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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, 2023
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-Logo-Registered5.jpg

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
CA92121
(Address of principal executive offices)(Zip Code)
(858) 550-7500
(Registrant's Telephone Number, Including Area Code)


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 6, 2023, the registrant had 17,435,958 shares of common stock outstanding.



LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT

FORM 10-Q

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION


2

GLOSSARY OF TERMS AND ABBREVIATIONS
AbbreviationDefinition
2022 Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 28, 2023
2023 Notes$750.0 million aggregate principal amount of convertible senior unsecured notes due 2023
APAC
Avista Public Acquisition Corp. II (prior to its domestication in Delaware and change of name to OmniAb, Inc.)
ASCAccounting Standards Codification
ASUAccounting Standards Update
CompanyLigand Pharmaceuticals Incorporated, including subsidiaries
CVRContingent value right
CyDexCyDex Pharmaceuticals, Inc.
ESPPEmployee Stock Purchase Plan, as amended and restated
FASBFinancial Accounting Standards Board
GAAPGenerally accepted accounting principles in the United States
LigandLigand Pharmaceuticals Incorporated, including subsidiaries
Merger AgreementAgreement and Plan of Merger, dated as of March 23, 2022, among APAC, Ligand, OmniAb and Merger Sub
Merger SubOrwell Merger Sub, Inc., a wholly owned subsidiary of APAC
MetabasisMetabasis Therapeutics, Inc.
NDANew Drug Application
New OmniAbOmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II and after it domestication in Delaware)
OmniAbOmniAb Operations, Inc. (formerly known as OmniAb, Inc. and prior to being spun off by the Company)
OmniAb BusinessLigand's antibody discovery business (prior to being spun off by the Company)
PDUFAPrescription Drug User Fee Act
PfenexPfenex Inc.
Q3 2022The Company's fiscal quarter ended September 30, 2022
Q3 2023The Company's fiscal quarter ended September 30, 2023
SBCShare-based compensation expense
SECSecurities and Exchange Commission
Separation AgreementSeparation and Distribution Agreement, dated as of March 23, 2022, among APAC, Ligand and OmniAb
TakedaTakeda Pharmaceutical Company Limited
TravereTravere Therapeutics, Inc.
VikingViking Therapeutics, Inc.
YTDYear-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, 2023December 31, 2022
ASSETS
Current assets:
   Cash and cash equivalents$19,275 $45,006 
   Short-term investments171,227 166,864 
   Accounts receivable, net36,003 30,424 
   Inventory25,392 13,294 
   Income taxes receivable— 4,614 
   Other current assets2,097 3,399 
      Total current assets253,994 263,601 
Deferred income taxes, net8,530 8,530 
Intangible assets, net314,843 342,455 
Goodwill103,770 105,673 
Commercial license rights, net6,602 10,182 
Property and equipment, net16,178 12,482 
Operating lease right-of-use assets6,235 10,914 
Financing lease right-of-use assets3,566 4,095 
Equity method investment in Primrose Bio13,985 — 
Equity securities in Primrose Bio33,097 — 
Other assets8,426 4,736 
      Total assets$769,226 $762,668 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable $2,475 $5,307 
   Accrued liabilities10,635 15,681 
   Income taxes payable1,204 — 
   Current operating lease liabilities497 670 
   2023 convertible senior notes, net— 76,695 
   Other current liabilities 916 457 
      Total current liabilities15,727 98,810 
Long-term contingent liabilities3,515 3,456 
Deferred income taxes, net32,586 30,615 
Long-term operating lease liabilities5,832 10,336 
Other long-term liabilities43,670 21,966 
      Total liabilities101,330 165,183 
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000 shares authorized; zero issued and outstanding at September 30, 2023 and December 31, 2022
— — 
   Common stock, $0.001 par value; 60,000 shares authorized; 17,421 and 16,951 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively
18 17 
   Additional paid-in capital183,994 147,590 
   Accumulated other comprehensive loss(944)(984)
   Retained earnings 484,828 450,862 
      Total stockholders' equity667,896 597,485 
      Total liabilities and stockholders' equity$769,226 $762,668 
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 endedNine months ended
September 30,September 30,
2023202220232022
Revenues:
   Royalties$23,863 $19,255 $61,447 $50,507 
   Captisol8,608 35,949 24,450 77,616 
   Contract revenue397 4,017 17,316 17,740 
Total revenues32,868 59,221 103,213 145,863 
Operating costs and expenses:
   Cost of Captisol3,485 14,153 8,871 31,213 
   Amortization of intangibles8,238 8,568 25,316 25,698 
   Research and development5,532 9,239 19,049 26,885 
   General and administrative14,656 14,920 36,798 38,931 
Total operating costs and expenses31,911 46,880 90,034 122,727 
   Gain on sale of Pelican (2,121)— (2,121)— 
Operating income from continuing operations3,078 12,341 15,300 23,136 
Other income (expense):
   Gain (loss) from short-term investments(13,184)(923)30,340 (15,709)
   Interest income2,263 591 6,018 1,023 
   Interest expense(1)(332)(525)(1,559)
   Other (loss) income, net(4,300)677 (4,570)4,980 
Total other income (expense), net(15,222)13 31,263 (11,265)
Income (loss) before income taxes from continuing operations(12,144)12,354 46,563 11,871 
Income tax benefit (expense)1,871 (2,709)(10,932)(2,556)
Net income (loss) from continuing operations(10,273)9,645 35,631 9,315 
Net loss from discontinued operations— (9,241)(1,665)(25,191)
Net income (loss)$(10,273)$404 $33,966 $(15,876)
     Basic net income from continuing operations per share$(0.59)$0.57 $2.07 $0.55 
     Basic net loss from discontinued operations per share$— $(0.55)$(0.10)$(1.49)
     Basic net income (loss) per share$(0.59)$0.02 $1.97 $(0.94)
     Shares used in basic per share calculation17,380 16,888 17,241 16,860 
     Diluted net income from continuing operations per share$(0.59)$0.56 $2.00 $0.54 
     Diluted net loss from discontinued operations per share$— $(0.54)(0.09)$(1.47)
     Diluted net income (loss) per share$(0.59)$0.02 1.91 $(0.93)
     Shares used in diluted per share calculation17,380 17,132 17,784 17,128 

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 endedNine months ended
September 30,September 30,
2023202220232022
Net income (loss)$(10,273)$404 $33,966 $(15,876)
Unrealized net gain (loss) on available-for-sale securities, net of tax23 6 40 (143)
Comprehensive income (loss)$(10,250)$410 $34,006 $(16,019)

See accompanying notes to unaudited condensed consolidated financial statements.

6


LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
Common StockAdditional paid in capitalAccumulated other comprehensive income (loss)Retained earningsTotal stockholders' equity
SharesAmount
Balance at December 31, 202216,951 $17 $147,590 $(984)$450,862 $597,485 
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes183 — (762)— — (762)
Share-based compensation— — 5,931 — — 5,931 
Unrealized net gain on available-for-sale securities, net of tax— — — 49 — 49 
Final distribution of OmniAb— — 1,665 — 1,665 
Net income— — — — 41,949 41,949 
Balance at March 31, 202317,134 $17 $154,424 $(935)$492,811 $646,317 
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes218 — 9,110 — — 9,110 
Share-based compensation— — 7,207 — — 7,207 
Unrealized net loss on available-for-sale securities, net of tax— — — (32)— (32)
Net income— — — — 2,290 2,290 
Balance at June 30, 202317,352 $17 $170,741 $(967)$495,101 $664,892 
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes69 1 3,284 — — 3,285 
Share-based compensation— — 6,884 — — 6,884 
Unrealized net gain on available-for-sale securities, net of tax— — — 23 — 23 
Tax return to provision— — 3,085 — — 3,085 
Net loss— — — — (10,273)(10,273)
Balance at September 30, 202317,421 $18 $183,994 $(944)$484,828 $667,896 


7

Common StockAdditional paid in capitalAccumulated other comprehensive lossRetained earnings Total stockholders' equity
SharesAmount
Balance at December 31, 202116,767 $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 taxes94 — (5,515)— — (5,515)
Share-based compensation— — 9,044 — — 9,044 
Unrealized net loss on available-for-sale securities, net of tax— — — (114)— (114)
Net loss— — — — (15,385)(15,385)
Balance at March 31, 202216,861 $17 $325,368 $(1,031)$468,838 $793,192 
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes21 — 604 — — 604 
Share-based compensation— — 9,499 — — 9,499 
Unrealized net loss on available-for-sale securities, net of tax— — — (35)— (35)
Net loss— — — — (895)(895)
Balance at June 30, 202216,882 $17 $335,471 $(1,066)$467,943 $802,365 
Issuance of common stock under employee stock compensation plans, net of shares withheld for payroll taxes12 — 724 — — 724 
Share-based compensation— — 12,597 — — 12,597 
Unrealized net loss on available-for-sale securities, net of tax— — — 6 — 6 
Warrant and bond hedge unwind transactions— — 202 — — 202 
Net income— — — — 404 404 
Balance at September 30, 202216,894 $17 $348,994 $(1,060)$468,347 $816,298 

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,
20232022
Cash flows from operating activities:
Net income (loss)$33,966 $(15,876)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in estimated fair value of contingent liabilities132 (1,378)
Depreciation and amortization of intangible assets27,605 40,399 
Amortization of premium on investments, net(938)75 
Amortization of debt discount and issuance fees159 639 
Amortization of commercial license rights(883)(163)
CECL adjustment to commercial license rights3,190 — 
Impairment loss of commercial license rights924 — 
Gain on sale of Pelican(2,121)— 
Gain on debt extinguishment— (4,192)
Share-based compensation20,022 31,140 
Deferred income taxes6,761 (25,570)
(Gain) loss from short-term investments(30,340)15,709 
Lease amortization expense1,231 4,535 
Other215 (45)
Changes in operating assets and liabilities, net of acquisition:
     Accounts receivable, net(5,436)20,550 
     Inventory(11,577)10,702 
     Accounts payable and accrued liabilities (7,461)(405)
     Income tax receivable and payable5,818 15,111 
     Deferred revenue226 (5,182)
     Other current assets918 (17)
     Other assets and liabilities (899)(1,654)
                Net cash provided by operating activities41,512 84,378 
Cash flows from investing activities:
Purchase of short-term investments(107,262)(39,052)
Proceeds from sale of short-term investments96,318 202,552 
Proceeds from maturity of short-term investments37,941 24,830 
Cash paid for equity method investment - Nucorion— (750)
Cash paid for investment in Primrose Bio(15,235)— 
Cash paid for Novan acquisition, net of restricted cash received(10,405)— 
Purchase of property and equipment(3,104)(15,792)
Payments to CVR Holders— (960)
Proceeds from commercial license rights349 — 
Other— 80 
               Net cash (used in) provided by investing activities(1,398)170,908 
Cash flows from financing activities:
Repayment at maturity/repurchase of 2023 Notes(76,854)(260,949)
Proceeds from convertible bond hedge settlement— 202 
Net proceeds from stock option exercises and ESPP15,922 1,831 
Taxes paid related to net share settlement of equity awards(4,290)(6,018)
Payments to CVR Holders— (1,545)
Payments for OmniAb transaction costs — (4,171)
Other(40)(42)
               Net cash used in financing activities(65,262)(270,692)
Net decrease in cash, cash equivalents and restricted cash(25,148)(15,406)
Cash, cash equivalents and restricted cash at beginning of period45,006 19,522 
Cash, cash equivalents and restricted cash at end of period$19,858 $4,116 

9

Supplemental disclosure of cash flow information:
Interest paid$288 $1,139 
Taxes paid$10 $6,630 
Restricted cash in other assets$583 $— 
Acquisition:
      Fair value of tangible assets acquired, net of cash and restricted cash received$17,101 — 
      Goodwill2,229 — 
      Intangible assets17,600 — 
      Liabilities assumed(26,525)— 
Net cash paid for Novan$10,405 — 
Supplemental schedule of non-cash activity:
Accrued Primrose transaction costs$1,013 $— 
Accrued fixed asset purchases$409 $3,626 
Accrued inventory purchases$521 $7,676 
Unrealized gain (loss) on AFS investments, net of tax$40 $(143)

See accompanying notes to unaudited condensed consolidated financial statements.
10

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

Business
On November 1, 2022, we completed the separation (the “Separation”) of our 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 on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of a separate public company, OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II (“New OmniAb”)), in a Reverse Morris Trust transaction pursuant to the Agreement and Plan of Merger, dated as of March 23, 2022 (the “Merger Agreement”), and the Separation and Distribution Agreement, dated as of March 23, 2022 (the “Separation Agreement”) (the Merger Agreement and Separation Agreement, collectively with the other related transaction documents, the “Transaction Agreements”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting 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.
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. We operate in one business segment: development and licensing of biopharmaceutical assets.
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 2022 Annual Report. Interim financial results are not necessarily indicative of the results that may be expected for the full year.
Discontinued Operations
The Company determined that the spin-off of the OmniAb Business in November 2022 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). Accordingly, the accompanying condensed consolidated financial statements have been updated to present the results of all discontinued operations reported as a separate component of loss in the condensed consolidated statements of operations and comprehensive loss (see Note 4, Spin-off of OmniAb). All disclosures have been adjusted to reflect continuing operations.
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 2022 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.
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
11

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. In general, for R&D services, which has not been significant, we recognize revenue over time and 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.
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, which has not been significant.
Disaggregation of Revenue
The following table represents disaggregation of royalties, Captisol and contract revenue (in thousands):
12

Three months endedNine months ended
September 30,September 30,
2023202220232022
Royalties
Kyprolis$10,537 $9,123 $24,862 $20,872 
Evomela2,497 3,123 7,404 8,218 
Teriparatide injection 2,800 4,071 9,913 12,484 
Rylaze 3,678 2,099 9,315 6,065 
Other4,351 839 9,953 2,868 
$23,863 $19,255 $61,447 $50,507 
Captisol
     Captisol - Core$8,608 $3,582 $24,450 $13,133 
     Captisol - COVID(1)
— 32,367 — 64,483 
$8,608 $35,949 $24,450 $77,616 
Contract revenue
Service revenue263 90 534 1,047 
Milestone— 2,658 15,300 8,651 
Other134 1,269 1,482 8,042 
$397 $4,017 $17,316 $17,740 
Total$32,868 $59,221 $103,213 $145,863 

(1) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.
13

Short-term Investments
Our short-term investments consist of the following at September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023Amortized costGross unrealized gainsGross unrealized lossesEstimated fair value
     Bank deposits$28,972 $11 $(11)$28,972 
     Bond fund84,811 — (808)84,003 
     Commercial paper18,935 — (4)18,931 
     Corporate bonds8,077 1 (35)8,043 
     Corporate equity securities5,775 — (4,903)872 
     Municipal bonds1,027 — (6)1,021 
US government securities4,702 — (19)4,683 
     Warrants— 22 — 22 
$152,299 $34 $(5,786)$146,547 
      Viking common stock24,680 
Total short-term investments$171,227 
December 31, 2022
     Bank deposits$5,012 $2 $(34)$4,980 
     Bond fund81,815 — (1050)80,765 
     Commercial paper7,211 3 — 7,214 
     Corporate bonds6,701 13 (58)6,656 
     Corporate equity securities5,807 262 (4,239)1,830 
     U.S. government securities2,232 — (70)2,162 
     Warrants— 135 — 135 
$108,778 $415 $(5,451)$103,742 
     Viking common stock63,122 
Total short-term investments$166,864 

During the nine months ended September 30, 2023, we sold 4.5 million shares of Viking common stock and recognized a realized gain of $37.2 million in total. During the three months ended September 30, 2023, there were no sales of Viking common stock.

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, 2023.
The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):
September 30, 2023
Amortized CostFair Value
Within one year$71,095 $71,070 
After one year through five years6,966 6,927 
Total$78,061 $77,997 

Our investment policy is capital preservation and we only invest in U.S.-dollar denominated investments. We held a total of 48 investments which were in an unrealized loss position with a total of $0.1 million unrealized losses as of September 30, 2023. 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, 2023.
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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, 2023, we considered the current and expected future economic and market conditions and concluded an increase of $0.1 million and an increase of $0.1 million of allowance for credit losses, respectively.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using 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 recorded against inventory for the three and nine months ended September 30, 2023 and 2022. In addition to finished goods, as of September 30, 2023 inventory consists of Captisol prepayments of $4.7 million, and as of December 31, 2022 inventory consists of Captisol prepayments of $5.9 million.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets consist of the following (in thousands):
September 30,December 31,
20232022
Indefinite-lived intangible assets
     Goodwill$103,770 $105,673 
Definite lived intangible assets
     Complete technology49,810 55,211 
          Less: accumulated amortization(20,176)(22,560)
     Trade name2,642 2,642 
          Less: accumulated amortization(1,677)(1,577)
     Customer relationships29,600 29,600 
          Less: accumulated amortization(18,788)(17,670)
     Contractual relationships360,000 362,000 
          Less: accumulated amortization(86,568)(65,191)
Total goodwill and other identifiable intangible assets, net$418,613 $448,128 

Commercial License Rights
Commercial license rights consist of the following (in thousands):
September 30, 2023December 31, 2022
Gross
Adjustments(1)
NetGross
Adjustments(2)
Net
Elutia and CorMatrix$17,696 $(11,881)$5,815 $17,696 $(9,538)$8,158 
Selexis and Dianomi10,602 (9,815)787 10,602 (8,578)2,024 
    Total$28,298 $(21,696)$6,602 $28,298 $(18,116)$10,182 
(1) Amounts represent accumulated amortization to principal of $11.1 million, credit loss adjustments of $9.7 million and impairment of $0.9 million as of September 30, 2023.
(2) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of December 31, 2022.

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 (Aziyo changed its corporate name to Elutia Inc. ("Elutia") in September 2023) 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 2022 Annual Report.
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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, 2023, we further considered the current and expected future economic and market conditions and recorded a $3.2 million credit loss adjustment to Elutia commercial license rights based on the assessment of current company performance and nonpayment by Elutia in recent quarters. Management is in process of modifying the payment terms with Elutia and has placed the loan on the non-accrual method during the three months ended September 30, 2023, instead of the effective interest method until we are able to reliably estimate future cash flows. During the three months ended September 30, 2023 we did not recognized revenue related to the Elutia commercial license right. During the nine months ended September 30, 2023 we recognized $0.8 million of revenue related to the Elutia commercial license right.
In addition, we recorded a $0.9 million impairment loss for Selexis commercial license rights during the three and nine months ended September 30, 2023 as a result of recently reduced programs.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30,December 31,
20232022
Compensation$2,890 $6,201 
Subcontractor1,966 1,756 
Professional fees3,229 662 
Customer deposit621 621 
Supplier303 634 
Royalties owed to third parties— 12 
Amounts owed to former licensees45 3,989 
Other1,581 1,806 
     Total accrued liabilities$10,635 $15,681 
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 endedNine months ended
September 30,September 30,
2023
2022(a)
2023
2022(a)
SBC - Research and development expenses$1,639 $3,277 $5,362 $7,920 
SBC - General and administrative expenses5,245 5,830 14,660 15,297 
$6,884 $9,107 $20,022 $23,217 
(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.
The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

Three months endedNine months ended
September 30,September 30,
2023202220232022
Risk-free interest rate4.3%2.8%4.1%2.9%
Dividend yield————
Expected volatility44.7%50.0%51.5%50.0%
Expected term (years)5.24.95.34.8
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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 Income (Loss) Per Share
Basic net income (loss) 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. Although we paid off the 2023 Notes in May 2023, it would have a dilutive impact when the average market price of our common stock exceeds the maximum conversion price during the nine months ended September 30, 2023. It was our intent and policy to settle conversions through combination settlement, which involved 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 6, Debt and Note 8, Stockholders’ Equity.
In accordance with ASC 260, Earnings per Share, if a company had a discontinuing operation, the company uses income from continuing operations, adjusted for preferred dividends and similar adjustments, as its control number to determine whether potential common shares are dilutive. The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share (in thousands):
Three months endedNine months ended
September 30,September 30,
2023202220232022
Weighted average shares outstanding:17,380 16,888 17,241 16,860 
Dilutive potential common shares:
     Restricted stock— 65 82 54 
     Stock options— 179 302 214 
2023 convertible senior notes— — 159 — 
Shares used to compute diluted income per share17,380 17,132 17,784 17,128 
Potentially dilutive shares excluded from calculation due to anti-dilutive effect4,762 6,706 4,663 6,503 

For the three months ended September 30, 2023, due to the net loss for the period, all of the 0.3 million weighted average equity awards were anti-dilutive.
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2. Sale of Pelican Business and Investment in Primrose Bio
On September 18, 2023, we entered into a merger agreement, pursuant to which our subsidiary, Pelican Technology Holdings, Inc. (“Pelican”) became a wholly owned subsidiary of Primrose Bio. Primrose Bio is a private company focused on synthetic biology. Pelican has developed technology related to PET (protein expression technology) and PelicCRM197 (vaccine material), and has property and equipment, as well as leased property in San Diego, CA. As part of the transaction, we received 2,146,957 common shares, 4,278,293 preferred shares and 474,746 restricted shares of Primrose Bio. Simultaneous with the merger, we entered into a Purchase and Sale Agreement with Primrose Bio and contributed $15.0 million in exchange for 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. In addition, starting January 1, 2025, we will receive 25% of sales revenue of PeliCRM197 above $3.0 million and 35% of all PeliCRM197 licensing revenue in perpetuity.
We retained contractual relationships utilizing the Pelican Expression Technology, including the commercial royalty rights to Jazz’s RYLAZE, Merck’s VAXNEUVANCE and V116 vaccines, Alvogen’s Teriparatide, Serum Institute of India’s vaccine programs, including Pneumosil and MenFive vaccines, among others.
We determined that the sale of Pelican meets the definition of a deconsolidation of a business. Net assets sold together with allocated goodwill and cash consideration paid were as follows (in thousands):

Property and equipment, net$8,250 
Intangible assets19,895 
Other assets717 
Operating lease right-of-use assets8,693 
Financing lease right-of-use assets20 
Accrued liabilities(630)
Deferred revenue(495)
Long-term operating lease liabilities(8,445)
Other liabilities(74)
Net assets sold27,931 
Allocated goodwill4,132 
Cash consideration paid15,000 
$47,063 

Fair value of the consideration received includes the following (in thousands):
Equity method investment$13,706 
Equity securities32,278 
Derivative assets3,200 
$49,184 

Goodwill allocated to the selling business based on the relative fair value of the Pelican business and Ligand that was written off was $4.1 million, resulting in a $2.1 million gain on sale of Pelican recorded to income (loss) from operations for the three and nine months ended September 30, 2023.
Transaction costs of $1.2 million were allocated to the equity method investment and equity securities based on the relative fair value.
As described above, we will receive 25% of sales revenue of PeliCRM197 above $3.0 million and 35% of all PeliCRM197 licensing revenue in perpetuity. The considerations were recognized as contingent consideration under the loss recovery model and they will be measured based on the gain contingency model under ASC 450, Contingencies, and thus, will be recognized as the underlying contingencies are resolved.
In addition, we will receive 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. The considerations were recognized as derivative assets with a fair value of $3.2 million, at the disposition date, which was included under other long-term asset in our condensed consolidated balance sheet. They are recognized as derivative assets under ASC 815, Derivatives and Hedging, as they have two underlyings
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(development and commercial milestones) and (i) the commercial milestones are dependent on the development milestones and (ii) the commercial milestone underlying is not determined to be predominate. The derivative assets are recorded at fair value as of September 18, 2023, and will be marketed to fair value at each reporting period going forward.
Investment in Primrose Bio
We received 2,146,957 common shares, 4,278,293 preferred shares and 474,746 restricted shares of Primrose Bio in consideration for the sale of Pelican. We apply the equity method to investments in common stock and to other investments in entities that have risk and reward characteristics that are substantially similar to an investment in the investee’s common stock. Since the preferred stock and restricted share investment in Primrose Bio has a substantive liquidation preference, it is not substantially similar to the common stock investment and is therefore recorded as an equity security under ASC 321, Investments - Equity Securities.
We account for our common stock investment in Primrose Bio under the equity method as we have the ability to exercise significant influence over its operating and financial results. In applying the equity method, we record the investment at fair value. Ligand's proportionate share of net loss of Primrose Bio is recorded in our condensed consolidated statements of operations for the three and nine months ended September 30, 2023. Our equity method investments are reviewed for indicators of impairment at each reporting period and are written down to fair value if there is evidence of a loss in value that is other-than-temporary. Our share of the net losses of Primrose Bio since the divestiture date for the quarter ended September 30, 2023 was $0.07 million; which reduced Ligand's equity method investment accordingly.
We determined that the Series A preferred stock investment in Primrose Bio did not have a readily determinable fair value and therefore elected the measurement alternative in ASC 321 to subsequently record the investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. When fair value becomes determinable, from observable price changes in orderly transactions, our investment will be marked to fair value. There have been no observable price changes or impairments identified since September 18, 2023.


3. Acquisition
Novan
On September 27, 2023, we closed the transaction to acquire certain assets of Novan, Inc. (“Novan”) pursuant to the agreement we entered into with Novan on July 17, 2023 for $15.0 million in cash (which agreement contemplated Novan filing for bankruptcy relief) and provide up to $15.0 million in debtor-in-possession (“DIP”) financing inclusive of a $3.0 million bridge loan funded on the same day. Novan filed for Chapter 11 reorganization on July 17, 2023. On September 27, 2023, the bankruptcy court approved our $12.2 million bid to purchase from Novan its lead product candidate berdazimer gel, 10.3%, all other assets related to the NITRICIL technology platform and the rights to one commercial stage asset. The remaining commercial assets of Novan will be sold to other parties. The approved $12.2 million bid was credited to the $15.0 million DIP financing, with the balance of $2.8 million and accrued interest repaid to us.
The acquisition was accounted for as business combination. We recorded $3.3 million of acquisition-related costs for legal, due diligence and other costs in connection with the acquisition within operating expenses in our condensed consolidated statement of operations for the nine months ended September 30, 2023.

The following table sets forth an allocation of the preliminary purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):

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Restricted Cash$583 
Property and equipment, net13,054 
Right-of-use asset3,683 
Other assets364 
Intangible assets acquired 17,600 
Goodwill2,229 
Deferred revenue(2,342)
Lease liabilities(3,683)
Other liabilities(20,500)
Cash paid for Novan, including restricted cash received10,988 
DIP loan fees and interest1,162 
Total consideration $12,150 

Acquired intangible assets of $17.6 million related to core technology. The fair value of the core technology was based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the licensing of the related technologies. These projected cash flows were discounted to present value using a discount rate of 29%. The fair value of the core technology is being amortized on a straight-line basis over the estimated useful life of 15 years.
Acquired other liabilities of $20.5 million related to a royalty and milestone payments purchase agreement, entered by Novan in 2019 and assumed as part of the acquisition, which previously provided Novan $25.0 million of funding used primarily in the clinical development of berdazimer gel, 10.3%. Pursuant to the purchase agreement, Novan will pay ongoing quarterly payments, calculated based on an applicable percentage per product of any upfront fees, milestone payments, royalty payments or equivalent payments received by Novan pursuant to any out-license agreement, net of any upfront fees, milestone payments, royalty payments or equivalent payments paid by Novan to third parties pursuant to any agreements under which Novan has in-licensed intellectual property with respect to such products. If Novan decides to commercialize any product on its own following regulatory approval, as opposed to commercializing through an out-license agreement or other third-party arrangement, Novan will be obligated to pay a low single digits royalty on net sales of such products. This contract liability was fair valued based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, and collaboration revenue streams derived from the related programs mentioned above, by applying a discount rate of 9.6% (our estimated rate of borrowing).
The estimated fair values of assets acquired, liabilities assumed and purchased intangibles are provisional. Specifically, the provisional amounts include estimated projections on the completion of the clinical development process and projected revenue related to commercializing products based on the underlying technology. The accounting for these amounts falls within the measurement period and, therefore, we may adjust these provisional amounts to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

4. Spin-off of OmniAb
On March 23, 2022, we entered into the Separation Agreement to separate our OmniAb Business and the Merger Agreement, pursuant to which APAC would combine with OmniAb, and acquire Ligand's OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). 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 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 was 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 on November 1, 2022, the historical financial results of OmniAb have been reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution. Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. Immediately following the Distribution, Merger Sub merged with and into OmniAb, with OmniAb continuing as the
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surviving company in the Merger and as a wholly owned subsidiary of New OmniAb. The entire transaction was completed on November 1, 2022, and following the Merger, New OmniAb is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.” 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 November 1, 2022.
Discontinued operations
In connection with the Merger, the Company determined its antibody discovery business qualified for discontinued operations accounting treatment in accordance with ASC 205-20. We recognized a $1.7 million tax provision adjustment related to deferred taxes during the nine months ended September 30, 2023 that was attributable to the discontinued operations. There was no revenue or expenses attributable to the discontinued operations during the three months ended September 30, 2023. The following table summarizes revenue and expenses of the discontinued operations for the three and nine months ended September 30, 2022 (in thousands):
Three months ended September 30, 2022Nine months ended September 30, 2022
Revenues:
Royalties$582 $984 
Contract revenue6,285 22,353 
Total revenues6,867 23,337 
Operating costs and expenses:
Amortization of intangibles3,250 9,757 
Research and development12,797 34,576 
General and administrative2,525 11,279 
Total operating costs and expenses18,572 55,612 
Loss from operations(11,705)(32,275)
Other income (expense):
Other income (expense), net208 485 
Total other income (expense), net208 485 
Loss before income tax(11,497)(31,790)
Income tax (expense) benefit2,256 6,599 
Net loss$(9,241)$(25,191)

The following table summarizes the significant non-cash items, capital expenditures of the discontinued operations, and financing activities that are included in the consolidated statements of cash flows for the nine months ended September 30, 2022 (in thousands):
Nine months ended
September 30, 2022
Operating activities:
Change in fair value of contingent consideration$(486)
Depreciation and amortization12,070 
Stock-based compensation expense7,923 
Investing activities:
Purchase of property, plant and equipment(12,415)
Payments to CVR Holders(960)
Financing activities:
Payments to CVR Holders$(1,545)
Supplemental cash flow disclosures:
Purchases of property, plant and equipment included in accounts payable and accrued expenses$3,458 


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5. 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, 2023December 31, 2022
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Short-term investments, excluding Viking(1)
$5,555 $140,970 $22 $146,547 $3,992 $99,615 $135 $103,742 
Investment in Viking common stock24,680 — — 24,680 63,122 — — 63,122 
Derivative assets(3)
— — 3,281 3,281 — — — — 
     Total assets$30,235 $140,970 $3,303 $174,508 $67,114 $99,615 $135 $166,864 
Liabilities:
CyDex contingent liabilities$— $— $164 $164 $— $— $84 $84 
Metabasis contingent liabilities(2)
— 3,431 — 3,431 — 3,429 — 3,429 
Amounts owed to former licensor— — — — 44 — — 44 
     Total liabilities$— $3,431 $164 $3,595 $44 $3,429 $84 $3,557 
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 bond funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black-Scholes value estimated by management on the last day of the period.
2.In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial. During the three and nine months ended September 30, 2023, we adjusted the balance of the Metabasis CVR liability by decreasing $0.1 million and increasing $0.002 million to mark to market, respectively.
3.In connection with the Purchase and Sale Agreement with Primrose Bio, we will receive 50.0% of potential development milestones and certain commercial milestones from two contracts previously entered into by Primordial Genetics. The considerations were recognized as derivative assets included under other long-term asset in our condensed consolidated balance sheet. They are recognized as derivative assets under ASC 815, Derivatives and Hedging, as they have two underlyings (development and commercial milestones) and (i) the commercial milestones are dependent on the development milestones and (ii) the commercial milestone underlying is not determined to be predominate. The fair value of the derivative assets was determined using a discounted cash flow approach using a discount rate inline with the stages of the underlying contracts.
A reconciliation of the level 3 liabilities as of September 30, 2023 is as follows (in thousands):
Fair value of level 3 financial instruments as of December 31, 2022
$84 
Payments to CVR holders and other contingent payments(50)
Fair value adjustments to contingent liabilities