Ligand Pharmaceuticals Inc.

10/30/2026 | Press release | Distributed by Public on 10/30/2026 14:47

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Part II, Item 1A. Risk Factors. This outlook represents our current judgment on the future direction of our business. These statements include those related to our future results of operations and financial position, Captisol-related revenues and Kyprolis and other product royalty revenues and milestones under license agreements, product development, and product regulatory filings and approvals, and the timing thereof. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected Kyprolis, Captisol and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market. In addition, ongoing or future arbitration, litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
We use our trademarks, trade names and services marks in this report as well as trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this report appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trade marks and trade names.
References to "Ligand Pharmaceuticals Incorporated," "Ligand," the "Company," "we" or "our" include Ligand Pharmaceuticals Incorporated and our wholly-owned subsidiaries.
Overview
We are a biopharmaceutical royalty company focused on deploying capital and licensing technologies to acquire and create diversified royalty streams from high-value medicines. Our primary business is investing in and structuring royalty interests in mid- to late-stage development and commercial biopharmaceutical products, allowing us to generate long-duration, non-dilutive cash flows supported by a lean corporate cost structure. Capital deployment and technology licensing are the primary drivers of our long-term growth.
We partner capital through a range of transaction structures-including royalty purchases, development-stage financing arrangements, and acquisitions of companies or assets with embedded royalty rights-designed to create cash flowing royalties and produce attractive risk-adjusted returns. Our goal is to provide investors with exposure to biopharmaceutical innovation through a diversified portfolio of royalty interests while mitigating the binary risk and capital intensity traditionally associated with drug development.
In addition to our royalty investment activities, we operate two infrastructure-light, royalty-generating platform technologies, Captisol® and NITRICIL®. These technologies exemplify our platform technology investment criteria: infrastructure-light, scalable intellectual property with existing royalty streams and the potential to generate incremental royalties through partner-driven development and commercialization.
Our revenue is generated primarily from royalties on sales of products commercialized by our partners, supplemented by Captisol material sales and contract revenue from license fees and milestone payments. We partner with leading biopharmaceutical companies to leverage their capabilities in late-stage development, regulatory execution, and commercialization, while we focus on disciplined capital deployment, portfolio construction, and risk management. This also allows us to leverage our partner's asset infrastructure in sales and marketing, manufacturing and R&D to avoid infrastructure ourselves.
Third Quarter Corporate Highlights
On July 14, 2026, Ligand completed the acquisition of XOMA Royalty, a biotechnology royalty aggregator. The acquisition strengthens Ligand's royalty portfolio by adding seven commercial products, including Roche's VABYSMO® (faricimab-svoa), Servier and Ipsen's OJEMDA™ (tovorafenib), and Zevra Therapeutics' MIPLYFFA® (arimoclomol). Additionally, the acquisition adds 14 late-stage development programs, featuring Takeda's mezagitamab and certain assets from Takeda's externalized asset portfolio, including osavampator, volixibat, and OHB-607, along with more than 100 additional assets in various stages of development to Ligand's portfolio. As a result, Ligand's portfolio has more than doubled in size, now comprising over 200 commercial, clinical, and preclinical stage royalty assets.
On September 22, 2026, Ligand announced the acquisition of a milestone and royalty interest in Santen Pharmaceutical's Ryjunea from Sydnexis for a $23 million upfront payment. Under the terms of the agreement, Ligand acquired a 100% interest in certain payments and related rights under Sydnexis's existing license agreement with Santen. The acquired payment rights include a tiered low-double-digit to high-teens royalty on Ryjunea net sales in Europe, the Middle East and Africa, as well as certain milestone payments.
On September 24, 2026, Ligand announced it entered into a financing agreement with AvenCell Therapeutics, Inc., a clinical-stage cell therapy company developing controllable, allogeneic CAR-T therapies for patients with cancer, for up to $47 million. The investment is expected to help advance AvenCell's pipeline, including AVC-201 for the treatment of relapsed/refractory acute myeloid leukemia (AML) and AVC-203 for the treatment of B-cell malignancies. Under the terms of the agreement, Ligand has committed up to $41 million in exchange for a mid single-digit to low double-digit royalty on worldwide annual net sales of all current and future AvenCell pipeline assets, with the applicable rate determined based on the total amount ultimately funded. The capital will be funded in four tranches, with the first tranche payable at closing, and the remaining three tranches payable upon achievement of certain predetermined clinical milestones and other specified financing conditions. Ligand has also committed up to $6 million in AvenCell's concomitant Series C financing.
Key Portfolio Developments
Qtorin rapamycin
•On August 4, 2026, Palvella announced that it plans to initiate a Phase 3 trial of Qtorin rapamycin for the treatment of cutaneous venous malformations in the fourth quarter of 2026. Palvella is planning a resubmission to the FDA for Breakthrough Therapy Designation incorporating TOIVA patient interview transcripts and new 24-week data.
•On October 28, 2026, Palvella announced the FDA accepted for filing and granted Priority Review of the NDA for Qtorin rapamycin for the treatment of microcystic lymphatic malformations ("microcystic LMs"). The FDA has assigned a Prescription Drug User Fee Act (PDUFA) target action date of February 28, 2027. Palvella is preparing for a potential U.S. commercial launch in the first half of 2027, subject to FDA approval.
AVIM Therapy/VIRTUE SAB
•On August 10, 2026, Orchestra BioMed highlighted several recent business updates:
◦The FDA granted AVIM Therapy a second FDA Breakthrough Device Designation ("BDD") specific to patients with uncontrolled hypertension despite anti-hypertensive medication who are indicated for a pacemaker.
◦The Sirolimus AngioInfusion ("Virtue SAB") pivotal trial is advancing with further site activations and patient enrollments.
•On October 1, 2026, Orchestra BioMed announced it surpassed full enrollment in the BACKBEAT global pivotal trial of AVIM Therapy with 330 patients randomized, exceeding its previously announced target of 316 randomized patients.
Zelsuvmi
•On August 13, 2026, Pelthos announced several recent business updates:
◦11,925 Zelsuvmi units were dispensed by 4,571 unique prescribers during the second quarter of 2026, representing a 48% quarter-over-quarter increase.
◦More than 25,000 patients have now been prescribed Zelsuvmi since it was commercially launched in July 2025.
◦Pelthos expects to launch Xepi in the first quarter of 2027.
Lasofoxifene
•On August 14, 2026, LeonaBio announced it is on track to complete enrollment of approximately 600 patients in the Phase 3 Elaine-3 clinical trial evaluating lasofoxifene in ER-positive (ER+), HER2-negative, ESR1-mutated metastatic breast cancer in the fourth quarter of 2026 with topline data expected in the second half of 2027.
Ojemda
•On September 16, 2026, Ipsen announced the Japanese Ministry of Health, Labour and Welfare ("MHLW") approved Ojemda for low-grade glioma harboring a BRAF mutation or fusion gene.
Volixibat
•On August 5, 2026, Mirum Pharmaceuticals announced volixibat was granted Breakthrough Therapy Designation for cholestatic pruritus due to primary sclerosing cholangitis (PSC). Additionally, a pre-NDA meeting was held for volixibat in cholestatic pruritus due to PSC and additional discussions are planned before potential NDA submission.
•On August 5, 2026, Mirum Pharmaceuticals announced enrollment was completed in the VANTAGE Phase 2b study of volixibat in cholestatic pruritus due to primary biliary cholangitis (PBC) with topline results expected in the first quarter of 2027.
Ersodetug
•On September 9, 2026, Rezolute provided an update on the FDA's review of data from its Phase 3 sunRIZE study of ersodetug for hypoglycemia due to congenital hyperinsulinism ("HI"). The study's open-label extension is ongoing, with high participation and several indicators of improved glycemic control, including a notable reduction in the use of background standard-of-care therapies.
•On October 5, 2026, Rezolute announced that following a preliminary review of detailed data from the Phase 3 sunRIZE study of ersodetug for the treatment of hypoglycemia due to congenital HI, the FDA recommended a pre-BLA meeting with Rezolute as a precursor to submitting a BLA.
•On October 14, 2026, Rezolute announced completion of enrollment in the Phase 3 study of ersodetug in tumor HI and topline data is expected mid-December 2026.
Soticlestat
•On August 13, 2026, Ovid announced a newly formed portfolio company with funds advised by Perceptive Advisors acquired global rights to soticlestat. Ovid secured equity in the company and the potential to receive regulatory and sales milestone payments and royalties upon success. Ligand is entitled to royalties and a share of milestones received by Ovid.
IV ganaxolone
•On October 26, 2026, Immedica announced that it will advance the development of intravenous (IV) ganaxolone for the treatment of refractory status epilepticus (RSE) and plans to initiate a new phase 3 clinical study in 2027. Ligand is entitled to royalties, milestones and revenue from Captisol material sales.
Results of Operations
Revenue and Income
(Dollars in thousands) Q3 2026 Q3 2025 Change % Change YTD 2026 YTD 2025 Change % Change
Revenue from intangible royalty assets $ 47,427 $ 40,161 $ 7,266 18 % $ 117,720 $ 91,832 $ 25,888 28 %
Income from financial royalty assets 22,857 6,425 16,432 256 % 43,554 18,640 24,914 134 %
Royalties 70,284 46,586 23,698 51 % 161,274 110,472 50,802 46 %
Captisol 7,946 10,672 (2,726) (26) % 24,578 32,419 (7,841) (24) %
Contract revenue and income 516 58,203 (57,687) (99) % 8,309 65,530 (57,221) (87) %
Total revenue and income $ 78,746 $ 115,461 $ (36,715) (32) % $ 194,161 $ 208,421 $ (14,260) (7) %
Q3 2026 vs. Q3 2025
Total revenue and income decreased by $36.7 million, or 32%, to $78.7 million in Q3 2026 compared to $115.5 million in Q3 2025. Royalties increased by $23.7 million, or 51%, to $70.3 million in Q3 2026 compared to $46.6 million in Q3 2025, primarily attributable to royalties earned on the newly acquired XOMA assets, Filspari and Ohtuvayre. Captisol sales decreased by $2.7 million, or 26%, to $7.9 million in Q3 2026 compared to $10.7 million in Q3 2025, primarily attributable to the timing of customer orders. Contract revenue and income decreased by $57.7 million, or 99%, to $0.5 million in Q3 2026 compared to $58.2 million in Q3 2025. The decrease was primarily attributable to the absence of the $53.1 million of income recognized in connection with the divestiture of our Pelthos subsidiary during the prior-year period, which included $24.5 million associated with the out-license of Zelsuvmi and a $28.6 million gain on the sale of the business.
YTD 2026 vs. YTD 2025
Total revenue and income decreased by $14.3 million, or 7%, to $194.2 million in YTD 2026 compared to $208.4 million in YTD 2025. Royalties increased by $50.8 million, or 46%, to $161.3 million in YTD 2026 compared to $110.5 million in YTD 2025, primarily attributable to royalties earned on the newly acquired XOMA assets, Filspari and Ohtuvayre.
Captisol sales decreased by $7.8 million, or 24%, to $24.6 million in YTD 2026 compared to $32.4 million in YTD 2025, primarily attributable to the timing of customer orders. Contract revenue and income decreased by $57.2 million, or 87%, to $8.3 million in YTD 2026 compared to $65.5 million in YTD 2025. The decrease was primarily attributable to the absence of the $53.1 million of income recognized in connection with the divestiture of our Pelthos subsidiary during the prior-year period.
Revenue from intangible royalty assets is based on our partners' product sales and the applicable royalty rates. The following table presents revenue from intangible royalty assets by program (in millions):
(in millions)
Q3 2026 Estimated Partner Product Sales
Effective Royalty Rate
Q3 2026 Royalty Revenue
Q3 2025 Estimated Partner Product Sales
Effective Royalty Rate
Q3 2025 Royalty Revenue
Filspari $ 186.7 9.0 % $ 16.8 $ 101.1 9.0 % $ 9.1
Kyprolis 350.8 3.0 % 10.5 404.4 2.9 % 11.6
Capvaxive 328.0 1.2 % 3.8 244.0 1.3 % 3.2
Ohtuvayre(1)
184.5 2.0 % 3.7 135.8 2.0 % 2.7
Rylaze 100.0 3.5 % 3.5 104.6 3.4 % 3.6
Teriparatide injection(2)
7.0 18.6 % 1.3 7.3 35.6 % 2.6
Vaxneuvance 137.4 0.8 % 1.1 226.0 0.9 % 2.0
Other 105.9 6.3 % 6.7 116.8 4.6 % 5.4
Total $ 1,400.3 $ 47.4 $ 1,340.0 $ 40.2
(in millions)
YTD 2026 Estimated Partner Product Sales
Effective Royalty Rate
YTD 2026 Royalty Revenue
YTD 2025 Estimated Partner Product Sales
Effective Royalty Rate
YTD 2025 Royalty Revenue
Filspari $ 463.3 9.0 % $ 41.7 $ 233.3 9.0 % $ 21.0
Kyprolis 1,045.8 2.3 % 24.3 1,168.4 2.1 % 25.1
Ohtuvayre(1)
523.4 2.1 % 10.8 310.0 2.0 % 6.2
Rylaze 303.2 3.3 % 10.0 299.5 3.2 % 9.5
Capvaxive 647.9 1.3 % 8.1 477.5 1.3 % 6.3
Teriparatide injection(2)
20.4 20.1 % 4.1 21.5 28.4 % 6.1
Vaxneuvance 475.3 0.8 % 4.0 672.5 0.9 % 6.0
Other 344.9 4.3 % 14.7 321.0 3.6 % 11.6
Total $ 3,824.2 $ 117.7 $ 3,503.7 $ 91.8
(1) Our royalty rate on Ohtuvayre is 3%, of which 2% is recognized in revenue from intangible royalty assets and the remaining 1% is accounted for as financial royalty asset.
(2) 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 Expenses
(Dollars in thousands) Q3 2026 Q3 2025 Change % Change YTD 2026 YTD 2025 Change % Change
Cost of Captisol $ 2,650 $ 3,801 $ (1,151) (30) % $ 9,137 $ 11,557 $ (2,420) (21) %
Amortization of intangibles 10,205 8,097 2,108 26 % 26,399 24,612 1,787 7 %
Research and development 2,766 21,019 (18,253) (87) % 19,582 77,671 (58,089) (75) %
General and administrative 72,616 28,446 44,170 155 % 122,575 67,422 55,153 82 %
Fair value adjustments to contingent liabilities 6,267 (456) 6,723 (1474) % 5,775 1,475 4,300 292 %
Fair value adjustments to partner program derivatives - (833) 833 (100) % - - -
N/M(1)
Total operating costs and expenses $ 94,504 $ 60,074 $ 34,430 57 % $ 183,468 $ 182,737 $ 731 - %
% of Revenue 120% 52% 94% 88%
(1) N/M = Not meaningful. Percentage change is not meaningful as no amount was recognized in either nine-month period.
Q3 2026 vs. Q3 2025
Total operating costs and expenses increased by $34.4 million, or 57%, to $94.5 million in Q3 2026 compared to $60.1 million in Q3 2025.
Cost of Captisol decreased by $1.2 million, or 30%, to $2.7 million in Q3 2026 compared to $3.8 million in Q3 2025, primarily attributable to the lower Captisol sales. Amortization of intangibles increased by $2.1 million, or 26%, to $10.2 million in Q3 2026 compared to $8.1 million in Q3 2025, primarily attributable to the addition of intangible assets from the XOMA Acquisition. See Note 2, XOMA Acquisition, for additional information.
Research and development expenses decreased by $18.3 million, or 87%, to $2.8 million in Q3 2026 compared to $21.0 million in Q3 2025. The decrease was primarily attributable to the absence of the $17.8 million charge recognized in the prior-year period related to the research and development funding arrangement associated with the AVIM Therapy royalty rights acquired in the Orchestra transaction.
General and administrative expenses increased by $44.2 million, or 155%, to $72.6 million in Q3 2026 compared to $28.4 million in Q3 2025. The increase was primarily attributable to $14.2 million transaction costs associated with the XOMA Acquisition, $10.8 million of post-combination compensation expense related to the cash settlement of XOMA employee restricted stock units, $7.6 million of severance expenses, and a $6.6 million increase in the allowance for credit losses on financial royalty assets, as well as higher employee-related costs, including increased headcount and share-based compensation, reflecting the Company's continued investment in its origination and portfolio management functions.
We recognized a $6.3 million loss from fair value adjustments to contingent liabilities in Q3 2026, compared with a $0.5 million gain in Q3 2025. The change was primarily driven by fair value adjustments related to contingent liabilities assumed in the XOMA acquisition. Fair value adjustments to partner program derivatives were zero in Q3 2026, compared with a $0.8 million gain in Q3 2025, which reflected the reversal of fair value adjustments recorded in the first half of 2025 on derivatives that were reclassified to financial royalty assets upon our early adoption of ASU 2025-07 effective January 1, 2025. We recognized no fair value adjustments to partner program derivatives in the nine months ended September 30, 2026 or 2025.
YTD 2026 vs. YTD 2025
Total operating costs and expenses increased by $0.7 million to $183.5 million in YTD 2026 compared to $182.7 million in YTD 2025.
Cost of Captisol decreased by $2.4 million, or 21%, to $9.1 million in YTD 2026 compared to $11.6 million in YTD 2025, primarily attributable to the lower Captisol sales. Amortization of intangibles increased by $1.8 million, or 7%, to $26.4 million in YTD 2026 compared to $24.6 million in YTD 2025, primarily attributable to the addition of intangible assets from the XOMA Acquisition. See Note 2, XOMA Acquisition, for additional information.
Research and development expenses decreased by $58.1 million, or 75%, to $19.6 million in YTD 2026 compared to $77.7 million in YTD 2025. The decrease was primarily attributable to the absence of the $44.3 million charge recognized in the prior-year period related to the research and development funding arrangement associated with the D-Fi royalty rights acquired in the Castle Creek transaction, the absence of the $17.8 million charge recognized in the prior-year period related to the research and development funding arrangement associated with the AVIM Therapy royalty rights acquired in the Orchestra transaction, and the absence of $6.4 million of research and development expenses associated with our former Pelthos business
following its divestiture in the Pelthos transaction. These decreases were partially offset by a $12.3 million research and development funding arrangement expense recognized in the current-year period related to Orchestra BioMed.
General and administrative expenses increased by $55.2 million, or 82%, to $122.6 million in YTD 2026 compared to $67.4 million in YTD 2025. The increase was primarily attributable to $19.1 million transaction costs associated with the XOMA Acquisition, $10.8 million of post-combination compensation expense related to the cash settlement of XOMA employee restricted stock units, $7.6 million of severance expenses, and a $7.2 million increase in the allowance for credit losses on financial royalty assets, as well as higher employee-related costs, including increased headcount and share-based compensation, reflecting the Company's continued investment in its origination and portfolio management functions.
We recognized a $5.8 million loss from fair value adjustments to contingent liabilities in YTD 2026, compared with a $1.5 million loss in YTD 2025. The change was primarily driven by fair value adjustments related to contingent liabilities assumed in the XOMA acquisition.
Non-operating Income and Expenses
(Dollars in thousands) Q3 2026 Q3 2025 Change % Change YTD 2026 YTD 2025 Change % Change
(Loss) gain from short-term investments $ (3,817) $ 7,798 $ (11,615) (149) % $ 11,806 $ (3,630) $ 15,436 (425) %
(Loss) gain from change in fair value of equity-method investments and other investments (35,727) 75,887 (111,614) (147) % (49,229) 75,887 (125,116) (165) %
Interest income 5,492 3,874 1,618 42 % 19,445 7,266 12,179 168 %
Interest expense (2,898) (910) (1,988) 218 % (6,393) (2,930) (3,463) 118 %
Other non-operating income (expense), net 8,614 (899) 9,513 (1,058) % 9,629 (97) 9,726 (10,027) %
Total non-operating (expenses) income, net $ (28,336) $ 85,750 $ (114,086) (133) % $ (14,742) $ 76,496 $ (91,238) (119) %
Q3 2026 vs. Q3 2025
The loss from short-term investments was $3.8 million in Q3 2026, compared with a gain of $7.8 million in Q3 2025, primarily due to changes in mark-to-market adjustments on our common stock investments. Q3 2026 included unrealized losses of $5.1 million on Viking and $3.4 million on Palvella, partially offset by unrealized gains of $3.5 million on Orchestra and $2.1 million on Agenus. Q3 2025 included an unrealized gain of $9.8 million on Palvella, partially offset by an unrealized loss of $1.5 million on Elutia.
The loss from change in fair value of equity-method investments and other investments was $35.7 million in Q3 2026, compared with a gain of $75.9 million in Q3 2025. The change primarily reflected mark-to-market adjustments on our Pelthos common stock and Series A convertible preferred stock acquired in connection with the Pelthos Transaction in July 2025. For additional information, see Note 3, Pelthos Transaction.
Interest income consists primarily of interest earned on our short-term investments and the Pelthos Convertible Notes acquired in November 2025. Interest income increased by $1.6 million to $5.5 million in Q3 2026, compared with $3.9 million in Q3 2025, primarily due to higher average invested balances and interest earned on the Pelthos Convertible Notes.
Interest expense consists primarily of coupon interest and non-cash amortization of debt discount and issuance costs associated with the 2030 Notes issued in August 2025 and non-cash amortization of debt discount and issuance costs associated with the 2031 Notes issued in June 2026. Interest expense increased by $2.0 million to $2.9 million in Q3 2026, compared with $0.9 million in Q3 2025. The increase was primarily due to a full quarter of interest expense on the 2030 Notes and non-cash interest expense related to the 2031 Notes.
Other non-operating income (expense), net primarily consists of fair value adjustments on derivatives (excluding partner program derivatives). Other non-operating income (expense), net was income of $8.6 million in Q3 2026, compared with expense of $0.9 million in Q3 2025. The change was primarily driven by a $8.5 million net gain from changes in fair value of derivative assets in Q3 2026, compared with a $0.7 million net loss in Q3 2025.
YTD 2026 vs. YTD 2025
The gain from short-term investments was $11.8 million in YTD 2026, compared with a loss of $3.6 million in YTD 2025, primarily due to changes in mark-to-market adjustments on our common stock investments. YTD 2026 included unrealized gains of $8.6 million on Palvella, $3.8 million on Orchestra and $2.1 million on Agenus, partially offset by an unrealized loss of $2.6 million on Viking. YTD 2025 included an unrealized loss of $14.0 million on Viking and $1.6 million on Elutia, partially offset by an unrealized gain of $12.3 million on Palvella.
The loss from change in fair value of equity-method investments and other investments was $49.2 million in YTD 2026, compared with a gain of $75.9 million in YTD 2025. The change primarily reflected mark-to-market adjustments on our Pelthos common stock and Series A convertible preferred stock acquired in connection with the Pelthos Transaction in July 2025. For additional information, see Note 3, Pelthos Transaction.
Interest income consists primarily of interest earned on our short-term investments and the Pelthos Convertible Notes acquired in November 2025. Interest income increased by $12.2 million to $19.4 million in YTD 2026, compared with $7.3 million in YTD 2025, primarily due to higher average invested balances and interest earned on the Pelthos Convertible Notes.
Interest expense consists primarily of coupon interest and non-cash amortization of debt discount and issuance costs associated with the 2030 Notes issued in August 2025, non-cash amortization of debt discount and issuance costs associated with the 2031 Notes issued in June 2026, as well as interest accrued under a royalty and milestone payments purchase agreement entered into by Novan, Inc. in 2019, which Ligand assumed in connection with the acquisition of our Pelthos Therapeutics business from Novan in September 2023. Interest expense increased by $3.5 million to $6.4 million in YTD 2026, compared with $2.9 million in YTD 2025. The increase was primarily due to a full nine months of interest expense on the 2030 Notes along with interest expense related to the 2031 Notes. The increase was partially offset by the absence of interest expense related to the Novan-assumed obligation following the deconsolidation of LNHC, Inc. on July 1, 2025 in connection with the Pelthos Transaction.
Other non-operating income (expense), net primarily consists of fair value adjustments on derivatives (excluding partner program derivatives). Other non-operating income (expense), net was income of $9.6 million in YTD 2026, compared with expense of $0.1 million in YTD 2025, primarily due to a $9.1 million net gain from fair value changes in derivative assets in YTD 2026, compared with a $0.1 million net loss in YTD 2025.
Income Tax Expense
(Dollars in thousands) Q3 2026 Q3 2025 Change YTD 2026 YTD 2025 Change
(Loss) income before income taxes $ (44,094) $ 141,137 $ (185,231) $ (4,049) $ 102,180 $ (106,229)
Income tax benefit (expense) 15,609 (23,864) 39,473 10,727 (22,511) 33,238
Net (loss) income $ (28,485) $ 117,273 $ (145,758) $ 6,678 $ 79,669 $ (72,991)
Effective tax rate 35.4 % 16.9 % 264.9 % 22.0 %
We compute our income tax provision by applying the estimated annual effective tax rate to income (loss) from operations and adjusting for the effects of any discrete income tax items recognized in the period. The effective tax rate for the three months ended September 30, 2026 and 2025 was 35.4% and 16.9%, respectively. The effective tax rate for the nine months ended September 30, 2026 and 2025 was 264.9% and 22.0%, respectively. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2026 was primarily due to the Section 162(m) limitation on the deduction for officer compensation, non-deductible transaction costs and post-combination compensation expense related to the XOMA acquisition, other non-deductible items, and income from foreign operations, which were partially offset by the foreign-derived deduction eligible income deduction. The effective tax rate for the nine months ended September 30, 2026 was also significantly affected by discrete tax benefits related to excess tax deductions on stock-based compensation and energy tax credits, relative to a near break-even pre-tax loss for the period. The variance from the U.S. federal statutory tax rate of 21% for the three and nine months ended September 30, 2025 was primarily due to Section 162(m) limitation on deduction for officer compensation and income from foreign operations, which were partially offset by the foreign derived intangible income deduction.
Liquidity and Capital Resources
As of September 30, 2026, we had approximately $447.4 million in cash, cash equivalents, and short-term investments, compared to $733.5 million as of December 31, 2025. The decrease was primarily attributable to cash used for the XOMA Acquisition and other acquisition and investment activities, partially offset by proceeds from the issuance of the 2031 Notes and cash generated from operations. A summary of our cash flow activity is provided below.
In connection with the XOMA Acquisition, we amended and restated our revolving credit facility in July 2026. The amended facility provides aggregate revolving commitments of $125.0 million and matures in September 2028. As of September 30, 2026, we had no outstanding borrowings under the facility, $0.6 million of letters of credit outstanding, and $124.4 million of available borrowing capacity. See Note 7, Debt, for additional information regarding the amended revolving credit facility.
In June 2026, we issued $700.0 million aggregate principal amount of the 2031 Notes and received net proceeds of approximately $679.0 million. We also maintain an at-the-market equity offering program that permits the sale of up to $100.0 million of common stock. No shares had been sold under the program as of September 30, 2026.
As of September 30, 2026, the conditions for holders to convert the 2030 Notes were met, and the 2030 Notes are convertible at the option of holders through December 31, 2026. As a result, the $460.0 million aggregate principal amount of the 2030 Notes, net of unamortized debt discount and issuance costs, is classified as a current liability in our condensed consolidated balance sheet. Upon conversion, we are required to settle the principal amount in cash, and we may settle any conversion value in excess of principal in cash, shares of our common stock, or a combination. No 2030 Notes had been submitted for conversion as of September 30, 2026. Whether the 2030 Notes remain convertible and classified as current in future periods will depend on whether the conversion condition is met at each quarter-end. See Note 7, Debt, for additional information. We believe that our cash, cash equivalents and short-term investments, together with availability under our revolving credit facility, are sufficient to settle the principal amount of the 2030 Notes in cash if all holders were to convert.
Our principal sources of liquidity are our existing cash, cash equivalents, and short-term investments, cash generated from operations, and available borrowing capacity under our amended revolving credit facility. We believe these resources will be sufficient to fund our working capital requirements, capital expenditures, debt service obligations, acquisitions, strategic investments, and other business initiatives for at least the next twelve months.
As of September 30, 2026, we had $38.9 million in contingent consideration liabilities, measured at fair value, related to the XOMA Acquisition and prior acquisitions, which are expected to be settled in future periods.
Cash Flow Summary
(Dollars in thousands) YTD 2026 YTD 2025
Net cash provided by (used in):
Operating activities $ 45,118 $ 3,444
Investing activities $ (651,221) $ (359,218)
Financing activities $ 536,362 $ 419,893
During the nine months ended September 30, 2026, we generated cash from operations primarily from revenue and other operating income. We used cash in investing activities primarily for the XOMA Acquisition and purchases of short-term investments, partially offset by proceeds from the sale and maturity of short-term investments. We generated cash from financing activities primarily from the issuance of our 2031 Notes.
During the nine months ended September 30, 2025, we generated cash from operations primarily from revenue and other operating income, partially offset by investments in the Castle Creek and Orchestra R&D funding arrangements. We used cash in investing activities primarily for purchases of short-term investments, financial royalty assets, and derivative assets, as well as cash transferred in connection with the Pelthos Transaction, partially offset by proceeds from the sale and maturity of short-term investments and collections from financial royalty assets. We generated cash from financing activities primarily from the issuance of the 2030 Notes, net of related transactions, as well as proceeds from Pelthos investors, stock option exercises, and employee stock purchase plan purchases.
Critical Accounting Policies and Estimates
Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is, by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2025 Annual Report.
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