. We have strategic investments, including Viking, that fall under this guidance update. We have adopted ASU 2016-01 effective January 1, 2018 as a cumulative-effect adjustment and reclassified $2.7 million unrealized gains on equity investments, net of tax, from accumulated other comprehensive income to accumulated deficit on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments. See “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (2), Investment in Viking” for additional information.

Stock Compensation - In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), which aims to simplify the accounting for share-based payment transactions, including accounting for income taxes, classification on the statement of cash flows, accounting for forfeitures, and classification of awards as either liabilities or equity. We have adopted this standard effective January 1, 2017. This standard increases the volatility of net income by requiring excess tax benefits from share-based payment arrangements to be classified as discrete items within the provision for income taxes, rather than recognizing excess tax benefits in additional paid-in capital. Upon adoption in the first quarter of 2017, we recorded $17.6 million to accumulated deficit on our consolidated balance sheet, primarily related to unrealized tax benefits associated with share-based compensation. Also, as a result of the adoption of this new standard, we made an accounting policy election to recognize forfeitures as they occur and will no longer estimate expected forfeitures. In addition, excess income tax benefits from share-based compensation arrangements are classified as cash flows from operations, rather than cash flows from financing activities. We elected to apply the cash flows classification guidance prospectively and have not adjusted prior periods.

Statement of Cash Flows - In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard was effective January 1, 2018. We adopted ASU 2016-15 effective January 1, 2018. For the year ended December 31, 2017, we have reclassed $5.0 million payments to CVR holders and other contingency payments from investing activities to operating activities. For the year ended December 31, 2016, we have reclassed $8.8 million payments to CVR holders and other contingency payments from investing activities to operating activities and financing activities in amount of $2.3 million and $6.5 million, respectively. In addition, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The standard requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017. We adopted this standard retrospectively, effective January 1, 2018 and included restricted cash amount of $2.6 million, which was included in other current assets in our consolidated balance sheet as of December 31, 2018, in the consolidated statement of cash flows. See additional information in “Footnote 7. Balance Sheet Account Details.” We did not have any restricted cash as of December 31, 2017 and 2016 .

 Accounting Standards Not Yet Adopted
 
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires organizations that lease assets to recognize the assets and liabilities created by those leases. The standard also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The ASU becomes effective for public companies for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. In 2018, the FASB issued guidance that provides an optional transition method for adoption of this standard, which allows organizations to initially apply the new requirements at the effective date, recognize a cumulative effect adjustment to the opening balance of retained earnings, and continue to apply the legacy guidance in ASC 840, Leases,
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including its disclosure requirements, in the comparative periods presented. We adopted this standard on January 1, 2019 by applying this optional transition method. For leases with a term of 12 months or less, we elected to not recognize lease assets and lease liabilities and expense the leases over a straight-line basis for the term of those leases. The adoption of this standards update resulted in no material impact to our balance sheet, statement of operations, equity or cash flows.

Financial Instruments - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. ASU 2016-13 is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for us beginning in the first quarter of 2020, with earlier adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.

2. Investment in Viking

Our current ownership in Viking is approximately 8.8% and we account it as investment in an available-for-sale security due to the fact that 1) we do not have the ability to exercise significant influence over Viking, 2) we are not involved in Viking's ongoing operations, and 3) Viking does not rely on us to provide technology products, expertise, support or services. Our investment in Viking is measured at fair value, with changes in fair value recognized in net income.

Our ownership in Viking was 17.6% and 30.3% as of December 31, 2017 and 2016, respectively. As a result of Viking's public stock offerings, we recorded a dilution gain of $2.7 million and a dilution loss of $10.7 million for the years ended December 31, 2017 and 2016, respectively. These amounts were recognized in Loss from Viking in our consolidated statement of operations. Our equity ownership interest in Viking decreased during the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, we concluded that we did not exert significant influence over Viking and discontinued accounting for our investment in Viking under the equity method. Viking is considered a related party as we maintain a seat on Viking's board of directors.

Ligand and Viking were previously parties to a Loan and Security Agreement, dated May 21, 2014 (as amended by the First Amendment to Loan and Security Agreement, dated April 8, 2015, and the Second Amendment to Loan and Security Agreement, dated January 22, 2016, the “Loan and Security Agreement”), pursuant to which we loaned $2.5 million to Viking. Such debt was evidenced by a Senior Convertible Promissory Note (the “Convertible Note”). Pursuant to the terms of the Loan and Security Agreement, upon the consummation of the Follow-On Public Offering on April 13, 2016, Viking repaid us $1.5 million, which payment was composed of $0.3 million in cash, with the remaining balance paid in Viking’s equity securities, resulting in the issuance of 960,000 shares of common stock to us in the Follow-On Public Offering. Such payment was applied, first, to accrued and unpaid interest on the Convertible Note and, second, to the unpaid principal amount of the Convertible Note. On July 15, 2017, Viking repaid an additional $0.2 million in cash. Such payment was applied, first, to accrued and unpaid interest on the Convertible Note and, second, to the unpaid principal amount of the Convertible Note. On May 23, 2018, the Convertible Note was repurchased in full by Viking for $3.9 million in cash. As of December 31, 2018, the Convertible Note and Loan and Security Agreement are no longer outstanding.

We also have outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share. We recorded the warrants in other current assets in our consolidated balance sheets at fair value of $9.3 million and $3.9 million at December 31, 2018 and 2017, respectively. For the years ended December 31, 2018, 2017 and 2016, a gain of $5.4 million, $3.2 million and $0.3 million on the fair market value of the warrants, respectively, was included within other income. See further discussion in “Note (4), Fair Value Measurement.”  

Prior to the adoption of ASU 2016-01, we reviewed our investment in Viking on a regular basis and assess whether events, changes in circumstances or the passage of time, in management's judgment, indicate that a loss in the market value of the investment may be other than temporary. This might include, but would not necessarily be limited to, the period of time during which the carrying value of our investment is significantly above the observed market value, a deterioration in Viking's financial condition, or an adverse event relating to its lead clinical programs.

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Based on a sustained low Viking common stock unit price during the year ended December 31, 2016, we determined that an other than temporary decrease in the value of our investment in Viking had occurred. We wrote down the value of our investment in Viking to its estimated fair value which resulted in impairment charges of $7.4 million for the year ended December 31, 2016.

Subsequent to the adoption of ASU 2016-01, we no longer account for our investment in Viking under the equity method; instead, it is measured at fair value, with changes in fair value recognized in net income. 

3. Business Combinations

As set forth below, we completed three acquisitions from January 1, 2016 through December 31, 2018, and all were accounted for as business combinations. We applied the acquisition method of accounting. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition. For each acquisition, we did not incur any material acquisition related costs.

Vernalis Acquisition

In October 2018, we acquired Vernalis, a structure-based drug discovery biotechnology company for $43.0 million, funded through cash on hand. The acquisition of Vernalis increases our overall portfolio of fully-funded programs. As Vernalis' operations are not considered material, pro forma information is not provided.

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

Cash and cash equivalents  $ 34,286 
Restricted cash  2,836 
Other assets  6,383 
Accounts payable and accrued liabilities  (3,403)
Restructuring and product reserves  (7,118)
Deferred revenue  (746)
Intangibles assets with finite life - core technology 7,000 
Goodwill 3,740 
$ 42,978 

None of the goodwill is deductible for tax purposes. The fair value of the core technologies were based on the discounted cash flow method that estimated the present value of the hypothetical royalty/milestone streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 34.0%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of approximately nine years.

The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, purchased intangibles and deferred revenue are provisional. The accounting for these amounts falls within the measurement period and therefore we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

Crystal Acquisition

On October 6, 2017, we acquired all of the assets and liabilities of Crystal. Crystal is a biotechnology company focused in avian genetics and the generation of fully-human therapeutic engineering of animals for the generation of fully-human therapeutic antibodies through its OmniChicken® technology. Under the terms of the agreement, we were to pay Crystal selling shareholders $27.2 million in cash including a $2.2 million working capital adjustment, and up to an additional $10.5 million of cash consideration based on Crystal’s achievement of certain research and business milestones prior to December 31, 2019. In addition, Crystal’s selling shareholders will receive 10% of revenues realized by Ligand above $15 million between the closing date and December 31, 2022 from existing collaboration agreements between Crystal and three of its collaborators, and Crystal’s selling shareholders will receive 20% of revenues above $1.5 million generated between the closing date and
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December 31, 2022 pursuant to a fourth existing collaboration agreement with a large pharmaceutical company. As of December 31, 2018, $0.2 million of the initial $27.2 million of cash consideration remained outstanding.

At the closing of the acquisition, we recorded an $8.4 million contingent liability for amounts potentially due to Crystal shareholders. The initial fair value of the liability was determined using a probability weighted income approach incorporating the estimated future cash flows from potential milestones and revenue sharing. These cash flows were then discounted to present value using discount rates based on our estimated corporate credit rating, and averaged to approximately 4.6%. Refer to Note 4 Fair Value Measurement for further discussion. The liability has been periodically assessed based on events and circumstances related to the underlying milestones, and any changes in fair value are recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different than the carrying amount of the liability. There was no change in the fair value of the contingent liabilities from the initial valuation date to December 31, 2018.

The aggregate acquisition consideration was determined to be $35.7 million, consisting of (in thousands):
Cash paid to Crystal shareholders $ 26,877 
Cash payable to Crystal Shareholders 336 
Assumed liabilities 129 
Fair value of contingent consideration 8,401 
Total consideration $ 35,743 

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

Cash and cash equivalents $ 224 
Accounts receivable 2,513 
Prepaid expenses and other assets 201 
Property and equipment, net 589 
Current liabilities assumed (354)
Deferred revenue (4,624)
Deferred tax liabilities, net

(9,503)
Intangible asset with finite life - core technology

36,000 
Goodwill 10,697 
Total consideration $ 35,743 

The fair value of the core technology, or OmniChicken technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniChicken technology. These projected cash flows were discounted to present value using a discount rate of 10.8%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.

The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed was $10.7 million and was recorded as goodwill, which is not deductible for tax purposes and is primarily attributable to Crystal’s potential revenue growth from combining the Crystal and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.

OMT Acquisition

On January 8, 2016, we acquired substantially all of the assets and liabilities of OMT. OMT is a biotechnology company engaged in the genetic engineering of animals for the generation of human therapeutic antibodies through its OmniAb® technology. The aggregate acquisition consideration was $173.4 million, consisting of (in thousands, except per share amounts):

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Cash consideration $ 96,006 
Total share consideration:
Actual number of shares issued 790 
Multiplied by: Ligand closing share price on January 8, 2016 98 
Total share consideration $ 77,373 
Total consideration $ 173,379 

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

Cash and cash equivalents $ 3,504 
Accounts receivable 5 
Income tax receivable 136 
Prepaid expenses and other current assets 1 
Deferred tax liabilities, net (55,708)
Intangible asset with finite life - core technology 167,000 
Liabilities assumed (1,528)
Goodwill 59,969 
Total consideration $ 173,379 

The fair value of the core technology, or OMT's OmniAb technology, was based on the discounted cash flow method that estimated the present value of a hypothetical royalty stream derived from the licensing of the OmniAb technology. These projected cash flows were discounted to present value using a discount rate of 15.5%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 20 years.

The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed was $60.0 million and was recorded as goodwill, which is not deductible for tax purposes and is primarily attributable to OMT’s potential revenue growth from combining the OMT and Ligand businesses and workforce, as well as the benefits of access to different markets and customers.

4. 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
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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, 2018 and 2017 (in thousands):

Fair Value Measurements at Reporting Date Using
December 31, 2018
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total (Level 1) (Level 2) (Level 3)
Assets:
Short-term investments (1)
$ 647,408  $ 47,517  $ 599,891  $ — 
Investment in warrants (3)
9,257  9,257  —  — 
Total assets $ 656,665  $ 56,774  $ 599,891  $ — 
Liabilities:
Contingent liabilities - Crystal (4)
$ 6,477  $ —  $ —  6,477 
Contingent liabilities - Cydex (5)
514  —  —  514 
Contingent liabilities - Metabasis (6)
5,551  —  5,551  — 
Liability for amounts owed to a former licensor (7)
199  199  —  — 
Total liabilities $ 12,741  $ 199  $ 5,551  $ 6,991 

Fair Value Measurements at Reporting Date Using
December 31, 2017
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)
$ 181,041  1,896  $ 179,145  $ — 
Note receivable Viking (2)
3,877  —  —  3,877 
Investment in warrants (3)
3,846  3,846  —  — 
Total assets $ 188,764  $ 5,742  $ 179,145  $ 3,877 
Liabilities:
Contingent liabilities - Crystal (4)
$ 8,401  $ —  $ —  $ 8,401 
Contingent liabilities - Cydex (5)
1,589  —  —  1,589 
Contingent liabilities - Metabasis (6)
3,971  —  3,971  — 
Liability for amounts owed to a former licensor (7)
284  284  —  — 
Total liabilities $ 14,245  $ 284  $ 3,971  $ 9,990 


(1) Amounts Investments in equity securities (including investments in Viking), are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. Short-term investments in marketable securities with maturities greater than 90 days are classified as level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

(2) The fair value of the Convertible Note receivable from Viking at December 31, 2017 approximated the book value since the contractual maturity date was within five months from the end of 2017, and there was no plan to extend the maturity date. The fair value at December 31, 2017 was determined using a probability weighted option pricing model. The fair value is subjective and is affected by certain significant input to the valuation model such as the estimated volatility of the common stock, which was estimated to be 75% at December 31, 2017. Changes in these assumptions may materially affect the fair value estimate. For the years ended December 31, 2018, December 31, 2017, and December 31, 2016, we reported an increase in the fair value of 0.0 million, an increase in the fair value of $0.9 million, and a decrease in the fair value of $0.2 million, respectively in "Other, net" of the consolidated statement of operations. See further discussion in “Note (2), Investment in Viking.”  

(3) Investment in warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, is classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. See further discussion in “Note (2), Investment in Viking.”

(4) The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. At
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December 31, 2018, most of the development and regulatory milestones were estimated to be highly probable of being achieved in 2019. Changes in these estimates may materially affect the fair value.

(5) The fair value of CyDex contingent liabilities was determined based on the income approach. To the extent the estimated future income may vary significantly given the long-term nature of the estimate, we utilize a Monte Carlo model. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates of timing and probability of achievement of certain revenue thresholds and developmental and regulatory milestones which may be achieved and affect amounts owed to former license holders.

(6) In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. Another Metabasis drug development program, RVT-1502, has been outlicensed to Metavant. RVT-1502 is a novel, orally-bioavailable, small molecule, glucagon receptor antagonist or “GRA.” We may be entitled to up to $529.0 million in milestone payments and royalties.

(7) The liability for amounts owed to a former licensor is determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to a former licensor.





A reconciliation of the level 3 financial instruments as of December 31, 2018 is as follows (in thousands):

Assets:
Fair value of level 3 financial instruments as of December 31, 2017 $ 3,877 
Cash payment received as repayment of note receivable

(3,877)
Fair value of level 3 financial instrument assets as of December 31, 2018 $ — 
Liabilities
Fair value of level 3 financial instruments as of December 31, 2017 $ 9,990 
Payments to CVR holders and other contingency payments (1,025)
Fair value adjustments to contingent liabilities (1,974)
Fair value of level 3 financial instruments as of December 31, 2018 $ 6,991 

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, long-lived assets, and equity investments.

We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.

Other than certain indefinite-lived intangible asset, there were no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the three years ended December 31, 2018, 2017 and 2016.

Fair Value of Financial Instruments

In August 2014 and May 2018, we issued the 2019 Notes and 2023 Notes, respectively. We use quoted market rates in an inactive market, which are classified as a Level 2 input, to estimate the current fair value of our 2019 and 2023 Notes. The carrying value of the notes does not reflect the market rate. See “Note (6), Convertible Senior Notes” for additional information related to the fair value.
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5. Lease Obligations
We lease office facilities under various operating leases. These leases expire between 2019 and 2023. Total rent expense, net under all office leases for 2018, 2017 and 2016 was $1.0 million, $0.3 million and $0.3 million, respectively. The following table provides a summary of operating lease obligations and payments expected to be received from sublease agreements as of December 31, 2018 (in thousands):

Operating lease obligations:
Lease
Termination
Date
Less than 1
year
1-2 years 3-4 years Total
Corporate headquarters - San Diego, CA April 2023 $ 135  $ 283  $ 198  $ 616 
Office and research facility - La Jolla, CA June 2019 373  —  —  373 
Bioscience and Technology Business Center - Lawrence, KS December 2020 57  56  —  113 
Office - Emeryville, CA August 2021 260  455  —  715 
Research Facility - Emeryville, CA August 2021 203  351  —  $ 554 
Office - Winnersh, United Kingdom April 2019 43  —  —  43 
Research Facility - Cambridge, United Kingdom September 2019 549  —  —  549 
Total operating lease obligations $ 1,620  $ 1,145  $ 198  $ 2,963 
Sublease payments expected to be received:
Office and research facility - La Jolla, CA June 2019 360  —  —  360 
Net operating lease obligations $ 1,260  $ 1,145  $ 198  $ 2,603 

6. 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.

As of December 31, 2017, our last reported sale price of our common stock exceeded the 130% threshold described above and accordingly the 2019 Notes were classified as a current liability. As a result, the related unamortized discount of $18.9 million at December 31, 2017, was classified as temporary equity component of currently redeemable convertible notes on our consolidated balance sheet.

As of December 31, 2018, our 2019 Notes are due in less than one year, and accordingly have been classified as a current liability. Under the original indenture conversion, we were obligated to deliver cash to settle the principal and may deliver cash or shares of common stock, at our option, to settle any premium due upon conversion for any conversion notices received prior 
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to May 22, 2018. We made an irrevocable election to settle the entire note in cash per a supplemental indenture entered into on May 22, 2018. As such, we must deliver cash to settle the principal and any premium due upon conversion for any conversion notices received on or after May 22, 2018.

As a result of the requirement to deliver cash to settle any premium due upon conversion, on May 22, 2018, we reclassified from equity to liability the conversion option (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.
  
 Convertible Bond Hedge and Warrant Transactions

In August 2014, to minimize the impact of potential dilution to our common stock upon conversion of the 2019 Notes, we entered into convertible bond hedges and sold warrants covering 3,264,643 shares of our common stock. The convertible bond hedges have an exercise price of $75.05 per share and are exercisable when and if the 2019 Notes are converted. If upon conversion of the 2019 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value 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 2019 Notes. Holders of the 2019 Notes and warrants will not have any rights with respect to the convertible bond hedges. We paid $48.1 million for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.

Conversion notices received after May 22, 2018 relating to the 2019 Notes must be fully settled in cash and amounts paid in excess of the principal amount will be offset by an equal receipt of cash under the convertible bond hedge. As a result of the irrevocable cash election, on May 22, 2018, we reclassified from equity to derivative asset the remaining bond hedge fair value of $340.0 million and marked it to market as of December 31, 2018 to $22.6 million with the resulting $119.4 million increase, net of $471.2 million in payments received, reflected in other expense, net, in our consolidated statements of operations for the year ended December 31, 2018.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants to acquire 3,264,643 shares of common stock with an exercise price of $125.08 per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. We received $11.6 million for these warrants and recorded this amount to additional paid-in capital. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants. We continue to have the ability to avoid settling the warrants associated with the 2019 Notes in cash after May 22, 2018. Accordingly, the warrants continue to be classified in additional paid in capital.

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In November 2018, we modified agreements with one of the bond hedge counterparties to cash settle a total of 525,000 warrants. As the modifications required the warrants to be cash settled, the fair value of the warrants was reclassified from stockholders’ equity to a derivative liability on the modification dates, resulting in a $28.3 million deduction to additional paid-in-capital during 2018. We settled these repurchases for total consideration of $30.1 million and recorded a $1.8 million loss during 2018 on the change in the fair value of the derivative liabilities between their modification and settlement dates, which is included in other expense, net in the accompanying consolidated statement of operations. As a result, as of December 31, 2018, 2,739,643 warrants remain outstanding.

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.

At the May 22, 2018 issuance date of the 2023 Notes, we did not have the necessary number of authorized but unissued shares of our common stock available to settle the conversion option of the 2023 Notes in shares. Therefore, in accordance with guidance found in ASC 815-15 – Embedded Derivatives, the conversion option of the Notes was deemed an embedded derivative requiring bifurcation from the 2023 Notes (host contract) and separate accounting as a derivative liability. The fair value of the conversion option derivative liability at May 22, 2018 was $144.0 million, which was recorded as a reduction to the carrying value of the debt. This debt discount is amortized to interest expense over the term of the debt using the effective interest method. Up to the date in which we received shareholder approval on June 19, 2018 to increase the authorized number of shares of our common stock, the conversion option was accounted for as a liability with the resulting change in fair value of $13.5 million during that period reflected in other expense, net, in our consolidated statements of operations for the year ended December 31, 2018. As of December 31, 2018, the debt discount remains and continues to be amortized to interest expense.

The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the conversion price of $248.48. As of December 31, 2018, the “if-converted value” did not exceed the principal amount of the 2023 Notes.

In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the conversion option totaling $3.2 million was recorded as interest expense for the twelve months ended December 31, 2018. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes.

It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.

Convertible Bond Hedge and Warrant Transactions

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In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering 3,018,327 shares of common stock with an exercise price of $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

For the period from May 22, 2018, the issuance date of the bond hedge and warrant transactions, to June 19, 2018, the date shareholders approved an increase in our authorized shares of common stock, the bond hedges and warrants required cash settlement and were accounted for as a derivative asset and liability, respectively, with the resulting increase in fair value of $19.2 million and $7.5 million reflected in other expense, net, in our consolidated statements of operations for twelve months ended December 31, 2018.

The following table summarizes information about the equity and liability components of the 2019 Notes and 2023 Notes (in thousands).
December 31, 2018 December 31, 2017
Principle amount of 2019 Notes outstanding $ 27,326  $ 245,000 
Unamortized discount (including unamortized debt issuance cost) (893) (20,471)
Total current portion of notes payable $ 26,433  $ 224,529 
Principle amount of 2023 Notes outstanding $ 750,000  $ — 
Unamortized discount (including unamortized debt issuance cost) (140,136) — 
Total long-term portion of notes payable $ 609,864  $ — 
Carrying value of equity component of 2023 Notes $ 127,997  $ — 
Fair value of convertible senior notes outstanding (Level 2) $ 713,533  $ 446,360 
As of December 31, 2018, there were no events of default or violation of any covenants under our financing obligations.
7. Balance Sheet Account Details

Short-term Investments
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The following table summarizes the various investment categories at December 31, 2018 and 2017 (in thousands):
Cost
Gross unrealized
gains
Gross unrealized
losses
Estimated
fair value
December 31, 2018
Short-term investments
Bank deposits $ 311,066  $ 26  $ (29) $ 311,063 
Corporate bonds 53,223  1  (45) 53,179 
Corporate equity securities 135  1,191  —  1,326 
Commercial paper 225,731  8  (76) 225,663 
U.S. Government bonds 7,982  —  (9) 7,973 
Municipal bonds 2,017  —  (4) 2,013 
$ 600,154  $ 1,226  $ (163) $ 601,217 
December 31, 2017
Short-term investments
Bank deposits $ 80,095  $ 6  $ (42) $ 80,059 
Corporate bonds 55,335  —  (96) 55,239 
Corporate equity securities 207  1689  —  1,896 
Commercial paper 27,933  —  (20) 27,913 
Agency bonds 4,991  —  (1) 4,990 
U.S. Government bonds 8,939  —  (10) 8,929 
Municipal bonds 2,028  —  (13) 2,015 
$ 179,528  $ 1,695  $ (182) $ 181,041 

Other current assets consist of the following (in thousands):
  December 31,
  2018 2017
Restricted cash $ 2,616  $ — 
Investment in Viking warrants 9,257  — 
Other 8,545  1,514 
$ 20,418  $ 1,514 

Property and equipment is stated at cost and consists of the following (in thousands):
December 31,
2018 2017
Lab and office equipment $ 4,183  $ 3,460 
Leasehold improvements 2,418  1,917 
Computer equipment and software 936  697 
7,537  6,074 
Less accumulated depreciation and amortization (2,165) (1,862)
$ 5,372  $ 4,212 
Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Depreciation expense of $0.9 million, $0.4 million, and $0.2 million was recognized for the years ended December 31, 2018, 2017, and 2016, respectively, and is included in operating expenses.

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Goodwill and identifiable intangible assets consist of the following (in thousands):
December 31,
2018 2017
Indefinite lived intangible assets
IPR&D $ —  $ 7,923 
Goodwill 86,646  85,959 
Definite lived intangible assets
Complete technology 235,413  222,900 
Less: Accumulated amortization (35,070) (23,301)
Trade name 2,642  2,642 
Less: Accumulated amortization (1,048) (916)
Customer relationships 29,600  29,600 
Less: Accumulated amortization (11,744) (10,264)
Total goodwill and other identifiable intangible assets, net $ 306,439  $ 314,543 

Amortization of finite lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of 20 years. Amortization expense of $15.8 million, $11.3 million, and $10.6 million was recognized for the years ended December 31, 2018 and 2017, and 2016, respectively. Estimated amortization expense for the years ending December 31, 2018 through 2023 is $13.6 million per year. For each of the years ended December 31, 2018, 2017, and 2016, there was no impairment of intangible assets with finite lives.


Accrued liabilities consist of the following (in thousands):
  December 31,
  2018 2017
Compensation $ 4,045  $ 4,085 
Legal 942  430 
Amounts owed to former licensees 428  396 
Royalties owed to third parties 1,025  954 
Payments due to broker for share repurchases 4,613  — 
Return reserve 3,590  — 
Restructuring 1,093  — 
Other 3,464  1,512 
$ 19,200  $ 7,377 


Contingent liabilities:

In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. We may be required to make additional payments upon achievement of certain clinical and regulatory milestones to the CyDex shareholders and former license holders. We paid CyDex shareholders, through 2016, 20% of all CyDex-related revenue, but only to the extent that, and beginning only when, CyDex-related revenue for the year exceeds $15.0 million; plus an additional 10% of all CyDex-related revenue recognized during such year, but only to the extent, and beginning only when aggregate CyDex-related revenue for such year exceeds $35.0 million.

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.
 
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The following table summarizes contingent liabilities as of December 2018 and 2017 (in thousands):

December 31, 2016 Payments Fair Value Adjustment Additions December 31, 2017 Payments Fair Value Adjustment December 31, 2018
Cydex $ 6,600  $ (5,000) $ —  $ —  $ 1,600  $ (25) $ (1,050) $ 525 
Metabasis $ 1,500  $ —  $ 2,500  $ —  $ 4,000  $ (3,900) $ 5,400  $ 5,500 
Crystal $ —  $ —  $ —  $ 8,400  $ 8,400  $ (1,000) $ (924) $ 6,476 
Total $ 8,100  $ (5,000) $ 2,500  $ 8,400  $ 14,000  $ (4,925) $ 3,426  $ 12,501 


8. Stockholders’ Equity

Share-based Compensation Expense

The following table summarizes share-based compensation expense (in thousands):
December 31,
2018 2017 2016
Share-based compensation expense as a component of:
Research and development expenses $ 8,352  $ 14,235  $ 8,836 
General and administrative expenses 12,494  10,680  10,057 
$ 20,846  $ 24,915  $ 18,893 

Stock Plans

In May 2012 and May 2016, our 2002 Stock Incentive Plan was amended to increase the number of shares available for issuance by 1.8 million  and 0.9 million shares, respectively. As of December 31, 2018, there were 0.6 million shares available for future option grants or direct issuance under the Amended 2002 Plan.
Following is a summary of our stock option plan activity and related information:
 
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term in
Years
Aggregate
Intrinsic
Value
(In  thousands)
Balance at December 31, 2017 1,876,332  $ 53.17  5.77 $ 157,340 
Granted 228,362  162.00 
Exercised (358,162) 55.24 
Forfeited (10,228) 114.53 
Balance at December 31, 2018 1,736,304  66.71  5.47 125,858 
Exercisable at December 31, 2018 1,313,374  47.03  4.56 117,314 
Options vested and expected to vest as of December 31, 2018 1,734,304  $ 66.71  5.47 $ 125,858 

The weighted-average grant-date fair value of all stock options granted during 2018, 2017 and 2016 was $66.71, $53.17 and $46.53 per share, respectively. The total intrinsic value of all options exercised during 2018, 2017 and 2016 was approximately $51.9 million, $13.3 million and $12.0 million, respectively.
Cash received from options exercised, net of fees paid, in 2018, 2017 and 2016 was $19.8 million, $4.7 million and $6.2 million, respectively.
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Following is a further breakdown of the options outstanding as of December 31, 2018:
 
Range of exercise prices
Options
outstanding
Weighted
average
remaining  life
in years
Weighted average
exercise price
Options
exercisable
Weighted average
exercise price
$8.58 - $10.05 184,702  1.87 $ 10.00  184,702  $ 10.00 
$10.12 - $12.81 46,510  2.92 11.40  46,510  11.40 
$14.47 - $14.47 217,616  3.11 14.47  203,616  14.47 
$16.14 - $17.88 38,790  0.17 16.36  38,790  16.36 
$21.92 - $21.92 200,372  4.13 21.92  200,372  21.92 
$32.00 - $56.26 182,767  5.70 50.38  174,470  50.10 
$63.58 - $67.53 20,434  5.44 67.42  20,153  67.47 
$74.42 - $74.42 190,825  5.12 74.42  190,825  74.42 
$85.79 - $100.38 299,282  7.57 93.32  157,872  91.62 
$101.15 - $195.91 353,006  8.79 148.50  96,064  131.77 
1,734,304  5.47 $ 66.71  1,313,374  $ 47.03 

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,
  2018 2017 2016
Risk-free interest rate 2.7%-3.0% 2.0%-2.2% 1.3%-1.9%
Expected volatility 33%-36% 43%-47% 48%-50%
Expected term 5.1 to 5.8 years 6.5 to 6.8 years 6.6 to 6.7 years

As of December 31, 2018, there was $20.4 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 2.39 years.
Restricted Stock Activity
The following is a summary of our restricted stock activity and related information:
 
Shares
Weighted-Average
Grant Date Fair
Value
Outstanding at December 31, 2017 133,294  $ 91.60 
Granted 62,133  169.92 
Vested (61,989) 86.19 
Forfeited (1,165) 125.16 
Outstanding at December 31, 2018 132,273  $ 130.63 
As of December 31, 2018, unrecognized compensation cost related to non-vested stock awards amounted to $9.2 million. That cost is expected to be recognized over a weighted average period of 1.38 years.

Employee Stock Purchase Plan

As of December 31, 2018, 64,008 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 3,386, 3,061 and 1,961 shares issued under the ESPP in 2018, 2017 and 2016, respectively.

Share Repurchases

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In May 2018, in conjunction with our 2023 Notes debt offering, we repurchased 260,000 shares of our common stock at a cost of $191.14 per share. In September 2018, the board of directors authorized us to repurchase up to $200.0 million of our common stock from time to time over a period of up to three years (the “Repurchase Program”). As of December 31, 2018, $125.2 million remains available for repurchase under the authorized program. On January 23, 2019, the board of directors elected to increase the Repurchase Program, authorizing us to repurchase up to a maximum of $350.0 million of our outstanding common stock under the Repurchase Program. The Repurchase Program will expire, as originally scheduled, on September 20, 2021. Since December 31, 2018 and as of February 28, 2019, we acquired 400,177 additional shares during 2019, and the maximum dollar value of shares that may yet be purchased under the Repurchase Program was $225.9 million.

During the years ended December 31, 2018, 2017 and 2016, we repurchased 782,248 shares for $127.5 million, 14,000 shares for $2.0 million, and 40,500 shares for $3.9 million, respectively.  

9.  Commitment and Contingencies: Legal Proceedings

We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in the our estimates of potential liability could materially impact our results of operations.

On July 27, 2018, AG Oncon, LLC, AG Ofcon, Ltd., Calamos Market Neutral Income Fund, Capital Ventures International, Citadel Equity Fund Ltd., Opti Opportunity Master Fund, Polygon Convertible Opportunity Master Fund, Wolverine Flagship Fund Trading Limited, as plaintiffs, filed a complaint in the Court of Chancery of the State of Delaware (AG Oncon, LLC v. Ligand Pharmaceuticals Inc.) alleging claims for violation of the Trust Indenture Act, breach of contract, damages and a declaratory judgment that the Supplemental Indenture, dated as of February 20, 2018, entered into by us and Wilmington Trust, National Association, as trustee, is invalid. On October 1, 2018, we filed a motion to dismiss the plaintiffs’ complaint. The hearing on our motion is currently scheduled for April 3, 2019. We believe the allegations are completely without merit, reject all claims raised by the plaintiffs and intend to vigorously defend this matter.

In November 2017, CyDex, our wholly owned subsidiary, received a paragraph IV certification from Teva alleging that certain of our patents related to Captisol were invalid, unenforceable and/or will not be infringed by Teva’s ANDA related to Spectrum Pharmaceuticals’ NDA for Evomela. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that Teva’s ANDA would infringe our patents. On March 22, 2018, Teva filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and on April 12, 2018, CyDex filed an answer to Teva’s counterclaims. On July 24, 2018, the U.S. District Court entered a Scheduling Order, setting a hearing for April 1, 2019, and a trial may begin in January 2020.
10. Income Taxes

The Tax Act was enacted on December 22, 2017 and includes a number of changes to existing tax laws that impact us, most notably it reduces the US federal corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The Tax Act made modifications to allowable tax depreciation, the deductability of compensation for officers, the deductibility of meals and entertainment expenses, and the deductibility of interest expense.

We remeasured our deferred tax assets and liabilities based on the impact of the federal tax rate change, recording a decrease to our net deferred tax asset balance and a corresponding increase to our income tax provision of approximately $0.6 million and $32.4 million for the year ended December 31, 2018 and 2017, respectively. We completed our accounting for the Tax Act during the fourth quarter of 2018.
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The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):
  Year Ended December 31,
  2018 2017 2016
Current expense (benefit):
Federal $ —  $ —  $ 21 
State 424  111  12 
Foreign (158) 261  — 
266  372  33 
Deferred expense (benefit):
Federal 29,928  44,075  10,534 
State (185) 228  (240)
Foreign —  —  — 
$ 30,009  $ 44,675  $ 10,327 

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,
  2018 2017 2016
Tax at federal statutory rate $ 36,400  $ 20,031  $ 2,786 
State, net of federal benefit 1,635  622  175 
Contingent liabilities 948  903  1,225 
Share-based compensation (8,131) (4,019) 263 
Research and development credits (2,758) (2,821) (1,525)
Change in uncertain tax positions 858  1,308  1,423 
Rate change for changes in federal or state law 178  32,429  25 
Change in valuation allowance (4,225) (4,169) 6,283 
Expired NOLs and credits 3,054  —  — 
Change in derivatives 615  —  — 
Other 1,435  391  (328)
$ 30,009  $ 44,675  $ 10,327 

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, 2018 and 2017 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, 2018, 2017 and 2016. The valuation allowance decreased $2.5 million in 2018, decreased $8.4 million in 2017 and increased $6.3 million in 2016.
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  December 31,
  2018 2017
  (in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 57,181  $ 90,272 
Research credit carryforwards 31,101  30,677 
Fixed assets and intangibles 1,637  1,984 
Accrued expenses 657  845 
Deferred revenue 957  17 
Capital Loss Carryforward —  1,609 
Investment in Viking —  5,137 
Other 11,430  12,499 
102,963  143,040 
Valuation allowance for deferred tax assets (4,476) (6,987)
Net deferred tax assets $ 98,487  $ 136,053 
Deferred tax liabilities:
Retrophin fair value adjustment (179) (243)
Convertible debt (2,905) (737)
Identified intangibles (44,643) (48,237)
Identified indefinite lived intangibles (1,759) (2,414)
Investment in Viking (2,480) — 
Net deferred tax liabilities $ (51,966) $ (51,631)
Deferred income taxes, net $ 46,521  $ 84,422 

As of December 31, 2018, we had federal net operating loss carryforwards set to expire through 2037 of $229.9 million and $125.3 million of state net operating loss carryforwards. We also have $23.0 million of federal research and development credit carryforwards, which expire through 2037. We have $22.7 million of California research and development credit carryforwards that have no expiration date.  

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, 2018 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, 2018, 2017 and 2016 is as follows (in thousands):
December 31, 
2018 2017 2016
Balance at beginning of year $ 29,363  $ 38,770  $ 36,452 
Additions based on tax positions related to the current year 1,247  1,067  70 
Additions for tax positions of prior years 336  109  2,408 
Reductions for tax positions of prior years (657) (10,583) (160)
Balance at end of year $ 30,289  $ 29,363  $ 38,770 

Included in the balance of unrecognized tax benefits at December 31, 2018 is $28.2 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.
81

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018 and December 31, 2017, 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 2014 tax year to the present. The state income tax returns generally remain open for the 2013 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.
The IRS began an audit of our 2016 tax year during the quarter ended June 30, 2018. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years. Notwithstanding the foregoing, we could adjust our provision for income taxes and contingent tax liability based on future developments.
11. Summary of Unaudited Quarterly Financial Information

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. Summarized quarterly data for 2018 and 2017 are as follows (in thousands, except per share amounts):
  First Quarter Second Quarter Third Quarter Fourth Quarter
2018
Total revenues $ 56,157  $ 90,043  $ 45,663  $ 59,590 
Total operating costs and expenses 19,116  19,868  22,301  26,441 
Income tax (expense) benefit (10,033) (22,419) (11,864) 14,307 
Net income (loss) 45,279  73,160  67,362  (42,482)
Basic per share amounts:
Net income (loss) $ 2.13  $ 3.45  $ 3.19  $ (2.02)
Diluted per share amounts:
Net income (loss) $ 1.83  $ 2.99  $ 2.80  $ (2.02)
Weighted average shares—basic 21,209  21,212  21,148  21,071 
Weighted average shares—diluted 24,800  24,438  24,052  21,071 
2017
Total revenues $ 29,267  $ 27,995  $ 33,375  $ 50,465 
Total operating costs and expenses 19,051  14,980  16,882  22,113 
Income tax expense (1,114) (2,242) (3,645) (37,674)
Net income (loss) 5,079  6,058  8,426  (7,007)
Basic per share amounts:
Net income (loss) $ 0.24  $ 0.29  $ 0.40  $ (0.33)
Diluted per share amounts:
Net income (loss) $ 0.22  $ 0.26  $ 0.36  $ (0.33)
Weighted average shares—basic 20,938  21,013  21,071  21,109 
Weighted average shares—diluted 23,019  23,216  23,551  21,109 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
 

Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures

82

We are responsible for maintaining disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As of the end of the period covered by this Annual Report on Form 10-K, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, and have concluded our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(b) Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with our management and directors; and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the COSO as set forth in the 2013 Internal Control-Integrated Framework. Based on our evaluation under the 2013 framework in Internal Control - Integrated Framework, management concluded that our internal controls over financial reporting were effective as of December 31, 2018.

Ernst & Young LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K and has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting as of December 31, 2018.

















Report of Independent Registered Public Accounting Firm

83

The Board of Directors and Stockholders of Ligand Pharmaceuticals Incorporated
Opinion on Internal Control Over Financial Reporting
We have audited Ligand Pharmaceuticals Incorporated’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ligand Pharmaceuticals Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes and our report dated February 28, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP

San Diego, California
February 28, 2019


84

Item 9B. Other Information

None.
Part III
 

Item 10. Directors, Executive Officers and Corporate Governance
Code of Conduct
The Board of Directors has adopted a Code of Conduct and Ethics Policy (“Code of Conduct”) that applies to all officers, directors and employees. The Company will promptly disclose (1) the nature of any amendment to the Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our Code of Conduct that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future. The Code of Conduct can be accessed via our website (http://www.ligand.com), Corporate Overview page. You may also request a free copy by writing to: Investor Relations, Ligand Pharmaceuticals Incorporated, 3911 Sorrento Valley Blvd, Suite 110, San Diego, CA 92121.
The other information under Item 10 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2018. 
 

Item 11. Executive Compensation
Item 11 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2018.
 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2018.
 

Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 13 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2018.
 

Item 14. Principal Accountant Fees and Services
Item 14 is hereby incorporated by reference to Ligand’s Definitive Proxy Statement to be filed with the SEC within 120 days of December 31, 2018.
85

PART IV
 

Item 15. Exhibits and Financial Statement Schedule
(a) The following documents are included as part of this Annual Report on Form 10-K.
(1) Financial statements
 
46
47
48
49
50
52
52
54
(2) Schedules not included herein have been omitted because they are not applicable or the required information is in the consolidated financial statements or notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
 
Incorporated by Reference 
Exhibit
Number
Description of Exhibit  Form  File Number  Date of Filing 
Exhibit
Number
Filed
Herewith
2.1
Agreement and Plan of Merger, dated as of December 17, 2015, by and among Ligand Pharmaceuticals Incorporated, Open Monoclonal Technology, Inc., OMT, LLC, Schrader 1 Acquisition, Inc., Schrader 2 Acquisition, Inc. and Fortis Advisors LLC   8-K  001-33093  December 18, 2015  2.1 
2.2
Rule 2.7 Announcement issued by Ligand Holdings UK Ltd., dated August 9, 2018   8-K  001-33093  August 9, 2018  2.1 
3.1
Amended and Restated Certificate of Incorporation of the Company.   S-4  333-58823  July 9, 1998  3.1 
3.2
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 14, 2000   10-K  0-20720  March 29, 2001  3.5 
3.3
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 30, 2004   10-Q  0-20720  August 5, 2004  3.6 
3.4
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated November 17, 2010  8-K  001-33093  November 19, 2010  3.1 
3.5
Third Amended and Restated Bylaws of the Company  8-K  001-33093  September 10, 2015  3.1 
4.1
Specimen stock certificate for shares of the common stock of the Company  10-K  001-33093  March 1, 2018  4.1 
4.2
Indenture dated August 18, 2014 between the Company and Wilmington Trust, National Association   8-K  001-33093  August 18, 2014  4.1 
4.3
Supplemental Indenture, dated as of February 20, 2018, between the Company and Wilmington Trust, National Association, as trustee  8-K  001-33093  July 30, 2018  4.1 
4.4
Second Supplemental Indenture, dated as of May 22, 2018, between the Company and Wilmington Trust, National Association, as trustee  8-K  001-33093  May 22, 2018  4.2 
4.5
Indenture, dated as of May 22, 2018, between the Company and Wilmington Trust, National Association, as trustee, including the form of 0.75% Convertible Senior Notes due 2023  8-K  001-33093  May 22, 2018  4.1 
86

2002 Stock Incentive Plan (as amended and restated through May 23, 2016)  S-8  333-212775  July 29, 2016   10.1 
2002 Employee Stock Purchase Plan (as amended effective July 1, 2009)  S-8  333-160132  June 22, 2009  10.2 
Form of Stock Option Grant Notice and Stock Option Agreement under the Company’s 2002 Stock Incentive Plan  10-K  001-33093  February 24, 2014  10.5 
Form of Stock Issuance Agreement for non-employee directors under the Company’s 2002 Stock Incentive Plan S-1 333-131029 January 13, 2006 10.289 
Form of Letter Agreement regarding Change of Control Severance Benefits between the Company and its officers 10-K 001-33093 March 16, 2007 10.309 
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Company’s 2002 Stock Incentive Plan   10-K 001-33093 March 1, 2018 10.6 
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Company’s 2002 Stock Incentive Plan - Performance-Based RSU Form 10-K 001-33093 March 1, 2018 10.7 
Form of Executive Officer Change in Control Severance Agreement   8-K  001-33093  August 22, 2007  10.1 
Amended and Restated Severance Plan, dated December 20, 2008  8-K  001-33093  December 24, 2008 10.2 
Research, Development and License Agreement, dated December 29, 1994, between SmithKline Beecham Corporation and the Company . 
S-1
S-3
33-87598
33-87600
December 20, 1994 
Amended and Restated Research, Development and License Agreement, dated December 1, 2005, between the Company and Wyeth (formerly American Home Products Corporation)  S-1  333-131029  January 13, 2006   10.287 
Settlement Agreement and Mutual Release, by and between the Company and The Rockefeller University, dated February 11, 2009   10-Q  001-33093  May 11, 2009  10.318 
TR Beta Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC   8-K  001-33093  January 28, 2010  10.2 
Glucagon Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC   8-K  001-33093  January 28, 2010  10.3 
General Contingent Value Rights Agreement, dated January 27, 2010, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC   8-K  001-33093  January 28, 2010  10.4 
Amendment of General Contingent Value Rights Agreement, dated January 26, 2011, among the Company, Metabasis Therapeutics, Inc., David F. Hale and Mellon Investor Services LLC   8-K  001-33093  January 31, 2011  10.1 
Captisol® Supply Agreement, dated December 20, 2002, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited   10-K  001-33093  March 3, 2011  10.1 
1st Amendment to Captisol® Supply Agreement, dated July 29, 2005, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited   10-K  001-33093  March 3, 2011  10.101 
2nd Amendment to Captisol® Supply Agreement, dated March 1, 2007, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited, and Hovione International Limited   10-K  001-33093  March 3, 2011  10.102 
3rd Amendment to Captisol® Supply Agreement, dated January 25, 2008, among CyDex, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited, and Hovione International Limited   10-K  001-33093  March 3, 2011  10.103 
87

4th Amendment to Captisol® Supply Agreement, dated September 28, 2009, among CyDex Pharmaceuticals, Inc., Hovione LLC, Hovione FarmaCiencia S.A., Hovione Pharmascience Limited and Hovione International Limited   10-K  001-33093  March 3, 2011  10.104 
License Agreement, dated September 3, 1993, between CyDex L.C. and The University of Kansas   10-K  001-33093  March 3, 2011  10.105 
Second Amendment to License Agreement, dated August 4, 2004, between CyDex, Inc. and The University of Kansas   10-K  001-33093  March 3, 2011  10.107 
Acknowledgement Agreement, dated February 22, 2008, between CyDex, Inc. and The University of Kansas   10-K  001-33093  March 3, 2011  10.111 
Exclusive License Agreement, dated June 4, 1996, between Pfizer, Inc. and The University of Kansas   10-K  001-33093  March 3, 2011  10.108 
Addendum to Nonexclusive License Agreement, dated December 11, 2001, between CyDex, Inc. and Pfizer, Inc.   10-K  001-33093  March 3, 2011  10.11 
License Agreement, dated January 4, 2006, between CyDex, Inc. and Prism Pharmaceuticals, Inc.   10-K  001-33093  March 3, 2011  10.112 
Amendment to License Agreement, dated May 12, 2006, between CyDex, Inc. and Prism Pharmaceuticals, Inc.   10-K  001-33093  March 3, 2011  10.113 
Supply Agreement, dated March 5, 2007, between CyDex, Inc. and Prism Pharmaceuticals, Inc.   10-K  001-33093  March 3, 2011  10.114 
License and Supply Agreement, dated October 12, 2005, between CyDex Pharmaceuticals, Inc. and Proteolix, Inc.   10-K  000-28298  February 23, 2010  10.22 
Supply Agreement, dated June 13, 2011 by and between CyDex Pharmaceuticals, Inc. and Merck Sharp & Dohme Corporation   10-Q/A 001-33093  November 2, 2017 10.26 
License Agreement, by and between CyDex Pharmaceuticals, Inc. and Spectrum Pharmaceuticals, Inc., dated as of March 8, 2013   10-Q  001-33093  May 8, 2013  10.2 
Supply Agreement, by and between CyDex Pharmaceuticals, Inc. and Spectrum Pharmaceuticals, Inc., dated as of March 8, 2013   10-Q  001-33093  May 8, 2013  10.3 
Royalty Stream and Milestone Payments Purchase Agreement, dated April 29, 2013, between the Company and Selexis S.A.   10-Q  001-33093  August 1, 2013  10.2 
Amendment of “General” Contingent Value Rights Agreement dated May 20, 2014 among the Company, Metabasis Therapeutics, Inc., David F. Hale and Computershare Inc.   8-K  001-33093  May 22, 2014  10.1 
Amendment of “TR Beta” Contingent Value Rights Agreement dated May 20, 2014 among the Company, Metabasis Therapeutics, Inc., David F. Hale and Computershare, Inc.   8-K  001-33093  May 22, 2014  10.2 
Master License Agreement dated May 21, 2014 among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc.  10-Q  001-33093  August 5, 2014  10.2 
Letter Agreement, dated as of August 12, 2014, between Bank of America, N.A. and the Company regarding the Base Convertible Note Hedge Transaction   8-K  001-33093  August 18, 2014  10.1 
Letter Agreement, dated as of August 12, 2014, between Bank of America, N.A. and the Company regarding the Base Issuer Warrant Transaction   8-K  001-33093  August 18, 2014  10.2 
Letter Agreement, dated as of August 12, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Base Convertible Bond Hedge Transaction   8-K  001-33093  August 18, 2014  10.3 
Letter Agreement, dated as of August 12, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Base Issuer Warrant Transaction   8-K  001-33093  August 18, 2014  10.4 
88

Letter Agreement, dated as of August 14, 2014, between Bank of America, N.A. and the Company regarding the Additional Convertible Bond Hedge Transaction   8-K  001-33093  August 18, 2014  10.5 
Letter Agreement, dated as of August 14, 2014, between Bank of America, N.A. and the Company regarding the Additional Issuer Warrant Transaction   8-K  001-33093  August 18, 2014  10.6 
Letter Agreement, dated as of August 14, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Additional Convertible Bond Hedge Transaction   8-K  001-33093  August 18, 2014  10.7 
Letter Agreement, dated as of August 14, 2014, between Deutsche Bank AG, London Branch and the Company regarding the Additional Issuer Warrant Transaction   8-K  001-33093  August 18, 2014  10.8 
First Amendment to Master License Agreement dated September 6, 2014 among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc.   10-Q  001-33093  October 31, 2014  10.9 
Second Amendment to Master License Agreement, dated April 8, 2015, among the Company, Metabasis Therapeutics, Inc. and Viking Therapeutics, Inc.   10-Q  001-33093  August 5, 2015  10.1 
Development Funding and Royalties Agreement, dated December 13, 2018, by and between Ligand Pharmaceuticals Incorporated and Palvella Therapeutics, Inc.
  		X
Sublicense Agreement between the Company, Pharmacopeia, Inc. and Retrophin LLC dated as of February 16, 2012.  10-Q  001-33093  May 4. 2012  10.1 
Amendment No. 4 to Sublicense Agreement, dated September 17, 2015, among the Company, Pharmacopeia, LLC and Retrophin, Inc.   10-Q/A  001-33093  December 23, 2015  10.1 
Amendment No. 5 to Sublicense Agreement, dated March 20, 2018, among the Company, Pharmacopeia, LLC and Retrophin, Inc.   10-Q  001-33093  May 9. 2018  10.1 
Lease, dated November 3, 2015, between the Company and 3911/3931 SVB, LLC   8-K  001-33093  November 10, 2015  10.1 
Amended and Restated Director Compensation and Stock Ownership Policy, effective as of March 2014  10-Q  001-33093  November 14, 2016  10.1 
Interest Purchase Agreement, dated May 3, 2016, between the Company and CorMatrix Cardiovascular, Inc.  8-K/A  001-33093  May 9, 2016  10.1 
Amended and Restated Interest Purchase Agreement, dated May 31, 2017, between the Company and CorMatrix Cardiovascular, Inc.   10-Q  001-033093  August 9, 2017  10.2 
License Agreement, dated March 5, 2018, between the Company and Roivant Sciences GmbH  10-Q  001-33093  May 9, 2018  10.2 
Letter Agreement, dated as of May 17, 2018, between Barclays Capital Inc. and the Company regarding the Base Convertible Note Hedge Transaction   8-K  001-00393  May 22, 2018  10.1 
Letter Agreement, dated as of May 17, 2018, between Barclays Capital Inc. and the Company regarding the Base Warrant Transaction   8-K  001-00393  May 22, 2018  10.2 
Letter Agreement, dated as of May 17, 2018, between Deutsche Bank AG and the Company regarding the Base Convertible Note Hedge Transaction  8-K  001-00393  May 22, 2018  10.3 
Letter Agreement, dated as of May 17, 2018, between Deutsche Bank AG and the Company regarding the Base Warrant Transaction  8-K  001-00393  May 22, 2018  10.4 
89

Letter Agreement, dated as of May 17, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Base Convertible Note Hedge Transaction  8-K  001-00393  May 22, 2018  10.5 
Letter Agreement, dated as of May 17, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Base Warrant Transaction  8-K  001-00393  May 22, 2018  10.6 
Letter Agreement, dated as of May 18, 2018, between Barclays Capital Inc. and the Company regarding the Additional Convertible Note Hedge Transaction  8-K  001-00393  May 22, 2018  10.7 
Letter Agreement, dated as of May 18, 2018, between Barclays Capital Inc. and the Company regarding the Additional Warrant Transaction  8-K  001-00393  May 22, 2018  10.8 
Letter Agreement, dated as of May 18, 2018, between Deutsche Bank AG and the Company regarding the Additional Convertible Note Hedge Transaction  8-K  001-00393  May 22, 2018  10.9 
Letter Agreement, dated as of May 18, 2018, between Deutsche Bank AG and the Company regarding the Additional Warrant Transaction  8-K  001-00393  May 22, 2018  10.1 
Letter Agreement, dated as of May 18, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Additional Convertible Note Hedge Transaction  8-K  001-00393  May 22, 2018  10.11 
Letter Agreement, dated as of May 18, 2018, between Goldman Sachs & Co. LLC and the Company regarding the Additional Warrant Transaction   8-K  001-00393  May 22, 2018  10.12 
Platform License Agreement, dated March 23, 2015, by and between Open Monoclonal Technology, Inc. and WuXi AppTec Biopharmaceuticals Co., Ltd.  10-Q  001-33093  August 8, 2018  10.13 
Amendment Number 1 to Platform License Agreement, dated June 11, 2017, by and between Open Monoclonal Technology, Inc. and WuXi Biologics (Hong Kong) Limited (as successor-in-interest to WuXi AppTec Biopharmaceuticals Co., Ltd.)  10-Q  001-33093  August 8, 2018  10.14 
Amendment Number 2 to Platform License Agreement, dated June 25, 2018, by and between Open Monoclonal Technology, Inc. and WuXi Biologics Ireland Limited (as successor-in-interest to WuXi Biologics (Hong Kong) Limited).  10-Q  001-33093  August 8, 2018  10.15 
Cooperation Agreement, dated August 9, 2018, by and between Vernalis plc and Ligand Holdings UK Ltd.  8-K  001-33093  August 8, 2018  10.1 
Break Fee Agreement, dated August 9, 2018, by and between Vernalis plc and Ligand Holdings UK Ltd.  8-K  001-33093  August 8, 2018  10.1 
Form of Indemnification Agreement between the Company and each of its directors 10-K  001-33093  March 1, 2018  10.60 
Form of Indemnification Agreement between the Company and each of its officers 10-K  001-33093  March 1, 2018  10.60 
Subsidiaries of the Company   X
Consent of independent registered public accounting firm-Ernst & Young LLP  X 
Certification by Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  X 
Certification by Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  X 
90

Certifications by Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  X 
101.INS  XBRL Instance Document. 
101.SCH  XBRL Taxonomy Extension Schema Document. 
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document. 
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document. 
101.LAB  XBRL Taxonomy Extension Label Linkbase Document 
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document. 

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





Item 16. Form 10-K Summary

None

91

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LIGAND PHARMACEUTICALS INCORPORATED
By:
/S/    JOHN L. HIGGINS        
John L. Higgins,
Chief Executive Officer
Date: February 28, 2019 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature Title Date
/s/    JOHN L. HIGGINS
Chief Executive Officer and Director (Principal Executive Officer) February 28, 2019
John L. Higgins
/s/    MATTHEW KORENBERG Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) February 28, 2019
Matthew Korenberg
/s/    TODD C. DAVIS Director February 28, 2019
Todd C. Davis
/s/    SUNIL PATEL Director February 28, 2019
Sunil Patel
/s/    STEPHEN L. SABBA Director February 28, 2019
Stephen L. Sabba
/s/    JOHN W. KOZARICH Director February 28, 2019
John W. Kozarich
/s/    JOHN L. LAMATTINA Director February 28, 2019
John L. Lamattina
/s/    JASON M. ARYEH Director February 28, 2019
Jason M. Aryeh
/s/    NANCY R. GRAY Director February 28, 2019
Nancy R. Gray

92
Exhibit 10.48

***Text Omitted and Filed Separately with
the Securities and Exchange Commission.
Confidential Treatment Requested Under
17 C.F.R. Sections 200.80(b)(4) and 240.24b-2.
DEVELOPMENT FUNDING AND ROYALTIES AGREEMENT

THIS DEVELOPMENT FUNDING AND ROYALTIES AGREEMENT (this “Agreement”) is made and entered into effective as of December 13, 2018 (the “Effective Date”) by and between LIGAND PHARMACEUTICALS, INC., a Delaware company having a place of business at 3911 Sorrento Valley Boulevard, Suite 110, San Diego, California 92121, U.S.A., (“Ligand”), and PALVELLA THERAPEUTICS, INC., a Delaware company having a place of business at 125 Strafford Avenue, Suite #360, Wayne, PA 19087, and its Affiliates (“Palvella”). Palvella and Ligand may be referred to herein individually as a “Party” or collectively as the “Parties.”

RECITALS

WHEREAS, Ligand is engaged in the development and commercialization of pharmaceutical products;

WHEREAS, Palvella owns or otherwise controls certain intellectual property rights and regulatory filings relating to the compound designated as PTX-022 (as defined below), which is the subject of clinical development;

WHEREAS, Ligand desires to contribute to the funding of the development of PTX-022 in exchange for the right to receive future payments based on the development and commercialization of PTX-022; and

WHEREAS, Palvella would like to obtain such funding from Ligand for such development activities, and make such future payments to Ligand, as set forth in this Agreement below.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein contained, the Parties hereby agree as follows.

ARTICLE 1 
DEFINITIONS
The terms in this Agreement with initial letters capitalized, whether used in the singular or the plural, will have the meaning set forth below or, if not listed below, the meaning designated in places throughout this Agreement.

1.1 “Accredited Investor” has the meaning ascribed to such term in Rule 501 of Regulation D promulgated under the Securities Act.
1.2 “Affiliate” of a Person means any other Person that (directly or indirectly) is controlled by, controls or is under common control with such initial Person.
CONFIDENTIAL

For the purposes of this definition, the term “control” (and, with correlative meanings, the terms “controlled by” and “under common control with”) as used with respect to a Person means: (a) direct or indirect ownership of more than fifty percent (50%) of the voting interest in the Person in question, or more than fifty percent (50%) interest in the income of the Person in question; provided, however, that, if local law requires a minimum percentage of local ownership, control will be established by direct or indirect beneficial ownership of one hundred percent (100%) of the maximum ownership percentage that may, under such local law, be owned by foreign interests; or (b) possession, directly or indirectly, of the power to direct or cause the direction of management or policies of the Person in question (whether through ownership of securities or other ownership interests, by contract, or otherwise).
1.3 “Applicable Law” means all laws, statutes, ordinances, codes, rules, and regulations that have been enacted by a Governmental Authority and are in force as of the Effective Date or come into force during the Term, in each case to the extent that the same are applicable to the performance by a Party of its obligations, and/or exercise of its rights, under this Agreement.
1.4 “Bankruptcy Event” means the occurrence of any of the following in respect of a Person: (a) an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; (b) the filing of any petition or answer by such Person seeking to adjudicate itself as bankrupt or insolvent, or seeking for itself any liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of such Person or its debts under any Applicable Law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization, examination, relief of debtors or other similar Applicable Law now or hereafter in effect, or seeking, consenting to or acquiescing in the entry of an order for relief in any case under any such Applicable Law, or the appointment of or taking possession by a receiver, trustee, custodian, liquidator, examiner, assignee, sequestrator or other similar official for such Person or for any substantial part of its property; (c) corporate or other entity action taken by such Person to authorize any of the actions set forth in clause (a) or clause (b) above; (d) without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy, insolvency or similar Applicable Law, or the filing of any such petition against such Person, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver or liquidator of such Person or of all or any substantial part of the property of such Person, in each case where such petition or order shall remain unstayed or shall not have been stayed or dismissed within ninety (90) days from entry thereof; provided that in the case of an involuntary petition, such Person has not challenged such petition within ninety (90) days thereof; (e) the appointment of a trustee, receiver, or custodian for all or substantially all of the property of such Person, or for any lesser portion of such property, if the result materially and adversely affects the ability of such Person to fulfill its obligations hereunder, which appointment is not dismissed within sixty (60) days; or (f) the dissolution or liquidation of Palvella.
1.5 “Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by Applicable Law to remain closed.
1.6 “Calendar Quarter” means the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31; provided, however, that (a) the
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first Calendar Quarter of the Term will extend from the Effective Date to the end of the first complete Calendar Quarter thereafter, and (b) the last Calendar Quarter of the Term will end upon the expiration or termination of this Agreement.
1.7 “Calendar Year” means (a) for the first Calendar Year of the Term, the period beginning on the Effective Date and ending on December 31, 2018, (b) for each Calendar Year of the Term thereafter, each successive period beginning on January 1 and ending twelve (12) consecutive calendar months later on December 31, and (c) for the last Calendar Year of the Term, the period beginning on January 1 of the Calendar Year in which this Agreement expires or terminates and ending on the effective date of expiration or termination of this Agreement.
1.8 “Change of Control” means with respect to a Party: (a) the sale or exclusive license of all or substantially all of such Party’s assets or business relating to this Agreement to a Third Party; (b) a merger, reorganization or consolidation involving the Party and a Third Party in which the voting securities of the Party outstanding immediately prior thereto cease to represent at least fifty percent (50%) of the combined voting power of the surviving entity immediately after such merger, reorganization or consolidation; or (c) a transaction (which may include a tender offer for such Party’s stock or the issuance, sale or exchange of stock of such Party) with a Third Party or Third Parties in which the stockholders of such Party immediately prior to the transaction do not, immediately after consummation of such transaction, (i) own, directly or indirectly through one or more intermediaries, stock or other securities of such Party that possess a majority of the voting power of all of such Party’s outstanding stock and other securities or (ii) possess the power to elect a majority of the members of such Party’s board of directors; provided, however, that, notwithstanding subsections (a), (b), and (c) above, a bona fide debt or equity financing of Palvella, including without limitation an IPO, Qualified Financing Event, Qualified Licensing Event or any equity financing involving a private placement of Palvella’s securities, will not constitute a Change of Control.
1.9 “Claims” has the meaning set forth in Section 8.1.
1.10 “Commercially Reasonable Efforts” means, as to Palvella and a Product, the level of effort, expertise, and resources required to Develop and Commercialize a Product consistent with the reasonable efforts that would be typically exerted by a biotechnology or pharmaceutical company of comparable size and capabilities as Palvella in pursuing the development and commercialization of a similar product with similar product characteristics at a similar stage in its development or product life, including without limitation with respect to commercial potential, the proprietary position of the Product, the regulatory status and approval process and other relevant technical, scientific, medical or legal factors.
1.11 “Commercialize,” “Commercializing,” and “Commercialization” means activities directed to manufacturing, obtaining pricing and reimbursement approvals for, marketing, promoting, distributing, importing, and/or selling a Product.
1.12 “Confidential Information” means any and all technical, business or other information or materials that are deemed confidential or proprietary to or by a Party and are disclosed or provided by such Party to the other Party under or in connection with this Agreement, whether disclosed or provided in oral, written, graphic, or electronic form, which may include without limitation trade secrets, processes, formulae, data, Know-How, improvements, inventions, chemical or biological materials, chemical
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structures, techniques, clinical, sublicensing and marketing and other Development and/or Commercialization plans, strategies, customer lists, financial data, intellectual property information, tangible or intangible proprietary information or materials or other information in whatever form.
1.13 “Control” or “Controlled” means, with respect to an item, information, or an intellectual property right, that the applicable Party owns or has a license or other appropriate rights in, to, and under such item, information, or intellectual property right and has the ability to disclose and grant a license or sublicense to the other Party as provided for in this Agreement in, to, and under such item, information, or intellectual property right without violating the terms of any written agreement with any Third Party.
1.14 “Cover,” “Covered,” or “Covering” means, with respect to a Patent Right, that, in the absence of ownership of or a license under such Patent Right, the manufacture, use, offer for sale, sale or importation of such Product or components thereof would infringe a Valid Claim in such Patent Right.
1.15 “Development” means non-clinical, pre-clinical and clinical drug discovery, research, and/or development activities, including without limitation quality assurance and quality control development, and any other activities reasonably related to or leading to the development and submission of information to a Regulatory Authority. When used as a verb, “Develop” means to engage in Development.
1.16 “Development Budget” has the meaning set forth in Section 2.2.
1.17 “Development Plan” has the meaning set forth in Section 2.2.
1.18 “Disclosing Party” has the meaning set forth in Section 5.1.
1.19 “Dollars” or “US$” means the lawful currency of the United States.
1.20 “Enforcing Party” has the meaning set forth in Section 6.2.1.
1.21 “Export Control Laws” means all applicable U.S., European Union or other applicable laws and regulations relating to (a) sanctions and embargoes imposed by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the European Union or (b) the export or re-export of commodities, technologies or services or data, including without limitation the Export Administration Act of 1979, 24 U.S.C. §§ 2401-2420; the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-1706; the Trading with the Enemy Act, 50 U.S.C. App. §§ 1 et. seq.; the Arms Export Control Act, 22 U.S.C. §§ 2778 and 2779; and the International Boycott Provisions of Section 999 of the U.S. Internal Revenue Code of 1986, and European Union laws and regulations (including without limitation Regulation (EC) No 428/2009, as amended), in each case as amended.
1.21 “FCPA” means the U.S. Foreign Corrupt Practices Act (15 U.S.C. § 78dd-1 et. seq.), as amended.
1.22 “FDA” means the United States Food and Drug Administration, or any successor agency thereto.
1.24 “Field” means the treatment of any and all indications, including without limitation pachyonychia congenita (“PC”).
1.25 “First Commercial Sale” means, with respect to a particular Product, the first commercial sale for monetary value by Palvella, one or more of its Affiliates or one or more of its Licensees in an
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arm’s length transaction to a Third Party that is not a Licensee, including without limitation any final sale to a distributor or wholesaler under any non-conditional sale arrangement, of such Product in the Field in the Territory after Regulatory Approval of such Product has been granted in the Field in the Territory. For the avoidance of doubt, sales or transfers of a Product for clinical and non-clinical research and trials (including studies reasonably necessary to comply with Applicable Law or requests by a Regulatory Authority), early access programs or for compassionate or similar use, shall not be considered a First Commercial Sale.
1.26 “GAAP” means generally accepted accounting principles in the United States, consistently applied.
1.27 “Governmental Authority” will mean any supranational, federal, national, multinational, regional, provincial, county, city, state, or local government, court, governmental agency, authority, board, bureau, instrumentality, regulatory body, or other political subdivision, domestic or foreign.
1.28 “Indemnitee” has the meaning set forth in Section 8.1.
1.29 “Initiate” means, when used with respect to a Phase 2/3 Clinical Study, the dosing of the first human patient with the first dose in such Phase 2/3 Clinical Study.
1.30 “IPO” means a transaction pursuant to which Palvella’s stock becomes publicly traded, including without limitation through a merger with a company whose stock is publicly traded or a firm commitment underwritten public offering of common stock of Palvella registered under the Securities Act.
1.31 “Know-How” means technical information and materials, including without limitation technology, software, instrumentation, devices, data, biological materials, assays, constructs, compounds, inventions (patentable or otherwise), practices, methods, algorithms, models, knowledge, know‑how, trade secrets, skill and experience (including without limitation all biological, chemical, pharmacological, toxicological, clinical, assay and related know-how and trade secrets, and all manufacturing data, manufacturing processes, specifications, assays, quality control and testing procedures, regulatory submissions and related know-how and trade secrets).
1.32 “Knowledge” means the actual knowledge of [***], after reasonable due inquiry, but is not meant to require or imply that any type of search (independent of that performed by the actual Governmental Authority during the normal course of patent prosecution, as applicable in a jurisdiction) has been conducted or opinion of counsel obtained.




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[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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1.33 “License” means any agreement pursuant to which Palvella grants to a Third Party (a “Licensee”) a license, sublicense, or other right to any Palvella Patents or Regulatory Filings or Regulatory Approvals relating to the Products; provided, however, that a License shall not include (a) any agreement pursuant to which a Licensee obtains solely the right to distribute a Product after purchase from Palvella, or (b) any agreement pursuant to which Palvella or any of its Affiliates grants a license or sublicense of any of its intellectual property rights (i) solely to conduct research, (ii) solely to manufacture a Product, or (iii) otherwise to service providers solely on a non-exclusive basis in the ordinary course of Development or Commercialization of a Product (e.g., material transfer agreements, distribution agreements, and consulting agreements).
1.34 “Licensee” has the meaning set forth in the definition of License.
135 “Losses” has the meaning set forth in Section 8.1.
1.36 “Milestone Payment” has the meaning set forth in Section 4.2.
1.37 “NDA” means a New Drug Application filed with the FDA that is required for approval for the applicable Product in the United States, or its foreign equivalent in the Territory.
1.38 “Net Sales” means, with respect to any Product, the gross amounts received by Palvella, its Affiliates and Licensees for arm’s length sales of such Product in the Field in the Territory to a Third Party (excluding any sales among Palvella, its Affiliates and any Licensee), commencing with the First Commercial Sale, less the following deductions solely to the extent incurred or allowed with respect to such sales, and solely to the extent such deductions are in accordance with GAAP, and which are not already reflected as a deduction from the invoiced price: (a) discounts (to the extent not previously applied to such amounts received), charge-back payments, and rebates; (b) credits or allowances for damaged goods, rejections, recalls or returns of such Product; (c) freight, insurance, postage, and shipping charges for delivery of such Product, to the extent separately billed on the invoice; (d) taxes, customs, or duties levied on, absorbed, or otherwise imposed on the sale of such Product, as adjusted for rebates and refunds, to the extent not paid by the Third Party and only to the extent such taxes, customs, or duties are not reimbursed to the paying party, but excluding all income taxes; and (e) that portion of the annual fees due under Section 9008 of the United States Patient Protection and Affordable Care Act of 2010 (Pub. L. No. 111-48) and any other fees imposed by any Applicable Law. If a Product is sold by Palvella, its Affiliates or Licensees through intermediaries such as agents, consignees or co-promoters who do not purchase and take title to Product, Royalties will be due only on sales to those Third Parties who actually purchase and take title to Product through such intermediaries. Net Sales will be determined in accordance with GAAP.
With respect to sales of a Product invoiced in Dollars, Net Sales shall be determined in Dollars. With respect to sales of a Product invoiced in a currency other than Dollars, Net Sales shall be determined by converting the currencies at which the sales are made into Dollars, at rates of exchange determined in a manner consistent with Palvella’s or the applicable Licensee’s methods for calculating rates of exchange in the preparation of Palvella’s or such applicable Licensee’s annual financial statements in accordance with GAAP.
A Product transferred to Third Parties in connection with clinical and non-clinical research and trials (including studies reasonably necessary to comply with Applicable Law), Product samples, charitable
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purposes, promotional purposes, early access programs, compassionate sales or use, or an indigent program or similar bona fide arrangements for which Palvella or any of its Affiliates or Licensees for good faith business reasons receives consideration in respect thereof that is less than the average cost of goods for a Product shall not be included in Net Sales.
1.39 “Non-Enforcing Party” has the meaning set forth in Section 6.2.1.
1.40 “Palvella Patents” means (a) any and all patents and patent applications that Cover a Product or its manufacture, use, sale, export or import, including without limitation the patents and patent applications set forth in Appendix B, and (b) any Patent Rights based on the patents and patent applications described in subsection (a).
1.41 “Patent Rights” means (a) patents and patent applications, and any foreign counterparts thereof, (b) all divisionals, continuations, continuations-in-part of any of the foregoing, and any foreign counterparts thereof, and (c) all patents issuing on any of the foregoing, and any foreign counterparts thereof, together with all registrations, reissues, re‑examinations, supplemental protection certificates, substitutions or extensions thereof, and any foreign counterparts thereof.
1.42 “Person” means any natural person, firm, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, business trust, unincorporated organization, Governmental Authority or any other legal entity, including without limitation public bodies, whether acting in an individual, fiduciary or other capacity
1.43 “Phase 2/3 Clinical Study” means a human clinical study of a Product in any country on a sufficient number of subjects that is designed to establish that such Product is safe and efficacious for its intended use, and to determine warnings, precautions, and adverse reactions that are associated with such Product in the dosage range to be prescribed, which trial is intended to support Regulatory Approval of such Product, as described in 21 C.F.R. § 312.21(c), or equivalent clinical study in a country other than the United States.
1.44 “Prior CDA” means the Mutual Confidentiality Agreement between the Parties, effective as of September 25, 2018.
1.45 “Product” means any product that contains PTX-022.
1.46 “PTO” means the United States Patent and Trademark Office.
1.47 “PTX-022” means the compound set forth on Appendix A.
1.48 “Public Official or Entity” means (a) any officer, employee (including without limitation physicians, hospital administrators or other healthcare professionals), agent, representative, department, agency, de facto official, representative, corporate entity, instrumentality or subdivision of any government, military or international organization, including without limitation any ministry or department of health or any state-owned or affiliated company or hospital, or (b) any candidate for political office, any political party or any official of a political party.

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1.49 “Qualified Financing Event” means an IPO or one or more equity financings of Palvella pursuant to which the gross proceeds in the aggregate to Palvella are at least [***].
1.50 “Qualified Licensing Event” means the date on which Palvella receives an aggregate of [***] in license fees pursuant to one or more Licenses; provided that any amounts received by Palvella under such Licenses that are bona fide reimbursements for expenses incurred by Palvella in the Development of PTX-022 will not be included in such license fees for purposes of this definition.
1.51 “Receiving Party” has the meaning set forth in Section 5.1.
1.52 “Regulatory Approval” means approval of an NDA by the FDA for the applicable Product in the United States, or approval by the applicable Regulatory Authority of a regulatory approval application that is equivalent to an NDA in a country other than the United States, and any approvals, licenses, registrations, or authorizations necessary for the manufacture, marketing, and sale of Product in such country and, where relevant, including without limitation any reimbursement or pricing approvals. For the sake of clarity, except as otherwise expressly provided herein, “Regulatory Approval” will not be achieved for a Product in a country or, where applicable, a multinational jurisdiction until any applicable approvals relating to pricing and reimbursement from the relevant Regulatory Authorities have been obtained in such country or such jurisdiction.
1.53 “Regulatory Authority” means any national or supranational Governmental Authority, including without limitation FDA, that has responsibility for granting any licenses or approvals or granting pricing and/or reimbursement approvals necessary for the development, marketing, and sale of a Product in any country.
1.54 “Regulatory Exclusivity” means any exclusive marketing rights or data exclusivity rights conferred by any Governmental Authority under Applicable Law with respect to a Product in a country or jurisdiction in the Territory to prevent Third Parties from Commercializing such Product in such country or jurisdiction, other than a Patent Right, including without limitation orphan drug exclusivity, pediatric exclusivity, rights conferred in the U.S. under the Hatch-Waxman Act or the FDA Modernization Act of 1997, in the EU under Directive 2001/83/EC, or rights similar thereto in other countries or regulatory jurisdictions in the Territory.
1.55 “Regulatory Filings” means any and all regulatory applications, filings, modifications, amendments, supplements, revisions, reports, submissions, authorizations, and Regulatory Approvals, and associated correspondence required to Develop and Commercialize Products in the Territory, including without limitation any reports or amendments necessary to maintain Regulatory Approvals.
1.56 “Royalties” has the meaning set forth in Section 4.3.1.
1.57 “Royalty Term” has the meaning set forth in Section 4.3.2.
1.58 “Securities Act” means the Securities Act of 1933, as amended.
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[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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1.59 “Term” has the meaning set forth in Section 7.1.
1.60 “Territory” means worldwide.
1.61 “Third Party” means any Person other than Palvella, Ligand, and their respective Affiliates.
1.62 “United States” or “U.S.” means the United States of America and all of its territories and possessions.
1.63 “Upfront Payment” has the meaning set forth in Section 4.1.
1.64 “Valid Claim” means either (a) a claim of an issued and unexpired patent or a supplementary protection certificate within the Palvella Patents that has not been held permanently revoked, unenforceable, or invalid by a decision of a court or other Governmental Authority of competent jurisdiction, unappealable or unappealed within the time allowed for appeal and that is not admitted to be invalid or unenforceable through reissue, disclaimer, or otherwise (i.e., only to the extent the subject matter is disclaimed or is sought to be deleted or amended through reissue), or (b) a claim of a pending patent application within the Palvella Patents that has not been abandoned, finally rejected, or expired without the possibility of appeal or refilling.
ARTICLE 2  
PALVELLA RESPONSIBILITIES; LICENSING; REPORTING

2.1 Responsibilities. Palvella will have the sole right, as between the Parties, to Develop and Commercialize Products in the Field, including without limitation determining the marketing and regulatory strategies for seeking (if and when appropriate) Regulatory Approvals and Regulatory Exclusivity in the Territory for Products in the Field, filing for such Regulatory Approvals and Regulatory Exclusivity for Products in the Field in the Territory, preparing, submitting, and maintaining any and all Regulatory Filings and Regulatory Approvals for Products in the Field in the Territory, and seeking any necessary Regulatory Approvals of Regulatory Authorities for Product labeling and promotional materials to be used in the applicable jurisdiction(s) in connection with Commercializing Products in the Field in the Territory. As between the Parties, Palvella will be responsible for all costs and expenses incurred by Palvella in connection with the foregoing activities, except for the payment set forth in Section 4.1. If an Affiliate and/or a Licensee meets or fulfills any or all of the obligations of Palvella under this Agreement, and/or observes any of the terms or conditions hereof, then Palvella will be deemed to have met or fulfilled such obligations or observed such terms or conditions, as the case may be.





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2.2 Development Plan and Development Budget. Palvella will conduct the activities set forth in the Development plan set forth on Appendix C (the “Development Plan”) in accordance with the Development budget set forth on Appendix D (the “Development Budget”). Palvella may update or modify in good faith the Development Plan and the Development Budget from time to time in its sole discretion without Ligand’s consent, provided that such amendments or modifications relate to reasonable and customary Development activities and do not result, in the aggregate, in additional expenditures in excess of [***] of, or result in a reduction in expenditures by more than [***] of, the aggregate amount of expenditures set forth in the Development Budget set forth on Appendix D as of the Effective Date. Otherwise, Palvella must obtain Ligand’s consent before amending or modifying the Development Budget, with such consent not to be unreasonably withheld, delayed, or conditioned. Palvella will use the Upfront Payment solely to fund activities in accordance with the Development Plan and the Development Budget, each of which may be amended from time to time in accordance with this Section 2.2. Without limiting any other remedies available, if all Development of Product(s) in the Field in the Territory is ceased, Palvella will pay to Ligand an amount equal to [***].
2.3 Diligence. Palvella will use Commercially Reasonable Efforts to carry out its responsibilities under this Agreement. During the Term, Palvella will use Commercially Reasonable Efforts to Develop and Commercialize at least one (1) Product in the Field in the Territory. Without limiting the foregoing, Palvella will Initiate a Phase 2/3 Clinical Study by December 31, 2019. Palvella will deliver to Ligand within thirty (30) days after the end of each Calendar Year a written report summarizing in reasonable detail the efforts of Palvella in the prior year to meet its obligations to Develop and Commercialize Products consistent with this Section 2.3 and the planned Development and Commercialization activities to be conducted by Palvella in the current Calendar Year.
2.4 Licensing.
2.4.1 Right to License. Palvella will retain the right to perform its activities under this Agreement through Licensees, subject to this Section 2.4. Palvella will remain responsible for the performance of Licensees under this Agreement, including without limitation for all payments due hereunder. Palvella will provide Ligand with notice of the entering into of each License promptly after execution of such License. In addition, Palvella will provide a redacted copy of any such License to Ligand after execution of such License.
2.4.2 Terms. Each License granted by Palvella pursuant to Section 2.4.1 will be subject to the terms and conditions of this Agreement and will contain terms and conditions consistent in all material respects with those in this Agreement. Agreements with any Licensee that include the right to Commercialize any Product(s) will contain provisions requiring such Licensee to calculate and report on net sales in sufficient detail to permit Palvella to meet its obligations set forth in Sections 4.4 and 4.5, and, to the extent that such Licensee will have access to Ligand’s Confidential Information, a requirement that such Licensee comply with confidentiality and non-use provisions consistent in all material respects with those contained in Article 5 with respect to Ligand’s Confidential Information.
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[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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2.4.3 Subcontracting. Palvella may utilize the services of Third Parties, including without limitation Third Party contract research organizations, contract manufacturing organizations, suppliers and service providers to perform its Development and Commercialization activities; provided that Palvella will remain at all times fully liable for its respective responsibilities under this Agreement. Any agreement with a Third Party to perform Palvella’s responsibilities under this Agreement will include confidentiality and non-use provisions which are no less stringent than those set forth in Article 5 and intellectual property provisions that will allow Palvella to comply with Article 6.  
ARTICLE 3  
 
REGULATORY

3.1 Regulatory Filings. Palvella will solely own and control any and all Regulatory Approvals and any and all other Regulatory Filings submitted in connection with seeking and maintaining Regulatory Approvals for Products in the Field in the Territory.
3.2 Regulatory Communications. Palvella will be the sole contact, as between the Parties, with the applicable Regulatory Authorities and will be solely responsible, using Commercially Reasonable Efforts, for all communications with such Regulatory Authorities that relate to any Regulatory Approvals or other Regulatory Filings prior to and after any Regulatory Approval with respect to the Products in the Field in the Territory. Except as may be required by Applicable Law, Ligand will not communicate regarding Products in the Field with any Governmental Authority having jurisdiction in the Territory unless explicitly requested or permitted in writing to do so by Palvella or unless so ordered by such Governmental Authority in the Territory, in which case Ligand will provide to Palvella notice of such order as soon as practicable, but in no event later than five (5) business days after receipt of such order. If Ligand is required to respond to any requests from or by any and all Regulatory Authorities with respect to any Product, Palvella will have an opportunity to comment on the response to the extent such response may materially impact the Product before Ligand submits such response and Ligand will provide a copy of the final response to Palvella.
3.3 Reports.
3.3.1 Within thirty (30) days after the end of each Calendar Quarter during the Term, Palvella will deliver to Ligand a report containing information regarding its Development and Commercialization activities conducted by or on behalf of Palvella and its Affiliates and Licensees during such Calendar Quarter. Without limiting the foregoing, such report shall include a description of all material activities in connection with any Regulatory Approvals and Regulatory Exclusivity for Products in the Field in the Territory, preparing, submitting, and maintaining any and all Regulatory Filings and Regulatory Approvals for Products in the Field in the Territory, and seeking any necessary Regulatory Approvals of Regulatory Authorities for Product labeling and promotional materials to be used in the applicable jurisdiction(s) in connection with Commercializing Products in the Field. In addition, such reports shall contain a description of Palvella’s performance against the activities and timelines set forth in the Development Plan and costs and expenses incurred against the Development Budget, each of which may be amended from time to time in accordance with Section 2.2.
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3.3.2 Prior to the consummation of an IPO, Palvella shall deliver to Ligand the following financial statements:
(a) within thirty (30) days after the end of each of the first three (3) Calendar Quarters of a Calendar Year, copies of the unaudited financial statements of Palvella for such Calendar Quarter; and
(b) within one hundred eighty (180) days after the end of each Calendar Year, copies of the audited financial statements of Palvella for such Calendar Year.
3.3.3 Prior to the consummation of an IPO, Palvella will provide Ligand with written notice at such time as (a) Palvella becomes insolvent as defined in Applicable Law, including without limitation interpretations in applicable case law; (b) Palvella is unable to pay its debts as they become due; (c) Palvella suspends, closes, or otherwise ceases to operate a portion of its business having a material adverse effect on Palvella’s ability to comply with its material obligations under this Agreement; and (d) Palvella fails to have enough cash on hand to fund at least two Calendar Quarters of its budgeted operating expenses, based on the Development Budget. In addition, within fifteen (15) days of a written request of Ligand (such request not to be made more than one time during any Calendar Year), Palvella will provide Ligand with its most recent audited financial statements. Ligand shall, and shall cause its representatives and Affiliates to, treat all notices and financial reports (and the information contained therein) as Confidential Information of Palvella, subject to the terms of Article 5.
ARTICLE 4  
 
PAYMENTS
4.1 Upfront Payment. In consideration for the rights granted under this Agreement to Ligand, including without limitation the right to receive the payments set forth in Sections 4.2 and 4.3, and to fund the Development activities described in this Agreement, Ligand shall pay Palvella a one-time payment of Ten Million Dollars ($10,000,000) (the “Upfront Payment”) on the Effective Date to an account designated in writing by Palvella.
4.2 Milestone Payments. In consideration for the Upfront Payment paid to Palvella under Section 4.1, Palvella will pay Ligand each milestone payment set forth in the table below after the first achievement of the specified milestone event (each, a “Milestone Event”) by Palvella, its Licensees or their Affiliates for a Product (each, a “Milestone Payment”). All such payments are non-refundable and non-creditable. Palvella will notify Ligand of any such achievement within five (5) business days after such achievement. Ligand may submit an invoice to Palvella for each Milestone Payment set forth in the table in this Section 4.2 below at any time after the corresponding Milestone Event is achieved. Palvella will pay any amounts payable under this Section 4.2 within thirty (30) days after receipt of an invoice therefor; provided that such invoice is submitted after the date on which such Milestone Payment becomes payable. If Ligand does not submit an invoice to Palvella with respect to the Milestone Payment, then such Milestone Payment will be payable within thirty (30) days after the date set forth in Palvella’s notice under this Section 4.2. For the avoidance of doubt, each Milestone Payment is payable a maximum of one time only, regardless of the number of times a Milestone Event is achieved.  
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Milestone Event

Milestone Payment
[***]
[***]
[***]
[***]
[***]
[***]

4.3 Royalty Payments.
4.3.1 Royalties on Products.
(a) In partial consideration for the Upfront Payment paid to Palvella under Section 4.1, Palvella hereby sells to Ligand all of its right, title, and interest in and to royalties on aggregate annual Net Sales of all Products in the Territory, as calculated by multiplying the applicable royalty rate in the table below (as may be adjusted pursuant to Section 4.3.1(a)(ii)) by the corresponding amount of incremental Net Sales of all Products in the Territory in each Calendar Year (“Royalties”). Palvella shall have no right, title, or interest in the Royalties and Palvella shall remit all Royalties to Ligand in accordance with Section 4.4. Commencing on the date that the Royalties paid to Ligand under this Section 4.3 and the payments paid to Ligand under Section 4.2 cumulatively equal at least [***] (the “Royalty Buy-Down Date”), Palvella will have the right to reduce the royalty rates set forth in Section 4.3.1(a)(i) by making a payment or payments (each, a “Royalty Buy-Down Payment”) at any time during the Term after the Royalty Buy-Down Date, as set forth in Section 4.3.1(a)(ii).
(i) If Palvella has not made a Royalty Buy-Down Payment within the time period set forth in Section 4.3.1(a), above, the royalty rates for the Term shall be as follows:
Net Sales Tier

Royalty Rate

For that portion of annual aggregate Net Sales of Products in a Calendar Year that are less than or equal to [***]


[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]but less than or equal to [***]

[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]

[***]

For example, and without limitation, if aggregate annual Net Sales of all Products in the Field in the Territory in a Calendar Year is [***], then Royalties due by Palvella would equal [***].

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[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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(ii) Royalty Buy-Down. At any time on or after the Royalty Buy-Down Date, Palvella shall have the right to reduce, in accordance with Section 4.3.1(a)(ii)(A), (B), (C), and/or (D), the royalty rates set forth in Section 4.3.1(a)(i). For clarity, Palvella will have the right to elect the options set forth in one or more of Section 4.3.1(a)(ii)(A), (B), (C), or (D). For example, and without limitation, Palvella may elect the option set forth in Section 4.3.1(a)(ii)(A) by making the [***] payment set forth therein, and then at a later time elect the option set forth in Section 4.3.1(a)(ii)(C) by making a payment equal to (x) [***] less (y) [***] previously paid pursuant to Section 4.3.1(a)(ii)(A).
(A) If Palvella has made a Royalty Buy-Down Payment of [***] within the time period set forth in Section 4.3.1(a), above, the royalty rates applicable commencing in the first Calendar Quarter after receipt of such Royalty Buy-Down Payment shall be as follows:
Net Sales Tier

Royalty Rate

For that portion of annual aggregate Net Sales of Products in a Calendar Year that are less than or equal to [***]


[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***] but less than or equal to [***]

[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]

[***]

(B) If Palvella has made Royalty Buy-Down Payment(s) totaling [***] within the time period set forth in Section 4.3.1(a), above, the royalty rates applicable commencing in the first Calendar Quarter after receipt of such Royalty Buy-Down Payment(s) totaling [***] shall be as follows:
Net Sales Tier

Royalty Rate

For that portion of annual aggregate Net Sales of Products in a Calendar Year that are less than or equal to [***]


[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***] but less than or equal to [***]

[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]

[***]


___________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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(C) If Palvella has made Royalty Buy-Down Payment(s) totaling [***] within the time period set forth in Section 4.3.1(a), above, the royalty rates applicable commencing in the first Calendar Quarter after receipt of such Royalty Buy-Down Payment(s) totaling [***] shall be as follows:
Net Sales Tier

Royalty Rate

For that portion of annual aggregate Net Sales of Products in a Calendar Year that are less than or equal to [***]


[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]

[***]
(D) If Palvella has made Royalty Buy-Down Payment(s) totaling [***] within the time period set forth in Section 4.3.1(a), above, the royalty rates applicable commencing in the first Calendar Quarter after receipt of such Royalty Buy-Down Payment(s) totaling [***] shall be as follows:
Net Sales Tier

Royalty Rate

For that portion of annual aggregate Net Sales of Products in a Calendar Year that are less than or equal to [***]


[***]
For that portion of annual aggregate Net Sales of Products in a Calendar Year that are greater than [***]

[***]

4.3.2 Royalty Term. Royalties will be remitted under this Section 4.3, on a country-by-country basis, commencing on First Commercial Sale of such Product in such country until the last to occur of: [***] (the “Royalty Term”).
4.4 Royalty Reports and Payments. During the Term following the First Commercial Sale of any Product, within forty-five (45) days after the end of each of the first three (3) Calendar Quarters of each Calendar Year and within sixty (60) days after the end of the last Calendar Quarter of each Calendar Year, Palvella will pay to Ligand Royalties due for such Calendar Quarter calculated in accordance with Section 4.3 and will deliver to Ligand a Royalties report showing, on a country-by-country basis, the information set forth in this Section 4.4 below:



___________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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4.4.1 the gross amount invoiced for and the amounts received and the Net Sales resulting from sales of Products sold by Palvella, its Affiliates or Licensees during such Calendar Quarter, including without limitation the specific deductions applied in the calculation of such Net Sales amounts, and any amounts required to be included in Net Sales pursuant to Section 6.2.3;
4.4.2 the Royalties (in Dollars) that have accrued in such Calendar Quarter with respect to such Net Sales;
4.4.3 withholding taxes, if any, required by Applicable Law to be deducted with respect to such Royalties; and
4.4.4 the rate of exchange used by Palvella in determining the amount of Dollars due hereunder.
If no Royalties are due for any Calendar Quarter hereunder, Palvella will so report. Palvella will keep, and will require in its Licenses, and use good faith efforts to enforce such requirements, its Licensees and their respective Affiliates to keep (all in accordance with GAAP), complete and accurate records in sufficient detail to properly reflect the Net Sales to enable the Royalties due hereunder to be determined for a period of at least three (3) Calendar Years.
In addition, Palvella will deliver to Ligand no later than twenty-five (25) days following the end of each Calendar Quarter a preliminary statement setting forth the actual Net Sales for the first two (2) months of such Calendar Quarter and estimated Net Sales for the third (3rd) month of such Calendar Quarter, the calculation of Royalties or Net Sales due on a country-by-country basis (based on such actual and estimated Net Sales) and, if applicable, the exchange rate to be utilized by Palvella to convert a local currency payment to Dollars.
4.5 Audits of Royalty Reports. Upon the written request of Ligand and not more than once in each Calendar Year, Palvella will permit an independent certified public accounting firm selected by Ligand and reasonably acceptable to Palvella, at Ligand’s expense, to have access during normal business hours to such records of Palvella as may be necessary or reasonably useful to verify the accuracy of the payment reports made and the amounts owed to Ligand under this Agreement for any Calendar Year period ending not more than thirty-six (36) months prior to the date of such request. Such rights with respect to any Calendar Year will terminate upon the earlier to occur of (a) the completion of an audit pursuant to this Section 4.5 with respect to such Calendar Year and (b) three (3) years after the end of any such Calendar Year. Ligand will provide Palvella with a copy of such accounting firm’s written report within thirty (30) days after completion of such report. If such accounting firm concludes that an overpayment or underpayment was made, then the owing Party will pay the amount due within thirty (30) days after the date Ligand delivers to Palvella such accounting firm’s written report so concluding, and any accrued interest as determined in accordance with Section 4.9 from the date such overpayment was paid or such underpayment was originally due, as applicable, until payment thereof. Ligand will bear the full cost of such audit unless such audit discloses that the additional payment payable by Palvella for the audited period is more than five percent (5%) of the amount of the payments due for that audited period, in which case Palvella will pay the reasonable documented fees and expenses charged by the accounting firm. If the Parties dispute any such accounting firm’s conclusion, they will resolve such issue pursuant to Article 11. Ligand will treat all information subject to review under Section 4.5 in accordance with the confidentiality provisions of this Agreement.
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4.6 Currency of Payments. All payments under this Agreement will be made in Dollars by wire transfer of immediately available funds into an account designated by Ligand. Net Sales outside of the U.S. will be first determined in the currency in which they are earned and will then be converted into an amount in Dollars using Palvella’s or the Licensee’s, as applicable, customary and usual conversion procedures used in preparing its financial statements pursuant to GAAP for the applicable reporting period.
4.7 Blocked Currency. In each country in the Territory where the local currency is blocked and cannot be removed from the country, at the election of Ligand, Royalties accrued on Net Sales in such country will be paid to Ligand in local currency by deposit in a local bank in such country designated by Ligand.
4.8 Taxes. Each Party will be solely responsible for the payment of all taxes imposed on its share of income arising directly or indirectly from the efforts of the Parties under this Agreement. The Parties agree to cooperate with one another and use reasonable efforts to reduce or eliminate tax withholding or similar obligations in respect of Royalties, Milestone Payments, and other payments made by Palvella to Ligand under this Agreement. To the extent Palvella is required under the Internal Revenue Code of 1986, as amended (the “Code”), or any other tax laws to deduct and withhold taxes on any payment to Ligand, and Palvella will pay the amounts of such taxes to the proper Governmental Authority in a timely manner and promptly transmit to Ligand an official tax certificate or other evidence of such withholding sufficient to enable Ligand to claim such payment of taxes. Upon Palvella’s reasonable request, Ligand will provide Palvella any tax forms that may be reasonably necessary in order for Palvella to determine whether to withhold tax on any such payments or to withhold tax on such payments at a reduced rate under the Code or any other tax laws, including without limitation any applicable bilateral income tax treaty. Palvella will give reasonable support so that any withholding tax or value added tax may be minimized or avoided to the extent permitted under the Applicable Laws and treaties. Each Party will provide the other with reasonable assistance to enable the recovery, as permitted by Applicable Laws, of withholding taxes, value added taxes, or similar obligations resulting from payments made under this Agreement, such recovery to be for the benefit of the Party bearing such withholding tax or value added tax. Palvella will use commercially reasonable efforts to require its Licensees to cooperate with Palvella and Ligand in a manner consistent with this Section 4.8. If any payment required to be made by Palvella under this Agreement is subject to increased deduction or withholding of tax by Ligand, then the sum payable by Palvella (in respect of which such increased deduction or withholding is required to be made) will be increased to the extent necessary to ensure that Ligand receives a sum equal to the sum which it would have received if no such increased tax deduction or withholding had been required.
4.9 Interest Due. Palvella will pay Ligand interest on any payments that are not paid on or before the date such payments are due under this Agreement at a monthly interest rate equal to the U.S. prime interest rate, as reported by The Wall Street Journal (New York edition) for the first Business Day of the month in which such payment was due plus five percentage points (5 ppts), or the maximum applicable legal rate, if less, calculated based on the total number of days payment is delinquent.
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ARTICLE 5  
 
NONDISCLOSURE OF CONFIDENTIAL INFORMATION

5.1 Nondisclosure. Each Party agrees that, during the Term and for a period of ten (10) years thereafter (or, for any trade secret, for so long as the Disclosing Party maintains such trade secret as a trade secret), a Party (the “Receiving Party”) receiving Confidential Information of the other Party (the “Disclosing Party”) will (a) maintain in confidence such Confidential Information, (b) not disclose such Confidential Information to any Third Party without the prior written consent of the Disclosing Party, except for disclosures expressly permitted in this Article 5, and (c) not use such Confidential Information for any purpose except those expressly permitted by this Agreement. The Parties agree that any Confidential Information (within the meaning of the Prior CDA) disclosed by the Parties or their Affiliates pursuant to the Prior CDA will be Confidential Information within the meaning of, and will be subject to, this Article 5.
5.2 Exceptions. The obligations under Section 5.1 will not apply with respect to any portion of Confidential Information of a Disclosing Party that the Receiving Party can show by competent evidence:
5.2.1 at the time of disclosure to Receiving Party is in the public domain;
5.2.2 after disclosure, becomes part of the public domain by publication or otherwise, except by breach of this Agreement by the Receiving Party or anyone to whom the Receiving Party disclosed Confidential Information;
5.2.3 was (a) in the Receiving Party’s possession at the time of disclosure without any obligation to keep it confidential or any restriction on its use or (b) subsequently and independently developed by the Receiving Party’s employees who had no knowledge of and who did not use, rely on or refer to any of Disclosing Party’s Confidential Information, in each case as shown by Receiving Party’s records; or
5.2.4 is received by the Receiving Party from a Third Party who has the lawful right to disclose such Confidential Information and who has not obtained such Confidential Information either directly or indirectly from the Disclosing Party.
5.3 Authorized Disclosure. To the extent (and only to the extent) that it is reasonably necessary or appropriate to fulfill its obligations or exercise its rights under this Agreement, the Receiving Party may disclose Confidential Information belonging to the Disclosing Party in the following instances:
5.3.1 prosecuting or defending litigation;
5.3.2 subject to Sections 5.4 and 5.5, required by Applicable Laws (including without limitation the rules and regulations of the U.S. Securities and Exchange Commission or any national securities exchange) and with judicial process; and
5.3.3 to Affiliates in connection with the performance of this Agreement and solely on a need-to-know basis; to potential or actual collaborators (including without limitation actual and potential
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Licensees), who prior to disclosure must be bound by written obligations of confidentiality and non-use no less restrictive than the obligations set forth in this Article 5; to potential or actual investment bankers, investors, lenders, acquirers, merger partners or other potential financial partners, and their attorneys and agents), who prior to disclosure must be bound by written obligations of confidentiality and non-use no less restrictive than the obligations set forth in this Article 5; or employees, independent contractors (including without limitation contract research organizations, contract manufacturing organizations, consultants and clinical investigators) or agents, each of whom prior to disclosure must be bound by written obligations of confidentiality and non-use no less restrictive than the obligations set forth in this Article 5; provided, however, that the Receiving Party will remain responsible for any failure by any Person who receives Confidential Information pursuant to this Section 5.3.3 to treat such Confidential Information as required under this Article 5.
If and whenever any Confidential Information is disclosed in accordance with this Section 5.3, such disclosure will not cause any such information to cease to be Confidential Information except to the extent that such disclosure results in a public disclosure of such information (other than in breach of this Agreement). Where reasonably possible and subject to Sections 5.4 and 5.5, the Receiving Party will notify the Disclosing Party in writing of the Receiving Party’s intent to make such disclosure pursuant to Sections 5.3.1–5.3.3 sufficiently prior to making such disclosure so as to allow the Disclosing Party adequate time to take whatever action appropriate to protect the confidentiality of the information while still permitting such disclosure, and the Receiving Party will cooperate with the Disclosing Party in such efforts.
5.4 Required Disclosure. A Receiving Party may disclose Confidential Information of the Disclosing Party to the extent such disclosure is required pursuant to interrogatories, judicial requests for information or documents, subpoena, civil investigative demand issued by a court or Governmental Authority or as otherwise required by Applicable Law; provided, however, that the Receiving Party will notify the Disclosing Party promptly in writing upon receipt thereof, giving (where practicable) the Disclosing Party sufficient advance notice to permit it to oppose, limit or seek a protective order or confidential treatment for such disclosure; and provided, further, that the Receiving Party will furnish only that portion of the Confidential Information that it is advised by counsel is legally required whether or not a protective order or other similar order is obtained by the Disclosing Party.
5.5 Securities Filings. In the event a Party proposes to file with the U.S. Securities and Exchange Commission or the securities regulators of any state or other jurisdiction a registration statement or any other disclosure document which describes or refers to this Agreement under the Securities Act, the Securities Exchange Act, of 1934, as amended, or any other applicable securities laws, such Party will notify the other Party in writing of such intention and will provide such other Party with a copy of relevant portions of the proposed filing not less than five (5) days prior to such filing (and any revisions to such portions of the proposed filing a reasonable time prior to the filing thereof), including without limitation any appendices to this Agreement, will consider in good faith the other Party’s comments and will use reasonable efforts to obtain confidential treatment of any information concerning this Agreement that such other Party requests, no later than two (2) days prior to such filing, be kept confidential, and will only disclose Confidential Information that it is advised by counsel is legally required to be disclosed. No such notice will be required under this Section 5.5 if the substance of the description of or reference to this
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Agreement contained in the proposed filing has been included in any previous filing made by the either Party hereunder or otherwise approved by the other Party.
5.6 Disclosure of Agreement. Except as otherwise permitted under Section 5.3.3, neither Party may issue any press release or make any other public statement or other disclosure disclosing to any Third Party any information relating to this Agreement or its terms or the transactions contemplated hereby without the prior written consent of the other Party, such consent not to be unreasonably withheld, delayed, or conditioned.
ARTICLE 6  
PATENT MATTERS

6.1  Preparation, Filing, Prosecution, and Maintenance of Palvella Patents. Palvella will have the responsibility, at its expense, and considering in good faith any and all recommendations of Ligand, for the preparation, filing, prosecution, and maintenance of the Palvella Patents, including any patent term extensions. Palvella will deliver to Ligand within [***] after the end of each Calendar Quarter a written report summarizing in reasonable detail the efforts of Palvella in the prior Calendar Quarter with respect to the preparation, filing, prosecution and maintenance of the Palvella Patents. Palvella will provide Ligand with notice of its intention to (a) permit any of the Palvella Patents to be abandoned in any country in the Territory or (b) elect not to file a new patent application claiming priority to a patent application within the Palvella Patents, either before such patent application’s issuance or within the time period required for the filing of an international (i.e., Patent Cooperation Treaty), regional (including the European Patent Office) or national patent application, in each case, at least [***] prior to such lapse or abandonment. In the event of any such lapse or abandonment, Ligand may elect to assume full responsibility for the continued prosecution and maintenance of such Palvella Patents, or the filing of such new patent application, in each case, upon obtaining Palvella’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.









_______________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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6.2 Intellectual Property Matters.
6.2.1 Procedures and Requirements. In the event that either Party has cause to believe that a Third Party may be infringing or misappropriating any of the Palvella Patents in the Field in the Territory, it will promptly notify the other Party in writing, identifying the alleged infringer and the alleged infringement or misappropriation complained of and furnishing the information upon which such determination is based. Palvella will have the first right but not the obligation to stop such infringement or misappropriation of the Palvella Patents by such Third Party in the Field in the Territory or settle, pursuant to Section 6.2.2, with such Third Party. If Palvella fails to take action within [***] following its receipt of a notice of such infringement or misappropriation, then Ligand, upon Palvella’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed will have the right to take action to stop such infringement or misappropriation. Upon reasonable request by the Party enforcing Palvella Patents in the Field in the Territory (the “Enforcing Party”), the other Party (the “Non-Enforcing Party”) will give the Enforcing Party all reasonable information and assistance, including without limitation allowing the Enforcing Party access to the Non-Enforcing Party’s files and documents and to the Non-Enforcing Party’s personnel who may have possession of relevant information and, if necessary or desirable for the Enforcing Party to prosecute any legal action, joining in the legal action as a party using counsel of its own choosing. Any such assistance provided by a Non-Enforcing Party will be rendered at the Enforcing Party’s cost and expense and the Enforcing Party will reimburse the Non-Enforcing Party for its reasonable and documented costs and expenses upon the Non-Enforcing Party’s request.
6.2.2 Settlement of an Enforcement Claim. The Enforcing Party will have the right to control settlement of any claims that a Third Party may be infringing or misappropriating any Palvella Patent in the Field and in the Territory; provided, however, that if such settlement could reasonably be deemed to have a material adverse effect on the Non-Enforcing Party, the Enforcing Party will not enter into any such settlement with respect to any Palvella Patent in the Territory without the prior written consent of the Non-Enforcing Party such consent not to be unreasonably withheld, delayed, or conditioned.
6.2.3 Expenses and Recovery. As between the Parties, the Enforcing Party will bear all costs and expenses (including without limitation any costs or expenses incurred that exceed the amounts recovered by the Enforcing Party pursuing any action under this Section 6.2.3) and payments awarded against or agreed to be paid by the Enforcing Party. Any amounts recovered by either Party pursuant to Section 6.2.1 or 6.2.2, whether by settlement or judgment, will be allocated in accordance with the following: [***].



_______________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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6.3 Infringement Claims by Third Parties. Ligand and Palvella each will promptly inform the other Party in writing of any actual, threatened, or alleged infringement or misappropriation, based on the making, using, selling, or offering for sale of a Product in the Field in the Territory, of a Third Party’s intellectual property rights of which it becomes aware. Neither Party will acknowledge to a Third Party the validity of any such allegation or admit liability with respect to any Product without the prior written consent of the other Party. Ligand and Palvella will each keep the other advised of all material developments in the conduct of any proceedings in defending any claim of such alleged infringement or misappropriation and will cooperate with the other in the conduct of such defense. In no event may either Party settle any such infringement or misappropriation claim in a manner that would materially adversely affect or impose any obligation on the other Party, without such other Party’s prior written consent, such consent not to be unreasonably withheld, delayed, or conditioned. Each Party will have the sole responsibility, at its cost and in its sole discretion, for defending any such allegations or claims made against it.
6.4 Limitation on Reporting Obligations. Ligand acknowledges and agrees that (a) Palvella shall not be in breach of any of its obligations under this Agreement for failing to disclose any information of a Third Party that is not expressly required to be disclosed under this Agreement, including notices, correspondence or reports, that Palvella is not permitted to disclose under its confidentiality obligations to such Third Party, and (b) Ligand may be excluded from access to any information or material if Palvella determines in good faith that such exclusion is reasonably necessary to preserve the attorney-client privilege or other similar privilege; provided that Palvella will notify Ligand of any such exclusion and, at Ligand’s request, will enter into a common interest agreement or similar agreement that will permit disclosure of such information or material while preserving the attorney-client privilege or other similar privilege.
6.5 Patent Marking. Palvella will include in all package inserts for all Products in each country in the Territory in which Products are commercialized a patent notice that includes the patent numbers of all Palvella Patents that Cover such Product, its method of manufacture or use in such country.
ARTICLE 7  
TERM AND TERMINATION

7.1 Term and Expiration. The term of this Agreement will commence on the Effective Date, and will continue for as long as payments are due or payable under this Agreement, or until such date as this Agreement is sooner terminated in accordance with Section 7.2 or 7.3 or by mutual written consent of the Parties (the “Term”).
7.2  Termination by Ligand. Ligand may terminate this Agreement for any or no reason upon ninety (90) days prior written notice to Palvella.
7.3 Termination for Material Breach.
7.3.1 If Ligand believes that Palvella is in material breach of this Agreement, then Ligand may deliver notice of such breach to Palvella. In such notice Ligand will identify with specificity the alleged breach and the actions or conduct that it wishes Palvella to take for an acceptable and prompt cure of such breach; provided that such identified actions will not be binding upon Palvella with respect to the
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actions that it may need to take to cure such breach. Palvella will have ninety (90) days to cure such breach. If Palvella fails to cure such breach within such cure period, Ligand may, subject to Section 7.3.2, terminate this Agreement immediately by providing Palvella a written notice at the end of such cure period. Notwithstanding the foregoing, if Palvella fails to cure such breach within such cure period, but within such cure period Palvella is using commercially reasonable efforts to cure such breach, then Ligand may not terminate this Agreement for so long as Palvella is using commercially reasonable efforts to cure such breach.
7.3.2 Notwithstanding the foregoing, if Palvella disputes in good faith the existence or materiality of such breach and provides notice to Ligand of such dispute within such cure period, Ligand will not have the right to terminate this Agreement in accordance with this Section 7.3 unless and until it has been determined in accordance with Article 11 that this Agreement was materially breached by Palvella and Palvella failed to cure such breach within the applicable cure period. It is understood and acknowledged that during the pendency of such a dispute, all of the terms and conditions of this Agreement will remain in effect and the Parties will continue to perform all of their respective obligations hereunder. The Parties further agree that any payments that are made by one Party to the other Party pursuant to this Agreement pending resolution of the dispute will be promptly refunded if a court or arbitrator determines pursuant to Article 11 that such payments are to be refunded by one Party to the other Party.
7.4 Continuing Obligations. Upon expiration or termination of this Agreement: (a) neither Party will be relieved of any obligation that accrued prior to the effective date of such termination and (b) all amounts due or payable to Ligand that were accrued prior to the effective date of termination will remain due and payable; provided that the foregoing will not be deemed to limit Palvella’s indemnification obligations under this Agreement for acts or omissions occurring prior to the effective date of such termination that are the subject of such indemnification even if the indemnification amount cannot be accrued or determined as of the effective date of such termination.
7.5 Retention of Payments. Upon expiration or termination of this Agreement, Ligand will have the right to retain all amounts previously paid to Ligand by Palvella.
7.6 Survival. Expiration or termination of this Agreement for any reason will not (a) release any Party from any obligation that has accrued prior to the effective date of such expiration or termination, (b) preclude any Party from claiming any other damages, compensation, or relief that it may be entitled to upon such expiration or termination, or (c) terminate any right to obtain performance of any obligation provided for in this Agreement that will survive expiration or termination. Without limiting the foregoing, upon expiration or termination of this Agreement, the rights and obligations of the Parties under Sections 7.4, 7.5, and this Section 7.6 and Articles 1, 5 (for the term set forth in Section 5.1), 8, 10, 11, and 12 will survive such expiration or termination.




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ARTICLE 8  
INDEMNITY

8.1 Palvella Indemnity Obligations. Palvella will defend Ligand, its Affiliates, and their respective directors, officers, employees, contractors, and agents (collectively, the “Indemnitees”), and will indemnify and hold harmless the Indemnitees, from and against any liabilities, losses, costs, damages, fees, or expenses incurred by such Indemnitees, and reasonable attorney’s fees and other legal expenses with respect thereto, (“Losses”) arising out of any allegation, claim, action, lawsuit, or other proceeding (“Claims”) brought against any Indemnitee to the extent directly resulting from or relating to: (a) any breach by Palvella of any of its representations, warranties, covenants, or obligations pursuant to this Agreement, (b) research, Development, manufacturing, Commercialization, transfer, importation or exportation, labeling, handling or storage, or use of or other exploitation of any Product by or on behalf of Palvella, its Affiliates, Licensees, distributors, or contractors, including without limitation Claims brought following the Effective Date based on product liability, bodily injury, risk of bodily injury, death, or property damage, (c) any allegations of infringement or misappropriation of the intellectual property of any Third Party, (d) the gross negligence or willful misconduct, or (e) any violation of Applicable Law by Palvella, its Affiliates, or Licensees; except in any such case to the extent such Losses and Claims directly result from: (i) the gross negligence or willful misconduct of Ligand, (ii) any breach by Ligand of any of its representations, warranties, covenants, or obligations pursuant to this Agreement, or (iii) any violation of Applicable Law by Ligand.
8.2 Procedure. If any Indemnitee intends to claim indemnification under this Article 8, the Indemnitee will promptly notify Palvella in writing of any Claim in respect of which the Indemnitee intends to claim such indemnification, and Palvella will assume the defense thereof with counsel selected by Palvella and reasonably acceptable to the Indemnitee; provided, however, that an Indemnitee will have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitee, if representation of such Indemnitee by the counsel retained by Palvella would be inappropriate due to actual or potential differing interests between such Indemnitee and any other Party represented by such counsel in such proceedings. Palvella will have the right to control the defense of, and settle, dispose of or compromise any Claims for which it is providing indemnification under this Article 8; provided that the prior written consent of the Indemnitee (which will not be unreasonably withheld, delayed, or conditioned) will be required in the event any such settlement, disposition or compromise would adversely affect the interests of the Indemnitee. The failure to deliver notice to Palvella within a reasonable time after the commencement of any such action, to the extent prejudicial to Palvella’s ability to defend such action, will relieve Palvella of any liability to the Indemnitee under this Article 8, but the omission to so deliver notice to Palvella will not relieve it of any liability that it may have to any Indemnitee otherwise than under this Article 8. The Indemnitee under this Article 8, its employees, and its agents, will cooperate with Palvella and its legal representatives in the investigation of any Claim covered by this indemnification.
ARTICLE 9  
REPRESENTATIONS, WARRANTIES, AND COVENANTS

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9.1 Mutual Representations and Warranties. Each Party represents and warrants to the other Party that:
9.1.1 it has the requisite corporate power and authority to enter into and perform its obligations under this Agreement;
9.1.2 it has full legal power to extend the rights granted to the other under this Agreement;
9.1.3 it is not aware of any impediment that would inhibit its ability to perform the terms and conditions imposed on it by this Agreement; and
9.1.4 it has taken all necessary action on its part required to authorize the execution and delivery of this Agreement.
9.2 Further Representations and Warranties, and Covenants, of Palvella. Palvella represents and warrants as of the Effective Date, and Palvella covenants, that:
9.2.1 it has enforceable written agreements with all of its employees, consultants, or independent contractors who receive Confidential Information under this Agreement obligating them to keep such information confidential and to use such information only as permitted in this Agreement, and assigning to Palvella ownership of all intellectual property rights created in the course of their employment;
9.2.2 as of the Effective Date, it has the full right to grant the rights to receive payments granted to Ligand under this Agreement, and is not currently bound by any agreement with any Third Party, or by any outstanding order, judgment, or decree of any court or administrative agency, that restricts it from granting to Ligand the rights as set forth in this Agreement;
9.2.3 it has not granted as of the Effective Date any right, option, license or interest in or to any Palvella Patents or Regulatory Filings that is in conflict with the rights granted to Ligand under this Agreement; and it has not granted, or permitted to be attached, any lien, security interest, or other encumbrance with respect to the Palvella Patents or Regulatory Filings;
9.2.4 During the Term, Palvella will not create, incur, assume or suffer to exist any lien, security interest, or other encumbrance on the Palvella Patents or Regulatory Filings, except to the extent that such lien, security interest, or encumbrance does not have an adverse effect on the interest of Ligand in PTX-022, including the right to receive payments and related information under this Agreement;
9.2.5 Palvella has no Knowledge of any infringement or misappropriation by any Third Party of any of the Palvella Patents or Regulatory Filings as of the Effective Date;
9.2.6 to Palvella’s Knowledge, Palvella solely owns the Palvella Patents existing as of the Effective Date, including without limitation all patents and patent applications set forth on Appendix B, and such ownership has been duly recorded with the PTO or corresponding Governmental Authorities;
9.2.7 Appendix B contains a true and complete list of all patents and patent applications of the Palvella Patents as of the Effective Date;
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9.2.8 Palvella has not utilized and will not utilize, in the Development or Commercialization of a Product, any Person that at such time, to Palvella’s Knowledge, is debarred by FDA or other Regulatory Authority;
9.2.9 To Palvella’s Knowledge, Palvella has obtained, and during the Term will maintain, all licenses, authorizations, and permissions necessary under Applicable Law for meeting and performing its obligations under this Agreement and all such licenses, authorizations, and permissions are in full force and effect;
9.2.10 To Palvella’s Knowledge, all of Palvella’s activities related to its use of Palvella Patents, and the Development and Commercialization of the Products comply in all material respects with Applicable Laws, and Palvella will use good faith efforts in compliance in all material respects with Applicable Laws during the Term;
9.2.11 Palvella has not incurred, and does not presently intend to incur, debts, liabilities, or other obligations beyond its ability to pay such debts, liabilities, or other obligations as they become absolute and matured. Palvella is not subject to any Bankruptcy Event, and no action has been taken or is intended by Palvella or, to its Knowledge, any other Person, to make Palvella subject to a Bankruptcy Event;
9.2.12 Palvella shall provide Ligand with written notice as promptly as possible (but in no event more than [***]) after acquiring Knowledge of the occurrence of a Bankruptcy Event in respect of Palvella;
9.2.13 the claims and rights of Ligand created by this Agreement to receive the payments set forth in Article 4 are not and shall not be subordinated to any creditor of Palvella or any other Person (other than as a result of Ligand’s own election);
9.2.14 Palvella and, to its Knowledge, its Affiliates and Licensees and their respective employees and contractors have not, and Palvella and its Affiliates will not, and will use good faith efforts to cause its Licensees and their respective employees and contractors to not, directly or indirectly through Third Parties, pay, promise, or offer to pay, or authorize the payment of, any money or give any promise or offer to give, or authorize the giving of anything of value to a Public Official or Entity or other Person for purpose of obtaining or retaining business for or with, or directing business to, any Person, including without limitation Ligand or Palvella. Without any limitation to the foregoing, Palvella and its Affiliates and Licensees and their respective employees and contractors have not, and Palvella and its Affiliates will not, and will use good faith efforts to cause its Licensees and their respective employees and contractors to not, directly or indirectly promise, offer, or provide any corrupt payment, gratuity, emolument, bribe, kickback, illicit gift, or hospitality or other illegal or unethical benefit to a Public Official or Entity or any other Person;


_______________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
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9.2.15 Palvella is aware of all applicable anti-corruption and anti-bribery laws, including without limitation the FCPA, and all applicable anti-corruption laws in effect in the countries in which Palvella conducts or will conduct business. Palvella and its Affiliates will not, and Palvella will use good faith efforts to cause its Licensees and their respective employees and contractors to not, cause any Indemnitees to be in violation of the FCPA, Export Control Laws, or any other Applicable Laws;
9.2.16 Palvella and its Affiliates will fully cooperate and will use good faith efforts to cause its Licensees and their respective employees, contractors, and subcontractors to cooperate fully with the Indemnitees in ensuring compliance with the FCPA, Export Control Laws, and all other Applicable Laws. During the Term, Palvella will provide Ligand with such due diligence information relating to compliance with the FCPA, Export Control Laws, and other Applicable Laws by Palvella and its Affiliates, subcontractors, and Licensees and their respective principals, directors, officers, employees, representatives, and contractors, as Ligand may reasonably request; and
9.2.17 Palvella will promptly notify Ligand if Palvella has any information or reasonable belief that there may be a violation of the FCPA, Export Control Laws, or any other Applicable Law in connection with the performance of this Agreement or the sale of the Product in the Territory.
9.3 Further Representations and Warranties of Ligand. Ligand represents and warrants that, as of the Effective Date, Ligand is an Accredited Investor.
ARTICLE 10 
DISCLAIMER; LIMITATION OF LIABILITY
10.1 DISCLAIMER. EXCEPT AS PROVIDED UNDER ARTICLE 9, EACH PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES, IN ALL CASES WITH RESPECT THERETO.
10.2 LIMITATION OF LIABILITY.
10.2.1 NEITHER PARTY WILL BE LIABLE FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE, OR MULTIPLE DAMAGES ARISING IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS OR PERFORMANCE OF ITS OBLIGATIONS HEREUNDER, OR FOR LOST PROFITS OR LOSS OF USE ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES.
10.2.2 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, SECTION 10.2.1 WILL NOT LIMIT OR RESTRICT (A) DAMAGES AVAILABLE FOR BREACHES OF CONFIDENTIALITY OBLIGATIONS UNDER ARTICLE 5, (B) THE INDEMNIFICATION OBLIGATIONS UNDER ARTICLE 8, OR (C) THE OBLIGATIONS TO PAY MILESTONE PAYMENTS AND ROYALTIES UNDER SECTIONS 4.2 AND 4.3.
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10.3 No Assumed Obligations. Notwithstanding any provision in this Agreement, Ligand is not assuming any liability or obligation of Palvella or any of Palvella’s Affiliates of whatever nature, whether presently in existence or arising or asserted hereafter. All such liabilities and obligations shall be retained by and remain liabilities and obligations of Palvella or its Affiliates, as the case may be.
ARTICLE 11  
DISPUTE RESOLUTION

11.1 Resolution by Senior Executives. The Parties will seek to settle amicably any and all disputes or differences arising out of or in connection with this Agreement. Any dispute between the Parties will be promptly presented to the Chief Executive Officer of Palvella and the Chief Executive Officer of Ligand, or their respective designees, for resolution. Such officers, or their designees, will attempt in good faith to promptly resolve such dispute. Notwithstanding the foregoing, either Party may seek equitable or interim relief or provisional remedy in any court of competent jurisdiction to enforce its rights under this Agreement, including without limitation injunctive relief and specific performance, without having to prove actual damages or post a bond. If the Chief Executive Officers of the Parties, or their respective designees, are unable to resolve a given dispute within thirty (30) days of the matter being referred to them, either Party may have the dispute adjudicated in accordance with Section 11.2.
11.2 Applicable Law and Venue. This Agreement will be governed by, enforced, and will be construed in accordance with the laws of the State of New York, United States of America without regard to any Applicable Law, rule, or principle that would result in the application of the laws of any other jurisdiction. All actions and proceedings arising out of or relating to this Agreement will be heard and determined exclusively in any New York State or federal court sitting in the Southern District of New York, and each Party hereby irrevocably consents to personal jurisdiction and venue in, and agrees to service of process issued or authorized by, such court in any such action or proceeding and irrevocably waive any defense of an inconvenient forum to the maintenance of any such action or proceeding. Notwithstanding the foregoing, either Party may seek injunctive relief in any court in any jurisdiction where appropriate.
ARTICLE 12  
MISCELLANEOUS

12.1 Assignment. This Agreement may not be assigned or otherwise transferred by either Party without the consent of the other Party, which consent will not be unreasonably withheld, delayed, or conditioned; provided, however, that either Party may, without such consent, assign this Agreement together with all of its rights and obligations hereunder to its Affiliates, or to a successor in interest in connection with the transfer or sale of all or substantially all of its business to which this Agreement relates, or in the event of a Change of Control, subject to the assignee agreeing to be bound by the terms of this Agreement and, if Palvella is the assigning Party, guarantees or similar or better credit support being provided, as necessary, to ensure that Ligand has substantially identical credit recourse. Any purported assignment in violation of the preceding sentences will be void. Any permitted assignee or successor will assume and be bound by all obligations of its assignor or predecessor under this Agreement.
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12.2 Severability. If any provision of this Agreement is held to be invalid or unenforceable, all other provisions will continue in full force and effect, and the Parties will substitute for the invalid or unenforceable provision a valid and enforceable provision which conforms as nearly as possible with the original intent of the Parties.
12.3 Notices. Any notice or other communication to a Party pursuant to this Agreement will be sufficiently made or given on the date it was sent; provided that such notice or other communication is sent by first class certified or registered mail, postage prepaid, or is sent by next day express delivery service, addressed to it at its address in this Section 12.3, below, or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith.
If to Ligand:
Ligand Pharmaceuticals, Inc.
3911 Sorrento Valley Boulevard, Suite 110 
San Diego, California 92121, U.S.A.
Attention: Chief Financial Officer

With a copy to (which alone will not constitute notice):

Ligand Pharmaceuticals, Inc.
3911 Sorrento Valley Boulevard, Suite 110 
San Diego, California 92121, U.S.A.
Attention: General Counsel

If to Palvella, to:

Palvella Therapeutics, Inc.
125 Strafford Avenue, Suite #360 
Wayne, PA 19087
Attention: Wes Kaupinen, President and CEO

With a copy to (which alone will not constitute notice):

Hogan Lovells US LLP
100 International Drive, Suite 2000 
Baltimore, MD 21202
Attention: Asher M. Rubin

12.4 Expenses. Except as expressly set forth in this Agreement or as may be specifically agreed to in writing by Palvella and Ligand, each Party will be responsible for all costs and expenses it incurs in connection with this Agreement.
12.5 Headings. The headings of Articles and Sections of this Agreement are for ease of reference only and will not affect the meaning or interpretation of this Agreement in any way.
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12.6 Waiver. The failure of either Party in any instance to insist upon the strict performance of the terms of this Agreement will not be construed to be waiver or relinquishment of any of the terms of this Agreement, either at the time of the Party’s failure to insist upon strict performance or at any time in the future, and such terms will continue in full force and effect.
12.7 Counterparts; Electronic Delivery. This Agreement and any amendment may be executed in one or more counterparts (including without limitation by way of PDF or electronic transmission), each of which will be deemed an original, but all of which together will constitute one and the same instrument. When executed by the Parties, this Agreement will constitute an original instrument, notwithstanding any electronic transmission, storage and printing of copies of this Agreement from computers or printers. For clarity, PDF signatures will be treated as original signatures.
12.8 Use of Names. Neither Party will, without prior written consent of the other Party, use the name or any trademark or trade name owned by the other Party, or owned by an Affiliate of the other Party, in any publication, publicity, advertising, or otherwise, except as expressly permitted by Article 5.
12.9 Independent Contractors. Nothing contained in this Agreement will be deemed to constitute a joint venture, partnership, or employer-employee relationship between Ligand and Palvella, or to constitute one as the agent of the other. Neither Party will be entitled to any benefits applicable to employees of the other Party. Both Parties will act solely as independent contractors, and nothing in this Agreement will be construed to make one Party an agent, employee, or legal representative of the other Party for any purpose or to give either Party the power or authority to act for, bind, or commit the other Party.
12.10 Entire Agreement. This Agreement, together with the Appendices attached hereto, constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof, and supersedes all prior or contemporaneous proposals, oral or written, confidentiality agreements, and all other communications between the Parties with respect to such subject matter, including without limitation the Prior CDA.
12.11 Modifications. The terms and conditions of this Agreement may not be amended or modified, except in writing signed by both Parties.
12.12 Exports. The Parties acknowledge that the export of technical data, materials, or products is subject to the exporting Party receiving any necessary export licenses and that the Parties cannot be responsible for any delays attributable to export controls which are beyond the reasonable control of either Party. Palvella and Ligand agree not to export or re-export, directly or indirectly, any information, technical data, the direct product of such data, samples, or equipment received or generated under this Agreement in violation of any applicable export control laws.
12.13 Further Assurances. Each Party agrees to do and perform all such further reasonable acts and things and will execute and deliver such other agreements, certificates, instruments, and documents necessary to carry out the intent and accomplish the purposes of this Agreement.
12.14 Interpretation.
12.14.1 This Agreement was prepared in the English language, which language will govern the interpretation of, and any dispute regarding, the terms of this Agreement.
30

12.14.2 Each of the Parties acknowledges and agrees that this Agreement has been diligently reviewed by and negotiated by and between them, that in such negotiations each of them has been represented by competent counsel and that the final agreement contained herein, including without limitation the language whereby it has been expressed, represents the joint efforts of the Parties and their counsel. Accordingly, in the event an ambiguity or a question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the Parties and no presumption or burden of proof will arise favoring or disfavoring any Party by virtue of the authorship of any provisions of this Agreement.
12.14.3 The definitions of the terms herein will apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun will include the corresponding masculine, feminine, and neuter forms. The word “any” will mean “any and all” unless otherwise clearly indicated by context.
12.14.4 Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument, or other document herein will be construed as referring to such agreement, instrument, or other document as from time to time amended, supplemented, or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or therein), (b) any reference to any Applicable Laws herein will be construed as referring to such Applicable Laws as from time to time enacted, repealed, or amended, (c) any reference herein to any Person will be construed to mean the Person’s successors and assigns (after any such succession or assignment), (d) the words “herein”, “hereof” and “hereunder”, and words of similar import, will be construed to refer to this Agreement in its entirety and not to any particular provision hereof, and (e) all references herein to Articles, Sections, or Appendices, unless otherwise specifically provided, will be construed to refer to Articles, Sections, and Appendices of this Agreement.
12.14.5 References to sections of the Code of Federal Regulations and to the United States Code will mean the cited sections, as these may be amended from time to time.
12.15 Force Majeure Event. Except for the payment of money, neither Party will be in breach or default, nor will either Party be liable or responsible to the other Party for losses or damages, nor will either Party have the right to terminate this Agreement, for any breach, default or delay by the other Party that is attributable to an event beyond their reasonable control, including without limitation acts of God, acts of government (including without limitation injunctions), fire, flood, earthquake, strike, lockout, labor dispute, breakdown of plant, shortage of equipment or supplies, loss or unavailability of manufacturing facilities or materials, casualty or accident, stoppage or interruption of transportation or utilities, civil commotion, acts of public enemies, acts of terrorism or threat of terrorist acts, blockage or embargo and the like (each, a “Force Majeure Event”); provided, however, that such Party will use commercially reasonable efforts to avoid and/or minimize the impact of such occurrence, and give prompt written notice of any Force Majeure Event to the other Party.
[Signature Page Follows] 
31

IN WITNESS WHEREOF, each of the Parties has caused its duly authorized officer to execute and deliver this Agreement as of the Effective Date.


LIGAND PHARMACEUTICALS, INC.


By:  /s/ Matthew Korenberg  
Name: Matthew Korenberg   
Title: Chief Financial Officer and EVP Finance


PALVELLA THERAPEUTICS, INC.

By:  /s/ Wesley H. Kaupinen  
Name: Wesley H. Kaupinen  
Title: President & CEO   























[Signature Page to Development Funding and Royalties Agreement]
1

Appendix A
PTX-022 

PTX-022 is a novel, [***] high-strength rapamycin topical [***] formulation [***], optimized for dermal targeting, which is the subject of clinical development pursuant to FDA IND No. 117347.

 


































_______________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
2

Appendix B
Palvella Patents 
[***]







































_____________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
3

Appendix C

Development Plan

•Secure FDA Fast Track Designation as basis for expedited development and review (Achieved on November 5, 2018)
o Provides for rolling review of NDA submission
o Opportunity for Priority Review (Priority Review designation means FDA's goal is to take action on an NDA within 6 months, compared to 10 months under standard review)
•[***]























______________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
4

Appendix D

Development Budget


[***]


























_________________________
[***] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
5

Exhibit 21.1

LIGAND PHARMACEUTICALS INCORPORATED
LIST OF SUBSIDIARIES


Name Jurisdiction of Incorporation
Glycomed Incorporated      California
Allergan Ligand Retinoid Therapeutics, Inc. Delaware
Ligand Pharmaceuticals International, Inc. Delaware
Ligand Biopharmaceuticals Incorporated Delaware
Ligand JVR, Inc. Delaware
Ligand Pharmaceuticals UK Limited United Kingdom
Ligand Pharmaceuticals (Canada) Incorporated Canada
Seragen Incorporated Delaware
Seragen Technology, Inc. Delaware
Pharmacopeia, LLC Delaware
Metabasis Therapeutics, Inc. Delaware
Neurogen Corporation Delaware
CyDex Pharmaceuticals, Inc.    Delaware
Open Monoclonal Technology, Inc. Delaware
OMT I, Inc. Delaware
OMT II, Inc. Delaware
Crystal Bioscience, Inc. California
Vernalis plc England and Wales
Vernalis (R&D) Limited England and Wales
Vernalis Group Limited England and Wales
Vernalis Therapeutics Inc. Delaware
Vernalis (Canada) Inc. Canada
Vernalis (Canada II) Inc. Canada
Vernalis Development Limited England and Wales
Vernalis Research Limited England and Wales
Cita NeuroPharmaceuticals Inc. Canada



Exhibit 23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:
 
(1) Registration Statement (Form S-8 No. 333-212775) pertaining to the 2002 Stock Incentive Plan, as amended and restated of Ligand Pharmaceuticals Incorporated,

(2) Registration Statement (Form S-8 No. 333-182547) pertaining to the 2002 Stock Incentive Plan, as amended and restated of Ligand Pharmaceuticals Incorporated,

(3) Registration Statement (Form S-8 No. 333-160132) pertaining to the 2002 Stock Incentive Plan, as amended and restated, and Employee Stock Purchase Plan, as amended and restated of Ligand Pharmaceuticals Incorporated, and

(4) Registration Statement (Form S-8 No. 333-131029) pertaining to the 2002 Stock Incentive Plan and 2002 Employee Stock Purchase Plan of Ligand Pharmaceuticals Incorporated;
  
of our reports dated February 28, 2019, with respect to the consolidated financial statements of Ligand Pharmaceuticals Incorporated and the effectiveness of internal control over financial reporting of Ligand Pharmaceuticals Incorporated included in this Annual Report (Form 10-K) of Ligand Pharmaceuticals Incorporated for the year ended December 31, 2018.
 

/s/ Ernst & Young LLP
 
San Diego, California
February 28, 2019



Exhibit 31.1
I, John L. Higgins, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Ligand Pharmaceuticals Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 28, 2019


/s/ John L. Higgins
John L. Higgins
Chief Executive Officer
(Principal Executive Officer)



Exhibit 31.2
I, Matthew Korenberg, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ligand Pharmaceuticals Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:    February 28, 2019


/s/ Matthew Korenberg
Matthew Korenberg
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)



Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
In connection with the Annual Report of Ligand Pharmaceuticals Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John L. Higgins, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)
The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 28, 2019
/s/ John L. Higgins
John L. Higgins
Chief Executive Officer
(Principal Executive Officer)

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
In connection with the Annual Report of Ligand Pharmaceuticals Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew Korenberg, Executive Vice President, Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)
The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and



(2) 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 28, 2019
/s/ Matthew Korenberg
Matthew Korenberg
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.