Notes to Condensed Consolidated Financial Statements
(Unaudited)
Unless the context requires otherwise, references in this report to “Ligand,” “we,” “us,” the “Company,” and “our” refer to Ligand Pharmaceuticals Incorporated and its consolidated subsidiaries.
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our 2019 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.
Reclassifications
Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, effective the first quarter of 2020, we began to present service revenue and contract revenue separately, which were combined in license fees, milestones and other revenues in prior years. As a result, service revenue and contract revenue in the condensed consolidated statement of operations for first quarter 2019 have been reclassified to conform to the current period presentation.
Significant Accounting Policies
We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2019 Annual Report.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.
Impact of COVID-19 Pandemic
The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees and partners, patients, communities and business operations, as well as the U.S. and global economy and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have closed our executive offices with our administrative employees continuing their work remotely and limited the number of staff in our research and development laboratories and other facilities. The continued spread of the COVID-19 pandemic and the measures taken by the governments of countries have affected, and could continue to affect, our business and the business of our partners, including future disruptions to our supply chain and the manufacture or shipment of drug substance and finished drug product for Captisol, delays by us or our partners in the initiation or enrollment of patients in clinical trials, discontinuations by patients enrolled in clinical trials, difficulties launching or commercializing products and other related activities, which could delay ongoing clinical trials, increase development costs, reduce royalty revenues and have a material adverse effect on our business, financial condition and results of operations. Several of our partners have reported that their operations have been impacted including delays in research and development programs and deprioritizing clinical trials in favor of treating patients who have contracted the virus or to prevent the spread of the virus. This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in the clinical trials being conducted by us or our partners. In addition, certain of our partners have reported negative impacts on product sales which will impact our royalty revenues.
While some of our partners have reported delays or reduced sales due to COVID-19, some of our other partners are working to develop drugs to treat COVID-19. For example, we are supplying Captisol to partners, including Gilead Sciences for Veklury® (remdesivir), a first new treatment for COVID-19 available under an EUA and is also being evaluated in multiple ongoing clinical trials and, as a result, we have worked to increase our manufacturing of Captisol to meet this increased demand. We believe we have adequate supply of Captisol and do not expect any significant risk or disruption to our supply chain for the foreseeable future. In addition, certain of our OmniAb partners have initiated antibody discovery programs for the potential treatment of COVID-19, which may lead to future milestone or royalty revenues if these programs are successful.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, the businesses of our partners, our results of operations and our financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact, including the timing and extent of governments reopening activities, and the economic impact on local, regional, national and international markets.
Accounting Standards Recently Adopted
Credit Losses - 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. This standard includes our financial instruments, such as accounts receivable, investments that are generally of high credit quality, and commercial license rights. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new guidance requires us to identify, analyze, document and support new methodologies for quantifying expected credit loss estimates for our financial instruments, using information such as historical experience and current economic conditions, plus the use of reasonable supportable forecast information. We adopted ASU 2016-13 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance sheet of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment, net of tax, recorded on January 1, 2020, is approximately $5.2 million on our unaudited condensed consolidated balance sheet as of January 1, 2020. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under previously applicable accounting standards. See additional disclosure on credit losses under “Short-term Investments”, “Accounts Receivable and Allowance for Credit Losses” and “Commercial License and Other Economic Rights” discussed below.
Goodwill Impairment Testing - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed 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. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.
Collaborative Arrangements - In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (Topic 808). The new standard clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, Revenue from Contracts with Customers, when the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. We adopted this standard on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.
Income Taxes - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The standard is expected to reduce cost and complexity related to accounting for income taxes. The new guidance eliminates certain exceptions and clarifies and amends existing guidance to promote consistent application among reporting entities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. We adopted this standard on a prospective basis on January 1, 2020, and the adoption did not have a material impact on our condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our condensed consolidated financial statements or disclosures.
Revenue
Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, service revenue, and contract revenue for license fees and development, regulatory and sales based milestone payments.
Royalties, Service Revenue, and Contract Revenue
We receive royalty revenue on sales by our partners of products covered by patents that we own. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.
We recognize service revenue for contracted R&D services performed for our customers over time. We measure our progress using an input method based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
Our contract revenue includes license fees and 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.
Captisol Sales
We recognize revenue when control of Captisol material 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.
Deferred Revenue
Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. 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 Captisol.
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 condensed consolidated balance sheet. Except for royalty revenue and certain service revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the three months ended March 31, 2020 and 2019, the amount recognized as revenue that was previously deferred was $0.4 million and $1.3 million, respectively.
Disaggregation of Revenue
The following table represents disaggregation of royalties, Captisol, service revenue and contract revenue (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
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|
|
|
|
|
|
|
|
|
|
|
March 31,
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|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kyprolis
|
$
|
4,405
|
|
|
$
|
3,833
|
|
|
|
|
|
|
|
|
|
|
|
Evomela
|
1,576
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
584
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
Promacta
|
—
|
|
|
14,193
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,565
|
|
|
$
|
19,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Captisol
|
|
$
|
21,109
|
|
|
$
|
8,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue
|
|
$
|
3,357
|
|
|
$
|
3,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License Fees
|
$
|
975
|
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
|
Milestone
|
334
|
|
|
10,254
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
821
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,130
|
|
|
$
|
11,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,161
|
|
|
$
|
43,484
|
|
|
|
|
|
|
|
|
|
Short-term Investments
Our investments consist of the following at March 31, 2020 and December 31, 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross unrealized gains
|
|
Gross unrealized losses
|
|
Estimated fair value
|
|
Amortized cost
|
|
Gross unrealized gains
|
|
Gross unrealized losses
|
|
Estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits
|
$
|
284,855
|
|
|
$
|
157
|
|
|
$
|
(1,398)
|
|
|
$
|
283,614
|
|
|
$
|
411,690
|
|
|
$
|
188
|
|
|
$
|
(3)
|
|
|
$
|
411,875
|
|
|
Corporate bonds
|
62,191
|
|
|
21
|
|
|
(1,666)
|
|
|
60,546
|
|
|
63,818
|
|
|
161
|
|
|
—
|
|
|
63,979
|
|
|
Commercial paper
|
127,928
|
|
|
5
|
|
|
(273)
|
|
|
127,660
|
|
|
210,525
|
|
|
43
|
|
|
(16)
|
|
|
210,552
|
|
|
Corporate equity securities
|
4,506
|
|
|
430
|
|
|
(3,483)
|
|
|
1,453
|
|
|
4,506
|
|
|
416
|
|
|
(1,850)
|
|
|
3,072
|
|
|
Mutual fund
|
150,747
|
|
|
—
|
|
|
(2,794)
|
|
|
147,953
|
|
|
250,635
|
|
|
—
|
|
|
(249)
|
|
|
250,386
|
|
|
Warrants
|
—
|
|
|
58
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
|
|
$
|
630,227
|
|
|
$
|
671
|
|
|
$
|
(9,614)
|
|
|
$
|
621,284
|
|
|
$
|
941,174
|
|
|
$
|
933
|
|
|
$
|
(2,118)
|
|
|
$
|
939,989
|
|
For available-for-sale debt securities with unrealized losses, the new credit losses standard (Topic 326) now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to be the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The adoption of the new credit losses standard did not have a material impact on our available-for-sale debt securities during the three months ended March 31, 2020.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Within one year
|
$
|
401,338
|
|
|
$
|
400,627
|
|
|
After one year through five years
|
73,636
|
|
|
71,193
|
|
|
After five years
|
—
|
|
|
—
|
|
|
Total
|
$
|
474,974
|
|
|
$
|
471,820
|
|
The following table summarizes our available-for-sale debt securities in an unrealized loss position (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
|
12 months or greater
|
|
|
|
Total
|
|
|
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits
|
$
|
(1,398)
|
|
|
$
|
214,597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,398)
|
|
|
$
|
214,597
|
|
|
Corporate bonds
|
(1,666)
|
|
|
40,460
|
|
|
—
|
|
|
—
|
|
|
(1,666)
|
|
|
40,460
|
|
|
Commercial paper
|
(273)
|
|
|
110,666
|
|
|
—
|
|
|
—
|
|
|
(273)
|
|
|
110,666
|
|
|
Total
|
$
|
(3,337)
|
|
|
$
|
365,723
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,337)
|
|
|
$
|
365,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits
|
$
|
(3)
|
|
|
$
|
58,584
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
58,584
|
|
|
Commercial paper
|
(16)
|
|
|
79,363
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
79,363
|
|
|
Total
|
$
|
(19)
|
|
|
$
|
137,947
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19)
|
|
|
$
|
137,947
|
|
Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 40 positions which were in an unrealized loss position as of March 31, 2020. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the three months ended March 31, 2020.
Accounts Receivable and Allowance for Credit Losses
Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. During the three months ended March 31, 2020, we considered the current and expected future economic and market conditions surrounding novel coronavirus (COVID-19) pandemic and recorded an additional $0.2 million of allowance for credit losses as of March 31, 2020.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Goodwill
|
$
|
94,341
|
|
|
$
|
95,229
|
|
|
Definite lived intangible assets
|
|
|
|
|
Complete technology
|
242,813
|
|
|
242,813
|
|
|
Less: accumulated amortization(1)
|
(53,728)
|
|
|
(50,203)
|
|
|
Trade name
|
2,642
|
|
|
2,642
|
|
|
Less: accumulated amortization
|
(1,213)
|
|
|
(1,180)
|
|
|
Customer relationships
|
29,600
|
|
|
29,600
|
|
|
Less: accumulated amortization
|
(13,594)
|
|
|
(13,224)
|
|
|
Total goodwill and other identifiable intangible assets, net
|
$
|
300,861
|
|
|
$
|
305,677
|
|
|
|
|
|
|
(1) accumulated amortization for complete technology includes immaterial amount of foreign currency translation adjustments for the complete technology acquired from the Vernalis acquisition.
|
|
|
|
Commercial License and Other Economic Rights
Commercial license and other economic rights consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Aziyo and CorMatrix
|
$
|
17,696
|
|
|
$
|
17,696
|
|
|
Palvella
|
10,000
|
|
|
10,000
|
|
|
Selexis
|
8,602
|
|
|
8,602
|
|
|
Dianomi
|
2,000
|
|
|
2,000
|
|
|
|
38,298
|
|
|
38,298
|
|
|
Less: accumulated amortization attributed to principal or research and development
|
(21,939)
|
|
|
(18,208)
|
|
|
Less: credit loss adjustments
|
(5,978)
|
|
|
—
|
|
|
Total commercial license and other economic rights, net
|
$
|
10,381
|
|
|
$
|
20,090
|
|
Commercial license and other economics rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, Palvella in December 2018 and Dianomi in January 2019. Commercial license rights acquired are accounted for as financial assets and other economic rights are accounted for as funded research and developments as further discussed below.
In May 2017, we entered into a Royalty Agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. We account for the Aziyo commercial license right as a financial asset, and in accordance with ASC 310, Receivables, we 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 March 31, 2020 is 23%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest.
In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we may receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congentia. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on any aggregate annual worldwide net sales of any PTX-022 products, 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 are not obligated to provide additional funding to Palvella for the development or commercialization of PTX-022. We determined the economic rights related to Palvella should be characterized as a funded research and development arrangement, thus we account for it in accordance with ASC 730-20, Research and Development Arrangements, and reduce our asset as the funds are expended by Palvella. As of March 31, 2020, the fund has been fully expended by Palvella and our cost basis for the asset has been reduced to zero, we will recognize milestones and royalties as revenue when earned.
We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the new credit losses on January 1, 2020. We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the three months ended March 31, 2020, we further considered the current and expected future economic and market conditions surrounding novel coronavirus (COVID-19) pandemic and recorded an additional $0.5 million reserve for credit losses in other expense, net, in our condensed consolidated statement of operations for the three months ended March 31, 2020 .
See further detail described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in our 2019 Annual Report.
Viking
As of March 31, 2020 and December 31, 2019, we recorded our common stock of Viking at fair value of $28.3 million and $48.4 million, respectively, in “investment in Viking” in our consolidated balance sheets. 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 also recorded the warrants in
“investment in Viking” in our consolidated balance sheet at fair value of $4.6 million and $9.9 million at March 31, 2020 and December 31, 2019, respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Compensation
|
|
$
|
2,321
|
|
|
$
|
1,986
|
|
|
Professional fees
|
|
690
|
|
|
1,135
|
|
|
Amounts owed to former licensees
|
|
383
|
|
|
381
|
|
|
Royalties owed to third parties
|
|
1,062
|
|
|
—
|
|
|
Return reserve
|
|
2,899
|
|
|
3,027
|
|
|
Current operating lease liabilities
|
|
1,483
|
|
|
1,242
|
|
|
Accrued interest
|
|
1,437
|
|
|
690
|
|
|
Other
|
|
1,573
|
|
|
1,375
|
|
|
Total accrued liabilities
|
|
$
|
11,848
|
|
|
$
|
9,836
|
|
Share-Based Compensation
Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. The following table summarizes share-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense as a component of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
$
|
2,397
|
|
|
$
|
2,127
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
3,256
|
|
|
3,220
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,653
|
|
|
$
|
5,347
|
|
|
|
|
|
|
|
|
|
The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
1.4%
|
|
2.5%
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
47%
|
|
44%
|
|
|
|
|
|
|
|
|
|
Expected term
|
4.7
|
|
5.1
|
|
|
|
|
|
|
|
|
Net Income (loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.
All of the 0.6 million weighted average shares of outstanding equity awards as of March 31, 2020 were anti-dilutive due to the net loss for the three months ended March 31, 2020.
Potentially dilutive common shares consist of shares issuable under 2019 Notes and 2023 Notes, stock options and restricted stock. 2019 Notes and 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which 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, after May 22, 2018, the 2019 Notes can only be settled in cash and therefore there has been no further impact on income per share of these notes since then. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for the awards. The 2019 Notes were paid off upon the maturity date in August 2019. See Note 4 - Convertible Senior Notes and Note 6 - Stockholders’ Equity.
The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
16,529
|
|
|
20,447
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
—
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted income per share
|
16,529
|
|
|
21,277
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect
|
10,144
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Fair Value Measurements
Assets and Liabilities Measured on a Recurring Basis
The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(1)
|
|
1,453
|
|
|
619,773
|
|
|
58
|
|
|
621,284
|
|
|
3,073
|
|
|
936,791
|
|
|
125
|
|
|
939,989
|
|
|
Investment in Viking common stock
|
|
28,258
|
|
|
—
|
|
|
—
|
|
|
28,258
|
|
|
48,425
|
|
|
—
|
|
|
—
|
|
|
48,425
|
|
|
Investment in Viking warrants(2)
|
|
4,621
|
|
|
—
|
|
|
—
|
|
|
4,621
|
|
|
9,910
|
|
|
—
|
|
|
—
|
|
|
9,910
|
|
|
Total assets
|
|
$
|
34,332
|
|
|
$
|
619,773
|
|
|
$
|
58
|
|
|
$
|
654,163
|
|
|
$
|
61,408
|
|
|
$
|
936,791
|
|
|
$
|
125
|
|
|
$
|
998,324
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal contingent liabilities(3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
859
|
|
|
$
|
859
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,659
|
|
|
$
|
2,659
|
|
|
CyDex contingent liabilities
|
|
—
|
|
|
—
|
|
|
413
|
|
|
413
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
348
|
|
|
Metabasis contingent liabilities(4)
|
|
—
|
|
|
5,410
|
|
|
—
|
|
|
5,410
|
|
|
—
|
|
|
5,935
|
|
|
—
|
|
|
5,935
|
|
|
Amounts owed to former licensor
|
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
Total liabilities
|
|
$
|
77
|
|
|
$
|
5,410
|
|
|
$
|
1,272
|
|
|
$
|
6,759
|
|
|
$
|
75
|
|
|
$
|
5,935
|
|
|
$
|
3,007
|
|
|
$
|
9,017
|
|
1.Short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of
our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on black scholes value estimated by management on the last day of the period.
2.Investment in warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, are classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in "Gain (loss) from Viking" in our condensed consolidated statement of operations.
3.The fair value of Crystal contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on development or regulatory milestones as defined in the merger agreement with Crystal. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. Changes in these estimates may materially affect the fair value. During the three months ended March 31, 2020, we paid a $1.8 million contingent liability on development milestones to former Crystal shareholders.
4.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially 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 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10 million payment upon initiation of a Phase 3 clinical trial.
Assets Measured on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets and long-lived assets.
We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.
There were no triggering events identified and no indication of impairment of our goodwill, indefinite-lived intangible assets, or long-lived assets during the three months ended March 31, 2020.
3. Business Combination
On July 23, 2019, we acquired privately-held Ab Initio Biotherapeutics, Inc., an antigen-discovery company located in South San Francisco, California. The transaction was accounted for as a business combination. 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 acquisition date. We did not incur any material acquisition related costs.
The purchase price of $12.0 million included $11.84 million cash consideration paid upon acquisition, net of cash acquired, and $0.15 million cash holdback for potential indemnification claims. As the acquisition is not considered significant, pro forma information has not been provided. The results of Ab Initio have been included in our results of operations since the date of acquisition.
The preliminary allocation of the purchase price consisted of (1) $0.03 million of fair value of tangible assets acquired, (2) $(0.08) million of liabilities assumed, (3) $7.4 million of acquired technologies, (4) $(1.6) million of deferred tax liability in connection with the acquired intangibles, and (5) $6.3 million of goodwill, none of which is deductible for tax purposes. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 12%. The fair value of the core technology is being amortized on a straight-line basis over the weighted average estimated useful life of the approximately 20 years.
The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, and purchased intangibles 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.
4. Convertible Senior Notes
0.75% Convertible Senior Notes due 2023
In May 2018, we issued $750.0 million aggregate principal amount of 0.75% convertible senior notes. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment, of 4.0244 shares per $1,000 principal amount of the 2023 Notes which represents an initial conversion price of approximately $248.48 per share.
Holders of the 2023 Notes may convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:
(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than 130% of the conversion price on such trading day;
(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or
(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.
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 March 31, 2020, the “if-converted value” did not exceed the principal amount of the 2023 Notes. In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.
In March 2020, we repurchased $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million. We accounted for the repurchase as a debt extinguishment, which resulted 1) a gain of $0.7 million reflected in other expense, net, in our condensed consolidated statement of operations for the three months ended March 31, 2020; 2) a $32.7 million reduction in debt discount, and 3) a $2.7 million reduction to additional paid in capital, net of tax, related to the reacquisition of the equity component in our condensed consolidated balance sheet as of March 31, 2020. After the repurchases, approximately $515.6 million in principal amount of the 2023 Notes remain outstanding.
Convertible Bond Hedge and Warrant Transactions
In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of its common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.
Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering approximately 3,018,327 shares of common stock with an exercise price of approximately $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from
August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.
The following table summarizes information about the 2023 Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Principal amount of 2023 Notes outstanding
|
$
|
515,560
|
|
|
$
|
750,000
|
|
|
Unamortized discount (including unamortized debt issuance cost)
|
(71,128)
|
|
|
(111,041)
|
|
|
Total long-term portion of notes payable
|
$
|
444,432
|
|
|
$
|
638,959
|
|
|
|
|
|
|
|
Carrying value of equity component of the 2023 Notes
|
$
|
64,966
|
|
|
$
|
101,422
|
|
|
Fair value of the 2023 Notes outstanding (Level 2)
|
$
|
425,662
|
|
|
$
|
647,280
|
|
|
|
|
|
|
|
|
|
|
|
5. Income Tax
Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three months ended March 31, 2020 and 2019 was 20.7% and 20.9%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2020 was primarily attributable to tax deductions related to stock award activities and foreign derived intangible income tax credits. The variance from the U.S. federal statutory tax rate of 21% for the three months ended March 31, 2019 was primarily attributable to tax deductions related to stock award activities which were recorded as discrete items.
6. Stockholders’ Equity
We grant options and awards to employees and non-employee directors pursuant to a stockholder approved stock incentive plan, which is described in further detail in Note 9, Stockholders’ Equity, of Notes to Consolidated Financial Statements in our 2019 Annual Report.
The following is a summary of our stock option and restricted stock activity and related information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Restricted Stock Awards
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Balance as of December 31, 2019
|
1,956,379
|
|
|
$
|
77.54
|
|
|
147,259
|
|
|
$
|
125.11
|
|
|
Granted
|
309,456
|
|
|
$
|
95.61
|
|
|
94,508
|
|
|
$
|
87.25
|
|
|
Options exercised/RSUs vested
|
(81,301)
|
|
|
$
|
11.70
|
|
|
(43,904)
|
|
|
$
|
123.28
|
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Balance as of March 31, 2020
|
2,184,534
|
|
|
$
|
82.55
|
|
|
197,863
|
|
|
$
|
107.43
|
|
As of March 31, 2020, outstanding options to purchase 1.4 million shares were exercisable with a weighted average exercise price per share of $66.97.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Amended Employee Stock Purchase Plan, or ESPP, is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As of March 31, 2020, 59,263 shares were available for future purchases under the ESPP.
Share Repurchases
During the three months ended March 31, 2020, we repurchased $73.3 million, of our common stock under our stock repurchase programs as discussed below.
In September 2018, our 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. On January 23, 2019, our Board of Directors increased the share repurchase authorization by $150.0 million. The available amount under the $350.0 million repurchase program was fully utilized during the third quarter of 2019.
On September 11, 2019, our Board of Directors approved a stock repurchase program authorizing, but not obligating, the repurchase of up to $500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and have entered into a Rule 10b5-1 trading plan, and may enter into additional Rule 10b5-1 trading plans in the future, to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. Our prior $350.0 million stock repurchase program mentioned above was terminated in connection with the approval of the new stock repurchase program. Authorization to repurchase $253.5 million of our common stock remained available as of March 31, 2020.
7. Commitment and Contingencies: Legal Proceedings
We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.
In November 2017, CyDex, our wholly-owned subsidiary, received a Paragraph IV certification Notice Letter from Teva stating that Teva had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of U.S. Patent Nos. 8,410,077 (“the ’077 patent”); 9,200,088 (“the ’088 patent”), or 9,493,582 (“the ’582 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or will not be infringed by Teva’s ANDA product. On December 20, 2017, CyDex filed a complaint against Teva in the U.S. District Court for the District of Delaware, asserting that the filing of Teva’s ANDA constitutes infringement of each of the ’077 patent, the ’088 patent, and the ’582 patent. 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 October 31, 2019, CyDex, Teva, and Acrotech Biopharma L.L.C. (the holder of the NDA for EVOMELA®) entered into a Confidential Settlement Agreement, settling this patent litigation. As a result of the settlement, Teva will be permitted to market a generic version of EVOMELA® in the United States on June 1, 2026 or earlier under certain circumstances. The terms of the settlement agreement are otherwise confidential.
On April 9, 2019, CyDex received a Paragraph IV certification Notice Letter from Alembic Global Holdings SA (“Alembic”) stating that Alembic had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or U.S. Patent No. 10,040,872 (“the ’872 patent”), and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Alembic’s ANDA product. On May 23, 2019, CyDex filed a complaint against Alembic, Alembic Pharmaceuticals, Ltd., and Alembic Pharmaceuticals, Inc. in the U.S. District Court for the District of Delaware, asserting that the filing of Alembic’s ANDA constitutes infringement of each of the ’088 patent and the ’582 patent. On July 29, 2019, Alembic filed an answer and counterclaims seeking declarations of non-infringement and invalidity as to each of the asserted patents and, on August 19, 2019, CyDex filed an answer to Alembic’s counterclaims. On April 7, 2020, the Court ordered that the Scheduling Order be amended such that, inter alia, the fact discovery cut off was set for November 2, 2020, the close of expect discovery was set for March 22, 2021, and that May 17, 2021 would remain the first day of a five-to-six-day bench trial.
On September 16, 2019, CyDex received a Paragraph IV certification Notice Letter from Lupin Ltd. (“Lupin”) stating that Lupin had submitted an ANDA to the FDA, seeking approval to manufacture, offer to sell, and sell a generic version of EVOMELA® prior to the expiration of any of the ’077 patent; the ’088 patent, the ’582 patent, or the ’872 patent, and alleging that these patents, each of which relates to Captisol®, are invalid, unenforceable, and/or would not be infringed by Lupin’s ANDA product. CyDex filed a complaint on October 29, 2019, alleging patent infringement against Lupin. Lupin filed an answer on December 11, 2019 and counterclaimed for declaratory judgments of invalidity and non-infringement as to all four patents and CyDex filed its answer to Lupin's counterclaims on January 2, 2020.
On October 31, 2019, we received three civil complaints filed in the US District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned several hundred civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the company and no individualized factual allegations have been advanced against us in any of the three complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.
8. Leases
We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to seven years, some of which include options to extend the leases for up to seven years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are immaterial.
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. 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.
In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.
The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
9. Subsequent Events
Icagen Acquisition
On April 1, 2020, we acquired the core assets, including its partnered programs and ion channel technology from Icagen and certain of its affiliates for $15.0 million in cash. Icagen will also be entitled to receive up to an additional $25.0 million of cash payments based on certain revenue milestones.
Bond Hedge Arrangement
On April 6, 2020, in connection with the repurchases of $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million, during the quarter ended March 31, 2020, we entered into amendments (the “Amendments”) with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedge transactions, dated May 17, 2018 and May 18, 2018 (collectively, the “Convertible Note Hedge Transactions”) we initially entered into in connection with the issuance of the 2023 Notes. The Amendments provide that the options under the Convertible Note Hedge Transactions corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.