LIGAND PHARMACEUTICALS INC (LGND) FY 2024 MD&A

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 Transactions

On March 23, 2022, we entered into (i) an Agreement and Plan of Merger (the “OmniAb Merger Agreement”), among Ligand, OmniAb, Avista Public Acquisition Corp. II, a Cayman Islands exempted company (“APAC”), and Orwell Merger Sub, Inc., a wholly owned subsidiary of APAC (“Merger Sub”), and (ii) a Separation and Distribution Agreement (the “OmniAb Separation and Distribution Agreement”), among Ligand, OmniAb and APAC. Prior to the effective time of the OmniAb Merger (defined below), APAC migrated to and domesticated as a Delaware corporation (“New OmniAb”) in accordance with the terms and conditions of the OmniAb Merger Agreement. Pursuant to the OmniAb Separation and Distribution Agreement, we, prior to the effective time of the OmniAb Merger (i) transferred our then-antibody discovery business (the “OmniAb Business”), including certain of our related subsidiaries, to OmniAb (the “OmniAb Separation”) and (ii) in connection therewith, distributed 100% of OmniAb’s common stock held by Ligand to Ligand stockholders (the “OmniAb Distribution”). We also contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Following the OmniAb Separation and the OmniAb Distribution, on November 1, 2022, in accordance with and subject to the terms and conditions of the OmniAb Merger Agreement, Merger Sub merged with and into OmniAb, with OmniAb continuing as the surviving company and wholly-owned subsidiary of New OmniAb on and after the effective time of the merger (the “OmniAb Merger”). In addition, New OmniAb changed its corporate name to “OmniAb, Inc.” concurrently upon the effectiveness of the OmniAb Merger.

After the OmniAb 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 OmniAb 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 for twelve months ended December 31, 2024 and 2023. A comparison of our results of operations for twelve months ended December 31, 2024 and 2023 can be found under “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

•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.”

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Results of Operations

Revenue and Other Income

FY 2024 vs. FY 2023

Total revenue and other income increased by $35.8 million, or 27%, to $167.1 million in 2024 compared to $131.3 million in 2023 primarily due to the $23.8 million increase in royalties. The increase in royalties in 2024 was primarily due to income from Qarziba financial royalty asset acquired in the third quarter of 2024 and an increase in sales of Travere Therapeutics’ Filspari. Captisol sales increased by $2.5 million to $30.9 million in 2024 compared to $28.4 million in 2023. The higher Captisol sales were due to the timing of customer orders. Contract revenue and other revenue increased by $9.5 million primarily due to milestone payments earned from Verona Pharma upon the approval and commercial launch of Ohtuvayre.

Revenue from intangible royalty assets 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%. 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 and Vaxnuevance royalty rates are in the low single digits. Filspari has a fixed royalty rate of 9%.

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

(1) We receive tiered profit sharing of 25% on quarterly profits less than $3.75 million, 35% on quarterly profits greater than $3.75 million but less than $7.5 million and 40% on quarterly profits greater than $7.5 million.

Operating Costs and Expense

FY 2024 vs. FY 2023

Total operating costs and expenses for 2024 increased by $68.2 million or 56% compared with 2023.

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Cost of Captisol increased year over year in 2024 primarily due to higher sales of Captisol during 2024 compared to 2023.

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 $3.1 million in 2024 compared to 2023, with the decrease primarily attributable to lower employee related expenses and lab supplies resulting from the Pelican spin-off in September 2023. The decrease was partially offset by additional costs associated with incubating the Pelthos business.

General and administrative expenses increased by $25.9 million in 2024 compared to 2023, with the increase primarily driven by higher stock-based compensation expenses for investments made in building out our business development and investment team. Additionally, a one-time, non-cash stock award modification expense related to the departure of Ligand's former Chief Operating Officer and costs associated with incubating the Pelthos Therapeutics business contributed to the increase.

Financial royalty asset impairment was $30.6 million for 2024 primarily due to Takeda's decision to discontinue the soticlestat program.

Fair value adjustment to partner program derivatives was $15.1 million for 2024 primarily due to certain Agenus partners discontinuing development of their partnered programs. These programs may be relicensed at a later date, and Ligand would retain its economic interest upon any relicense activity.

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 million consideration paid.

Other income (expense)

FY 2024 vs. FY 2023

The increase in the gain (loss) from short-term investments of $28.7 million is primarily driven by the realized gain of $60.0 million from the sale of 0.7 million shares of Viking common stock in 2024, compared to the $44.4 million realized gain from the sales of 5.0 million shares of Viking common shares in 2023. In addition, the increase was driven by changes in the fair value of our ownership in Viking common stock (an unrealized gain of $9.0 million in 2024 compared to an unrealized gain of $2.6 million in 2023) and a $7.1 million net gain on the arrangements we executed and exercised in 2024 to hedge against the fluctuation in Viking's share price.

Interest income consists primarily of interest earned on our short-term investments and remained relatively steady in 2024 compared to 2023.

Interest expense in 2024 consists primarily of a royalty and milestone payments purchase agreement, entered by Novan in 2019, and assumed as part of the Novan acquisition in September 2023. Interest expense in 2023 consists primarily of 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. See additional information in “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note (10), Debt.”

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Other non-operating expense, net, primarily consists of mark-to-market adjustments on derivatives (other than Viking Share Collar and Put and the partner program derivatives) and CVRs and losses on equity method investments. Other non-operating expense, net, increased by $53.2 million in 2024 compared to 2023, primarily due to the $25.8 million loss from revaluation of Primrose investments, the $12.8 million equity method loss from Primrose Bio, the $12.1 million loss from change in fair value of derivative assets, and the $3.0 million impairment loss related to Neuritek warrants in 2024.

Income tax benefit (expense)

FY 2024 vs. FY 2023

Our effective tax rate for 2024 and 2023 was 260% and 15%, 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 2024, the variance from the U.S. federal statutory rate of 21% was primarily attributable to increase in foreign includable income and non-deductible stock based compensation. In 2023, the variance from the U.S. federal statutory rate of 21% was primarily due the decrease in unrecognized tax benefits. The items below also had an impact on the difference between our statutory U.S. rate.

2024

•$5.6 million (224.2%) increase from foreign includable income

•$3.9 million (155.6%) increase from Section 162(m) limitation

•$3.2 million (128.3%) decrease from foreign tax credit

•$1.6 million (65.0%) decrease from valuation allowance

•$1.1 million (44.3%) increase from foreign rate differential

•$0.8 million (33.0%) decrease from the foreign-derived intangible income deduction

•$0.6 million (23.9%) increase from the return to provision

•$0.2 million (9.1%) decrease from research & development tax credit

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 compensation

•$1.0 million (1.6%) decrease from the foreign-derived intangible income deduction

•$0.8 million (1.3%) decrease from Section 162(m) limitation

Liquidity and Capital Resources

At December 31, 2024, we had approximately $256.2 million in cash, cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments decreased by $85.9 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

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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 1.0 million shares of common stock in Viking.

On September 30, 2022, we entered into an At-The-Market Equity Offering Sales Agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Agent”), under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $100 million in “at the market” offerings through the Agent (the “ATM Offering”). The shelf registration statement relating to such shares included a prospectus covering the offering, issuance and sale of up to $100 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. During 2024, we issued 360,325 shares of common stock in the ATM Offering, generating net proceeds of $37.4 million, net of commissions and other transaction costs.

We are obligated to make payments under 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 (9), Leases.”

We also have commitments under our supply agreement with Hovione for Captisol purchases. The total purchase obligation as of December 31, 2024 was $21.6 million, of which $9.0 million is expected to be paid within a year and the remaining amount is expected to be paid between 1 to 3 years.

In April 2023, our Board approved a stock repurchase program authorizing, but not requiring, the repurchase of up to $50 million of our common stock from time to time through April 2026. We expect to acquire shares, if at all, primarily through open-market transactions in accordance with all applicable requirements of Rule 10b-18 of the Exchange Act. 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. Authorization to repurchase $50 million of our common stock remained available as of December 31, 2024. 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 million. 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.

On July 8, 2024, we entered into the first Amendment to the Revolving Credit Facility which amends the Credit Agreement to, among other things, increase the aggregate revolving credit facility amount from $75 million to $125 million.

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, 2024, we had $124.4 million in available borrowing under the Revolving Credit Facility, after utilizing $0.6 million for letter of credit. The maturity date of the Revolving Credit Facility, as amended, is October 12, 2026. As of December 31, 2024, there were no events of default or violation of any covenants under our financing obligations.

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, 2024, we had $3.7 million in fair value of contingent consideration liabilities associated with the acquisitions to be settled in future periods.

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Cash Flow Summary

In 2024, we generated cash from operations primarily from revenue and other operating income. We used cash for investing activities primarily for the Apeiron Acquisition and Agenus Transaction. During the year, we generated cash from financing activities, primarily including net proceeds from the sales of shares of common stock in the ATM Offering, and net proceeds from stock options exercises and ESPP.

In 2023, we generated cash from operations primarily from revenue and other operating income. We used cash for investing activities primarily for the purchases of financial royalty assets, the Novan acquisition and our 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 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 revenue and other operating 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.

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.

Impairment Assessment of Finite-lived Intangibles

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.

Financial Royalty Assets - Recognition of Income

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Financial royalty assets represent a portfolio of future milestone and royalty payment rights acquired that are passive in nature (i.e., we do not own the intellectual property or have the right to commercialize the underlying products).

Our financial royalty assets are classified similar to loans receivable and are measured at amortized cost using the prospective effective interest method described in ASC 835-30 Imputation of Interest. The effective interest rate is calculated by forecasting the expected cash flows to be received over the life of the asset relative to the initial invested amount. The effective interest rate is recalculated in each reporting period as the difference between expected cash flows and actual cash flows are realized and as there are changes to expected future cash flows.

The gross carrying value of a financial royalty asset is made up of the opening balance, or net purchase price for a new financial royalty asset, which is increased by accrued interest income (except for assets under the non-accrual method) and decreased by cash receipts in the period to arrive at the ending balance.

We recognize income from financial royalty assets when there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Income is calculated by multiplying the carrying value of the financial royalty asset by the periodic effective interest rate. We account for financial royalty assets related to developmental pipeline or recently commercialized products on a non-accrual basis. Developmental pipeline products are non-commercialized, non-approved products that require FDA or other regulatory approval, and thus have uncertain cash flows. Newly commercialized products typically do not have an established reliable sales pattern, and thus have uncertain cash flows.

Valuation of Partnered Programs Derivative Assets Acquired in Agenus Transaction

Partnered Programs acquired in the transaction with Agenus are accounted for as derivative assets under ASC 815, Derivatives and Hedging, and were recorded at fair value at acquisition. These derivative assets are marked to fair value at each subsequent reporting period. To determine the fair value of the derivative assets, the Company applied a discounted cash flow model using observable and unobservable market data for inputs, including the estimated amount and timing of the expected cash flows and the probability of success of underlying clinical programs which considers the level of risk appropriate for a respective program stage.

Recent Accounting Pronouncements

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.”