LIGAND PHARMACEUTICALS INC (LGND) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flows. It is provided in addition to the accompanying consolidated financial statements and notes.
OmniAb Separation and Spin-Off
On March 23, 2022, we entered into the Merger Agreement, by and among our company, Avista Public Acquisition Corp. II (New OmniAb) and OmniAb, Inc., a Delaware corporation and then wholly-owned subsidiary of our company (OmniAb), and Orwell Merger Sub Inc. (Merger Sub), pursuant to which New OmniAb combined with OmniAb, our then-antibody discovery business (the OmniAb Business), in a Reverse Morris Trust transaction. Pursuant to the Separation Agreement, we transferred the OmniAb Business, including certain of our related subsidiaries, to OmniAb and, in connection therewith, distributed (the Distribution) to Ligand stockholders 100% of the common stock of OmniAb. Immediately following the Distribution on November 1, 2022, in accordance with and subject to the terms and conditions of the Merger Agreement, Merger Sub merged with and into OmniAb (the Merger), with OmniAb continuing as the surviving company in the Merger and as a wholly-owned subsidiary of New OmniAb. After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after October 31, 2022. As a result, OmniAb's historical financial results through the Separation are reflected in our consolidated financial statements as discontinued operations.
Our MD&A is organized as follows:
•Results of Operations. Detailed discussion of our revenue and expenses from continuing operations for years ended December 31, 2023, 2022 and 2021.
•Liquidity and Capital Resources. Discussion of key aspects of our consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of significant changes we believe are important to understand the assumptions and judgments underlying our consolidated financial statements.
•Recent Accounting Pronouncements. For summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”
Results of Operations
Revenue
FY 2023 vs. FY 2022
| (Dollars in thousands) | 2023 | 2022 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Royalties | $ | 83,910 | $ | 72,527 | $ | 11,383 | 16 | % | ||||||
| Captisol - Core | 28,372 | 16,429 | 11,943 | 73 | % | |||||||||
| Captisol - COVID | — | 88,066 | (88,066) | (100) | % | |||||||||
| Contract | 19,032 | 19,223 | (191) | (1) | % | |||||||||
| Total revenue | $ | 131,314 | $ | 196,245 | $ | (64,931) | (33) | % |
Total revenue decreased by $64.9 million, or 33%, to $131.3 million in 2023 compared to $196.2 million in 2022 primarily due to the $88.1 million decrease in sales of COVID-related Captisol. The lower sales were due to reduced demand for remdesivir, a treatment for moderate or severe COVID-19. Core Captisol sales were $28.4 million in 2023 compared to $16.4 million in 2022. The higher sales were due to the timing of customer orders. Royalty revenue increased by $11.4 million, or 16%, to $83.9 million in 2023 compared to $72.5 million in 2022. The increase in royalty revenue is primarily due to the increases in sales of Kyprolis, Rylaze and Pneumosil.
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FY 2022 vs. FY 2021
| (Dollars in thousands) | 2022 | 2021 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Royalties | $ | 72,527 | $ | 48,927 | $ | 23,600 | 48 | % | ||||||
| Captisol - Core | 16,429 | 23,423 | (6,994) | (30) | % | |||||||||
| Captisol - COVID | 88,066 | 140,827 | (52,761) | (37) | % | |||||||||
| Contract | 19,223 | 28,367 | (9,144) | (32) | % | |||||||||
| Total revenue | $ | 196,245 | $ | 241,544 | $ | (45,299) | (19) | % |
Total revenue from continuing operations decreased by $45.3 million, or 19%, to $196.2 million in 2022 compared to $241.5 million in 2021 primarily due to the $52.8 million decrease in sales of COVID-related Captisol. The lower sales were due to reduced demand for remdesivir, a treatment for moderate or severe COVID-19. Core Captisol sales were $16.4 million in 2022 compared to $23.4 million in 2021. The lower sales were due to the timing of customer orders. Royalty revenue increased by $23.6 million, or 48%, to $72.5 million in 2022 compared to $48.9 million in 2021. The increase in royalty revenue is driven primarily by increases in sales of drugs using the Pelican platform (Rylaze, Pneumosil and Teriparatide) along with an increase in sales of Kyprolis. Contract revenue decreased year over year in 2022 by $9.1 million primarily due to the timing of partner milestone events.
Royalty revenue is a function of our partners' product sales and the applicable royalty rate. Kyprolis royalty rate is under a tiered royalty rate structure with the highest being 3.0%. Evomela has a contractually fixed royalty rate of 20%. Teriparatide injection has a tiered gross profit share 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 in the low single digits. 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) | 2023 Estimated Partner Product Sales | Effective Royalty Rate | 2023 Royalty Revenue | 2022 Estimated Partner Product Sales | Effective Royalty Rate | 2022 Royalty Revenue | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Kyprolis | $ | 1,503.1 | 2.4% | $ | 35.6 | $ | 1,275.6 | 2.4% | $ | 30.1 | ||||
| Evomela | 51.0 | 20.0% | 10.2 | 51.0 | 20.0% | 10.2 | ||||||||
| Teriparatide injection(1) | 37.2 | 29.8% | 11.1 | 47.2 | 33.5% | 15.8 | ||||||||
| Rylaze | 397.5 | 3.4% | 13.5 | 278.7 | 3.2% | 8.8 | ||||||||
| Other | 956.4 | 1.4% | 13.5 | 383.7 | 2.0% | 7.6 | ||||||||
| Total | $ | 2,945.2 | $ | 83.9 | $ | 2,036.2 | $ | 72.5 |
(1) - Teriparatide injection sales have been adjusted for certain deductible items as defined in the respective license agreement, and the royalty revenue is based on a tiered gross profit share.
Operating Costs and Expense
FY 2023 vs. FY 2022
| (Dollars in thousands) | 2023 | 2022 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cost of Captisol | $ | 10,512 | $ | 52,827 | $ | (42,315) | (80) | % | ||||||
| Amortization of intangibles | 33,654 | 34,237 | (583) | (2) | % | |||||||||
| Research and development | 24,537 | 36,082 | (11,545) | (32) | % | |||||||||
| General and administrative | 52,790 | 70,062 | (17,272) | (25) | % | |||||||||
| Total operating costs and expenses | $ | 121,493 | $ | 193,208 | $ | (71,715) | (37) | % |
Total operating costs and expenses for 2023 decreased by $71.7 million or 37% compared with 2022.
Cost of Captisol decreased year over year in 2023 primarily due to lower sales of Captisol during 2023 and by the capacity ramp-up right of use asset impairment of $9.8 million recorded in the fourth quarter of 2022.
Amortization of intangibles decreased by $0.6 million in 2023 compared to 2022 with the decrease primarily due to the cessation of amortization of certain Pelican intangibles resulting from the sale of the Pelican business.
At any one time, we are working on multiple programs. As such, we generally do not track our R&D expenses on a specific program basis. Our R&D expenses decreased by $11.5 million in 2023 compared to 2022, with the decrease primarily due to lower share-based compensation and employee-related expenses, partially offset by an increase in R&D expenses due to the Novan acquisition.
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General and administrative expenses decreased by $17.3 million in 2023 compared to 2022 primarily due to decreases in share-based compensation expense including a one-time charge associated with the retirement of our former CEO in the fourth quarter of 2022, and employee-related expenses, partially offset by an increase in G&A expenses due to the Novan acquisition.
FY 2022 vs. FY 2021
| (Dollars in thousands) | 2022 | 2021 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cost of Captisol | $ | 52,827 | $ | 62,176 | $ | (9,349) | (15) | % | ||||||
| Amortization of intangibles | 34,237 | 34,222 | 15 | — | % | |||||||||
| Research and development | 36,082 | 32,105 | 3,977 | 12 | % | |||||||||
| General and administrative | 70,062 | 46,790 | 23,272 | 50 | % | |||||||||
| Other operating income | — | (37,600) | 37,600 | (100) | % | |||||||||
| Total operating costs and expenses | $ | 193,208 | $ | 137,693 | $ | 55,515 | 40 | % |
Total operating costs and expenses from continuing operations for 2022 increased by $55.5 million, or 40% compared with 2021.
Cost of Captisol decreased year over year in 2022 primarily due to lower sales of Captisol during 2022, partially offset by the capacity ramp-up right of use asset impairment of $9.8 million recorded in the fourth quarter of 2022.
Amortization of intangibles remained steady in 2022 compared to 2021 as there have been no significant changes to the gross balance of intangible assets over these periods.
At any one time, we are working on multiple programs. As such, we generally do not track our R&D expenses on a specific program basis. Our R&D expenses increased by $4.0 million in 2022 compared to 2021 due to higher employee-related expenses and increased facility related expenses.
General and administrative expenses increased by $23.3 million in 2022 compared to 2021 primarily due to increases in stock compensation expense including a one-time charge associated with the retirement of our former CEO in the fourth quarter of 2022, headcount-related expenses and legal expenses.
Other operating income in 2021 was due to reducing the fair value of the CVR liability associated to the acquisition of Pfenex to zero, as the CVR payment expiration date passed on December 31, 2021 without achieving the triggering event. We did not have any other operating income in 2022.
We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of research and clinical studies, regulatory requirements placed upon us by regulatory authorities such as the FDA and EMA, our inability to predict the decisions of our partners, our ability to fund research and development programs, competition from other entities of which we may become aware in future periods, predictions of market potential for products that may be derived from our work, and our ability to recruit and retain personnel or third-party contractors with the necessary knowledge and skills to perform certain research. Refer to “Item 1A. Risk Factors” for additional discussion of the uncertainties surrounding our research and development initiatives.
Gain on Sale of Pelican
The gain on sale of Pelican in the amount of $2.1 million for 2023 represents the excess of the fair value of 1) our investment in Primrose Bio and other economic rights; 2) the carrying amount of Pelican business assets and liabilities together with allocated goodwill as of September 18, 2023, the date of sale; and 3) $15.0 million consideration paid.
Other income (expense)
FY 2023 vs. FY 2022
| (Dollars in thousands) | 2023 | 2022 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gain (loss) from short-term investments | $ | 46,365 | $ | 28,540 | $ | 17,825 | (62) | % | ||||||
| Interest income | 7,711 | 2,046 | 5,665 | 277 | % | |||||||||
| Interest expense | (656) | (1,799) | 1,143 | 64 | % | |||||||||
| Gain on derivative instruments | 250 | — | 250 | N/A | ||||||||||
| Other income (expense), net | (1,952) | 4,187 | (6,139) | 147 | % | |||||||||
| Total other income (expense), net | $ | 51,718 | $ | 32,974 | $ | 18,744 | (57) | % |
The fluctuation in the gain (loss) from short-term investments is primarily driven by the realized gain of $44.4 million from the sales of 5.0 million shares of Viking common stock in 2023, compared to no Viking shares sold in 2022. In addition,
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the fluctuation is driven by the changes in the fair value of our ownership in Viking common stock (an unrealized gain of $2.6 million in 2023 as compared to an unrealized gain of $32.2 million in 2022).
Interest income consists primarily of interest earned on our short-term investments. The year over year increase in 2023 is primarily due to the significant interest rate increases by the federal reserve during 2023.
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 costs) on our 2023 Notes. In May 2023, the 2023 Notes matured, and we paid the remaining $76.9 million principal amount and $0.3 million accrued interest in cash. The decrease in interest expense was primarily due to the zero debt outstanding balance after May 2023 compared to 2022. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (8), Debt.”
Other expense, net, increased year over year in 2023 primarily due to a current expected credit loss (CECL) adjustment over the Elutia commercial license right of $3.2 million and a Selexis commercial license right impairment loss of $0.9 million compared to no CECL adjustment over similar assets in 2022. In addition, we recorded a $4.2 million gain on our debt extinguishments in 2022 compared to no loss on debt extinguishments in 2023. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (8), Debt.”
FY 2022 vs. FY 2021
| (Dollars in thousands) | 2022 | 2021 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gain (loss) from short-term investments | $ | 28,540 | $ | (5,263) | $ | 33,803 | (642) | % | ||||||
| Interest income | 2,046 | 886 | 1,160 | 131 | % | |||||||||
| Interest expense | (1,799) | (19,619) | 17,820 | 91 | % | |||||||||
| Other income (expense), net | 4,187 | (7,650) | 11,837 | 155 | % | |||||||||
| Total other income (expense), net | $ | 32,974 | $ | (31,646) | $ | 64,620 | 204 | % |
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 (an unrealized gain of $32.2 million in 2022 as compared to an unrealized loss of $9.6 million in 2021).
Interest income consists primarily of interest earned on our short-term investments. The year over year increase in 2022 is primarily due to the significant interest rate increases by the federal reserve during 2022.
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 costs) on our 2023 Notes. The year over year decrease was primarily due to the adoption of ASU 2020-06 which significantly reduced the debt discount balance subject to amortization. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.” In addition, we carried a lower average debt outstanding balance during 2022 as compared 2021. During 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. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (8), Debt.”
Other income (expense), net, increased year over year in 2022 primarily due to a $4.2 million gain on our debt extinguishments in 2022 compared to $7.3 million loss on debt extinguishments in 2021. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (8), Debt.”
Income tax benefit (expense)
FY 2023 vs. FY 2022
| (Dollars in thousands) | 2023 | 2022 | Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income before income tax expense (benefit) from continuing operations | $ | 63,660 | $ | 36,011 | $ | 27,649 | 77 | % | ||||||
| Income tax benefit (expense) | (9,841) | (41,230) | 31,389 | (76) | % | |||||||||
| Net income (loss) from continuing operations | $ | 53,819 | $ | (5,219) | $ | 59,038 | (1,131) | % | ||||||
| Effective Tax Rate | 15 | % | 114 | % |
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Our effective tax rate for 2023 and 2022 was 15% and 114%, respectively. Our tax rate is affected by recurring items, such as the U.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In 2023, the variance from the U.S. federal statutory rate of 21% was primarily attributable to the decrease in unrecognized tax benefits. In 2022, the variance from the U.S. federal statutory rate of 21% was primarily due to limitations on the deductibility of stock-based compensation for certain officers and a discrete tax expense of $24.8 million related to the valuation allowance established during the fourth quarter of 2022 against deferred tax assets for California research and development credits and net operating losses. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 requires taxpayers to capitalize and amortize R&D expenditures over five years for domestic research and fifteen years for foreign research pursuant to Section 174 of the Internal Revenue Code of 1986, as amended. We recorded an increase of $4.7 million to our current federal income tax expense and deferred tax assets for continuing operations during 2022 due to the capitalization of R&D under Section 174.
2023
•$7.2 million (11.3%) decrease from unrecognized tax benefits
•$2.2 million (3.4%) increase from the return to provision
•$1.2 million (1.9%) decrease from stock based compensaiton
•$1.0 million (1.6%) decrease from the foreign-derived intangible income deduction
•$0.8 million (1.3%) decrease from Section 162(m) limitation
2022
•$24.8 million (68.9%) increase from valuation allowance adjustments
•$5.9 million (16.3%) increase from Section 162(m) limitation
•$2.4 million (6.7%) decrease from the foreign-derived intangible income deduction
•$1.3 million (3.6%) increase due to excess tax benefits from share-based compensation which are recorded as a discrete item within the provision for income tax pursuant to ASU 2016-09
Net Loss from Discontinued Operations
Net loss from discontinued operations for the years ended December 31, 2023, 2022 and 2021 was $1.7 million, $28.1 million and $19.2 million, respectively. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (4), Spin-off Of OmniAb.”
Liquidity and Capital Resources
At December 31, 2023, we had approximately $170.3 million in cash, cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments decreased by $41.6 million from last year, due to factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs.
Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. Our short-term investments include U.S. government debt securities, investment-grade corporate debt securities, bond 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 1.7 million shares of common stock in Viking.
On September 30, 2022, we entered into an At-The-Market Equity Offering Sales Agreement (Sales Agreement) with Stifel, Nicolaus & Company, Incorporated (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 (ATM Offering). The shelf registration statement relating to such shares 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. As of December 31, 2023 we have not issued any shares of common stock in the ATM Offering.
In May 2018, we issued the 2023 Notes with an aggregate principal amount of $750.0 million. A portion of the proceeds from such issuance totaling $49.7 million were used to repurchase 260,000 shares of our common stock. 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.
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During 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. On May 15, 2023, the 2023 Notes maturity date, we paid the remaining $76.9 million principal amount and $0.3 million accrued interest in cash.
We are obligated to make payments to operating leases, including rental commitments on leases that have not yet commenced. For information on these obligations, see detail in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (7), Leases.”
We also have commitments under our supply agreement with Hovione for Captisol purchases. The total purchase obligation as of December 31, 2023 was $28.8 million, of which $8.6 million is expected to be paid within a year and the remaining amount is expected to be paid between 1 to 3 years.
In September 2019, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500.0 million of our common stock from time to time over a period of up to three years. Our $500.0 million stock repurchase program expired in September 2022. In April 2023, our Board of Directors approved a stock repurchase program authorizing, but not requiring, the repurchase of up to $50.0 million of our common stock from time to time through April 2026. We expect to acquire these shares, if at all, primarily through open-market transactions in accordance with all applicable requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 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. See “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities.”
On October 12, 2023, we entered into a $75 million Revolving Credit Facility with Citibank, N.A. as the Administrative Agent. We, our material domestic subsidiaries, as Guarantors (as defined in the Credit Agreement), and the Lenders (each as defined in the Credit Agreement) entered into the Credit Agreement with the Administrative Agent, under which the Lenders, the Swingline Lender and the L/C Issuer (each as defined in the Credit Agreement) agreed to make loans and other financial accommodations to us in an aggregate amount of up to $75.0 million. At our option, borrowings under the Revolving Credit Facility accrue interest at a rate equal to either Term SOFR or a specified base rate plus an applicable margin linked to our leverage ratio, ranging from 1.75% to 2.50% per annum for Term SOFR loans and 0.75% to 1.50% per annum for base rate loans. The Revolving Credit Facility is subject to a commitment fee payable on the unused Revolving Credit Facility commitments ranging from 0.30% to 0.45%, depending on our leverage ratio. During the term of the Revolving Credit Facility, we may borrow, repay and re-borrow amounts available under the Revolving Credit Facility, subject to voluntary reductions of the swing line, letter of credit and revolving credit commitments.
Borrowings under the Credit Agreement are secured by certain of our collateral and that of the Guarantors. In specified circumstances, additional guarantors are required to be added. The Credit Agreement contains customary affirmative and negative covenants, including certain financial maintenance covenants, and events of default applicable to us. In the event of violation of the representations, warranties and covenants made in the Credit Agreement, we may not be able to utilize the Revolving Credit Facility or repayment of amounts owed thereunder could be accelerated.
As of December 31, 2023, we had $74.5 million in available borrowing under the Revolving Credit Facility, after utilizing $0.5 million for a letter of credit. The maturity date of the Revolving Credit Facility is October 12, 2026.
We believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital; capital expenditure and 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 December 31, 2023, we had $3.2 million in fair value of contingent consideration liabilities associated with the acquisitions to be settled in future periods.
Cash Flow Summary
| (in thousands) | 2023 | 2022 | 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 49,577 | $ | 137,850 | $ | 78,798 | |||||
| Investing activities | $ | (11,682) | $ | 163,624 | $ | 30,523 | |||||
| Financing activities | $ | (59,947) | $ | (275,990) | $ | (137,761) |
In 2023, we generated cash from operations primarily from collections on our trade receivables. We used cash for investing activities primarily for the purchases of commercial license rights, Novan acquisition and investment in Primrose Bio, partially offset by cash from the sale and maturity of short-term investments including Viking shares. During the year, we used
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cash for financing activities, including the repayment of the remaining $76.9 million principal amount upon maturity of the 2023 Notes and $0.3 million accrued interest in cash.
In 2022, we generated cash from operations primarily from collections on our trade receivables. We generated cash from investing activities primarily from the sale and maturity of short-term investments. During the year, we used cash for financing activities, including the payments related to the extinguishment of certain 2023 Notes.
In 2021, we generated cash from operations primarily due to the increase in net income. We generated cash from investing activities primarily from the sale and maturity of short-term investments. During the year, we used cash for financing activities, including the payments related to the extinguishment of certain 2023 Notes, partially offset by cash received from issuance of common stock under employee stock plans and bond hedge settlement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
We apply the following five-step model in accordance with ASC 606 in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under 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 are adjusted in the period in which they become known, typically the following quarter.
Our contracts with customers often will include variable consideration in the form of contingent milestone-based payments. We include contingent milestone based payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the occurrence of the development milestone or regulatory approval.
Revenue from Captisol sales is recognized when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. For Captisol material, we consider our performance obligation is satisfied at a point in time, once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the
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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.
We occasionally have sub-license obligations related to arrangements for which we receive license fees, milestones and royalties. We evaluate the determination of gross as a principal versus net as an agent reporting based on each individual agreement.
Goodwill and Intangible Assets — Impairment Assessments
Goodwill
Goodwill is evaluated annually for impairment using either a quantitative or qualitative analysis. Goodwill is tested for impairment at the reporting unit level, and is based on the net assets for each reporting unit, including goodwill and intangible assets. Goodwill is assigned to each reporting unit, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis. In addition, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price.
The annual goodwill impairment test was performed using a qualitative analysis in 2023 and 2022. A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each reporting unit. The results of the qualitative analyses did not indicate a need to perform quantitative analysis.
In 2022, during an interim period we used a quantitative assessment for goodwill and the relative fair value method to reallocate goodwill for the OmniAb business and Ligand core business due to the reorganization of the Company’s business discussed in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (4), Spin-off of OmniAb.”
Intangible Assets
We regularly perform reviews to determine if an event occurred that may indicate the carrying values of our intangible assets are impaired. If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by comparing its carrying amounts to its undiscounted cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the ability of an asset to generate positive cash flows and the pattern of utilization of a particular asset.
In order to estimate the fair value of identifiable intangible assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
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Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payments, including restricted stock, ESPP and stock options, based on the estimated fair value. Restricted stock unit (RSU) and performance stock unit (PSU) are all considered restricted stock. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. We recognize share-based compensation expense based on the fair value on a straight-line basis over the requisite service periods of the awards, taking into consideration of forfeitures as they occur. A PSU generally represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any expense change resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment. A limited amount of PSUs contain a market condition dependent upon the Company’s relative and absolute total stockholder return over a three-year period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation expense for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the market conditions.
Conversion and Modification of Equity Awards Outstanding at Separation Date
In connection with the OmniAb Separation on November 1, 2022, under the provisions of the existing plans, we adjusted our outstanding equity awards in accordance with the Merger Agreement to preserve the intrinsic value of the awards immediately before and after the Distribution. Upon the Distribution, employees holding stock options, restricted stock units and performance restricted stock units denominated in pre-Distribution Ligand stock received a number of otherwise-similar awards either in post-Distribution Ligand stock or in a combination of post-Distribution Ligand stock and OmniAb stock based on conversion ratios outlined for each group of employees in the Merger Agreement that we entered into in connection with the Distribution. The equity awards that were granted prior to March 2, 2022 were converted under the shareholder method, wherein employees holding outstanding equity awards received equity awards in both Ligand and OmniAb. For equity awards granted after March 2, 2022, for Ligand employees, the number of awards that were outstanding at the Separation were proportionately adjusted into post-Distribution Ligand stock to maintain the aggregate intrinsic value of the awards at the date of the Separation; for OmniAb employees, the number of awards that were outstanding at the Separation were proportionately adjusted into post-Distribution OmniAb stock to maintain the aggregate intrinsic value of the awards at the date of the Separation. The conversion ratio was determined based on the relative values of Ligand common stock in the “regular way” and “ex-distribution” markets during the five-trading day period prior to the closing of the business combination.
These modified awards otherwise retained substantially the same terms and conditions, including term and vesting provisions. Additionally, we will not incur any future compensation cost related to equity awards held by OmniAb employees and directors. We will incur future compensation cost related to OmniAb equity awards held by our employees.
Recent Accounting Pronouncements
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For the summary of recent accounting pronouncements applicable to our consolidated financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (1), Basis of Presentation and Summary of Significant Accounting Policies.”