NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Business
Ligand is a biopharmaceutical company with a business model that is based upon the concept of developing or acquiring royalty revenue generating assets and coupling them with a lean corporate cost structure.
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.
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 condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates
Correction of Previously Reported Financials
In connection with the preparation of the financial statements for the year ended December 31, 2015, the Company determined that the deferred tax assets and the tax benefit previously reported in our condensed and consolidated financial statements as of and for the three- and nine-month periods ended September 30, 2015 reflected an error in the calculation of certain capital loss carry-forwards at September 30, 2015 related to the sale of the Avinza product line. The error resulted in an understatement of long-term deferred income tax assets of
$2.1 million
, which represents approximately
1%
of the previously reported deferred tax assets as of September 30, 2015, and an understatement of tax benefit as well as net income of approximately
$2.1 million
for the three- and nine-month periods ended September 30, 2015. The impact on basic and diluted EPS for the same periods of
$0.11
per share and
$0.10
per share, respectively, represents less than
1%
of the previously reported EPS. While concluded the error was not material to any prior periods, individually or in the aggregate, based on our qualitative and quantitative analysis, management opted to correct the error by restating the respective amounts that were previously reported as of and for the three- and nine-month periods ended September 30, 2015 in this 10-K filing. Please refer to Note 11. Summary of Unaudited Quarterly Financial Information for details.
2015 Restatement
The Company is restating its previously issued consolidated financial statements as of and for the year ended December 31, 2015 and the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2015
to correct errors r
elating to the Company's net operating loss (NOL) carryforward benefits in the United States which resulted in an overstatement of deferred tax assets (DTA). In connection with three acquisitions that were completed prior to February 2010, the Company recognized DTA for a portion of the NOLs, which included capitalized research and development expenses, obtained from the acquired businesses. From the time of the acquisitions until September 2015, there was a full valuation allowance against all of the Company’s NOLs, including those obtained from the entities acquired. In September 2015, the Company concluded that the valuation allowance against substantially all of its DTA was no longer required based on its then recent income and projections of sustained profitability. As a result, the Company released its DTA valuation allowance in full, including
$27.5 million
related to NOLs recognized as part of the businesses acquired prior to February of 2010.
During the quarter ended September 30, 2016, the Company concluded that for accounting purposes the approximately
$27.5 million
of DTA that were obtained upon acquiring the businesses prior to February of 2010 did not meet the more likely-than-not criterion for recognition in 2015 and that the related valuation allowance should not have been reversed. As a result, the Company's income tax benefit and net income for the year ended December 31, 2015 were overstated by
$27.5 million
each.
The Company also recorded adjustments to the consolidated financial statements as part of this restatement relating to the classification of our 2019 Convertible Senior Notes. As of December 31, 2015, the Company's last reported sale price exceeded the
130%
threshold described in Note 5 - "Financing Arrangements" and accordingly the 2019 Convertible Senior Notes have been reclassified as a current liability as of December 31, 2015. As a result, the related unamortized discount of
$39.6 million
was classified as temporary equity component of currently redeemable convertible notes on our Consolidated Balance Sheet.
The account balances labeled As Reported in the following tables as of and for the year ended December 31, 2015 represent the previously reported amounts as presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. For the effects of correcting the errors related to the DTA on the condensed and consolidated financial statements for the interim period ended September 30, 2015, please refer to
Note 11 Summary of Unaudited Quarterly Financial Information.
The effects of these prior period corrections on the statement of operations and comprehensive income are as follows (in thousands except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
Income tax benefit
|
$
|
219,596
|
|
|
$
|
(27,481
|
)
|
|
$
|
192,115
|
|
Net income
|
257,305
|
|
|
(27,481
|
)
|
|
229,824
|
|
Comprehensive income
|
257,273
|
|
|
(27,481
|
)
|
|
229,792
|
|
Basic earnings per share
|
13.00
|
|
|
(1.39
|
)
|
|
11.61
|
|
Diluted earnings per share data
|
12.12
|
|
|
(1.29
|
)
|
|
10.83
|
|
The effects of these prior period corrections on the consolidated balance sheet is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
As Reported
|
|
Adoption of ASU 2015-03
(1)
|
|
Adjustments
|
|
As Restated
|
Current debt issuance costs
|
$
|
860
|
|
|
$
|
(860
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt issuance costs
|
$
|
2,527
|
|
|
$
|
(2,527
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income taxes
|
$
|
216,564
|
|
|
$
|
—
|
|
|
$
|
(27,481
|
)
|
|
$
|
189,083
|
|
Total assets
|
533,929
|
|
|
(3,387
|
)
|
|
(27,481
|
)
|
|
503,061
|
|
2019 convertible senior notes, net - current
|
—
|
|
|
(3,387
|
)
|
|
205,372
|
|
|
201,985
|
|
Total current liabilities
|
20,836
|
|
|
(3,387
|
)
|
|
205,372
|
|
|
222,821
|
|
2019 convertible senior notes, net - long term
(1)
|
205,372
|
|
|
—
|
|
|
(205,372
|
)
|
|
—
|
|
Total liabilities
|
229,538
|
|
|
(3,387
|
)
|
|
—
|
|
|
226,151
|
|
Equity component of currently redeemable convertible notes (Note 5)
|
—
|
|
|
—
|
|
|
39,628
|
|
|
39,628
|
|
Additional paid-in capital
|
701,478
|
|
|
—
|
|
|
(39,628
|
)
|
|
661,850
|
|
Accumulated deficit
|
(402,010
|
)
|
|
—
|
|
|
(27,481
|
)
|
|
(429,491
|
)
|
Total stockholders' equity
|
304,391
|
|
|
—
|
|
|
(67,109
|
)
|
|
237,282
|
|
Total liabilities and stockholders' equity
|
533,929
|
|
|
(3,387
|
)
|
|
(27,481
|
)
|
|
503,061
|
|
(1)
Unamortized issuance cost was reclassified to debt discount in this 10-K/A form due to that it is filed after the Company's retrospective adoption of
ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
in Q1 2016.
|
Upon the occurrence of certain circumstances, holders of the 2019 Convertible Senior 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. 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 2019 Convertible Senior 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.
The corrections did not have any impact on the company's cash flow statements for any period.
Correction of Immaterial Errors
During the three and nine months ended September 30, 2015, a clerical error was identified in the calculation of the projections used in the June 30, 2015 and September 30, 2015 valuation of contingent liabilities related to CyDex CVR holders. The error in the June 30, 2015 projection resulted in an understatement of short-term contingent liabilities of
$0.6 million
as of June 30, 2015, and an overstatement of net income of
$0.6 million
, or
$0.03
per share for the three and six months ended June 30, 2015, respectively. No other error was identified in the other interim period(s) in 2015 or 2014 based on the Company's review in those periods. The impact of correcting the error resulted in an understatement of net income of
$0.6 million
, or
$0.03
per share for the three months ended September 30, 2015. Based on a qualitative and quantitative analysis of the error, the Company concluded that it is immaterial to the interim condensed consolidated financial statements for the three and six months ended June 30, 2015 and had no effect on the trend of financial results. As such, the Company has corrected the error in the condensed consolidated financial statements for the period ended September 30, 2015.
Reclassifications
Certain reclassifications have been made to the previously issued statement of operations for comparability purposes. These reclassifications had no effect on the reported net income, stockholders' equity and operating cash flows as previously reported.
Income Per Share
Basic income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and common stock equivalents of all dilutive securities calculated using the treasury stock method and the if-converted method.
The total number of potentially dilutive securities including stock options and warrants excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive, were
3.3 million
,
5.1 million
and
0.8 million
for the years ended
December 31, 2015
,
2014
and
2013
respectively. In addition, the Company issued
793,594
shares of its common stock in
January 2016
as part of the consideration for the acquisition of Open Monoclonal Technology, Inc. (Refer to Note 12 for details), which was not included in basic and diluted income per share for the year ended
December 31, 2015
.
The following table presents the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Restated
|
|
|
|
|
EPS Attributable to Common Shareholders
|
2015
|
|
2014
|
|
2013
|
Net income from continuing operations
|
$
|
229,824
|
|
|
$
|
12,024
|
|
|
$
|
8,832
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
2,588
|
|
Net income
|
$
|
229,824
|
|
|
$
|
12,024
|
|
|
$
|
11,420
|
|
Shares used to compute basic income per share
|
19,790
|
|
|
20,419
|
|
|
20,312
|
|
Dilutive potential common shares:
|
|
|
|
|
|
Restricted stock
|
56
|
|
|
36
|
|
|
80
|
|
Stock options
|
882
|
|
|
978
|
|
|
353
|
|
2019 Convertible Senior Notes
|
499
|
|
|
—
|
|
|
—
|
|
Shares used to compute diluted income per share
|
21,228
|
|
|
21,433
|
|
|
20,745
|
|
Basic per share amounts:
|
|
|
|
|
|
Income from continuing operations
|
$
|
11.61
|
|
|
$
|
0.59
|
|
|
$
|
0.43
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.13
|
|
Net income
|
$
|
11.61
|
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
Diluted per share amounts:
|
|
|
|
|
|
Income from continuing operations
|
$
|
10.83
|
|
|
$
|
0.56
|
|
|
$
|
0.43
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.12
|
|
Net income
|
$
|
10.83
|
|
|
$
|
0.56
|
|
|
$
|
0.55
|
|
Cash Equivalents
Cash equivalents consist of all investments with maturities of
three
months or less from the date of acquisition.
Short-term Investments
Short-term investments primarily consist of investments in debt securities that have effective maturities greater than three months and less than twelve months from the date of acquisition. The Company classifies its 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). The Company determines the cost of investments based on the specific identification method.
Restricted Investments
Restricted investments consist of certificates of deposit held with a financial institution as collateral under a facility lease and third-party service provider arrangements.
The following table summarizes the various investment categories at
December 31, 2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Estimated
fair value
|
December 31, 2015
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
Bank deposits
|
43,043
|
|
|
—
|
|
|
(4
|
)
|
|
43,039
|
|
Corporate bonds
|
41,238
|
|
|
—
|
|
|
(35
|
)
|
|
41,203
|
|
Commercial paper
|
1,747
|
|
|
—
|
|
|
—
|
|
|
1,747
|
|
Asset backed securities
|
10,020
|
|
|
—
|
|
|
(5
|
)
|
|
10,015
|
|
Corporate equity securities
|
1,843
|
|
|
4,944
|
|
|
—
|
|
|
6,787
|
|
|
$
|
97,891
|
|
|
$
|
4,944
|
|
|
$
|
(44
|
)
|
|
$
|
102,791
|
|
December 31, 2014
|
|
|
|
|
|
|
|
Short-term investments (Corporate equity securities)
|
2,179
|
|
|
4,954
|
|
|
$
|
—
|
|
|
$
|
7,133
|
|
Certificates of deposit-restricted
|
1,261
|
|
|
—
|
|
|
—
|
|
|
1,261
|
|
|
$
|
3,440
|
|
|
$
|
4,954
|
|
|
$
|
—
|
|
|
$
|
8,394
|
|
Concentrations of Business Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents and investments.
The Company invests its excess cash principally in United States government debt securities, investment grade corporate debt securities and certificates of deposit. The Company has 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. During
2015
, the Company did not experience any significant losses on its cash equivalents, short-term investments or restricted investments.
A relatively small number of partners accounts 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,
|
|
2015
|
|
2014
|
|
2013
|
Partner A
|
27
|
%
|
|
37
|
%
|
|
33
|
%
|
Partner B
|
23
|
%
|
|
31
|
%
|
|
28
|
%
|
Partner C
|
18
|
%
|
|
10
|
%
|
|
14
|
%
|
The Company obtains Captisol from a single supplier, Hovione. If this supplier were not able to supply the requested amounts of Captisol, the Company would be unable to continue to derive revenues from the sale of Captisol until it obtained an alternative source, which could take a considerable length of time.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or market value. The Company determines cost using the first-in, first-out method. The Company analyzes its inventory levels periodically and writes down inventory to its 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, 2015
and
2014
. As of
December 31, 2015
, the commitment under our supply agreement with Hovione for Captisol purchases was
$12.3 million
.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the best estimate of the amount of probable losses in the Company’s existing accounts receivable. Accounts receivable that are outstanding longer than their contractual payment terms, ranging from
30
to
90
days, are considered past due. When determining the allowance for doubtful accounts, several factors are taken into consideration, including historical write-off experience and review of specific customer accounts for collectability. Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for recovery is considered remote. There was
no
allowance for doubtful accounts recorded as of
December 31, 2015
and
2014
.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
Indefinite lived intangible assets
|
|
|
|
IPR&D
|
$
|
12,556
|
|
|
$
|
12,556
|
|
Goodwill
|
12,238
|
|
|
12,238
|
|
Definite lived intangible assets
|
|
|
|
Complete technology
|
15,267
|
|
|
15,267
|
|
Less: Accumulated amortization
|
(3,762
|
)
|
|
(2,999
|
)
|
Trade name
|
2,642
|
|
|
2,642
|
|
Less: Accumulated amortization
|
(652
|
)
|
|
(519
|
)
|
Customer relationships
|
29,600
|
|
|
29,600
|
|
Less: Accumulated amortization
|
(7,304
|
)
|
|
(5,824
|
)
|
Total goodwill and other identifiable intangible assets, net
|
$
|
60,585
|
|
|
$
|
62,961
|
|
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
$2.4 million
was recognized in each of the three years ending
December 31, 2015
,
2014
, and
2013
. Estimated amortization expense for the years ending December 31, 2016 through
2021
is
$2.4 million
per year. For each of the years ended
December 31, 2015
,
2014
, and
2013
, there was
no
impairment of intangible assets with finite lives.
The Company accounts for goodwill in accordance with
Accounting Standards Codification ("ASC"), 350, Goodwill
and Other Intangibles
. The Company performs its impairment analysis for goodwill and certain non-amortizing intangibles on at least an annual basis. The Company uses the income approach and the market approach, each weighted at
50%
, for goodwill impairment analysis. For the income approach, the Company considers the present value of future cash flows and the carrying value of its assets and liabilities, including goodwill. The market approach is based on an analysis of revenue multiples of guideline public companies. If the carrying value of the assets and liabilities, including goodwill, were to exceed the Company’s estimation of the fair value, the Company would record an impairment charge in an amount equal to the excess of the carrying value of goodwill over the implied fair value of the goodwill. The Company performs an evaluation of goodwill as of December 31 of each year, absent any indicators of earlier impairment, to ensure that impairment charges, if applicable, are reflected in the Company's financial results before December 31 of each year. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill and other intangible asset balances are included in the identifiable assets of the business segment to which they have been assigned. As of
December 31, 2015
,
2014
and
2013
there has been no impairment of goodwill for continuing operations.
Intangible assets related to acquired IPR&D are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered to be indefinite-lived, they are not amortized but are tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. For the year ended
December 31, 2013
, the Company recorded a non-cash impairment charge of
$0.5 million
for the write-off of IPR&D for Captisol-enabled IV Clopidogrel. The impairment analysis was performed based on the income method using a Monte Carlo analysis. The asset was impaired upon notification from MedCo that they intended to terminate the license agreement and return the rights of the compound to the Company. Captisol-enabled IV Clopidogrel is an intravenous formulation of the anti-platelet medication designed for situations where the administration of oral platelet inhibitors is not feasible or desirable. For the years ended
December 31, 2015
and
December 31, 2014
, there was
no
impairment of IPR&D assets.
Commercial license rights
Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in
April 2013
and
April 2015
. Individual commercial license rights acquired under the agreement are carried at allocated cost and approximate fair value. The carrying value of the license rights will be reduced on a pro-rata basis as revenue is realized over the term of the agreement. Declines in the fair value of license rights below their carrying value that are deemed to be other than temporary are reflected in earnings in the period such determination is made. As of
December 31, 2015
, management does not believe there have been any events or circumstances indicating that the carrying amount of its commercial license rights may not be recoverable.
Property and Equipment, net
Property and equipment is stated at cost and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
Lab and office equipment
|
$
|
2,248
|
|
|
$
|
2,232
|
|
Leasehold improvements
|
273
|
|
|
273
|
|
Computer equipment and software
|
632
|
|
|
624
|
|
|
3,153
|
|
|
3,129
|
|
Less accumulated depreciation and amortization
|
(2,781
|
)
|
|
(2,643
|
)
|
|
$
|
372
|
|
|
$
|
486
|
|
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 $
0.2 million
,
$0.3 million
, and
$0.3 million
was recognized for the years ending
December 31, 2015
,
2014
, and
2013
, respectively and is included in operating expenses.
Contingent Liabilities
CyDex contingent liabilities
In connection with the Company’s acquisition of CyDex in
January 2011
, the Company 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. Any change in fair value is recorded in the Company’s consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid under the CVR agreements may be materially different than the carrying amount of the liability. The fair value of the liability at
December 31, 2015
and
2014
was
$9.5 million
and
$11.5 million
, respectively. The Company recorded a fair value adjustment to increase the liability for CyDex related contingent liabilities of
$3.8 million
for the year ended
December 31, 2015
,
$5.7 million
increase in the liability for the year ended
December 31, 2014
and a decrease in the liability of
$0.6 million
for the year ended
December 31, 2013
. Contingent liabilities decreased for cash payments to CVR holders and other contingency payments by
$5.8 million
during the year ended
December 31, 2015
,
$3.5 million
during the year ended
December 31, 2014
and
$1.0 million
during the year ended
December 31, 2013
.
Metabasis contingent liabilities
In connection with the Company’s acquisition of Metabasis in
January 2010
, the Company issued Metabasis stockholders
four
tradable CVRs,
one
CVR from each of
four
respective series of CVR, for each Metabasis share. The CVRs will entitle Metabasis stockholders to cash payments as frequently as every
six
months as cash is received by the Company from proceeds from Metabasis’ partnership with Roche (which has been terminated) or the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The acquisition-date fair value of the CVRs of
$9.1 million
was determined using quoted market prices of Metabasis common stock in active markets. 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. The fair value of the liability was
$4.0 million
and
$3.7 million
as of
December 31, 2015
and
2014
, respectively. The Company recorded an increase in the liability for CVRs of
$1.2 million
during the year ended
December 31, 2015
, a decrease of
$0.5 million
during the year ended
December 31, 2014
and an increase of
$4.2 million
during the year ended
December 31, 2013
. Contingent liabilities decreased for cash payments to CVR holders by
$0.9 million
for the year ended
December 31, 2015
.
No
cash payments were made to Metabasis CVR holders for the years ended
December 31, 2014
and
2013
.
Revenue Recognition
Royalties on sales of products commercialized by the Company’s partners are recognized in the quarter reported by the respective partner. Generally, the Company receives royalty reports from its licensees approximately one quarter in arrears due to the fact that its agreements require partners to report product sales between
30
and
60
days after the end of the quarter. The Company recognizes royalty revenues when it can reliably estimate such amounts and collectability is reasonably assured. Under this accounting policy, the royalty revenues reported are not based upon estimates and such royalty revenues are typically reported to the Company by its partners in the same period in which payment is received.
Revenue from material sales of Captisol is recognized upon transfer of title, which normally passes upon shipment to the customer, provided all other revenue recognition criteria have been met. All product returns are subject to the Company's credit and exchange policy, approval by the Company and a
20%
restocking fee. To date, product returns have not been material to net material sales in any related period. The Company records revenue net of product returns, if any, and sales tax collected and remitted to government authorities during the period.
The Company analyzes its revenue arrangements and other agreements to determine whether there are multiple elements that should be separated and accounted for individually or as a single unit of accounting. For multiple element contracts, arrangement consideration is allocated at the inception of the arrangement to
all deliverables on the basis of relative selling price, using a hierarchy to determine selling price. Management first considers VSOE, then TPE and if neither VSOE nor TPE exist, the Company uses its best estimate of selling price.
Many of the Company's revenue arrangements for Captisol involve a license agreement with the supply of manufactured Captisol product. Licenses may be granted to pharmaceutical companies for the use of Captisol product in the development of pharmaceutical compounds. The supply of the Captisol product may be for all phases of clinical trials and through commercial availability of the host drug or may be limited to certain phases of the clinical trial process. Management believes that the Company's licenses have stand-alone value at the outset of an arrangement because the customer obtains the right to use Captisol in its formulations without any additional input by the Company.
Other nonrefundable, up-front license fees are recognized as revenue upon delivery of the license, if the license is determined to have standalone value that is not dependent on any future performance by the Company under the applicable collaboration agreement. Nonrefundable contingent event-based payments are recognized as revenue when the contingent event is met, which is usually the earlier of when payments are received or collections are assured, provided that it does not require future performance by the Company. The Company occasionally has sub-license obligations related to arrangements for which it receives license fees, milestones and royalties. Management evaluates the determination of gross versus net reporting based on each individual agreement.
Sales-based contingent payments from partners are accounted for similarly to royalties, with revenue recognized upon achievement of the sales targets assuming all other revenue recognition criteria for milestones are met. Revenue from development and regulatory milestones is recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that (1) the milestone event is substantive, its achievability was not reasonably assured at the inception of the agreement, and the Company has no further performance obligations relating to that event, and (2) collectability is
reasonably assured. If these criteria are not met, the milestone payment is recognized over the remaining period of the Company’s performance obligations under the arrangement.
Revenue from research funding under our collaboration agreements is earned and recognized on a percentage-of completion basis as research hours are incurred in accordance with the provisions of each agreement.
In May 2014, the Company entered into a licensing agreement and research collaboration with Omthera. The research collaboration will target the development of novel products that utilize the proprietary Ligand developed LTP TECHNOLOGY to improve lipid-lowering activity of certain omega-3 fatty acids. The Company is eligible to receive compensation and reimbursement from Omthera for internal research effort and external costs incurred, as well as development and regulatory event-based payments. The completion of a proof of concept under the development program would trigger a
$1.0 million
payment which is determined to be a milestone under the milestone method of accounting as (1) it is an event that can only be achieved in part on the Company's past performance, (2) there was substantive uncertainty at the date the arrangement was entered into that the event would be achieved and (3) it results in additional payment being due to the Company. None of the other event-based payments represents a milestone under the milestone method of accounting. No event based payment or milestone was achieved during the periods presented. The Company received
$0.5 million
from Omthera in 2014 under the agreement and recognized
$0.1 million
and
$0.4 million
, respectively, for the years ended
December 31, 2015
and
2014
as collaborative revenue based on the percentage of completion of the research program.
No
milestone payment or contingent payment was received in 2015.
Cost of Material Sales
The Company determines cost using the first-in, first-out method. Cost of material sales include all costs of purchase and other costs incurred in bringing the Captisol inventories to their present location and condition, costs to store, and distribute.
Preclinical Study and Clinical Trial Accruals
Substantial portions of the Company’s preclinical studies and all of the Company’s clinical trials have been performed by third-party laboratories, CROs. The Company accounts for a significant portion of its clinical study costs according to the terms of its contracts with CROs. The terms of its CRO contracts may result in payment flows that do not match the periods over which services are provided to us under such contracts. The Company's objective is to reflect the appropriate preclinical and clinical trial expenses in its financial statements in the same period as the services occur. As part of the process of preparing its financial statements, the Company relies on cost information provided by its CROs. The Company is also required to estimate certain of its expenses resulting from its obligations under its CRO contracts. Accordingly, the Company's preclinical study and clinical trial accrual is dependent upon the timely and accurate reporting of CROs and other third-party vendors. The Company periodically evaluates its 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.
Income Taxes
Income taxes are accounted for under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the consolidated financial statements. The Company provides a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. The Company calculates the valuation allowance in accordance with the authoritative guidance relating to income taxes under ASC 740,
Income Taxes
, which requires an assessment of both positive and negative evidence that is available regarding the reliability of these deferred tax assets, when measuring the need for a valuation allowance. Developing the provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company's judgments and tax strategies are subject to audit by various taxing authorities. While management believes the Company has provided adequately for its income tax liabilities in its consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the Company's consolidated financial condition and results of operations.
Research and Development Expenses
Research and development expense consists of labor, material, equipment, and allocated facilities costs of the Company’s scientific staff who are working pursuant to the Company’s collaborative agreements and other research and development projects. Also included in research and development expenses are third-party costs incurred for the Company’s 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
Stock-Based Compensation
The Company grants options and awards to employees, non-employee consultants, and non-employee directors. Only new shares of common stock are issued upon the exercise of stock options. Non-employee directors are accounted for as employees. Options and restricted stock granted to certain directors vest in equal monthly installments over
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. All option awards generally expire
ten
years from the date of grant.
Stock-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 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:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2014
|
|
2013
|
|
Risk-free interest rate
|
1.7%-2.0%
|
|
1.9%
|
|
1.13%-1.82%
|
|
Expected volatility
|
50%-58%
|
|
62%-69%
|
|
69%
|
|
Expected term
|
6.5 years
|
|
6 years
|
|
6 years
|
|
Forfeiture rate
|
8.52%
|
|
8.6%-9.7%
|
|
8.4%-9.8%
|
|
The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant. The expected term of the employee and non-employee director options is the estimated weighted-average period until exercise or cancellation of vested options (forfeited unvested options are not considered) based on historical experience. Volatility is a measure of the expected amount of variability in the stock price over the expected life of an option expressed as a standard deviation. In making this assumption, the Company used the historical volatility of the Company’s stock price over a period equal to the expected term. The forfeiture rate is based on historical data at the time of the grant.
The following table summarizes stock-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
|
2013
|
Stock-based compensation expense as a component of:
|
|
|
|
|
|
Research and development expenses
|
$
|
4,080
|
|
|
$
|
3,595
|
|
|
$
|
1,705
|
|
General and administrative expenses
|
8,378
|
|
|
7,675
|
|
|
3,961
|
|
|
$
|
12,458
|
|
|
$
|
11,270
|
|
|
$
|
5,666
|
|
Segment Reporting
Under
Accounting Standards Codification No. 280, “Segment Reporting” (ASC 280)
, operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity’s chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company has evaluated its operating segment in accordance with
ASC 280
, and has determined that the previously identified
two
reportable segments should be consolidated to
one
reporting segment at
December 31, 2015
. In earlier periods, the Company had identified two reporting segments: developing, licensing and manufacturing materials using Captisol reformulation technology by CyDex and development and licensing biopharmaceutical assets by Ligand. Due to the full integration of the these two
segments and the organizational changes during the year ended
December 31, 2015
, especially in the fourth quarter of 2015 as management evaluated, planned for, and executed the acquisition of a new business from Open Monoclonal Technology, Inc. (Refer to Note 12 for details), our chief operating decision maker now evaluates the performance of and manages the Company as one comprehensive business, which is development and licensing biopharmaceutical assets and coupling them with a lean corporate cost structure. As a result, management has concluded that the Company operates under one segment and there is one reporting segment at
December 31, 2015
, and all the respective disclosure under two reporting segments for 2014 and 2013 have been removed from this 10-K.
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 less 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).
Variable Interest Entities ("VIE")
The Company identifies an entity as a VIE if either: (1) the entity does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the entity's equity investors lack the essential characteristics of a controlling financial interest. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in any VIE and therefore is the primary beneficiary. If the Company is the primary beneficiary of a VIE, it consolidates the VIE under applicable accounting guidance. If the Company is no longer the primary of a VIE or the entity is no longer considered as a VIE as facts and circumstances changed, it deconsolidates the entity under the applicable accounting guidance. Beginning May 2015, the Company deconsolidated Viking, a previously reported VIE, and elected to record its investment in Viking under the equity method of accounting as Viking is no longer considered a VIE, and the Company does not have voting control or other elements of control that would require consolidation. The investment is subsequently adjusted for the Company’s share of Viking's operating results, and if applicable, cash contributions and distributions, which is reported on a separate line in our condensed consolidated statement of operations called “Equity in net losses of Viking”. On the condensed consolidated balance sheet, the Company reports its investment in Viking on a separate line in the non-current assets section called “Investment in Viking”. See
Note 2, Investment in Viking,
for additional details.
Convertible Debt
In August 2014, the Company completed a
$245.0 million
offering of convertible senior notes, which mature in 2019 and bear interest at
0.75%
. The Company accounts for notes by separating the liability and equity components of the instrument in a manner that reflects the Company's nonconvertible debt borrowing rate. As a result, the Company assigned a value to the debt component of the notes equal to the estimated fair value of similar debt instruments without the conversion feature, which resulted in the Company recording the debt instrument at a discount. The Company is amortizing the debt discount over the life of the notes as additional non-cash interest expense utilizing the effective interest method.
Recent Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09,
Revenue from Contracts with Customers.
ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, (5) recognize revenue when (or as) the entity satisfies a performance obligation. Management is currently evaluating the effect the adoption of this standard will have on the Company's financial statements.
In February 2015, FASB issued ASU 2015-02
Consolidation (Topic 810): Amendments to the Consolidation Analysis
. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
In April 2015, FASB issued ASU 2015-03,
Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
This update was issued to simplify the presentation for debt issuance costs. Upon adoption, such costs shall be presented on our consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability and not as a deferred charge presented in Other assets on our consolidated balance sheets. This amendment will be effective for interim and annual periods beginning on January 1, 2016, and is required to be retrospectively adopted. Management adopted the change in the presentation on our consolidated balance sheets in Q1 2016 retrospectively, and also changed the presentation on our consolidated balance sheet for the year ended December 31, 2015 accordingly in this Form 10-K/A, which was filed subsequent to the adoption (see Note 5 for details).
In November 2015, the FASB issued
ASU 2015-17 Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
that amends the presentation of deferred income taxes on our Consolidated Balance Sheet such that they are presented entirely as noncurrent assets and liabilities. As permitted by the standard, we adopted the new presentation prospectively, beginning January 1, 2015. Consistent with our prospective adoption, presentation of deferred income tax assets and liabilities as of December 31, 2014, was not restated. If they had been restated, Other current liabilities would have be reduced by
$0.3 million
and Long-term deferred tax liabilities would have been would have increased by
$0.3 million
.
In January 2016, the FASB issued
ASU2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities
that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. The new standard is effective for interim and annual periods beginning on January 1, 2018. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
2. Investment in Viking
Transaction History
In May 2014, the Company entered into a MLA to license rights to
five
programs to Viking. Upon the consummation of the Viking IPO, Viking agreed to issue to the Company shares of Viking common stock having an aggregate value of approximately
$29.2 million
. In addition, Viking agreed to pay the Company royalties and milestone payments on products developed under the MLA. As part of this transaction, the Company extended a
$2.5 million
loan to Viking under a LSA. The loan accrues interest at a fixed rate equal to
5%
.
In April 2015, the Company entered into an amendment to the MLA with Viking ("the MLA Amendment") which among other things, capped
the Company’s aggregate ownership of Viking common stock to
49.9%
of the Viking capital stock outstanding following the closing of the Viking IPO. Additionally, the Company and Viking entered into an amendment to the LSA Amendment, pursuant to which, the loans were no longer due and payable upon completion of the Viking IPO, but were extended to become due upon the earlier of: (i) a certain private qualified financing transaction or (ii) a public offering subsequent to the Viking IPO or (iii)
one
year after the closing of the Viking IPO. The Company may elect to receive equity of Viking common stock or cash equal to
200%
of the principal amount plus accrued and unpaid interest. As of
December 31, 2015
, the aggregate fair market value of the note receivable was
$4.8 million
.
In May 2015, Viking completed the Viking IPO selling
3.5 million
shares of its common stock at an initial offering price of
$8.00
per share for an aggregate offering price of
$27.6 million
. In connection with the Viking IPO, the Company purchased
1.1 million
shares for
$9.0 million
. In addition, pursuant to the amended MLA Amendment, the Company received approximately
3.7 million
shares of Viking common stock having a value of
$29.2 million
based on the initial public offering price of
$8.00
per share. As a result, the Company including its related parties owned an aggregate of
49.4%
of the outstanding common stock of Viking, based on the shares of outstanding Viking common stock at
December 31, 2015
. As of
December 31, 2015
, the carrying value of the Company's investment in Viking was
$29.7 million
.
Accounting Consideration
In May 2014, the Company determined it held a variable interest in Viking. The Company's variable interests in Viking included the convertible note issued pursuant to the LSA and the Company’s potential upfront payment of equity pursuant to the MLA. The Company considered certain criteria, including risk and reward sharing, experience and financial condition of its partner, voting rights, involvement in day-to-day operating decisions, the Company’s representation on Viking's executive committee, and level of economics between the Company and Viking. Based on these criteria, and using its judgment, the Company determined that it was the primary beneficiary of Viking and, as a result, the Company consolidated Viking on its financial statements. From May 21, 2014 through May 4, 2015, the date of Viking’s IPO, recorded
100%
of the losses incurred as net loss attributable to noncontrolling interest because it was a primary beneficiary with no equity interest in the VIE. The loans issued pursuant to the LSA were included as notes payable by Viking and were eliminated as long as the Company consolidated Viking on its financial statements.
Upon completion of the Viking IPO in May 2015, the Company determined that Viking was no longer a VIE. The Company also determined that it does not have voting control or other elements of control that would require consolidation of Viking. As a result of this assessment, the Company deconsolidated Viking on May 4, 2015 by derecognizing its assets, liabilities, and noncontrolling interest from the Company's consolidated financial statements. Applying deconsolidation accounting guidance, the Company determined, based on an independent valuation, the fair value of its equity investment in Viking upon deconsolidation was approximately
$34.9 million
after applying a discount on the Viking IPO price due to applicable transfer restrictions applicable to the Company as an affiliate of Viking pursuant to Rule 144 under the Securities Act of 1933. Based on a separate independent valuation, the Company determined that the fair value of the convertible notes receivable was approximately
$5.5 million
upon deconsolidation. The Company recorded a
$28.2 million
gain on deconsolidation of Viking in its consolidated statement of operations as of
December 31, 2015
.
Following the deconsolidation, the Company accounts for its equity investment in Viking under the equity method. For the year ended
December 31, 2015
, the Company reported approximately
$5.1 million
, as equity in net losses from Viking. The Company has opted to account for the Viking convertible notes receivable at fair value. For the year ended
December 31, 2015
, the Company recorded a change in the fair value of the Viking convertible notes of
$0.8 million
. See Note 3,
Fair Value Measurements for additional details.
The following table represents the assets and liabilities, which are owned by and are obligations of Viking and are with no recourse to the Company, as of
December 31, 2014
(in thousands):
|
|
|
|
|
|
December 31, 2014
|
Cash and cash equivalents
|
$
|
756
|
|
Other current assets
|
18
|
|
Capitalized IPO expenses
|
2,268
|
|
Total current assets
|
3,042
|
|
|
|
Other assets
|
1
|
|
Total assets
|
$
|
3,043
|
|
|
|
Accounts payable
|
2,211
|
|
Accrued liabilities
|
77
|
|
Current portion of notes payable
|
334
|
|
Total current liabilities
|
2,622
|
|
|
|
Long-term portion of notes payable (eliminates in consolidation)
|
2,331
|
|
Total liabilities
|
$
|
4,953
|
|
Metabasis CVR Payouts
In connection with the shares of Viking common stock received pursuant to the MLA, the Company will make a cash payment to the holders of certain Metabasis CVRs. The Company made a cash payment to certain holders of Metabasis CVRs
of
$0.8 million
during the year ended
December 31, 2015
. The remaining cash payment, made in January 2016, was
$2.6 million
. See
Note 1. Summary of Significant Accounting Policies-Contingent Liabilities
for additional information on the Metabasis CVRs.
3. Fair Value Measurement
The Company measures 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. The Company establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:
Level 1 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions
The following table provide a summary of the assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
December 31, 2015
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
$
|
3,015
|
|
|
$
|
—
|
|
|
$
|
3,015
|
|
|
$
|
—
|
|
Short-term investments
(2)
|
92,775
|
|
|
6,786
|
|
|
85,989
|
|
|
—
|
|
Note receivable Viking
(3)
|
4,782
|
|
|
—
|
|
|
—
|
|
|
4,782
|
|
Total assets
|
$
|
100,572
|
|
|
$
|
6,786
|
|
|
$
|
89,004
|
|
|
$
|
4,782
|
|
Liabilities:
|
|
|
|
|
|
|
|
Current contingent liabilities - CyDex
(4)
|
$
|
7,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,812
|
|
Current contingent liabilities-Metabasis
(5)
|
$
|
2,602
|
|
|
—
|
|
|
2,602
|
|
|
—
|
|
Long-term contingent liabilities - Metabasis
(5)
|
1,355
|
|
|
—
|
|
|
1,355
|
|
|
—
|
|
Long-term contingent liabilities - CyDex (4)
|
1,678
|
|
|
—
|
|
|
—
|
|
|
1,678
|
|
Liability for amounts owed to former licensees
(6)
|
794
|
|
|
794
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
14,241
|
|
|
$
|
794
|
|
|
$
|
3,957
|
|
|
$
|
9,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
December 31, 2014
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs *
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
$
|
—
|
|
|
|
|
|
|
|
Current co-promote termination payments receivable
(7)
|
$
|
322
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
322
|
|
Short-term investments
(2)
|
7,133
|
|
|
7,133
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
7,455
|
|
|
$
|
7,133
|
|
|
$
|
—
|
|
|
$
|
322
|
|
Liabilities:
|
|
|
|
|
|
|
|
Current contingent liabilities - CyDex (4)
|
$
|
6,796
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,796
|
|
Current co-promote termination liability
(7)
|
322
|
|
|
—
|
|
|
—
|
|
|
322
|
|
Long-term contingent liabilities - Metabasis
(5)
|
3,652
|
|
|
—
|
|
|
3,652
|
|
|
—
|
|
Long-term contingent liabilities - CyDex (4)
|
4,701
|
|
|
—
|
|
|
—
|
|
|
4,701
|
|
Liability for amounts owed to former licensees
(6)
|
773
|
|
|
773
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
16,244
|
|
|
$
|
773
|
|
|
$
|
3,652
|
|
|
$
|
11,819
|
|
*Adjusted to correct an error in disclosure that was deemed immaterial to the financial statements taken as a whole. Contingent liabilities related to Metabasis were reclassified from Level 1 to Level 2 as market is deemed inactive. Additionally, certain certificates of deposit with maturities less than 90 days were not previously disclosed in the table above.
(1) Highly liquid investments with maturities less than 90 days from the purchase date are recorded as cash equivalents that 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) Investments in equity securities, 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.
(3) The fair value of the convertible note receivable from Viking was determined using a probability weighted option pricing model using a lattice methodology. 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
65%
at
December 31, 2015
. Changes in these assumptions may materially affect the fair value estimate. For the year ended
December 31, 2015
, the Company reported a decrease in the fair value of the Viking convertible notes of
$0.8 million
in "Other, net" of the consolidated statement of operations.
(4) The fair value of the liabilities for CyDex contingent liabilities were determined based on the income approach using a Monte Carlo analysis. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s assumptions regarding revenue volatility, probability of commercialization of products, 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 and CVR holders. Changes in these assumptions can materially affect the fair value estimate.
(5) The liability for CVRs for Metabasis are determined using quoted market prices in an inactive market for the
underlying CVR.
(6) The liability for amounts owed to former licensees are determined using quoted market prices in active markets for the underlying investment received from a partner, a portion of which is owed to former licensees.
(7) The co-promote termination payments receivable represents a receivable for future payments to be made by Pfizer related to product sales and is recorded at its fair value. The receivable and liability will remain equal. The fair value is determined based on a valuation model using an income approach.
The following table represents significant unobservable inputs used in determining the fair value of contingent liabilities assumed in the acquisition of CyDex:
|
|
|
|
|
|
|
|
December 31,
|
|
|
2015
|
|
2014
|
Range of annual revenue subject to revenue sharing (1)
|
|
$22.5 million
|
|
$17.2 million-$17.3 million
|
Revenue volatility
|
|
25%
|
|
25%
|
Average of probability of commercialization
|
|
73%
|
|
81%
|
Sales beta
|
|
0.40
|
|
0.60
|
Credit rating
|
|
BB
|
|
B
|
Equity risk premium
|
|
6%
|
|
6%
|
|
|
(1)
|
Revenue subject to revenue sharing represent management’s estimate of the range of total annual revenue subject to revenue sharing (i.e. annual revenues in excess of
$15 million
) through December 31, 2016, which is the term of the CVR agreement.
|
A reconciliation of the level 3 financial instruments as of
December 31, 2015
is as follows (in thousands):
|
|
|
|
|
Assets:
|
|
Fair value of level 3 financial instruments as of December 31, 2014
|
$
|
322
|
|
Assumed payments made by Pfizer or assignee
|
(390
|
)
|
Fair value adjustments to co-promote termination liability
|
68
|
|
Note receivable Viking
|
4,782
|
|
Fair value of level 3 financial instrument assets as of December 31, 2015
|
$
|
4,782
|
|
|
|
Liabilities
|
|
Fair value of level 3 financial instruments as of December 31, 2014
|
$
|
11,819
|
|
Assumed payments made by Pfizer or assignee
|
(390
|
)
|
Payments to CVR holders and other contingency payments
|
(5,848
|
)
|
Fair value adjustments to contingent liabilities
|
3,841
|
|
Fair value adjustments to co-promote termination liability
|
68
|
|
Fair value of level 3 financial instruments as of December 31, 2015
|
$
|
9,490
|
|
Other Fair Value Measurements-2019 Convertible Senior Notes
In August 2014, the Company issued the 2019 Convertible Senior Notes. The Company uses a quoted market rate in an inactive market, which is classified as a Level 2 input, to estimate the current fair value of its 2019 Convertible Senior Notes. The estimated fair value of the 2019 Senior Convertible Notes was
$377.9 million
as of
December 31, 2015
. The carrying value of the notes does not reflect the market rate. See Note 7
Financing Arrangements
for additional information.
Viking
The Company records its investment in Viking under the equity method of accounting. The investment is subsequently adjusted for the Company’s share of Viking's operating results, and if applicable, cash contributions and distributions. See
Note 2 Investment in Viking
for additional information. The market value of the Company's investment in Viking was
$16.3 million
as of
December 31, 2015
. The carrying value of the investment in Viking does not reflect the market value.
4. Lease Obligations
The Company leases office and laboratory facilities in California, Kansas and New Jersey. These leases expire between
2016
and
2019
and are subject to annual increases which range from
3.0%
to
3.5%
. The Company currently subleases office and laboratory space in California and New Jersey. The following table provides a summary of operating lease obligations and payments expected to be received from sublease agreements as of
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations:
|
|
Lease
Termination
Date
|
|
Less than 1
year
|
|
1-2 years
|
|
3-4 years
|
|
Thereafter
|
|
Total
|
Corporate headquarters-La Jolla, CA
|
|
April 2016
|
|
$
|
230
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
230
|
|
Corporate headquarters-San Diego, CA
|
|
April 2023
|
|
21
|
|
|
259
|
|
|
275
|
|
|
341
|
|
|
$
|
896
|
|
Bioscience and Technology Business Center-Lawrence, KS
|
|
December 2017
|
|
54
|
|
|
54
|
|
|
—
|
|
|
—
|
|
|
108
|
|
Vacated office and research facility-Cranbury, NJ
|
|
August 2016
|
|
1,743
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,743
|
|
Total operating lease obligations
|
|
|
|
2,048
|
|
|
313
|
|
|
275
|
|
|
341
|
|
|
2,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease payments expected to be received:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office and research facility-La Jolla, CA
|
|
April 2016
|
|
145
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
145
|
|
Office and research facility-Cranbury, NJ
|
|
August 2016
|
|
141
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141
|
|
Net operating lease obligations
|
|
|
|
$
|
1,762
|
|
|
$
|
313
|
|
|
$
|
275
|
|
|
$
|
341
|
|
|
$
|
2,691
|
|
Lease termination
In November 2015, the Company entered into a lease termination agreement with its current lessor for the corporate headquarters facility located in La Jolla, California. The termination agreement accelerated the expiration date of the lease to April 2016, through which date, the Company is obligated to pay all base rent, operating expenses and other obligations due under the current lease. In addition, contingent upon the Company's surrender of the leased space in compliance with the termination agreement on or before April 2016, the Company is entitled to receive from the lessor a one-time lease buy-out payment equal to the base rent and the operating expenses paid for last six months of the revised lease term. In February 2016, the Company received a notice from its current landlord regarding the termination date of the lease and are currently in discussions to resolve any disputes.
In conjunction with the execution of the termination agreement, the Company entered into a new lease agreement with a different lessor for its corporate headquarters located in San Diego, California. The new lease has an initial term of approximately
7
years and is expected to commence in May 2016. The base rent under the new facility lease agreement is approximately
$0.1 million
per year for the first year, escalating
3.0%
annually thereafter over the initial term. The Company has an option to extend the term of the lease for an additional
five
years. The lease is subject to additional charges for property management, common area maintenance and other costs.
Lease exit obligations
For the years ended
December 31, 2015
and
2014
, the Company had lease exit obligations of
$0.9 million
and
$3.3 million
, respectively. For the years ended
December 31, 2015
and
2014
, the Company made cash payments, net of sublease payments received of
$3.3 million
and
$3.5 million
, respectively. The Company recognized adjustments for accretion and changes in leasing assumptions of
$0.9 million
,
$1.1 million
and
$0.6 million
for the years ended
December 31, 2015
,
2014
and
2013
, respectively.
Rent expense and deferred rent
Total rent expense under all office leases for
2015
,
2014
and
2013
was
$0.4 million
,
$0.7 million
and
$0.7 million
, respectively. The Company recognizes rent expense on a straight-line basis. Deferred rent at
December 31, 2015
and
2014
was
$0.2 million
and
$0.3 million
, respectively.
5. Financing Arrangements
2019 Convertible Senior Notes
In August 2014, the Company issued
$245.0 million
aggregate principal amount of its 2019 Convertible Senior Notes, resulting in net proceeds of
$239.3 million
. The 2019 Convertible Senior 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 Convertible Senior 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 the Company's 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 the Company's 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 2015, the Company's last reported sale price exceeded the
130%
threshold described above and accordingly the Convertible Notes have been classified as a current liability as of December 31, 2015. As a result, the related unamortized discount of
$39.6 million
was classified as temporary equity component of currently redeemable convertible notes on our Consolidated Balance Sheet. The determination of whether or not the Convertible Notes are convertible as described above is made each quarter until maturity, conversion or repurchase. It is possible that the Convertible Notes may not be convertible in future periods, in which case the Convertible Notes would be classified as long-term debt, and the unamortized discount would be classified as permanent equity unless one of the other conversion events described above were to occur.
On or after
May 15, 2019
until the close of business on the second scheduled trading day immediately preceding
August 15, 2019
, holders of the notes may convert all or a portion of their notes at any time. Upon conversion, Ligand must deliver cash to settle the principal and may deliver cash or shares of common stock, at the option of the Company, to settle any premium due upon conversion.
The Company separately accounted for the debt and equity components of the 2019 Convertible Senior Notes by allocating the
$245.0 million
total proceeds between the debt component and the embedded conversion option, or equity component, due to Ligand's ability to settle the 2019 Convertible Senior Notes in cash for the principal portion and to settle any premium in cash or common stock, at the Company's election. The debt allocation was performed in a manner that reflected the Company's non-convertible borrowing rate for similar debt of
5.83%
derived from independent valuation analysis. The initial debt value of
$192.5 million
accretes at
5.83%
to reach
$245.0 million
at the maturity date. The equity component of the 2019 Convertible Senior Notes was recognized as a debt discount and represents the difference between the
$245.0 million
proceeds at issuance of the 2019 Convertible Senior Notes and the fair value of the debt allocation on their respective issuance dates. The debt discount is amortized to interest expense using the effective interest method over the expected life of a similar liability without an equity component. As of
December 31, 2015
, the “if-converted value” exceeded the principal amount of the 2019 Convertible Senior Notes by
$108.9 million
.
In connection with the issuance of the 2019 Convertible Senior Notes, the Company incurred
$5.7 million
of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portions of these costs allocated to the equity components totaling
$1.2 million
were recorded as a reduction to additional paid-in capital. The portions of these costs allocated to the liability components totaling
$4.5 million
were recorded as assets on the balance sheet at the time the debt was issued. Beginning in 2016, the unamortized issuance costs allocated to the liability components are recorded as part of debt discount on the consolidated balance sheet upon the Company's respective adoption of
ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
As such, we changed the presentation on the consolidated balance sheet for the year ended December 31, 2015 in this 10-K/A accordingly, which is filed subsequent to the adoption of the accounting guidance. As of December 31, 2015, $3.4 million issuance cost was included in the unamortized debt discount.
The portions allocated to the liability components are amortized to interest expense using the effective interest method over the expected life of the 2019 Convertible Senior Notes.
The Company determined the expected life of the debt discount for the 2019 Convertible Senior Notes to be equal to the original
five
-year term of the notes. The carrying value of the equity component related to the 2019 Convertible Senior Notes as of
December 31, 2015
, net of issuance costs, was
$51.3 million
.
Convertible Bond Hedge and Warrant Transactions
To minimize the impact of potential dilution to the Company's common stock upon conversion of the 2019 Convertible Senior Notes, the Company entered into convertible bond hedges and sold warrants covering
3,264,643
shares of its common stock. The convertible bond hedges have an exercise price of
$75.05
per share and are exercisable when and if the 2019 Convertible Senior Notes are converted. If upon conversion of the 2019 Convertible Senior Notes, the price of the Company's 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 the Company and are not part of the terms of the 2019 Convertible Senior Notes. Holders of the 2019 Convertible Senior Notes and warrants will not have any rights with respect to the convertible bond hedges. The Company paid
$48.1 million
for these convertible bond hedges and recorded the amount as a reduction to additional paid-in capital.
Concurrently with the convertible bond hedge transactions, the Company entered into warrant transactions whereby it sold warrants to acquire approximately
3,264,643
shares of common stock with an exercise price of approximately
$125.08
per share, subject to certain adjustments. The warrants have various expiration dates ranging from November 13, 2019 to April 22, 2020. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The Company 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 the Company does not have the obligation and does not intend to file any registration statement with the Securities and Exchange Commission registering the issuance of the shares under the warrants.
The carrying values and the fixed contractual coupon rates of the Company's financing arrangements are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015 Restated
|
|
December 31, 2014
|
|
Convertible notes payable, 2.16% to 3.84%, due 2015, VIE
|
$
|
—
|
|
|
$
|
334
|
|
2019 Convertible Senior Notes
|
|
|
|
Principal amount outstanding
|
245,000
|
|
|
|
Unamortized discount
|
(43,015
|
)
|
|
|
Net carrying amount
|
201,985
|
|
|
|
Total current portion of notes payable
|
$
|
201,985
|
|
|
$
|
334
|
|
2019 Convertible Senior Notes
|
|
|
|
Principal amount outstanding
|
$
|
—
|
|
|
$
|
245,000
|
|
Unamortized discount
|
—
|
|
|
(49,092
|
)
|
Net carrying amount
|
—
|
|
|
195,908
|
|
Total long-term portion of notes payable
|
$
|
—
|
|
|
$
|
195,908
|
|
The fair value of the Company’s debt instruments approximates their carrying values as the interest is tied to or approximates market rates. As of
December 31, 2015
, there were no events of default or violation of any covenants under the Company's financing obligations.
6. Discontinued Operations
Avinza Product Line
In 2006, the Company and King, now a subsidiary of Pfizer, entered into a purchase agreement, or the Avinza Purchase Agreement, pursuant to which Pfizer acquired all of the Company's rights in and to Avinza in the United States, its territories and Canada, including, among other things, all Avinza inventory, records and related intellectual property, and assume certain liabilities as set forth in the Avinza Purchase Agreement. Pursuant to the terms of the Avinza Purchase Agreement, the Company retained the liability for returns of product from wholesalers that had been sold by the Company prior to the close of this transaction. Accordingly, as part of the accounting for the gain on the sale of Avinza, the Company recorded a reserve for Avinza product returns. For the years ended
December 31, 2015
,
2014
and
2013
, the Company recognized pre-tax gains of
$0
,
$0
and
$2.6 million
, respectively, due to subsequent changes in certain estimates of assets and liabilities recorded as of the sale date.
7. Other Balance Sheet Details
Other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
Co-promote termination receivable
|
—
|
|
|
322
|
|
Prepaid expenses
|
$
|
1,177
|
|
|
$
|
835
|
|
Other receivables
|
731
|
|
|
685
|
|
|
$
|
1,908
|
|
|
$
|
1,842
|
|
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
Compensation
|
$
|
1,711
|
|
|
$
|
1,708
|
|
Legal
|
726
|
|
|
459
|
|
Amounts owed to former licensees
|
915
|
|
|
925
|
|
Royalties owed to third parties
|
823
|
|
|
705
|
|
Other
|
1,222
|
|
|
1,069
|
|
|
$
|
5,397
|
|
|
$
|
4,866
|
|
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2014
|
Deferred rent
|
—
|
|
|
327
|
|
Deposits
|
268
|
|
|
411
|
|
Other
|
29
|
|
|
32
|
|
|
$
|
297
|
|
|
$
|
770
|
|
8. Stockholders’ Equity
Stock Plans
In May 2009, the Company’s stockholders approved the amendment and restatement of the Company’s 2002 Stock Incentive Plan (the “Amended 2002 Plan”). The Company’s 2002 Stock Incentive Plan was amended to (i) increase the number
of shares available for issuance under the Amended 2002 Plan by
1.3 million
shares, (ii) revise the list of performance criteria that may be used by the compensation committee for purposes of granting awards under the Amended 2002 Plan that are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code, as amended, and (iii) eliminate the automatic option grant program for non-employee directors, the director fee stock issuance program and the director fee option grant program, which programs have been superseded by the Company’s amended and restated Director Compensation Policy. Additionally, in May 2012, the Company’s stockholders approved an amendment and restatement of the Company’s 2002 Stock Incentive Plan to increase the number of shares available for issuance by
1.8 million
shares. As of
December 31, 2015
, there were
0.7 million
shares available for future option grants or direct issuance under the Amended 2002 Plan.
Following is a summary of the Company’s 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, 2014
|
1,800,697
|
|
|
$
|
28.78
|
|
|
7.25
|
|
$
|
51,558
|
|
Granted
|
287,747
|
|
|
62.82
|
|
|
|
|
|
Exercised
|
(326,418
|
)
|
|
26.55
|
|
|
|
|
|
Forfeited
|
(78,685
|
)
|
|
45.75
|
|
|
|
|
|
Balance at December 31, 2015
|
1,683,341
|
|
|
34.23
|
|
|
6.66
|
|
124,880
|
|
Exercisable at December 31, 2015
|
1,193,288
|
|
|
25.41
|
|
|
5.98
|
|
99,061
|
|
Options vested and expected to vest as of December 31, 2015
|
1,683,341
|
|
|
$
|
34.23
|
|
|
6.66
|
|
$
|
124,880
|
|
The weighted-average grant-date fair value of all stock options granted during
2015
,
2014
and
2013
was
$35.39
,
$46.20
and
$14.28
per share, respectively. The total intrinsic value of all options exercised during
2015
,
2014
and
2013
was approximately
$20.7 million
,
$15.3 million
and
$5.9 million
, respectively. As of
December 31, 2015
, there was
$13.1 million
of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted average period of
2.4
years.
Cash received from options exercised, net of fees paid, in
2015
,
2014
and
2013
was
$8.7 million
,
$4.4 million
and
$3.0 million
, respectively.
Following is a further breakdown of the options outstanding as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices
|
Options
outstanding
|
|
Weighted
average
remaining life
in years
|
|
Weighted average
exercise price
|
|
Options
exercisable
|
|
Weighted average
exercise price
|
$8.58 – $12.53
|
353,949
|
|
|
5.17
|
|
$
|
10.26
|
|
|
353,824
|
|
|
$
|
10.26
|
|
$12.81-16.14
|
371,551
|
|
|
5.58
|
|
14.75
|
|
|
342,754
|
|
|
14.78
|
|
$17.10-32.30
|
361,019
|
|
|
6.55
|
|
23.34
|
|
|
270,634
|
|
|
23.81
|
|
$32.76-74.42
|
552,544
|
|
|
8.18
|
|
64.69
|
|
|
226,076
|
|
|
67.13
|
|
$89.75-104.59
|
44,278
|
|
|
9.47
|
|
98.13
|
|
|
—
|
|
|
—
|
|
$8.58 – $104.59
|
1,683,341
|
|
|
6.66
|
|
$
|
34.23
|
|
|
1,193,288
|
|
|
$
|
25.41
|
|
Restricted Stock Activity
The following is a summary of the Company’s restricted stock activity and related information:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant Date Fair
Value
|
Outstanding at December 31, 2014
|
82,673
|
|
|
$
|
45.76
|
|
Granted
|
112,954
|
|
|
63.50
|
|
Vested
|
(49,366
|
)
|
|
44.8
|
|
Forfeited
|
(15,512
|
)
|
|
54.91
|
|
Outstanding at December 31, 2015
|
130,749
|
|
|
$
|
60.36
|
|
Restricted stock awards generally vest over
three
years. As of
December 31, 2015
, unrecognized compensation cost related to non-vested stock awards amounted to
$4.7 million
. That cost is expected to be recognized over a weighted average period of
1.6
years.
Employee Stock Purchase Plan
The Company’s Amended ESPP allows participants to purchase up to
1,250
shares of Ligand common stock during each offering period, but in no event may a participant purchase more than
1,250
shares of common stock during any calendar year. The length of each offering period is
six
months, and employees are eligible to participate in the first offering period beginning after their hire date.
The Amended ESPP allows employees to purchase a limited amount of common stock at the end of each six month period at a price equal to
85%
of the lesser of fair market value on either the start date of the period or the last trading day of the period (the “Lookback Provision”). The
15%
discount and the Lookback Provision make the Amended ESPP compensatory. There were
3,374
,
3,774
and
5,016
shares of common stock issued under the Amended ESPP in
2015
,
2014
and
2013
, respectively, resulting in an expense of
$56,000
,
$54,000
and
$45,000
, respectively. For shares purchased under the Company’s Amended ESPP, a weighted-average expected volatility of
49%
,
40%
and
36%
was used for
2015
,
2014
and
2013
, respectively. The expected term for shares issued under the ESPP is
6 months
. As of
December 31, 2015
,
215,821
shares of common stock had been issued under the Amended ESPP to employees and
72,367
shares are available for future issuance.
Preferred Stock
The Company has authorized
5,000,000
shares of preferred stock, of which
1,600,000
are designated Series A Participating Preferred Stock (the “Preferred Stock”). The Board of Directors of Ligand has the authority to issue the Preferred Stock in one or more series and to fix the designation, powers, preferences, rights, qualifications, limitations and restrictions of the shares of each such series, including the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), liquidation preferences and the number of shares constituting any such series, without any further vote or action by the stockholders. The rights and preferences of Preferred Stock may in all respects be superior and prior to the rights of the common stock. The issuance of the Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of common stock or adversely affect the rights and powers, including voting rights, of the holders of the common stock and could have the effect of delaying, deferring or preventing a change in control of Ligand. As of
December 31, 2015
and
2014
, there are
no
preferred shares issued or outstanding.
Shareholder Rights Plan
In October 2006, the Company’s Board of Directors renewed the Company’s stockholder rights plan, which was originally adopted and has been in place since September 2002, and which expired on September 13, 2006, through the adoption of a new 2006 Stockholder Rights Plan (the “2006 Rights Plan”). The 2006 Rights Plan provides for a dividend distribution of
one
preferred share purchase right (a “Right”) on each outstanding share of the Company’s common stock. Each Right entitles stockholders to buy
1/1000th
of a share of Ligand Series A Participating Preferred Stock at an exercise price of
$100
. The Rights will become exercisable if a person or group announces an acquisition of
20%
or more of the Company’s common stock, or announces commencement of a tender offer for
20%
or more of the common stock. In that event, the Rights permit stockholders, other than the acquiring person, to purchase the Company’s common stock having a market value of twice the exercise price of the Rights, in lieu of the Preferred stock. In addition, in the event of certain business combinations, the Rights permit the purchase of the common stock of an acquiring person at a
50%
discount. Rights held by the acquiring person become null and void in each case. The 2006 Rights Plan expires in 2016.
Corporate Share Repurchase
In September 2015, the Company's Board of Directors authorized the Company to repurchase up to
$200 million
of its own stock in privately negotiated and open market transactions for a period of up to three years, subject to the Company's evaluation of market conditions, applicable legal requirements and other factors. During the year ended
December 31, 2015
, the Company repurchased
6,120
common shares at a weighted average price of
$79.92
per share pursuant to the repurchase plan, or
$0.5 million
of common shares.
In August 2014, the Company's Board of Directors authorized the Company to repurchase up to
$200 million
of its own stock in privately negotiated and open market transactions for a period of up to one year, subject to the Company's evaluation of market conditions, applicable legal requirements and other factors. The plan expired in August 2015. During the year ended
December 31, 2014
, the Company repurchased
1,253,425
common shares at a weighted average price of
$54.20
per share pursuant to the repurchase plan, or
$68.0 million
of common shares.
9. Litigation
The Company records 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, The Company records the minimum estimated liability related to the claim in accordance with
FASB ASC Topic 450 Contingencies.
As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. Revisions in the Company's estimates of potential liability could materially impact its results of operations.
Securities Litigation
In 2012, a federal securities class action and shareholder derivative lawsuit was filed in Pennsylvania alleging that the Company and its CEO assisted various breaches of fiduciary duties based on the Company’s purchase of a licensing interest in a development-stage pharmaceutical program from the Genaera Liquidating Trust in 2010 and the Company’s subsequent sale of half of its interest in the transaction to Biotechnology Value Fund, Inc. Plaintiff filed a second amended complaint in February 2015, which the Company moved to dismiss in March 2015. The district court granted the motion to dismiss on
November 11, 2015. The plaintiff has appealed that ruling to the Third Circuit. The Company intends to continue to vigorously defend against the claims against the Company and its CEO. The outcome of the matter is not presently determinable.