Ligand Pharmaceuticals (LGND) 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________________

☒ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From ______ to ______ .

Commission File Number: 001-33093

LIGAND PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	77-0160744
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3911 Sorrento Valley Boulevard, Suite 110
San Diego
CA	92121
(Address of principal executive offices)	(Zip Code)

(858) 550-7500

(Registrant's Telephone Number, Including Area Code)

5980 Horton Street, Suite 405

Emeryville, CA 94608

(Former Name or Former Address, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading symbol:	Name of each exchange on which registered:
Common Stock, par value $0.001 per share	LGND	The Nasdaq Global Market

________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”

and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 4, 2022, the registrant had 16,893,579 shares of common stock outstanding.

LIGAND PHARMACEUTICALS INCORPORATED

QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. Condensed Consolidated Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Condensed Consolidated Statements of Stockholders' Equity	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	33
	ITEM 4. Controls and Procedures	33
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	34
	ITEM 1A. Risk Factors	34
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
	ITEM 3. Defaults Upon Senior Securities	36
	ITEM 4. Mine Safety Disclosures	36
	ITEM 5. Other Information	36
	ITEM 6. Exhibits	38
	SIGNATURE	38

2

GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation	Definition
2021 Annual Report	Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022
2023 Notes	$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
APAC	Avista Public Acquisition Corp. II (after its domestication in Delaware, known as OmniAb, Inc.)
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Company	Ligand Pharmaceuticals Incorporated, including subsidiaries
CVR	Contingent value right
Crystal	Crystal Bioscience, Inc.
CyDex	CyDex Pharmaceuticals, Inc.
EMA	European Medicines Agency
ESPP	Employee Stock Purchase Plan, as amended and restated
FASB	Financial Accounting Standards Board
GAAP	Generally accepted accounting principles in the United States
Icagen	Icagen, LLC
Ligand	Ligand Pharmaceuticals Incorporated, including subsidiaries
Merger Agreement	Agreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub
Merger Sub	Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC
Metabasis	Metabasis Therapeutics, Inc.
NDA	New Drug Application
OmniAb	OmniAb Operations, Inc. (formerly known as OmniAb, Inc.)
OmniAb Business	Ligand's antibody discovery business
Pfenex	Pfenex Inc.
Q3 2021	The Company's fiscal quarter ended September 30, 2021
Q3 2022	The Company's fiscal quarter ended September 30, 2022
SBC	Share-based compensation expense
SEC	Securities and Exchange Commission
Separation Agreement	Separation and Distribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb
Travere	Travere Therapeutics, Inc.
Viking	Viking Therapeutics, Inc.
xCella	xCella Biosciences, Inc.
YTD	Year-to-date

3

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)

	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	4,116	$	19,522
Short-term investments	117,291		321,586
Accounts receivable, net	65,168		85,453
Inventory	22,326		27,326
Income taxes receivable	785		6,193
Other current assets	10,746		4,671
Total current assets	220,432		464,751
Deferred income taxes, net	35,500		34,482
Intangible assets, net	517,025		551,040
Goodwill	181,206		181,206
Commercial license rights, net	10,193		10,110
Property and equipment, net	33,418		20,511
Operating lease right-of-use assets	32,108		16,542
Financing lease right-of-use assets	14,444		16,207
Other assets	6,279		2,741
Total assets	$	1,050,605	$	1,297,590
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	15,887	$	8,403
Accrued liabilities	19,338		17,579
Income taxes payable	9,703		—
Current contingent liabilities	1,773		2,588
Deferred revenue	9,547		10,996
Current operating lease liabilities	2,345		2,053
Current financing lease liabilities	48		46
2023 convertible senior notes, net	76,600		—
Total current liabilities	135,241		41,665
2023 convertible senior notes, net	—		320,717
Long-term contingent liabilities	6,855		8,483
Deferred income taxes, net	29,832		59,095
Long-term operating lease liabilities	34,893		15,494
Long-term deferred revenue	5,537		9,270
Other long-term liabilities	21,949		21,707
Total liabilities	234,307		476,431
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at September 30, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value; 60,000 shares authorized; 16,894 and 16,767 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	17		17
Additional paid-in capital	348,994		372,969
Accumulated other comprehensive loss	(1,060)		(917)
Retained earnings	468,347		449,090
Total stockholders' equity	816,298		821,159
Total liabilities and stockholders' equity	$	1,050,605	$	1,297,590

See accompanying notes to unaudited condensed consolidated financial statements.

4

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues:
Royalties	$	19,837	$	15,648	$	51,491	$	31,376
Captisol	35,949		35,093		77,616		128,875
Contract revenue	10,302		14,094		40,093		44,409
Total revenues	66,088		64,835		169,200		204,660
Operating costs and expenses:
Cost of Captisol	14,153		11,446		31,213		50,192
Amortization of intangibles	11,818		11,827		35,455		35,391
Research and development	22,036		16,938		61,461		50,769
General and administrative	17,445		12,718		50,210		39,747
Other operating income	—		(3,800)		—		(37,600)
Total operating costs and expenses	65,452		49,129		178,339		138,499
Income (loss) from operations	636		15,706		(9,139)		66,161
Other income (expense):
Gain (loss) from short-term investments	(923)		1,937		(15,709)		8,135
Interest income	591		169		1,023		698
Interest expense	(332)		(4,439)		(1,559)		(15,154)
Other income (expense), net	885		1,886		5,465		(5,516)
Total other expense, net	221		(447)		(10,780)		(11,837)
Income (loss) before income taxes	857		15,259		(19,919)		54,324
Income tax benefit (expense)	(453)		(1,536)		4,043		8,230
Net income (loss)	$	404	$	13,723	$	(15,876)	$	62,554
Basic net income (loss) per share	$	0.02	$	0.82	$	(0.94)	$	3.77
Shares used in basic per share calculations	16,888		16,688		16,860		16,595
Diluted net income (loss) per share	$	0.02	$	0.80	$	(0.94)	$	3.64
Shares used in diluted per share calculations	17,132		17,142		16,860		17,187

See accompanying notes to unaudited condensed consolidated financial statements.

5

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income (loss)	$	404	$	13,723	$	(15,876)	$	62,554
Unrealized net gain (loss) on available-for-sale securities, net of tax	6		(14)		(143)		(74)
Comprehensive income (loss)	$	410	$	13,709	$	(16,019)	$	62,480

See accompanying notes to unaudited condensed consolidated financial statements.

6

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands)

	Common Stock			Additional paid in capital		Accumulated other comprehensive loss		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at December 31, 2021	16,767	$	17	$	372,969	$	(917)	$	449,090	$	821,159
ASU 2020-06 adoption, net of tax (Note 1)	—	—		(51,130)		—		35,133		(15,997)
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	94	—		(5,515)		—		—		(5,515)
Share-based compensation	—	—		9,044		—		—		9,044
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(114)		—		(114)
Net loss	—	—		—		—		(15,385)		(15,385)
Balance at March 31, 2022	16,861	$	17	$	325,368	$	(1,031)	$	468,838	$	793,192
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	21	—		604		—		—		604
Share-based compensation	—	—		9,499		—		—		9,499
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(35)		—		(35)
Net loss	—	—		—		—		(895)		(895)
Balance at June 30, 2022	16,882	$	17	$	335,471	$	(1,066)	$	467,943	$	802,365
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	12	—		724		—		—		724
Share-based compensation	—	—		12,597		—		—		12,597
Unrealized net gain on available-for-sale securities, net of deferred tax	—	—		—		6		—		6
Warrant and bond hedge unwind transactions	—	—		202		—		—		202
Net income	—	—		—		—		404		404
Balance at September 30, 2022	16,894	$	17	$	348,994	$	(1,060)	$	468,347	$	816,298

7

	Common Stock			Additional paid in capital		Accumulated other comprehensive loss		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at January 1, 2021	16,080	$	16	$	318,358	$	(801)	$	391,952	$	709,525
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	572	1		20,580		—		—		20,581
Share-based compensation	—	—		8,405		—		—		8,405
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(55)		—		(55)
Warrant and bond hedge unwind transactions	—	—		396		—		—		396
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(11,118)		—		—		(11,118)
Net income	—	—		—		—		18,106		18,106
Balance at March 31, 2021	16,652	$	17	$	336,621	$	(856)	$	410,058	$	745,840
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	24	—		1,103		—		—		1,103
Share-based compensation	—	—		10,216		—		—		10,216
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(5)		—		(5)
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		(1,362)		—		—		(1,362)
Net income	—	—		—		—		30,725		30,725
Balance at June 30, 2021	16,676	$	17	$	346,578	$	(861)	$	440,783	$	786,517
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes	31	—		1,898		—		—		1,898
Share-based compensation	—	—		9,754		—		—		9,754
Unrealized net loss on available-for-sale securities, net of deferred tax	—	—		—		(14)		—		(14)
Reacquisition of equity due to 2023 debt extinguishment, net of tax	—	—		92		—		—		92
Warrant and bond hedge unwind transactions	—	—		96		—		—		96
Net income	—	—		—		—		13,723		13,723
Balance at September 30, 2021	16,707	$	17	$	358,418	$	(875)	$	454,506	$	812,066

See accompanying notes to unaudited condensed consolidated financial statements.

8

LIGAND PHARMACEUTICALS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine months ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(15,876)	$	62,554
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities	(1,378)		(39,377)
Depreciation and amortization of intangible assets	40,399		37,902
Amortization of premium on investments, net	75		145
Amortization of debt discount and issuance fees	639		12,863
Amortization of commercial license rights	(163)		96
Loss (gain) on debt extinguishment	(4,192)		7,303
Share-based compensation	31,140		28,375
Deferred income taxes	(25,570)		(8,229)
Loss (gain) from short-term investments	15,709		(8,135)
Lease amortization expense	4,535		3,349
Other	(45)		658
Changes in operating assets and liabilities:
Accounts receivable, net	20,550		(8,838)
Inventory	10,702		(3,103)
Accounts payable and accrued liabilities	(405)		(3,635)
Income tax receivable and payable	15,111		(4,167)
Deferred revenue	(5,182)		(20,696)
Other assets and liabilities	(1,671)		(5,909)
Net cash provided by operating activities	84,378		51,156
Cash flows from investing activities:
Purchase of short-term investments	(39,052)		(116,898)
Proceeds from sale of short-term investments	202,552		152,465
Proceeds from maturity of short-term investments	24,830		37,100
Cash paid for equity method investment	(750)		—
Purchase of property and equipment	(15,792)		(6,566)
Payments to CVR Holders	(960)		—
Other	80		135
Net cash provided by investing activities	170,908		66,236
Cash flows from financing activities:
Repurchase of 2023 Notes	(260,949)		(155,760)
Payments under financing lease obligations	(42)		(9,188)
Proceeds from convertible bond hedge settlement	202		18,938
Payments to convertible bond holders for warrant purchases	—		(18,446)
Net proceeds from stock option exercises and ESPP	1,831		29,484
Taxes paid related to net share settlement of equity awards	(6,018)		(5,903)
Payments to CVR Holders	(1,545)		(1,050)
Payments for OmniAb transaction costs	(4,171)		—
Net cash used in financing activities	(270,692)		(141,925)
Net decrease in cash, cash equivalents and restricted cash	(15,406)		(24,533)
Cash, cash equivalents and restricted cash at beginning of period	19,522		47,963
Cash, cash equivalents and restricted cash at end of period	$	4,116	$	23,430

Supplemental disclosure of cash flow information:
Interest paid	$	1,139	$	1,740
Taxes paid	$	6,630	$	3,720
Supplemental schedule of non-cash activity:
Accrued fixed asset purchases	$	3,626	$	557
Accrued inventory purchases	$	7,676	$	4,968
Unrealized loss on AFS investments	$	(143)	$	(74)

See accompanying notes to unaudited condensed consolidated financial statements.

9

LIGAND PHARMACEUTICALS INCORPORATED

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 2021 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.

Significant Accounting Policies

We have described our significant accounting policies in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2021 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.

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation. Specifically, “long-term deferred revenue” has been added to the condensed consolidated balance sheet, separated from “other long-term liabilities” in our prior period presentation.

Accounting Standards Updates, Recently Adopted

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The guidance simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Consequently, a convertible debt instrument, such as the Company’s 2023 Notes, will be accounted for as a single liability measured at its amortized cost, if no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

We adopted this guidance effective January 1, 2022 under the modified retrospective approach and the comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption and our 2023 Notes are no longer bifurcated into separate liability and equity components. The principal amount of the 2023 Notes is classified as a single liability measured at amortized cost in the condensed consolidated balance sheet for the period ended September 30, 2022. Upon adoption of ASU 2020-06 on January 1 2022, we recorded an adjustment to the 2023 Notes liability component, deferred tax liabilities, additional paid-in-capital and retained earnings. This adjustment was calculated based on the carrying amount of the 2023 Notes as if it had always been treated as a single liability measured at amortized cost. Furthermore, we recorded an adjustment to the debt issuance costs contra liability and equity (additional paid-in-capital) components under the same premise, as if debt issuance costs had always been treated as a contra liability only. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2023 Notes by $20.4 million, reduced deferred tax liabilities by $4.4 million, reduced additional paid-in capital by $51.1 million and increased retained earnings by $35.1 million. The net balance of the 2023 Notes at January 1, 2022 was $341.1 million which included an unamortized discount of $2.2 million.

10

Revenue

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

We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Royalties

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

Captisol Sales

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

Contract Revenue

Our contracts with customers often include variable consideration in the form of contingent milestone payments. We include contingent milestone payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone payment is based on sales, 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 milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation, which typically occurs with our contracts for R&D services.

For R&D services we recognize revenue over time and we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time it will take us to complete the activities, or the costs we may incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.

11

Some customer contracts are sublicenses which require that we make payments to an upstream licensor related to license fees, milestones and royalties which we receive from customers. In such cases, we evaluate the determination of gross revenue as a principal versus net revenue as an agent reporting based on each individual agreement.

Deferred Revenue

Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue and certain service revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry any contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the three months ended September 30, 2022 and 2021, the amount recognized as revenue that was previously deferred was $4.1 million, and $7.7 million, respectively. During the nine months ended September 30, 2022 and 2021, the amount recognized as revenue that was previously deferred was $8.8 million, and $22.8 million, respectively.

Disaggregation of Revenue

The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Royalties
Kyprolis	$	9,123	$	8,821	$	20,872	$	18,548
Evomela	3,123		2,665		8,218		7,191
Teriparatide injection	4,071		2,567		12,484		2,831
Rylaze	2,099		600		6,065		600
Other	1,421		995		3,852		2,206
	$	19,837	$	15,648	$	51,491	$	31,376
Captisol
Captisol - Core	$	3,582	$	5,374	$	13,133	$	16,310
Captisol - COVID(1)	32,367		29,719		64,483		112,565
	$	35,949	$	35,093	$	77,616	$	128,875
Contract revenue
Service Revenue	$	4,975	$	4,828	$	15,574	$	17,650
License Fees	460		200		5,154		2,293
Milestone	3,658		7,419		14,022		19,436
Other	1,209		1,647		5,343		5,030
	$	10,302	$	14,094	$	40,093	$	44,409
Total	$	66,088	$	64,835	$	169,200	$	204,660

(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.

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Short-term Investments

Our short-term investments consist of the following at September 30, 2022 and December 31, 2021 (in thousands):

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
September 30, 2022
Bank deposits	$	2,506	$	—	$	(53)	$	2,453
Corporate bonds	4,887		—		(107)		4,780
Corporate equity securities	5,807		312		(3,615)		2,504
Mutual fund	88,115		—		(1,203)		86,912
US government securities	2,229		—		(84)		2,145
Warrants	—		232		—		232
	$	103,544	$	544	$	(5,062)	$	99,026
Viking common stock							18,265
Total short-term investments							$	117,291
December 31, 2021
Bank deposits	$	63,389	$	13	$	(21)	$	63,381
Corporate bonds	29,308		17		(38)		29,287
Commercial paper	36,008		2		(12)		35,998
Corporate equity securities	5,807		402		(2,027)		4,182
Mutual fund	152,136		—		(249)		151,887
U.S. government securities	5,577		—		(23)		5,554
Warrants	—		408		—		408
	$	292,225	$	842	$	(2,370)	$	290,697
Viking common stock							30,889
Total short-term investments							$	321,586

Gain (loss) from short-term investments in our condensed consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities.

Allowances are recorded for available-for-sale debt securities with unrealized losses. This limits the amount of credit losses that can be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. The provisions of the credit losses standard did not have a material impact on our available-for-sale debt securities during the three and nine months ended September 30, 2022.

The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):

	September 30, 2022
	Amortized Cost		Fair Value
Within one year	$	8,659	$	8,458
After one year through five years	982		939
Total	$	9,641	$	9,397

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 8 positions which were in an unrealized loss position as of September 30, 2022. 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 and it is not more-likely-than-not 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 and nine months ended September 30, 2022.

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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 and nine months ended September 30, 2022, we considered the current and expected future economic and market conditions including, but not limited to, the anticipated unfavorable impacts of the COVID-19 pandemic on our business and recorded an adjustment of $(0.1) million and $(0.3) million of allowance for credit losses, respectively, as of September 30, 2022.

Inventory

Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the first-in, first-out method or the specific identification method.

We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. There were no write-downs related to obsolete inventory recorded for the three and nine months ended September 30, 2022 and 2021. As of September 30, 2022 inventory consists of Captisol prepayments of $7.4 million, and as of December 31, 2021 inventory consists of Captisol prepayments of $24.6 million.

Goodwill and Other Identifiable Intangible Assets

Goodwill and other identifiable intangible assets consist of the following (in thousands):

	September 30,		December 31,
	2022		2021
Indefinite-lived intangible assets
Goodwill	$	181,206	$	181,206
Definite lived intangible assets
Complete technology	282,057		280,617
Less: accumulated amortization	(90,611)		(78,991)
Trade name	2,642		2,642
Less: accumulated amortization	(1,544)		(1,444)
Customer relationships	40,700		40,700
Less: accumulated amortization	(20,272)		(18,267)
Contractual relationships	362,000		362,000
Less: accumulated amortization	(57,947)		(36,217)
Total goodwill and other identifiable intangible assets, net	$	698,231	$	732,246

Prior to 2022, we only had one reporting unit and reportable segment. In connection with the announcement in March 2022 of our intention to separate the OmniAb business pursuant to a distribution to Ligand’s stockholders of Ligand’s shares in OmniAb followed by a merger with APAC, management concluded that we had two reporting units and reportable segments - the OmniAb business and the Ligand core business. See Note 2, Segment Information, for additional information. We performed a fair value analysis utilizing a combination of income approach and market approach to determine the fair value of each segment in order to appropriately allocate the goodwill between the segments as of the announcement date. The following table presents our allocation of goodwill balance by segment (in thousands):

	Fair Value
Goodwill
Ligand core business	$	105,673
OmniAb business	75,533
	$	181,206

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Commercial License Rights

Commercial license rights consist of the following (in thousands):

	September 30, 2022						December 31, 2021
	Gross		Adjustments(1)		Net		Gross		Adjustments(2)		Net
Aziyo and CorMatrix	$	17,696	$	(9,455)	$	8,241	$	17,696	$	(9,461)	$	8,235
Selexis and Dianomi	10,602		(8,650)		1,952		10,602		(8,727)		1,875
Total	$	28,298	$	(18,105)	$	10,193	$	28,298	$	(18,188)	$	10,110

(1) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of September 30, 2022.

(2) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of December 31, 2021.

Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis, S.A. (Selexis) in April 2013 and April 2015, CorMatrix Cardiovascular, Inc. (CorMatrix) in May 2016, which was later acquired by Aziyo in 2017, and Dianomi Therapeutics, Inc. in January 2019. Commercial license rights acquired are accounted for as financial assets in accordance with ASC 310, Receivables, as further discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 2021 Annual Report.

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 and nine months ended September 30, 2022, we further considered the current and expected future economic and market conditions surrounding the novel coronavirus (COVID-19) pandemic and concluded no further adjustment was needed on the allowance for credit losses as of September 30, 2022.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2022		2021
Compensation	$	6,229	$	6,532
Professional fees	2,848		2,046
Amounts owed to former licensees	4,042		630
Return reserve	—		2,420
Acquisition related liabilities	—		1,000
Subcontractor	1,756		1,759
Other	4,463		3,192
Total accrued liabilities	$	19,338	$	17,579

Share-Based Compensation

Share-based compensation expense for awards to employees and non-employee directors is a non-cash expense and is recognized on a straight-line basis over the vesting period. 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				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
SBC - Research and development expenses	$	6,104	$	4,480	$	14,519	$	12,975
SBC - General and administrative expenses	6,493		5,274		16,621		15,400
	$	12,597	$	9,754	$	31,140	$	28,375

The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

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	Three months ended		Nine months ended
	September 30,		September 30,
	2022	2021	2022	2021
Risk-free interest rate	2.8%	0.8%	2.9%	0.5%
Dividend yield	—	—	—	—
Expected volatility	50%	48%	50%	61%
Expected term (years)	4.9	4.9	4.8	5.0

A limited amount of performance-based restricted stock units (PSUs) contain a market condition based on our relative total shareholder return ranked on a percentile basis against the NASDAQ Biotechnology Index over a three-year performance period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation cost for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the performance conditions.

Net (Loss) Income Per Share

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

Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. The 2023 Notes have a dilutive impact when the average market price of our common stock exceeds the maximum conversion price. 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. 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. 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		Nine months ended
	September 30,		September 30,
	2022	2021	2022	2021
Weighted average shares outstanding:	16,888	16,688	16,860	16,595
Dilutive potential common shares:
Restricted stock	65	75	—	85
Stock options	179	379	—	507
Shares used to compute diluted income per share	17,132	17,142	16,860	17,187
Potentially dilutive shares excluded from calculation due to anti-dilutive effect	6,706	5,574	6,503	4,984

For the three months ended September 30, 2022, 0.6 million of potentially dilutive shares in connection with the adoption of ASU 2020-06 were anti-dilutive. Under the new standard, we are required to reflect the dilutive effect of the 2023 Notes by application of the if-converted method.

For the nine months ended September 30, 2022, due to the net loss for the period, all of the 0.3 million weighted average equity awards and 1.1 million of potentially dilutive shares in connection with the adoption of ASU 2020-06 were anti-dilutive.

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2. Segment Information

ASC 280, Segment reporting, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and for which discrete financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.

We are a biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. Our operating segments are identified in the same manner as they are reported internally and used by our chief operating decision maker for the purpose of evaluating performance and allocating resources. Historically, we have disclosed one reportable segment. On March 23, 2022, we entered into the Merger Agreement, pursuant to which APAC would combine with OmniAb, and acquire the OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). Immediately prior to the Merger and pursuant to the Separation Agreement, we, among other things, would transfer the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc. to OmniAb (the “Reorganization”) and, in connection therewith, would distribute (the “Distribution”) to Ligand stockholders 100% of the common stock of OmniAb. Immediately following the Distribution, Merger Sub would merge with and into OmniAb (the “Merger”), with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of APAC. The entire transaction was completed on November 1, 2022. See Note 9, Subsequent Event, for additional information.

In connection with the execution of the Merger Agreement, we made organizational changes to better align our organizational structure with our strategy and operations, and management has reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operated the following two reportable segments: (1) OmniAb business and (2) Ligand core business. The OmniAb business segment is focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines. After the closing date of the Transactions, the historical financial results of OmniAb will be reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution.

Our chief operating decision maker relies on internal management reporting processes that provide revenue and operating income by reportable segment for making financial decisions and allocating resources. Segment operating income (loss) represents income (loss) before income taxes, interest income, interest expense, other income (expense), net, unallocated share-based compensation, and unallocated corporate overhead. Our management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed.

The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results and was derived from each segment’s internal financial information as used for corporate management purposes (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
OmniAb business revenue
Royalties	$	582	$	—	$	984	$	—
Contract	6,285		5,140		22,353		19,520
Total OmniAb business revenue	6,867		5,140		23,337		19,520
Ligand core business revenue
Royalties	19,255		15,648		50,507		$	31,376
Captisol - Core	3,582		5,374		13,133		16,310
Captisol - COVID	32,367		29,719		64,483		112,565
Contract	4,017		8,954		17,740		24,889
Total Ligand core business revenue	59,221		59,695		145,863		185,140
Total revenue	$	66,088	$	64,835	$	169,200	$	204,660
Segment operating income (loss)
OmniAb business	$	(11,721)	$	(9,177)	$	(26,905)	$	(21,587)
Ligand core business	22,022		32,620		49,050		112,601
Total segment operating income	10,301		23,443		22,145		91,014
Unallocated corporate items
Shared-based compensation	6,462		5,811		17,255		16,429
Other corporate expenses	3,203		1,926		14,029		8,424
Total unallocated corporate items	9,665		7,737		31,284		24,853
Income (loss) from operations	$	636	$	15,706	$	(9,139)	$	66,161

3. Fair Value Measurements

Assets and Liabilities Measured on a Recurring Basis

The following table presents the hierarchy for our assets and liabilities measured at fair value (in thousands):

	September 30, 2022								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Short-term investments, excluding Viking(1)	$	4,649	$	94,145	$	232	$	99,026	$	9,735	$	280,553	$	409	$	290,697
Investment in Viking common stock	18,265		—		—		18,265		30,889		—		—		30,889
Total assets	$	22,914	$	94,145	$	232	$	117,291	$	40,624	$	280,553	$	409	$	321,586
Liabilities:
CyDex contingent liabilities	$	—	$	—	$	308	$	308	$	—	$	—	$	349	$	349
Metabasis contingent liabilities(2)	—		2,507		—		2,507		—		3,358		—		3,358
Icagen contingent liabilities(3)	—		—		5,333		5,333		—		—		7,364		7,364
xCella contingent liabilities(4)	—		—		480		480		—		—		—		—
Amounts owed to former licensor	73		—		—		73		86		—		—		86
Total liabilities	$	73	$	2,507	$	6,121	$	8,701	$	86	$	3,358	$	7,713	$	11,157

1.Excluding our investment in Viking, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black-Scholes value estimated by management on the last day of the period.

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2.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. During the three and nine months ended September 30, 2022, we adjusted the balance of the Metabasis CVR liability $0.1 million and $(0.9) million to mark to market, respectively.

3.The fair value of Icagen contingent liabilities was determined using a probability weighted income approach. Most of the contingent payments are based on certain revenue milestones as defined in the asset purchase agreement with Icagen. The fair value is subjective and is affected by changes in inputs to the valuation model including management’s estimates regarding the timing and probability of achievement of certain developmental and regulatory milestones. Changes in these estimates may materially affect the fair value. During the nine months ended September 30, 2022, we paid $1.5 million contingent liability based on revenue milestones to former Icagen shareholders, respectively. During the three and nine months ended September 30, 2022, we adjusted the balance of the Icagen CVR liability $(0.2) million and $(0.5) million to mark to market, respectively.

4.The fair value of xCella contingent liabilities is determined when it is probable that the earnout liability will occur and the amount can be reasonably estimated. We concluded that no earnout liability would be recognized at the acquisition date in September 2020. During the three and nine months ended September 30, 2022, we paid $1.0 million contingent liabilities to former xCella shareholders. During the three and nine months ended September 30, 2022, we recorded $0.5 million and $1.4 million of earnout liability to be allocated to the cost of the acquired assets due to contingencies being met as part of the acquisition agreement, respectively.

A reconciliation of the level 3 financial instruments as of September 30, 2022 is as follows (in thousands):

Fair value of level 3 financial instruments as of December 31, 2021	$	7,713
Payments to CVR holders and other contingent payments	(2,505)
Fair value adjustments to contingent liabilities	(527)
Contingent liabilities from xCella asset acquisition	1,440
Fair value of level 3 financial instruments as of September 30, 2022	$	6,121

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.

In connection with the organizational changes to the Company’s reportable segments, we re-allocated goodwill between the two identified reporting units (OmniAb business and Ligand core business). We performed a goodwill impairment analysis immediately before and after the allocation of goodwill and concluded no impairment. At September 30, 2022, there were no indicators of impairment at either of the reporting units.

At September 30, 2022, there were no indicators of impairment of our indefinite-lived intangible assets, or long-lived assets.

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. The maximum conversion rate of the 2023 Notes is 5.2317 per $1,000 principal amount of the 2023 Notes which represents a maximum conversion price of approximately $191.14.

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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“Indenture”).

In advance of the Distribution of the shares of common stock of OmniAb to Ligand’s shareholders on November 1, 2022, a notice of convertibility was delivered to the holders of the 2023 Notes. No holders exercised their right to convert their 2023 Notes during the applicable period for conversion. The conversion rate for the 2023 Notes will be adjusted in accordance with the requirements of the Indenture based on calculations determined with reference to a valuation period of the first 10 consecutive trading days after, and including, the ex-dvidend date of the spin-off (as determined in the Indenture).

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 (not accounting for the anticipated adjustment in the conversion rate). 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, is amortized to interest expense using the effective interest method over the five year expected life of the 2023 Notes, and the effective interest rate as of September 30, 2022 is 0.5%. During the three months ended September 30, 2022 we recognized a total of $0.3 million in interest expense which includes $0.2 million in contractual interest expense and $0.1 million in amortized issuance costs. During the nine months ended September 30, 2022 we recognized a total of $1.5 million in interest expense which includes $0.9 million in contractual interest expense and $0.6 million in amortized issuance costs.

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

During 2021, we repurchased $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million. After the repurchases, approximately $343.3 million in principal amount of the 2023 Notes were outstanding as of December 31, 2021.

During the three months ended September 30, 2022, we repurchased $38.6 million in principal amount of the 2023 Notes for $37.7 million in cash, including accrued interest of $0.1 million. We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $0.9 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the three months ended September 30, 2022, and a $0.1 million reduction in debt discount.

During the nine months ended September 30, 2022, we repurchased $266.4 million in principal amount of the 2023 Notes for $261.4 million in cash, including accrued interest of $0.5 million. We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $4.2 million reflected in other income (expense), net, in our condensed consolidated statement of operations for the nine months ended September 30, 2022, and a $1.3 million reduction in debt discount.

Convertible Bond Hedge and Warrant Transactions

In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $248.48 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and

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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.

In January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

During the year ended December 31, 2021, in connection with the repurchases of $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,559,254. We received $18.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 598,021 as of December 31, 2021. These unwind transactions resulted in a $0.5 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of December 31, 2021.

In August 2022, in connection with the repurchases of $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million made during the six months ended June 30, 2022, we entered into Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We received $0.2 million as part of these Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 370,219 as of September 30, 2022. This transaction resulted in a $0.2 million net increase in additional paid-in-capital in our condensed consolidated balance sheet as of September 30, 2022.

The following table summarizes information about the 2023 Notes (in thousands):

	September 30, 2022		December 31, 2021(1)
Principal amount of the 2023 Notes outstanding	$	76,854	$	343,301
Unamortized discount (including unamortized debt issuance cost)	(254)		(22,584)
Total long-term portion of notes payable	$	76,600	$	320,717
Fair value of the 2023 Notes outstanding (Level 2)	$	74,395	$	341,801

(1) - Balances as of December 31, 2021 reported before the adoption of ASU 2020-06.

5. Income Tax

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Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in various state jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses, stock award activities and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three and nine months ended September 30, 2022 and 2021 was 52.9% and 10.1%, and 20.3% and (15.1)%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2022 was due primarily to the tax deductions related to foreign derived intangible income tax credit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation, non-deductible ISO related stock compensation expense and recognition of non-refundable foreign taxes paid during the period. The variance from the U.S. federal tax rate of 21% for the three and nine months ended September 30, 2021 was significantly impacted by tax benefits related to (1) a $3.8 million and $37.6 million Pfenex CVR adjustment recorded during the respective period, due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR, and (2) net excess tax windfalls from share-based compensation resulting from increased stock option exercise

activity.

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 the Notes to Consolidated Financial Statements in our 2021 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, 2021	2,199,598	$	106.00	264,143	$	138.21
Granted	852,475	$	91.39	260,577	$	89.99
Options exercised/RSUs vested	(34,941)	$	38.56	(136,448)	$	120.77
Forfeited	(36,529)	$	76.26	(2,059)	$	121.79
Balance as of September 30, 2022	2,980,603	$	102.98	386,213	$	111.93

As of September 30, 2022, outstanding options to purchase 1.7 million shares were exercisable with a weighted average exercise price per share of $102.23.

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 September 30, 2022, 38,007 shares were available for future purchases under the ESPP.

Share Repurchases

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 may enter into Rule 10b5-1 trading plans, 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. We did not have any share repurchases during the three and nine months ended September 30, 2022. Authorization to repurchase $248.8 million of our common stock remained available as of September 30, 2022.

At-the Market Equity Offering Program

On September 30, 2022, we filed a registration statement on Form S-3 (the “Shelf Registration Statement”), which became automatically effective upon filing, covering the offering of common stock, preferred stock, debt securities, warrants and units.

On September 30, 2022, we also entered into an At-The-Market Equity Offering Sales Agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Agent”), under which we may, from time to time, sell shares of our

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common stock having an aggregate offering price of up to $100.0 million in “at the market” offerings through the Agent (the “ATM Offering”). The Shelf Registration Statement included a prospectus covering the offering, issuance and sale of up to $100.0 million of our common stock from time to time through the ATM Offering. The shares to be sold under the Sales Agreement may be issued and sold pursuant to the Shelf Registration Statement. To date, we have not issued any shares of common stock in the ATM Offering.

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.

On October 31, 2019, we received three civil complaints filed in the U.S. District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned more than one thousand civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the Company and no individualized factual allegations have been advanced against us in any of the three complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.

CyDex, a wholly owned subsidiary of Ligand, and Baxter Healthcare Corp. (“Baxter”) are parties to a license agreement relating to Ligand’s Captisol® technology and, more specifically, relating to Captisol®-enabled Nexterone® (amiodarone HCl premixed injection). CyDex contended that Baxter has not paid all of the royalties due to CyDex under the terms of the license agreement and Baxter contends that it has overpaid royalties for several years. On April 6, 2021, Baxter initiated an arbitration with AAA pursuant to the arbitration provision of the license agreement. On April 21, 2021, CyDex filed an answering statement and counterdemand. On December 2, 2021, Baxter filed an Amended Notice of Arbitration Demand seeking a declaration limiting the “royalty term” of the license agreement to “the later of i) the expiration of the licensed [p]atent; or ii) when there are no longer any CyDex patents listed in the Orange Book for [Nexterone®].” Baxter later clarified its position, and asserted that royalties should have ceased being due upon the May 4, 2022 expiry of CyDex’s U.S. Patent No. 6,869,939. The parties conducted a three-day arbitration hearing May 24-26, 2022. In a September 9, 2022 Final Award, the Tribunal ruled in CyDex’s favor by (1) denying Baxter’s request for a partial refund of previously paid royalties, (2) granting CyDex’s request for underpaid royalties, and (3) concluding that “[g]oing forward Baxter shall pay CyDex” a royalty consistent with CyDex’s construction of the license agreement until, at least, the March 13, 2029 expiry of CyDex’s U.S. Patent No. 7,635,773.

On April 22, 2022, Pfenex Inc. (“Pfenex”), a wholly owned subsidiary of Ligand, received a notice of alleged breach from Beijing Kangchen Biological Technology Co., Ltd. (“Kangchen”) with respect to a Development and License Agreement between Pfenex and Kangchen (“License Agreement”) pertaining to the development and commercialization of teriparatide in certain Southeast Asian countries. The allegations in the notice focused on the activities of Pfenex and other parties. On June 16, 2022, we rejected all claims raised by Kangchen in the notice. On June 24, 2022, Kangchen served Pfenex a notice of termination of the License Agreement and demanded initiation of the dispute resolution process in accordance with the License Agreement. On June 29, 2022, we again rejected all claims raised by Kangchen in the notice of termination and agreed to engage in the applicable dispute resolution process, including good faith negotiations between the parties. On October 20, 2022, we agreed to make a single lump sum payment to Kangchen in connection with a termination agreement that, among other things, terminates the License Agreement and releases all claims between the parties arising from the License Agreement. We anticipate that the termination agreement between Pfenex and Kangchen will go into effect the fourth quarter of 2022.

From time to time, we may also become subject to other legal proceedings or claims arising in the ordinary course of our business. We currently believe that none of the claims or actions pending against us is likely to have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. Given the unpredictability inherent in litigation, however, we cannot predict the outcome of these matters.

8. Leases

We lease certain office facilities and equipment primarily under various operating leases. Our leases have remaining contractual terms up to ten years, some of which include options to extend the leases for up to five years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating

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lease costs are primarily related to facility leases for administration offices and research and development facilities, and our finance leases are primarily related to our right to use the equipment under the agreement with Hovione, our third-party manufacturer, to exclusively manufacture Captisol.

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 adjusted for lease incentives and other items as prescribed by ASC Topic 842, Leases. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.

The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Operating and Finance Lease Assets and Liabilities (in thousands):

Assets	September 30, 2022		December 31, 2021
Operating lease assets	$	32,108	$	16,542
Finance lease assets	14,444		16,207
Total lease assets	$	46,552	$	32,749
Liabilities
Current operating lease liabilities	$	2,345	$	2,053
Current finance lease liabilities	48		46
	2,393		2,099
Long-term operating lease liabilities	34,893		15,494
Long-term finance lease liabilities	14		58
Total lease liabilities	$	37,300	$	17,651

During the three and nine months ended September 30, 2022, we entered into several lease agreements and amendments, which resulted in an increase in lease assets of $8.3 million and $18.4 million, and liabilities of $8.5 million and $21.7 million, respectively.

Maturity of Operating and Finance Lease Liabilities as of September 30, 2022 (in thousands):

Maturity Dates	Operating Leases
Remaining three months ending December 31, 2022	$	1,306
2023	4,842
2024	4,735
2025	4,939
2026	5,242
2027	5,381
Thereafter	22,317
Total lease payments	48,762
Less estimated tenant improvement allowance:	(1,030)
Less imputed interest	(10,494)
Present value of lease liabilities	$	37,238

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9. Subsequent Event

On November, 1, 2022, Ligand completed the Transactions. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of the close of business on October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. The Distribution was immediately followed by the Merger, pursuant to which OmniAb merged with Merger Sub, with OmniAb continuing as the surviving entity and becoming a wholly owned subsidiary of APAC. Prior to the Distribution and Merger, OmniAb changed its name to OmniAb Operations, Inc. and APAC changed its name to OmniAb, Inc. Following the Merger, OmniAb, Inc. is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.”

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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Part II, Item 1A. Risk Factors. This outlook represents our current judgment on the future direction of our business. These statements include those related to our Captisol-related revenues and manufacturing capacity, our Kyprolis and other product royalty revenues, the impact of COVID-19, product returns, product development, and the potential separation of the OmniAb Business. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Kyprolis, Captisol and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market. In addition, ongoing or future arbitration, litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We use our trademarks, trade names and services marks in this report as well as trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this report appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trade marks and trade names.

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

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Overview

Prior to the completion on November 1, 2022 of the expected tax-free spin-off of our subsidiary OmniAb (further discussed below), our business included OmniAb’s antibody discovery business. OmniAb’s discovery platform provides pharmaceutical industry partners access to diverse antibody repertoires and high-throughput screening technologies to enable discovery of next-generation therapeutics. At the heart of the OmniAb platform is the Biological Intelligence™ (BI) of its proprietary transgenic animals, including OmniRat, OmniChicken and OmniMouse that have been genetically modified to generate antibodies with human sequences to facilitate development of human therapeutic candidates. OmniFlic (transgenic rat) and OmniClic (transgenic chicken) address industry needs for bispecific antibody applications though a common light chain approach, and OmniTaur features unique structural attributes of cow antibodies for complex targets. The OmniAb suite of technologies span from BI-powered repertoire generation to cutting edge antibody discovery and optimization offering a highly efficient and customizable end-to-end solution for the growing discovery needs of the global pharmaceutical industry.

After the spin-off of our OmniAb antibody discovery business, Ligand is a revenue-generating biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) ultimately to generate our revenue. Our Captisol platform technology is a patent-protected, chemically modified cyclodextrin with a structure designed to optimize the solubility and stability of drugs. Our Pelican Expression Technology is a robust, validated, cost-effective and scalable platform for recombinant protein production that is especially well-suited for complex, large-scale protein production where traditional systems are not. We have established multiple alliances, licenses and other business relationships with the world’s leading pharmaceutical companies including Amgen, Merck, Pfizer, Sanofi, Takeda, Gilead Sciences and Baxter International.

Our revenue consists of three primary elements: royalties from commercialized products, sale of Captisol material, and contract revenue from license, milestone and other service payments. In addition to discovering and developing our own proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.

Update on the OmniAb Separation Process

On November 1, 2022, Ligand completed (the “Closing”) the separation (the “Separation”) of its antibody discovery business and certain related assets and liabilities (the “OmniAb Business”) through a spin-off of OmniAb to Ligand’s shareholders of record as of October 26, 2022 (the “Record Date”) on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of APAC in a Reverse Morris Trust transaction (collectively, the “Transactions”) pursuant to the Merger Agreement and the Separation Agreement (collectively with the other related transaction documents, the “Transaction Agreements”). The day prior to the Closing, OmniAb was renamed OmniAb Operations, Inc. and APAC was renamed OmniAb, Inc. (“New OmniAb”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting the OmniAb Business, including certain related subsidiaries of Ligand, to OmniAb (the “Contribution”). In consideration for the Contribution, OmniAb issued to Ligand additional shares of OmniAb common stock such that the number of shares of OmniAb common stock then outstanding equaled the number of shares of OmniAb common stock necessary to effect the Distribution. Pursuant to the Distribution, Ligand shareholders as of the Record Date received one share of OmniAb common stock for each share of Ligand common stock held as of such date. Pursuant to the Merger Agreement, each share of OmniAb common stock was thereafter exchanged for the right to receive 4.90007 shares of New OmniAb common stock and 0.75842 shares of New OmniAb common stock subject to price-based earnout triggers (the “Earnout Shares”). The Earnout Shares will vest based upon the achievement of certain volume-weighted average trading prices (VWAP) for shares of OmniAb for any 20 trading days over a consecutive 30 trading-day period during the five-year period following the Closing, with (i) fifty percent of such Earnout Shares vesting upon achievement of a VWAP of $12.50 per share of OmniAb common stock or upon the occurrence of a change of control transaction that will result in the holders of OmniAb common stock receiving a price per share in excess of $12.50, and (ii) the remaining fifty percent of the Earnout Shares vesting upon achievement of a VWAP of $15.00 per share of OmniAb common stock or upon the occurrence of a change of control transaction that will result in the holders of OmniAb common stock receiving a price per share in excess of $15.00. The Earnout Shares are not transferable until the vesting condition for the applicable tranche of Earnout Shares has been achieved. Upon the closing of the Transactions, the ownership of the outstanding stock of New OmniAb (including the Earnout Shares) was as follows: Ligand’s existing shareholders held approximately

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85.0%, APAC’s existing public shareholders held approximately 1.1% and the sponsor and related parties of APAC held approximately 13.9%. Fractional shares of New OmniAb common stock were not issued pursuant to the Merger. Instead, shareholders received cash in lieu of any fractional share (other than with respect to Earnout Shares).

As of the Closing, OmniAb expected to have approximately $95 million of net cash. The transaction is expected to be tax-free to Ligand and its shareholders for U.S. federal income tax purposes.

On November 2, 2022, OmniAb began regular-way trading on NASDAQ under the ticker symbol “OABI.” Ligand continues to trade under the ticker symbol “LGND.”

Business Updates

Travere Therapeutics announced that the previously assigned PDUFA target action date of November 17, 2022 for its NDA under Subpart H for accelerated approval of sparsentan for the treatment of IgA nephropathy (IgAN) is expected to be extended by three months and is now February 17, 2023. Travere subsequently announced the European Medicines Agency has accepted for review the Conditional Marketing Authorization for sparsentan for IgAN in Europe with a review decision expected in the second half of 2023.

Verona Pharma announced positive top-line results from its Phase 3 ENHANCE-2 trial evaluating ensifentrine for the treatment of chronic obstructive pulmonary disease (COPD). The trial successfully met its primary and secondary endpoints evaluating lung function, and significantly reduced the rate and risk of COPD exacerbations. Ensifentrine was well tolerated with safety results similar to placebo. Verona subsequently announced additional analyses demonstrating ensifentrine reduced exacerbation rates across all subgroups in the Phase 3 ENHANCE-2 trial.

Merck announced the European Medicines Agency has recommended approval of VAXNEUVANCE for active immunization for the prevention of invasive disease, pneumonia and acute otitis media caused by Streptococcus pneumoniae in individuals from 6 weeks to less than 18 years of age. VAXNEUVANCE is a 15-valent pneumococcal vaccine utilizing Ligand’s CRM197 vaccine carrier protein and is currently authorized for use in the European Union for individuals 18 years of age and older and is approved in the United States for individuals 6 weeks of age and older. In July 2022 Merck started a broad Phase 3 program for V116, their investigational 21-valent pneumococcal conjugate vaccine utilizing Ligand’s CRM197 vaccine carrier protein.

Sermonix Pharmaceuticals announced results of its ELAINE 1 Phase 2 study of lasofoxifene vs. fulvestrant in postmenopausal women with locally advanced or metastatic ER+/HER2- breast cancer and an ESR1 mutation. Median progression-free survival was 6.04 months for lasofoxifene vs. 4.04 months for fulvestrant (p=0.138). Objective response rate was 13.2% for lasofoxifene vs. 2.9% for fulvestrant, (p=0.12), with 1 complete response and 4 partial responses in the lasofoxifene arm vs. no complete responses and 1 partial response in the fulvestrant arm. While the study was not powered for statistical significance, all endpoints numerically favored lasofoxifene.

As of September 30, 2022, over 60 partners have access to OmniAb-derived antibodies and more than 270 programs are being actively pursued or commercialized by OmniAb's partners. As of September 30, 2022, the platform has generated 25 clinical- or commercial- stage OmniAb-derived antibodies.

Results of Operations

Revenue

(Dollars in thousands)	Q3 2022		Q3 2021		Change		% Change		YTD 2022		YTD 2021		Change		% Change
Royalties	$	19,837	15,648		$	4,189	27	%	$	51,491	$	31,376	$	20,115	64	%
Captisol - Core	3,582		5,374		(1,792)		(33)	%	13,133		16,310		(3,177)		(19)	%
Captisol - COVID	32,367		29,719		2,648		9	%	64,483		112,565		(48,082)		(43)	%
Contract revenue	10,302		14,094		(3,792)		(27)	%	40,093		44,409		(4,316)		(10)	%
Total revenue	$	66,088	$	64,835	$	1,253	2	%	$	169,200	$	204,660	$	(35,460)	(17)	%

Q3 2022 vs. Q3 2021

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Total revenue increased by $1.3 million, or 2%, to $66.1 million in Q3 2022 compared to $64.8 million in Q3 2021 primarily due to the $4.2 million increase in royalties revenue which was driven by Kyprolis and sales of products using the Pelican platform. Contract revenue decreased by $3.8 million, or 27%, to $10.3 million in Q3 2022 primarily due to the achievement of significant milestones tied to the Pelican platform in Q3 2021. Core Captisol sales decreased by $1.8 million, or 33%, to $3.6 million in Q3 2022 primarily due to the timing of customer orders. Captisol sales related to COVID-19 were $32.4 million in Q3 2022, compared with $29.7 million for the same period in 2021 with the increase related to the demand for the pandemic-related treatment.

Revenues attributable to the Ligand core business segment and OmniAb business segment were $59.2 million and $6.9 million, and $59.7 million and $5.1 million, respectively, for Q3 2022 and Q3 2021.

YTD 2022 vs. YTD 2021

Total revenue decreased by $35.5 million, or 17%, to $169.2 million in YTD 2022 compared to $204.7 million in YTD 2021 primarily due to the $48.1 million decrease in sales of COVID-related Captisol that is used in formulation with remdesivir. Captisol sales related to COVID-19 were $64.5 million for the nine months ended September 30, 2022, compared with $112.6 million for the same period in 2021. The lower sales were due to reduced demand for the pandemic-related treatment. Royalties increased in YTD 2022 by $20.1 million compared to YTD 2021, with the increase primarily due to Kyprolis and sales of products using the Pelican platform. Core Captisol sales decreased by $3.2 million, or 19%, to $13.1 million in YTD 2022 compared to YTD 2021 primarily due to timing of customer orders. Contract revenue decreased by $4.3 million, or 10%, to $40.1 million in YTD 2022 compared to YTD 2021 primarily due to the achievement of significant milestones tied to the Pelican platform in YTD 2021.

Revenues attributable to the Ligand core business segment and OmniAb business segment were $145.9 million and $23.3 million, and $185.1 million and $19.5 million, respectively, for YTD 2022 and YTD 2021.

Royalty revenue is a function of our partners’ product sales and the applicable royalty rate. Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being 3.0%. Evomela has a fixed royalty rate of 20%. Teriparatide injection has a tiered royalty between 25% and 40% on sales that have been adjusted for certain deductible items as defined in the respective license agreement. The Rylaze royalty rate is tiered between 3% and 5%. Contract revenue includes service revenue, license fees and development, regulatory and sales based milestone payments.

The following table represents royalty revenue by program (in millions):

(in millions)	Q3 2022 Estimated Partner Product Sales		Effective Royalty Rate		Q3 2022 Royalty Revenue		Q3 2021 Estimated Partner Product Sales		Effective Royalty Rate		Q3 2021 Royalty Revenue
Kyprolis	$	336.8	2.7	%	$	9.1	$	312.3	2.8	%	$	8.8
Evomela	15.6		20.0	%	3.1		13.3		20.0	%	2.7
Teriparatide injection(1)	11.7		34.9	%	4.1		6.9		37.3	%	2.6
Rylaze	70.0		3.0	%	2.1		20.7		2.9	%	0.6
Other	49.5		2.9	%	1.4		43.6		2.1	%	0.9
Total	$	483.6			$	19.8	$	396.8			$	15.6
(in millions)	YTD 2022 Estimated Partner Product Sales		Effective Royalty Rate		YTD 2022 Royalty Revenue		YTD 2021 Estimated Partner Product Sales		Effective Royalty Rate		YTD 2021 Royalty Revenue
Kyprolis	$	980.4	2.1	%	$	20.9	$	877.2	2.1	%	$	18.5
Evomela	41.1		20.0	%	8.2		36.0		20.0	%	7.2
Teriparatide injection(1)	36.5		34.2	%	12.5		7.9		35.6	%	2.8
Rylaze	197.2		3.1	%	6.1		20.7		2.9	%	0.6
Other	174.4		2.2	%	3.8		114.3		2.0	%	2.3
Total	$	1,429.6			$	51.5	$	1,056.1			$	31.4

(1) - Teriparatide injection sales have been adjusted for certain deductible items as defined in the respective license agreement.

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Operating Costs and Expenses

(Dollars in thousands)	Q3 2022		% of Revenue	Q3 2021		% of Revenue	YTD 2022		% of Revenue	YTD 2021		% of Revenue
Cost of Captisol	$	14,153		$	11,446		$	31,213		$	50,192
Amortization of intangibles	11,818			11,827			35,455			35,391
Research and development	22,036			16,938			61,461			50,769
General and administrative	17,445			12,718			50,210			39,747
Other operating income	—			(3,800)			—			(37,600)
Total operating costs and expenses	$	65,452	99%	$	49,129	76%	$	178,339	105%	$	138,499	68%

Q3 2022 vs. Q3 2021

Total operating costs and expenses increased by $16.3 million, or 33%, to $65.5 million in Q3 2022 compared to $49.1 million in Q3 2021.

Cost of Captisol increased by $2.7 million, or 24%, to $14.2 million in Q3 2022 compared to $11.4 million in Q3 2021, with the increase primarily due to higher total sales of Captisol and a shift in the mix of Captisol sales this quarter away from clinical use customers. All of the cost of Captisol is attributable to the Ligand core business segment.

Amortization of intangibles remained steady in Q3 2022 compared to the same period in 2021 as there have been no significant changes to the gross balance of intangible assets over these periods. Amortization of intangibles were $8.6 million and $3.2 million for the Ligand core business segment and OmniAb business segment during both Q3 2022 and Q3 2021, respectively.

At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. Research and development expense was $22.0 million for Q3 2022, compared with $16.9 million for the same period of 2021, with the increase primarily due to continued investment in the OmniAb business including facilities and headcount related expenditures associated with the spin-off. Excluding $0.9 million in unallocated corporate items, R&D expenses were $8.1 million and $13.0 million for the Ligand core business segment and OmniAb business segment during Q3 2022, respectively. Excluding $0.9 million in unallocated corporate items, R&D expenses were $6.4 million and $9.6 million, for the Ligand core business segment and OmniAb business segment during Q3 2021, respectively.

General and administrative expense was $17.4 million for Q3 2022, compared to $12.7 million for the same period in 2021, with the increase primarily due to legal expenses and headcount related expenditures. Excluding $8.7 million in unallocated corporate items, general and administrative expenses were $6.3 million and $2.4 million for the Ligand core business segment and OmniAb business segment during Q3 2022, respectively. Excluding $6.8 million in unallocated corporate items, general and administrative expenses were $4.4 million and $1.5 million for the Ligand core business segment and OmniAb business segment during Q3 2021, respectively.

There was no other operating income for Q3 2022, compared with $3.8 million for Q3 2021, which represented a non-cash valuation adjustment related to eliminating the remaining Pfenex CVR liability.

YTD 2022 vs. YTD 2021

Total operating costs and expenses increased by $39.8 million, or 29%, to $178.3 million in YTD 2022 compared to $138.5 million in YTD 2021 primarily attributable to the a non-cash valuation adjustment of $37.6 million recorded in YTD 2021, which represented a non-cash valuation adjustment related to eliminating the Pfenex CVR liability.

Cost of Captisol decreased by $19.0 million, or 38%, to $31.2 million in YTD 2022 compared to $50.2 million in YTD 2021, with the decrease primarily due to lower total sales of Captisol. All of the cost of Captisol is attributable to the Ligand core business segment.

Amortization of intangibles remained steady in YTD 2022 compared to YTD 2021 as there have been no significant changes to the gross balance of intangible assets over these periods. Amortization of intangibles were $25.7 million and $9.8 million for the Ligand core business segment and OmniAb business segment in YTD 2022, respectively, and $25.9 million and $9.5 million in YTD 2021, respectively.

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At any one time, we are working on multiple R&D programs. As such, we generally do not track our R&D expenses on a specific program basis. Research and development expenses were $61.5 million in YTD 2022, compared with $50.8 million in YTD 2021, with the increase primarily due to continued investment in the OmniAb business which includes facilities and headcount related expenditures associated with the spin-off of OmniAb. Excluding $2.6 million in unallocated corporate items, R&D expenses were $23.9 million and $35.0 million for the Ligand core business segment and OmniAb business segment in YTD 2022, respectively. Excluding $2.7 million in unallocated corporate items, R&D expenses were $20.8 million and $27.3 million, for the Ligand core business segment and OmniAb business segment in YTD 2021, respectively.

General and administrative expenses increased by $10.5 million, or 26%, to $50.2 million in YTD 2022 compared to $39.7 million in YTD 2021, with the increase primarily due to $5.0 million in transaction costs in connection with the spin-off of OmniAb and other headcount related expenditures and additional legal expenses incurred during the nine months ended September 30, 2022. Excluding $28.7 million in unallocated corporate items, general and administrative expenses were $16.0 million and $5.5 million for the Ligand core business segment and OmniAb business segment in YTD 2022, respectively. Excluding $22.2 million in unallocated corporate items, general and administrative expenses were $13.1 million and $4.4 million for the Ligand core business segment and OmniAb business segment in YTD 2021, respectively.

There was no other operating income in YTD 2022, compared with $37.6 million in YTD 2021, which represented a non-cash valuation adjustment to reduce the Pfenex CVR liability due to an expected lower probability of achieving the required milestone under the Pfenex CVR Agreement.

Other Income (Expense)

(Dollars in thousands)	Q3 2022		Q3 2021		Change		YTD 2022		YTD 2021		Change
Gain (loss) from short-term investments	$	(923)	$	1,937	$	(2,860)	$	(15,709)	$	8,135	$	(23,844)
Interest income	591		169		422		1,023		698		325
Interest expense	(332)		(4,439)		4,107		(1,559)		(15,154)		13,595
Other income (expense), net	885		1,886		(1,001)		5,465		(5,516)		10,981
Total other income (expense), net	$	221	$	(447)	$	668	$	(10,780)	$	(11,837)	$	1,057

Q3 2022 vs. Q3 2021

The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and other equity security investments, contributing an unrealized loss of $0.9 million in Q3 2022 as compared to an unrealized gain of $1.6 million in Q3 2021.

Interest income consists primarily of interest earned on our short-term investments. The increase over the prior year was due to the increase in interest rate, partially offset by the decrease in our short-term investment balance.

Interest expense includes the 0.75% coupon cash interest expense in addition to the non-cash accretion of discount (including the amortization of debt issuance cost) on our 2023 Notes in both Q3 2022 and Q3 2021. The decrease was primarily due to the adoption of ASU 2020-06 which significantly reduced the debt discount balance subject to amortization. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies for detail on ASU 2020-06 adoption. In addition, we carried a lower average debt outstanding balance in Q3 2022 as compared to Q3 2021. During Q3 2022, we repurchased $38.6 million in principal amount of the 2023 Notes. See Note 4, Convertible Senior Notes.

Other income (expense), net, in Q3 2022 decreased by $1.0 million as compared to Q3 2021, primarily due to the $0.9 million gain on extinguishment of debt during Q3 2022 compared to a $2.0 million reduction in fair value adjustment of

Metabasis and Icagen CVRs during Q3 2021. See Note 3, Fair Value Measurements and Note 4, Convertible Senior Notes.

YTD 2022 vs. YTD 2021

The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and other equity security investments, contributing an unrealized loss of $15.4 million in YTD 2022, as compared to an unrealized gain of $2.4 million and a realized gain of $5.7 million in YTD 2021.

Interest income consists primarily of interest earned on our short-term investments. The increase over the prior year was due to the increase in interest rate, partially offset by the decrease in our short-term investment balance.

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Interest expense includes the 0.75% coupon cash interest expense in addition to the non-cash accretion of discount (including the amortization of debt issuance cost) on our 2023 Notes in both YTD 2022 and YTD 2021. The decrease was primarily due to the adoption of ASU 2020-06 which significantly reduced the debt discount balance subject to amortization. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies for detail on ASU 2020-06 adoption. In addition, we carried a lower average debt outstanding balance during YTD 2022 as compared YTD 2021. During YTD 2022, we repurchased $266.4 million in principal amount of the 2023 Notes. See Note 4, Convertible Senior Notes.

Other income (expense), net, in YTD 2022 increased by $11.0 million as compared to YTD 2021, primarily due to a $4.2 million gain on extinguishment of debt and $1.4 million gain for the fair value adjustment of Metabasis, Icagen and CyDex CVRs during YTD 2022 compared to a $7.3 million loss on extinguishment of debt, which was partially offset by $1.8 million gain for the fair value adjustment of Metabasis, Icagen and CyDex CVRs during YTD 2021. See Note 3, Fair Value Measurements and Note 4, Convertible Senior Notes.

Income Tax Benefit (Expense)

(Dollars in thousands)	Q3 2022			Q3 2021			Change		YTD 2022			YTD 2021			Change
Income (loss) before income taxes	$	857		$	15,259		$	(14,402)	$	(19,919)		$	54,324		$	(74,243)
Income tax benefit	(453)			(1,536)			1,083		4,043			8,230			(4,187)
Income (loss) from operations	$	404		$	13,723		$	(13,319)	$	(15,876)		$	62,554		$	(78,430)
Effective tax rate	52.9		%	10.1		%			20.3		%	(15.1)		%

We compute our income tax provision by applying the estimated annual effective tax rate to income from operations and adding the effects of any discrete income tax items specific to the period. The effective tax rate for the three and nine months ended September 30, 2022 and 2021 was 52.9% and 10.1%, and 20.3% and (15.1)%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2022 was due primarily to the tax deductions related to foreign derived intangible income tax credit as well as the research and development tax credits, which were partially offset by Section 162(m) limitation and non-deductible ISO related stock compensation expense during the period. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2021 was significantly impacted by tax benefits related to (1) a $3.8 million and $37.6 million Pfenex CVR adjustment recorded during the respective period due to the lower probability of achieving the specific development and regulatory milestone by December 31, 2021 as defined by the Pfenex CVR, and (2) net excess tax windfalls from share-based compensation resulting from increased stock option exercise activity.

Liquidity and Capital Resources

As of September 30, 2022, our cash, cash equivalents, and short-term investments totaled $121.4 million, which decreased by $219.7 million from the end of last year due to factors described in the Cash Flow Summary below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and short-term investments, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.

Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. Our short-term investments include U.S. government debt securities, investment-grade corporate debt securities, mutual funds and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as 6.7 million shares of common stock in Viking.

In May 2018, we issued an aggregate principal amount of $750.0 million of the 2023 Notes. During the nine months ended September 30, 2022, we repurchased $266.4 million in principal amount of the 2023 Notes for $261.4 million in cash, including accrued interest of $0.5 million. After the repurchases, $76.9 million in principal amount of the 2023 Notes remain outstanding. We may continue to use cash on hand to repurchase additional 2023 Notes through open-market transactions, including through Rule 10b5-1 trading plans to facilitate open-market repurchases, or otherwise, from time to time. The timing and amount of repurchase transactions will be determined by management based on the evaluation of market conditions, trading price of the 2023 Notes, legal requirements and other factors. The 2023 Notes were not convertible as of September 30, 2022. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal

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to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. See Note 4, Convertible Senior Notes. In advance of the Distribution of the shares of common stock of OmniAb to Ligand’s shareholders on November 1, 2022, a notice of convertibility was delivered to the holders of the 2023 Notes. No holders exercised their right to convert their 2023 Notes during the applicable period for conversion. The conversion rate for the 2023 Notes will be adjusted in accordance with the requirements of the Indenture based on calculations determined with reference to a valuation period of the first 10 consecutive trading days after, and including, the ex-dvidend date of the spin-off (as determined in the Indenture).

On September 30, 2022, we entered into the Sales Agreement with the Agent, under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $100.0 million in “at the market” offerings through the Agent. Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent. The Agent will receive a commission from the Company of up to 3.0% of the gross proceeds of any shares of common stock sold under the Sales Agreement. The shares will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-267678), including the sales agreement prospectus contained therein, which automatically became effective upon filing with the SEC on September 30, 2022.

We believe that our existing funds, cash generated from operations and existing sources of and access to financing are adequate to fund our need for working capital, capital expenditures, debt service requirements, continued advancement of research and development efforts, potential stock repurchases and other business initiatives we plan to strategically pursue, including acquisitions and strategic investments.

As of September 30, 2022, we had $8.6 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.

Cash Flow Summary

(Dollars in thousands)	YTD 2022		YTD 2021
Net cash provided by (used in):
Operating activities	$	84,378	$	51,156
Investing activities	$	170,908	$	66,236
Financing activities	$	(270,692)	$	(141,925)

During the nine months ended September 30, 2022, we repurchased $266.4 million in principal of the 2023 Notes for $261.4 million in cash, including accrued interest of $0.5 million.

During the nine months ended September 30, 2021, we repurchased $152.0 million in principal amount of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million.

Critical Accounting Policies and Estimates

Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2021 Annual Report, other than the adoption of the Accounting Standards Updates described in Item 1. Condensed consolidated Financial Statements - Note 1, Basis of Presentation and Summary of Significant Accounting Policies, related to convertible debt.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

There were no substantial changes to our market risks in the nine months ended September 30, 2022, when compared to the disclosures in Item 7A of our 2021 Annual Report.

Item 4.    Controls and Procedures

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We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2022 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

For information that updates the disclosures set forth under Part I. Item 3. Legal Proceedings in our 2021 Annual Report, refer to Note 7, Commitment and Contingencies: Legal Proceedings, to the Condensed Consolidated Financial Statements contained in Part I. Item 1. of this report.

Item 1A. Risk Factors

Other than as set forth below, we do not believe that there have been any material changes to the risk factors disclosed in Part I, Item 1A of our 2021 Annual Report. The risk factors described in our 2021 Annual Report and below are not the only risks we face. Factors we currently do not know, factors that we currently consider immaterial or factors that are not specific to us, such as general economic conditions, may also materially adversely affect our business or our consolidated operating results, financial condition or cash flows.

If the Distribution, together with certain related transactions, fails to qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”), or the Merger fails to qualify as a reorganization under Section 368(a) of the Code, Ligand and its stockholders could incur significant tax liabilities, and APAC and OmniAb could be required to indemnify Ligand for taxes that could be material pursuant to indemnification obligations under the tax matters agreement to be entered into in connection with the closing of the Merger (the “Tax Matters Agreement”).

Ligand received a tax opinion from Latham & Watkins LLP, tax counsel to Ligand, which shall provide that the Distribution will qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code and that the Merger will not cause Section 355(e) of the Code to apply to the Distribution. In addition, the obligations of Ligand and OmniAb to complete the Merger were conditioned upon, among other things, Ligand’s receipt of such tax opinion. The obligation of APAC to complete the Merger was conditioned upon, among other things, receipt of an opinion of Weil, Gotshal & Manges LLP, tax counsel to APAC, that the Merger will be treated as a reorganization under Section 368(a) of the Code. The opinions were delivered in connection with the closing of the Merger and were based on, among other things, certain facts, assumptions, representations and undertakings from Ligand, OmniAb and APAC, including those regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations, or undertakings are incorrect or not satisfied, Ligand may not be able to rely on the opinions, and Ligand and its stockholders could be subject to significant U.S. federal income tax liabilities. In addition, the opinions will not be binding on the IRS or the courts. Notwithstanding the opinions, the IRS could determine on audit that the Distribution or Merger does not qualify as a reorganization if it determines that any of the facts, assumptions, representations or undertakings on which the opinions are based are not correct or have been violated or that the Distribution or Merger should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the Distribution.

If the Distribution, together with certain related transactions, is ultimately determined not to qualify as a reorganization, the Distribution could be treated as a taxable disposition of shares of OmniAb stock by Ligand and as a taxable dividend or capital gain to Ligand’s stockholders for U.S. federal income tax purposes. If the Merger is ultimately determined not to qualify as a reorganization, the Merger could be treated as a taxable disposition of OmniAb stock by Ligand stockholders. In either

34

such case, Ligand and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.

Under the Tax Matters Agreement that APAC and OmniAb entered into with Ligand, APAC and OmniAb will generally be required to indemnify Ligand against taxes incurred by Ligand that arise as a result of certain actions or omissions by APAC or OmniAb that prevent the Distribution, together with certain related transactions, from qualifying as a reorganization under Sections 355 and 368(a)(1)(D) of the Code. Further, even if APAC and OmniAb are not responsible for tax liabilities of Ligand under the Tax Matters Agreement, OmniAb nonetheless could be liable under applicable U.S. federal tax law for such liabilities if Ligand were to fail to pay them. If APAC or OmniAb are required to pay any liabilities under the circumstances set forth in the Tax Matters Agreement or pursuant to applicable tax law, the amounts may be significant.

The anticipated benefits of the Separation and Merger may not be achieved.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation and Merger, including the potential that the Separation and Merger Combination will:

•allow each business to pursue its own operational and strategic priorities and more quickly respond to trends, developments and opportunities in its respective markets;

•create two separate and distinct management teams focused on each business’s unique strategic priorities, target markets and corporate development opportunities;

•give each business opportunity and flexibility by pursuing its own investment, capital allocation and growth strategies consistent with its long-term objectives;

•allow investors to separately value each business based on the unique merits, performance and future prospects of each business, providing investors with two distinct investment opportunities;

•enhance the ability of each business to attract and retain qualified management and to better align incentive-based compensation with the performance of each separate business; and

•give each of OmniAb and Ligand its own equity currency for use in connection with acquisitions.

We may not achieve the anticipated benefits of the Separation and Merger for a variety of reasons. Further, such benefits, if ultimately achieved, may be delayed. In addition, the Separation and Merger could materially and adversely affect our business, financial condition and results of operations.

The Separation and Distribution may expose Ligand and OmniAb to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

The Separation and Distribution are subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (i) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return; and (ii) the entity: (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer; (b) has unreasonably small capital with which to carry on its business; or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by OmniAb or Ligand or any of our respective subsidiaries) may bring an action alleging that the Separation or Distribution or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including without limitation, voiding OmniAb’s claims against Ligand, requiring the future OmniAb stockholders to return to Ligand some or all of the shares of OmniAb common stock issued in the Distribution, or providing Ligand with a claim for money damages against OmniAb in an amount equal to the difference between the consideration received by Ligand and OmniAb fair market value at the time of the Distribution.

The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, an entity would be considered insolvent if (i) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities); (ii) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (iii) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (iv) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a

35

court would determine that OmniAb or Ligand or any of our subsidiaries were solvent at the time of or after giving effect to the Distribution.

The Distribution of OmniAb common stock is also subject to review under state corporate distribution statutes. Under the DGCL, a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Although Ligand intends to make the Distribution of OmniAb common stock entirely from surplus, we cannot assure you that a court will not later determine that some or all of the Distribution to Ligand stockholders was unlawful.

Completion of the separation of OmniAb resulted in substantial changes in our board of directors and management.

Completion of the Separation of OmniAb on November 1, 2022 resulted in substantial changes in our board of directors and management. In particular, Matthew Foehr, our former President and Chief Operating Officer, and Charles Berkman, our former Senior Vice President, General Counsel and Secretary, resigned from their positions with us upon the completion of the Separation to join management positions with OmniAb, Inc. In connection with the Separation and the departure of the foregoing officers, Ligand appointed new officers. Matthew Korenberg, our former Executive Vice President, Finance and Chief Financial Officer, was appointed our President and Chief Operating Officer. Octavio Espinoza, our former Senior Vice President, Finance, was appointed our Chief Financial Officer. Andrew Reardon, our former Vice President, Special Counsel, was appointed Chief Legal Officer and Secretary. Furthermore, Sarah Boyce, Jennifer Cochran and Sunil Patel resigned as members of our board of directors in connection with the Separation to join the board of directors of OmniAb Inc. These senior officer and board level changes could be disruptive to our operations, present significant management challenges and could harm our business.

As a result of the Separation of OmniAb, the following risk factors described in our 2021 Annual Report are no longer applicable to our business:

•Our OmniAb antibody platform faces specific risks, including the quality of our antibody discovery platform and technological capabilities and their acceptance by new and existing partners in our market.

•The OmniAb antibody platform could become subject to more extensive government regulation than we currently anticipate, and regulatory compliance obligations and the investigational exemption and approval processes to which our animals may become subject are expensive, time-consuming and uncertain both in timing and in outcome.

•Our OmniAb antibody platform utilizes various species of animals that could contract disease or die and could otherwise subject us to controversy and adverse publicity, which may interrupt our business operations or harm our reputation.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

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Item 6. Exhibits

		Incorporated by Reference
Exhibit Number	Description of Exhibit	Form	File Number	Date of Filing	Exhibit Number	Filed Herewith
2.1*	Agreement and Plan of Merger, dated as of March, 23, 2022, by and among Avista Public Acquisition Corp. II, Ligand Pharmaceuticals Incorporated, OmniAb, Inc. and Orwell Merger Sub Inc.	8-K	001-33093	March 24, 2022	2.1
2.2*	Separation and Distribution Agreement, dated as of March 23, 2022, by and among Avista Public Acquisition Corp. II, Ligand Pharmaceuticals Incorporated and OmniAb, Inc.	8-K	001-33093	March 24, 2022	2.2
2.3	Sponsor Insider Agreement, dated March 23, 2022, by and among OmniAb, Inc., Avista Public Acquisition Corp. II and the other parties signatory thereto	8-K	001-33093	March 24, 2022	2.3
2.4	Amended and Restated Forward Purchase Agreement, dated March 23, 2022, by and among Avista Public Acquisition Corp. II, Avista Acquisition LP II and OmniAb, Inc.	8-K	001-33093	March 24, 2022	2.4
3.1	Amended and Restated Certificate of Incorporation of the Company	S-4	333-58823	July 9, 1998	3.1
3.2	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 14, 2000	10-K	0-20720	March 29, 2001	3.5
3.3	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 30, 2004	10-Q	0-20720	August 5, 2004	3.6
3.4	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated November 17, 2010	8-K	001-33093	November 19, 2010	3.1
3.5	Certificate of Amendment of the Amended and Restated Certification of Incorporation of the Company, dated June 19, 2018	S-8	333-233130	August 8, 2019	3.6
3.6	Fourth Amended and Restated Bylaws of the Company	8-K	001-33093	October 30, 2020	3.1
4.1	Specimen stock certificate for shares of the common stock of the Company	10-K	001-33093	March 1, 2018	4.1
4.2	Indenture, dated as of May 22, 2018, between the Company and Wilmington Trust, National Association, as trustee, including the form of 0.75% Convertible Senior Notes due 2023	8-K	001-33093	May 22, 2018	4.1
10.1	Amended and Restated Employee Matters Agreement, dated as of August 18, 2022, by and among Ligand Pharmaceuticals Incorporated, OmniAb Operations, Inc. (f/k/a OmniAb, Inc.), OmniAb, Inc. (f/k/a Avista Public Acquisition Corp. II) and Orwell Merger Sub Inc.					X
10.2	Tax Matters Agreement, dated as of November 1, 2022, by and among OmniAb, Inc.(f/k/a Avista Public Acquisition Corp. II) Ligand Pharmaceuticals Incorporated and OmniAb Operations, Inc. (f/k/a OmniAb, Inc.)	8-K	001-33093	November 4, 2022	10.1
31.1	Certification by Principal Executive Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification by Principal Financial Officer, Pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X

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32.1**	Certifications by Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101	The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statement of Comprehensive Income, (iv) Consolidated Condensed Statements of Stockholders' Equity, (v) Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.	X
104	The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL and contained in Exhibit 101.	X

* Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. Ligand Pharmaceuticals Incorporated agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

** These certifications are deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	November 8, 2022	By:	/s/ Octavio Espinoza
			Octavio Espinoza
			Chief Financial Officer
			Duly Authorized Officer and Principal Financial Officer

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