Mark One
For the quarterly period ended June 30, 2002 or
For the Transition Period From ___ to ___. Commission file number 0-20720
LIGAND
PHARMACEUTICALS INCORPORATED
(Exact Name of
Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiciton of
Incorporation or Organization)
77-0160744
(I. R. S. Employer Identification No.)
10275
Science Center Drive San Diego, CA
(Address of Principal Executive Offices)
92121-1117
(Zip Code)
Registrant's Telephone Number, Including Area Code: (858) 550-7500
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 [X] No [ ]
As of July 31, 2002, the registrant had 71,425,621 shares of common stock outstanding.
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COVER PAGE |
1 |
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TABLE OF CONTENTS |
2 |
| PART I. FINANCIAL INFORMATION | |
| ITEM 1. Financial Statements | |
| Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 | 3 |
| Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 | 4 |
| Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 | 5 |
| Notes to Consolidated Financial Statements | 6 |
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
|
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk |
23 |
| PART II. OTHER INFORMATION | |
| ITEM 1. Legal Proceedings | * |
| ITEM 2. Changes in Securities and Use of Proceeds | 24 |
| ITEM 3. Defaults upon Senior Securities | * |
| ITEM 4. Submission of Matters to a Vote of Security Holders | 24 |
| ITEM 5. Other Information | * |
|
ITEM 6.
Exhibits and Reports on Form 8-K |
25 |
| SIGNATURE | 27 |
*No information provided due to inapplicability of item.
2
ASSETS
June 30, December 31,
2002 2001
----------- -----------
Current assets:
Cash and cash equivalents...................... $ 25,087 $ 20,741
Short-term investments......................... 17,469 16,947
Accounts receivable, net ...................... 13,498 9,798
Inventories.................................... 2,305 3,756
Other current assets........................... 2,860 2,332
----------- -----------
Total current assets................... 61,219 53,574
Restricted investments........................... 2,189 2,370
Property and equipment, net...................... 10,238 9,690
Acquired technology, net ........................ 36,358 37,879
Other assets..................................... 17,653 13,960
----------- -----------
$ 127,657 $ 117,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ 10,026 $ 5,385
Accrued liabilities............................ 6,261 12,245
Current portion of deferred revenue............ 10,302 8,729
Current portion of equipment financing
obligations ................................. 2,592 2,867
Convertible note .............................. 2,500 2,500
----------- -----------
Total current liabilities.............. 31,681 31,726
Long-term portion of deferred revenue ........... 3,624 4,164
Long-term portion of equipment financing
obligations ................................... 2,640 3,354
Accrued acquisition obligation................... 2,700 2,700
Convertible subordinated debentures.............. -- 47,326
Zero coupon convertible senior notes............. -- 86,078
----------- -----------
Total liabilities...................... 40,645 175,348
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Convertible preferred stock,
$0.001 par value; 5,000,000 shares authorized;
none issued................................ -- --
Common stock, $0.001 par value; 130,000,000
shares authorized; 71,391,021 shares and
60,164,840 shares issued at June 30, 2002 and
December 31, 2001, respectively.............. 71 60
Additional paid-in capital..................... 692,465 529,374
Deferred warrant expense ...................... -- (692)
Accumulated other comprehensive (loss) income . (72) 14
Accumulated deficit............................ (604,541) (585,720)
----------- -----------
87,923 (56,964)
Treasury stock, at cost; 73,842 shares......... (911) (911)
----------- -----------
Total stockholders' equity (deficit) .. 87,012 (57,875)
----------- -----------
$ 127,657 $ 117,473
=========== ===========
See accompaning notes.
3
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Product sales................... $ 10,465 $ 10,002 $ 24,160 $ 18,609
Collaborative research and
development and other revenues 8,701 7,487 19,891 15,915
--------- --------- --------- ---------
Total revenues................. 19,166 17,489 44,051 34,524
--------- --------- --------- ---------
Operating costs and expenses:
Cost of products sold .......... 4,681 3,077 9,141 5,916
Research and development........ 13,681 13,191 26,797 25,596
Selling, general and administrative 10,279 8,886 19,935 19,043
--------- --------- --------- ---------
Total operating costs and expenses 28,641 25,154 55,873 50,555
--------- --------- --------- ---------
Loss from operations.............. (9,475) (7,665) (11,822) (16,031)
--------- --------- --------- ---------
Other income (expense):
Interest income............... 372 551 663 1,282
Interest expense.............. (2,814) (3,449) (5,066) (6,894)
Debt conversion expense ...... -- -- (2,015) --
Other, net.................... (329) (52) (581) (553)
--------- --------- --------- ---------
Total other expense, net....... (2,771) (2,950) (6,999) (6,165)
--------- --------- --------- ---------
Net loss.......................... $(12,246) $(10,615) $(18,821) $(22,196)
========= ========= ========= =========
Basic and diluted per share amounts:
Net loss....................... $ (.17) $ (.18) $ (.28) $ (.38)
========= ========= ========= =========
Weighted average number of
common shares................ 70,413 59,380 68,196 59,119
========= ========= ========= =========
See accompaning notes.
4
Six Months Ended June 30,
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net loss......................................... $ (18,821) $ (22,196)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accretion of debt discount and interest...... 3,139 4,536
Depreciation and amortization of property and
equipment.................................. 1,635 1,873
Amortization of acquired technology ......... 1,708 1,659
Equity in loss of affiliate ................. 564 620
Debt conversion expense...................... 2,015 --
Other........................................ 823 947
Changes in operating assets and liabilities:
Accounts receivable ....................... (3,700) (2,339)
Inventories................................ 1,451 1,132
Other current assets ...................... (528) 171
Accounts payable and accrued liabilities... (1,343) 1,719
Deferred revenue........................... 1,033 2,399
---------- ----------
Net cash used in operating activities.. (12,024) (9,479)
---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments.............. (3,014) (10,739)
Proceeds from sale of short-term investments..... 2,492 8,276
Purchases of property and equipment.............. (2,171) (1,340)
Decrease in other assets......................... 67 143
---------- ----------
Net cash used in investing activities.. (2,626) (3,660)
---------- ----------
FINANCING ACTIVITIES
Principal payments on equipment financing
obligations.................................... (1,443) (2,244)
Proceeds from equipment financing arrangements .. 453 372
Redemption of convertible debentures ............ (50,000) --
Decrease/(increase) in restricted investments.... 181 (1,299)
Net proceeds from issuance of zero coupon
convertible senior notes....................... -- 10,000
Net proceeds from issuance of common stock....... 69,805 25,686
---------- ----------
Net cash provided by financing activities.. 18,996 32,515
---------- ----------
Net increase in cash and cash equivalents........ 4,346 19,376
Cash and cash equivalents at beginning of period. 20,741 9,224
---------- ----------
Cash and cash equivalents at end of period....... $ 25,087 $ 28,600
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................... $ 3,792 $ 2,341
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of zero coupon convertible senior notes
to common stock................................ $ 86,135 $ --
Issuance of common stock for acquired technology 5,000 5,000
Issuance of common stock for debt conversion
incentive ..................................... 2,015 --
See accompaning notes.
5
The consolidated financial statements of Ligand Pharmaceuticals Incorporated (“Ligand” or the “Company”) for the three and six months ended June 30, 2002 and 2001 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the consolidated financial position as of June 30, 2002 and the consolidated results of operations for the three and six months ended June 30, 2002 and 2001. The results of operations for the period ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K and the unaudited consolidated financial statements for the three months ended March 31, 2002 included in the Company’s Quarterly Report on Form 10-Q filed with the SEC.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.
New Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB No. 30.
The adoption of SFAS No. 142 and SFAS No. 144 effective January 1, 2002 did not have a material effect on the Company's operations or financial position.
Net Loss Per Share. Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods presented as the inclusion of common stock equivalents in the number of shares used for the diluted computation would be anti-dilutive.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in-first-out method. Inventories consist of the following (in thousands):
June 30, December 31,
2002 2001
---------------- ---------------
Raw materials $ 150 $ 143
Work-in-process 749 2,729
Finished goods 1,406 884
--------------- ---------------
$ 2,305 $ 3,756
=============== ===============
6
Other Assets. Other assets consist of the following (in thousands):
June 30, December 31,
2002 2001
---------------- ---------------
Technology license, net $ 8,950 $ 4,000
Prepaid royalty buyout, net 3,264 3,400
Deferred rent 3,107 3,204
Investment in X-Ceptor 1,884 2,448
Other 448 908
---------------- ---------------
$ 17,653 $ 13,960
=============== ===============
Accrued Liabilities. Accrued liabilities consist of the following (in thousands):
June 30, December 31,
2002 2001
---------------- ---------------
Compensation $ 2,785 $ 2,786
Royalties 2,077 2,736
Interest 63 1,942
Payment to licensor -- 2,500
Other 1,336 2,281
---------------- ---------------
$ 6,261 $ 12,245
================ ===============
Comprehensive Loss. Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss, as well as foreign currency translation adjustments. The accumulated unrealized gains or losses are reported as accumulated other comprehensive income (loss) as a separate component of stockholders’ equity (deficit). Comprehensive loss for the three and six months ended June 30, 2002 and 2001 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Comprehensive loss $(12,269) $(10,634) $(18,906) $(22,180)
========== ========= ========= =========
In February 2002, pursuant to an agreement reached in December 2001, the Company converted $50 million in issue price of zero coupon convertible senior notes and $11.8 million of accrued interest owed to Elan Corporation, plc (“Elan”) into 4,406,010 shares of common stock.
In March 2002, Elan agreed to convert the remaining $20 million in issue price zero coupon convertible senior notes and $4.7 million of accrued interest into 1,766,916 shares of Ligand common stock. In connection with the conversion, Ligand provided Elan with a $2.0 million conversion incentive through the issuance of 102,151 shares of common stock. As part of the agreement to convert, Elan exercised existing warrants to acquire 91,406 shares of Ligand common stock at a price per share of $10.00.
In March 2002, Ligand entered into an agreement with Royalty Pharma AG, to sell a portion of the Company’s rights to future royalties from certain collaborative partners’ net sales of three selective estrogen receptor modulator (SERM) products now in Phase III clinical development. The agreement provides for the initial sale of rights to 0.25% of such product net sales for $6 million and options to acquire up to an additional 1.00% of net sales for $50 million. The $6 million was recognized as revenue in the first quarter of 2002. In April 2002, Royalty Pharma exercised the first option to acquire an additional 0.125% of such product net sales for $3 million. The Company recognizes revenue for options under the agreement when the option is exercised.
7
In July 2002, the agreement was amended to replace the existing option, exercisable in December 2002, to acquire an additional 0.25% of net sales for $8.0 million, with two new options. The new options, each for an additional 0.125% of net sales, are exercisable for $3.50 million and $3.85 million on September 30, 2002 and December 31, 2002, respectively.
FDA Approval
In March 2002, the FDA approved Avinza™, a product licensed from Elan for the relief of chronic, moderate to severe pain. The approval of Avinza™ triggered a $5 million milestone payment to Elan that was settled through the issuance of 302,554 shares of common stock.
Under the Avinza™ license agreement, the Company is committed to spend not less than $7 million through May 2003 to undertake additional clinical activities related to the commercialization of Avinza™. In the event the Company does not spend this amount, any shortfall would be paid to Elan. As of June 30, 2002, approximately 60% of this commitment had been incurred.
Product Launch
In the second quarter of 2002, the Company shipped $11.5 million of Avinza™ to wholesaler customers. The product was sold under certain promotional launch programs that provided customers with discounts off wholesale price and 90-day payment terms instead of the Company’s normal 30-day terms. The promotions were implemented to ensure that a sufficient retail supply of Avinza™ was available in those territories where Ligand sales representatives are initially promoting the product. Of the amount shipped, $4.1 million was recognized as revenue during the second quarter based on the Company’s practice of deferring recognition of revenue associated with promotional product terms for a new product launch requiring broad retail pharmacy distribution. The revenue deferred and the related cost of product sold was netted and recorded as deferred revenue in the Company’s balance sheet. The deferred revenue and related product cost will be recognized as product is sold through to patients.
In June 2002, the Company redeemed $50 million in face value of convertible subordinated debentures due January 2003. The remaining $1.8 million of accretion to face value at the time of redemption was charged to interest expense.
Property Lease
The Company leases its corporate headquarters from a limited liability company (the “LLC”) in which Ligand holds a 1% ownership interest. The lease terminates in 2014 and can be extended for a period of five years. The lease agreement provides for increases in annual rent of 4%. Ligand also has an option to either purchase the LLC or the leased premises from the LLC at a purchase price equal to the outstanding debt on the property plus a calculated return on the investment made by the LLC’s other shareholder.
In accordance with existing accounting standards, the lease is treated as an operating lease for financial reporting purposes. The FASB, however, is considering modifications to existing accounting principles that under certain conditions could result in consolidation of such entities or treatment of such lease arrangements as capital leases. If Ligand were required to treat such lease arrangement as a financing obligation, the Company’s consolidated balance sheet as of June 30, 2002 would reflect additional property and equipment of $13.6 million and additional debt of $12.9 million. The impact of such treatment on the Company’s historical operating results is not significant.
8
Convertible Note
The $2.5 million convertible note was issued in connection with the Company’s collaborative arrangement with SmithKline Beecham Corporation. The note is convertible, at the option of SmithKline Beecham, into the Company’s common stock at $13.56 per share and is due October 2002.
Litigation
The Company is subject to various lawsuits and claims with respect to matters arising out of the normal course of business. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates.
Under a 1999 investment agreement with X-Ceptor Therapeutics, Inc. (“X-Ceptor”), Ligand maintained the right to acquire all of the outstanding stock of X-Ceptor not held by Ligand at June 30, 2002, or to extend the purchase right for 12 months by providing additional funding of $5 million. In April 2002, Ligand informed X-Ceptor that it was extending its purchase right. The $5 million was paid to X-Ceptor in July 2002.
In April 2002, the Company raised net proceeds of approximately $65.9 million in a private placement of 4,252,500 shares of its common stock.
9
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 at “Risks and Uncertainties”. This outlook represents our current judgment on the future direction of our business. Such risks and uncertainties could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of 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 the Private Securities Litigation Reform Act of 1995.
Our trademarks, trade names and service marks referenced herein include Ligand®, ONTAK®, Panretin®, Targretin®, and Avinza™. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.
We discover, develop and market drugs that address patients’ critical unmet medical needs in the areas of cancer, men’s and women’s health, or hormone-related health issues, skin diseases, osteoporosis, and metabolic, cardiovascular and inflammatory diseases. Our drug discovery and development programs are based on our proprietary gene transcription technology, primarily related to Intracellular Receptors, also known as IRs, a type of sensor or switch inside cells that turns genes on and off, and Signal Transducers and Activators of Transcription, also known as STATs, which are another type of gene switch.
We currently market five products in the United States: Avinza™, for the relief of chronic, moderate to severe pain; ONTAK®, for the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma ( or CTCL); Targretin® capsules and Targretin® gel, for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy; and Panretin® gel, for the treatment of Kaposi’s sarcoma in AIDS patients. In March 2002, the Food and Drug Administration (or FDA) approved Avinza™, a product we license from our strategic partner Elan Corporation, plc. We have exclusive marketing rights to Avinza™ in the United States and Canada. Avinza™ was launched in the U.S. in June 2002. In Europe, we were granted a marketing authorization for Panretin® gel in October 2000 and for Targretin® capsules in March 2001 and have a marketing authorization application under review for ONZAR (ONTAK® in the U.S.). Targretin® capsules and Panretin® gel were launched in Europe in the fourth quarter of 2001. During the second quarter, we withdrew our Targretin® gel MAA in Europe due to a request for additional clinical trials in CTCL which we judged uneconomic given the size of the CTCL market and the existing approval for Targretin® capsules in Europe.
We are currently involved in the research phase of research and development collaborations with Eli Lilly and Company and TAP Pharmaceutical Products Inc. (or TAP). Collaborations in the development phase are being pursued by Abbott Laboratories, Allergan, Inc., GlaxoSmithkline, Organon, Pfizer and Wyeth. We receive funding during the research phase of the arrangements and milestone and royalty payments as products are developed and marketed by our corporate partners. In addition, in connection with some of these collaborations, we received non-refundable up-front payments. As of June 30, 2002, we had deferred revenue of $6.7 million associated with these collaboration agreements. Such amount is being amortized as revenue over the service periods of the agreements which range from December 1997 to December 2013.
We have been unprofitable since our inception. We expect to incur additional operating losses until sales of our products generate sufficient revenues to cover our expenses. We expect that our operating results will fluctuate from period to period as a result of differences in the timing of expenses incurred and revenues earned from product sales and collaborative research and development arrangements. Some of these fluctuations may be significant.
10
Total revenues for the second quarter of 2002 increased to $19.2 million compared to $17.5 million for the second quarter of 2001, an increase of 9.6%. Net loss for the second quarter of 2002 of $12.2 million or $0.17 per share, compares to $10.6 million or $0.18 per share for the second quarter of 2001. Loss from operations for the second quarter of 2002 of $9.5 million compares to $7.7 million for the 2001 period.
For the six months ended June 30, 2002, total revenues were $44.1 million, compared to $34.5 million for 2001, an increase of 28%. Net loss for the same period in 2002 was $18.8 million or $0.28 per share compared to a net loss of $22.2 million or $0.38 per share for the 2001 period. Loss from operations for the six months ended June 30, 2002 of $11.8 million compares to $16.0 million for 2001.
Product Sales
Product sales for the second quarter of 2002 were $10.5 million compared to $10.0 million for the second quarter of 2001. Product sales for the six months ended June 30, 2002 increased to $24.2 million compared to $18.6 million for the prior year period.
Product revenue in 2002 includes sales of $4.1 million for Avinza™ which was launched in the U.S. in June 2002. In connection with the launch, we shipped $11.5 million of Avinza™ to wholesaler customers. This product was sold under certain promotional launch programs, not uncommon with new product launches, that provided customers with discounts off wholesale price and 90-day payment terms instead of the Company’s normal 30-day terms. The promotions were implemented to ensure that a sufficient retail supply of Avinza™ was available in those territories where Ligand sales representatives are initially promoting the product. Of the amount shipped, $4.1 million was recognized as net revenue based on our practice of deferring recognition of revenue associated with promotional terms for a new product launch requiring broad retail pharmacy distribution. The deferred net revenue of $6.1 million and related product cost will be recognized as product is sold through to patients.
Excluding Avinza™, sales of our in-line products for the second quarter of 2002 were $6.4 million compared to $10.0 million in 2001. Sales of ONTAK®decreased from $5.0 million in the second quarter of 2001 to $4.9 million in the second quarter of 2002 while sales of Targretin® capsules decreased from $3.3 million in 2001 to $1.2 million in 2002 and sales of Targretin® gel and Panretin® gel decreased from $1.6 million in 2001 to $0.2 million in 2002. The decrease in sales for each of these products is due to decisions made by several of our major wholesalers not to purchase or to purchase lower quantities of our products in order to reduce inventory carrying levels. The lower sales are further attributed to slower than expected demand growth for our in-line products due primarily to delays in completion and data publication of key ongoing, expanded-use clinical trials in B-cell non-Hodgkins lymphoma (NHL) and chronic lymphocytic leukemia (CLL), and to delays in new, expanded use physician initiated trials in a number of key indications for ONTAK® and Targretin® capsules. Sales during the quarter were also reduced by $1.5 million for higher than estimated returns of expired product. These returns reflect the lower than expected demand growth of our in-line products and inconsistent inventory rotation by certain distributors.
We continue to expect that off-label use and sales of ONTAK® and Targretin® capsules will increase when and as data is obtained from ongoing expanded-use clinical trials and the initiation of new expanded-use trials. The level and timing of any such off-label use, however, is influenced by a number of factors including the accrual of patients and overall progress of clinical trials which are managed by third parties. See Risk Factors for further discussion of risks associated with product development.
Our products include small-volume specialty pharmaceutical products that address the needs of cancer patients in relatively small niche markets with substantial geographical fluctuations in demand. To ensure patient access to our drugs, we maintain broad distribution capabilities with inventories held at approximately 100 locations throughout the United States. Furthermore, the purchasing and stocking patterns of our wholesaler customers are influenced by a number of factors that vary with each product including but not limited to overall level of demand, periodic promotions, required minimum shipping quantities and wholesaler competitive initiatives. As a result, the level of product in the distribution channel may average from two to six months’ worth of projected inventory usage. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.
11
Collaborative Research and Development and Other Revenues
Collaborative research and development and other revenues for the quarter ended June 30, 2002 were $8.7 million compared to $7.5 million for the quarter ended June 30, 2001. For the six months ended June 30, 2002, collaborative research and development and other revenues were $19.9 million compared to $15.9 million in the prior year period. A comparison of collaborative research and development and other revenues is as follows (in thousands):
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Collaborative research
and development $ 5,624 $ 7,343 $10,736 $12,077
Royalty sale 3,000 -- 9,000 --
Distribution agreements 77 77 155 3,632
Other -- 67 -- 206
-------- -------- -------- --------
$ 8,701 $ 7,487 $19,891 $15,915
======== ======== ======== ========
Collaborative research and development revenue includes reimbursement for ongoing research activities, earned development milestones and SAB No. 101 recognition of prior years’ up-front fees. Revenue from distribution agreements includes recognition of up-front fees collected upon contract signing and deferred over the life of the distribution arrangement and milestones achieved under such agreements.
The decrease in collaborative research and development revenue for the three and six months ended June 30, 2002 compared to the corresponding prior periods is due to the loss of funding from collaborative research arrangements with Bristol-Myers Squibb, which was terminated in June 2001, and Organon, the research phase of which concluded in February 2002. This decrease is partially offset by collaborative research funding earned under our agreement with TAP which was entered into in June 2001 and a $1.1 million milestone earned in the second quarter of 2002 under our collaboration agreement with Eli Lilly and Company.
Royalty sale represents revenue earned from the sale to Royalty Pharma AG of rights and options to future royalties from certain collaborative partners’ net sales of three selective estrogen receptor modulator (SERM) products. These products are now in Phase III clinical development. The royalty purchase agreement provides for the initial sale of rights to 0.25% of such product net sales and grants Royalty Pharma options to acquire up to an additional 1.00% of net sales for $50 million. We earned $6 million in the first quarter upon the initial sale of rights and $3 million in the second quarter when Royalty Pharma exercised the first option to acquire an additional 0.125% of such product net sales.
Revenue from distribution agreements decreased to $0.2 million for the six months ended June 30, 2002 from $3.6 million for 2001. The 2001 amount includes milestones earned under our distribution agreement with Elan for the European submission of a Marketing Authorization Approval (“MAA”) for Targretin® gel and the European grant of an MAA for Targretin® capsules.
Gross Margin
Gross margin on product sales was 55.3% for the second quarter of 2002 compared to 69.2% for the second quarter of 2001. Gross margin on product sales for the six months ended June 30, 2002 was 62.2% compared to 68.2% for the prior year period. The margin for the second quarter of 2002 was negatively impacted by sales of Avinza™, which has higher product costs than certain of our other products, lower sales of our in-line products over which we spread certain fixed costs (amortization of acquired technology), and the impact of higher than estimated returns of expired products. Additionally, the decrease in margin for the six month period is due to the final increase in the contractual royalty rate on ONTAK®.
12
Operating Expenses
Research and development expenses were $13.7 million in the second quarter of 2002 compared to $13.2 million for the second quarter of 2001. For the six months ended June 30, 2002, research and development expenses were $26.8 million compared to $25.6 million in 2001. The increase in 2002 reflects the funding of Phase III clinical trials for Targretin® capsules in non-small cell lung cancer. This increase is partially offset by the timing of expenses incurred on certain ongoing development programs to improve existing products. We expect development expenses to further increase in 2002 as additional patients are accrued under the non-small cell lung cancer clinical trials.
Selling, general and administrative expenses were $10.3 million for the second quarter of 2002 compared to $8.9 million for the second quarter of 2001. The increase is due to higher advertising and promotion expenses in connection with the launch of Avinza™ and costs associated with the hiring and deployment of approximately 25 sales representatives to target general pain centers not served by our existing oncology and dermatology sales forces. Selling, general and administrative expenses for the six months ended June 30, 2002 were $19.9 million compared to $19.0 million for the six months ended June 30, 2001. The increase is due to expenses associated with the launch of Avinza™ partially offset by lower expenses in 2002 compared to 2001 when significant advertising and promotion expenses were incurred in connection with the commencement of post-approval trials and post-launch promotions for Targretin® capsules.
We expect selling and marketing expenses for the remainder of 2002 to continue to increase due to post-launch promotions of Avinza™ and a greater emphasis on physician attended, product information and advisory meetings and physician investigational new drug (“PIND”) studies in support of ONTAK® and Targretin® capsules.
Other Expenses
Other expense, net was $2.8 million for the second quarter of 2002 compared to $3.0 million for the second quarter of 2001. The decrease in the net expense is due to lower interest expense resulting from the conversion of all outstanding zero coupon convertible senior notes owed to Elan in the fourth quarter of 2001 and the first quarter of 2002 and the early redemption of $50 million in face value of convertible subordinated debentures in June 2002. The decrease in interest expense is partially offset by $1.8 million of accelerated accretion to face value in connection with the early redemption of the convertible subordinated debentures.
Other expense, net was $7.0 million for the six months ended June 30, 2002 compared to $6.2 million for the six months ended June 30, 2001. The increase in the net expense reflects debt conversion expense of $2.0 million for an incentive provided to Elan in connection with the March 2002 conversion of zero coupon convertible senior notes into common stock. This increase is partially offset by a decrease in interest expense resulting from the conversion of all outstanding zero coupon convertible senior notes and the early redemption of $50 million in face value of convertible subordinated debentures.
We have financed our operations through private and public offerings of our equity securities, collaborative research and development and other revenues, issuance of convertible notes, capital and operating lease transactions, equipment financing arrangements, product sales and investment income.
At June 30, 2002, working capital was $29.5 million. This compares to working capital of $21.8 million at December 31, 2001. Cash, cash equivalents, short-term investments, and restricted investments totaled $44.7 million at June 30, 2002 compared to $40.1 million at December 31, 2001. We primarily invest our cash in United States government and investment grade corporate debt securities.
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Operating activities used cash of $12.0 million for the six months ended June 30, 2002 compared to $9.5 million for the six months ended June 30, 2001. Operating cash flow in 2002 compared to the prior year period benefited from increased product sales and $9 million of cash received in connection with the sale to Royalty Pharma AG of rights and options to future royalties from certain collaborative partners’ net sales of three selective estrogen receptor modulator (SERM) products. The increase in revenue in 2002 was offset by higher operating expenses and changes in working capital. Changes in operating assets and liabilities in the 2002 period used net cash of $3.1 million.
Investing activities used cash of $2.6 million for the six months ended June 30, 2002 compared to $3.7 million for the six months ended June 30, 2001. The use of cash in 2002 reflects the net purchase of short-term investments
of $0.5 million and capital expenditures of $2.2 million primarily for lab and computer equipment. Cash used for investing activities in 2001 includes net purchases of short-term investments of $2.5 million and capital expenditures of $1.3 million.
Under a 1999 investment agreement with X-Ceptor Therapeutics, Inc. (“X-Ceptor”), we maintained the right to acquire all of the outstanding stock of X-Ceptor not held by Ligand at June 30, 2002, or to extend the purchase right for 12 months by providing additional funding of $5 million. In April 2002, we informed X-Ceptor that we were extending the purchase right. The $5 million was paid to X-Ceptor in July 2002.
Financing activities provided cash of $19.0 million for the six months ended June 30, 2002 compared to $32.5 million for the six months ended June 30, 2001. Cash received in 2002 includes net proceeds of $65.9 million through a private placement of 4,252,500 shares of our common stock, $2.7 million from the exercise of employee stock options and $0.9 million from the exercise of a warrant held by Elan in connection with the conversion of zero coupon convertible senior notes. This was offset by the $50 million early redemption of convertible subordinated debentures and net payments of $1.0 million on equipment financing arrangements. Cash received in 2001 includes $22.4 million from a private placement of our common stock and $10 million in connection with the issuance of zero coupon convertible senior notes to Elan, partially offset by net repayments of $1.9 million on equipment financing arrangements and $1.3 million of cash restricted pursuant to certain third party service provider arrangements.
At June 30, 2002, we had outstanding a $2.5 million convertible note to SmithKline Beecham Corporation due in October 2002 with interest at prime and convertible into our common stock at $13.56 per share, at SmithKline Beecham’s option.
Certain of our property and equipment is pledged as collateral under various equipment financing arrangements. As of June 30, 2002, $5.2 million was outstanding under such arrangements with $2.6 million classified as current. Our equipment financing arrangements have terms of three to five years with interest ranging from 7.03% to 10.66%.
We lease our office and research facilities under operating lease arrangements with varying terms through July 2015. Our corporate headquarters is leased from a limited liability company (the “LLC”) in which we hold a 1% ownership interest. The lease terminates in 2014 and can be extended for a period of five years. We also have the right, but not the obligation, to purchase either the LLC or the leased premises from the LLC at a purchase price equal to the outstanding debt on the property plus a calculated return on the investment made by the LLC’s other shareholder.
In accordance with existing accounting standards, the lease is treated as an operating lease for financial reporting purposes. The FASB, however, is considering modifications to existing accounting principles that under certain conditions could result in consolidation of such entities or treatment of such lease arrangements as capital leases. If Ligand were required to treat such lease arrangement as a financing obligation, our consolidated balance sheet as of June 30, 2002 would reflect additional property and equipment of $13.6 million and additional debt of $12.9 million. The impact of such treatment on our historical operating results is not significant.
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We are required to spend not less than $7 million through May 2003 for clinical expenditures under the Avinza™ license agreement with Elan. As of June 30, 2002, we have incurred approximately 60% of this commitment.
We believe our available cash, cash equivalents, short-term investments and existing sources of funding will be sufficient to satisfy our anticipated operating and capital requirements through at least the next 12 months. Our future operating and capital requirements will depend on many factors, including: the effectiveness of our commercial activities; the pace of scientific progress in our research and development programs; the magnitude of these programs; the scope and results of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; the ability to establish additional collaborations or changes in existing collaborations; the efforts of our collaborators; and the cost of production.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of APB Opinion No. 30.
The adoption of SFAS No. 142 and SFAS No. 144 effective January 1, 2002 did not have a material effect on our operations or financial position.
The following is a summary description of some of the many risks we face in our business. You should carefully review these risks in evaluating our business, including the businesses of our subsidiaries. You should also consider the other information described in this report.
Our product development and commercialization involves a number of uncertainties and we may never generate sufficient revenues from the sale of products to become profitable.
We were founded in 1987. We have incurred significant losses since our inception. At June 30, 2002, our accumulated deficit was approximately $605 million. To date, we have received the majority of our revenues from our collaborative arrangements and only began receiving revenues from the sale of pharmaceutical products in 1999. To become profitable, we must successfully develop, clinically test, market and sell our products. Even if we achieve profitability, we cannot predict the level of that profitability or whether we will be able to sustain profitability. We expect that our operating results will fluctuate from period to period as a result of differences in when we incur expenses and receive revenues from product sales, collaborative arrangements and other sources. Some of these fluctuations may be significant.
Most of our products in development will require extensive additional development, including preclinical testing and human studies, as well as regulatory approvals, before we can market them. We cannot predict if or when any of the products we are developing or those being co-developed with our partners will be approved for marketing. There are many reasons that we or our collaborative partners may fail in our efforts to develop our other potential products, including the possibility that:
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We are building marketing and sales capabilities in the United States and Europe which is an expensive and time-consuming process and may increase our operating losses.
Developing the sales force to market and sell products is a difficult, expensive and time-consuming process. We
have developed a U.S. sales force of about 80 people, some of whom are contracted from a third party. We also rely on third-party distributors to distribute our products. The distributors are responsible for providing many marketing support services, including customer service, order entry, shipping and billing, and customer reimbursement assistance. In Europe, we will rely initially on other companies to distribute and market our products. We have entered into agreements for the marketing and distribution of our products in territories such as the United Kingdom, Germany, France, Spain, Portugal, Greece, Italy, and Central and South America and have established a subsidiary, Ligand Pharmaceuticals International, Inc., with a branch in London, England, to coordinate our European marketing and operations. We may not be able to continue to expand our sales and marketing capabilities sufficiently to successfully commercialize our products in the territories where they receive marketing approval. To the extent we enter into co-promotion or other licensing arrangements, any revenues we receive will depend on the marketing efforts of others, which may or may not be successful.
Our small number of products means our results are vulnerable to setbacks with respect to any one product.
We currently have only 5 products approved for marketing and a handful of other products/indications that have made significant progress through development. Because these numbers are small, especially the number of marketed products, any significant setback with respect to any one of them could significantly impair our operating results and/or reduce the market price for shares of our stock. Setbacks could include problems with shipping, manufacturing, product safety, marketing, government licenses and approvals, intellectual property rights and physician or patient acceptance of the product.
Sales of our specialty pharmaceutical products may significantly fluctuate each period based on the nature of our products, our promotional activities and wholesaler purchasing and stocking patterns.
Our products include small-volume specialty pharmaceutical products that address the needs of cancer patients in relatively small niche markets with substantial geographical fluctuations in demand. To ensure patient access to our drugs, we maintain broad distribution capabilities with inventories held at approximately 100 locations throughout the United States. Furthermore, the purchasing and stocking patterns of our wholesaler customers are influenced by a number of factors that vary with each product including but not limited to overall level of demand, periodic promotions, required minimum shipping quantities and wholesaler competitive initiatives. As a result, the level of product in the distribution channel may average from two to six months’ worth of projected inventory usage. If any or all of our major distributors decide to substantially reduce the inventory they carry in a given period, our sales for that period could be substantially lower than historical levels.
Some of our key technologies have not been used to produce marketed products and may not be capable of producing such products.
To date, we have dedicated most of our resources to the research and development of potential drugs based upon our expertise in our IR and STAT technologies. Even though there are marketed drugs that act through IRs, some aspects of our IR technologies have not been used to produce marketed products. In addition, we are not aware of any drugs that have been developed and successfully commercialized that interact directly with STATs. Much remains to be learned about the location and function of IRs and STATs. If we are unable to apply our IR and STAT technologies to the development of our potential products, we will not be successful in developing new products.
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Our drug development programs will require substantial additional future funding which could hurt our operational and financial condition.
Our drug development programs require substantial additional capital to successfully complete them, arising from costs to:
Our future operating and capital needs will depend on many factors, including:
We currently estimate our research and development expenditures over the next 3 years to range between $200 million and $250 million. However, we base our outlook regarding the need for funds on many uncertain variables. Such uncertainties include regulatory approvals, the timing of events outside our direct control such as product launches by partners and the success of such product launches, negotiations with potential strategic partners, and other factors. Any of these uncertain events can significantly change our cash requirements as they determine such one-time events as the receipt of major milestones and other payments.
For example, we are required under the terms of our agreement with Elan, to spend not less than $7 million through May 2003 to undertake additional clinical activities related to the commercialization of Avinza. In the event we do not spend this amount, any shortfall would have to be paid to Elan.
While we expect to fund our research and development activities from cash generated from internal operations to the extent possible, if we are unable to do so we may need to complete additional equity or debt financings or seek other external means of financing. If additional funds are required to support our operations and we are unable to obtain them on terms favorable to us, we may be required to cease or reduce further commercialization of our products, to sell some or all of our technology or assets or to merge with another entity.
We may require additional money to run our business and may be required to raise this money on terms which are not favorable or which reduce our stock price.
We have incurred losses since our inception and do not expect to generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available at all or on favorable terms. In addition, these financings, if completed, still may not meet our capital needs and could result in substantial dilution to our stockholders. For instance, in February and March 2002 we issued to Elan 6.3 million shares upon the conversion of zero coupon convertible senior notes held by Elan, and in January 2001 and April 2002 we issued 2 million shares and 4.3 million shares of our common stock, respectively, in private placements. These transactions have resulted in the issuance of significant numbers of new shares. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our drug development programs. Alternatively, we may be forced to attempt to continue development by entering into arrangements with collaborative partners or others that require us to relinquish some or all of our rights to technologies or drug candidates that we would not otherwise relinquish.
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Our products face significant regulatory hurdles prior to marketing which could delay or prevent sales.
Before we obtain the approvals necessary to sell any of our potential products, we must show through preclinical studies and human testing that each product is safe and effective. We have a number of Ligand and partner products moving toward or currently in clinical trials, the most significant of which are our Phase III trials for Targretin capsules in non-small cell lung cancer and three Phase III trials by our partners involving bazedoxifene and lasofoxifene. Our failure to show any product’s safety and effectiveness would delay or prevent regulatory approval of the product and could adversely affect our business. The clinical trials process is complex and uncertain. The results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a product’s safety and effectiveness to the satisfaction
of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials. The FDA may also require additional clinical trials after regulatory approvals are received, which could be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization.
The rate at which we complete our clinical trials depends on many factors, including our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. For example, each of our Phase III Targretin clinical trials will involve approximately 600 patients and may require significant time and investment to complete enrollments. Delays in patient enrollment may result in increased costs and longer development times. In addition, our collaborative partners have rights to control product development and clinical programs for products developed under the collaborations. As a result, these collaborators may conduct these programs more slowly or in a different manner than we had expected. Even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.
We may not be able to pay amounts due on our outstanding indebtedness when due which would cause defaults under these arrangements.
We and our subsidiaries may not have sufficient funds to make required payments due under existing debt. If we or our subsidiaries do not have adequate funds, we will be forced to refinance the existing debt and may not be successful in doing so. At June 30, 2002, we had outstanding a $2.5 million convertible note to SmithKline Beecham due in 2002 with interest at prime and convertible into our common stock at $13.56 per share.
We face substantial competition which may limit our revenues.
Some of the drugs that we are developing and marketing will compete with existing treatments. In addition, several companies are developing new drugs that target the same diseases that we are targeting and are taking IR-related and STAT-related approaches to drug development. The principal products competing with our products targeted at the cutaneous t-cell lymphoma market are Supergen/Abbott’s Nipent® and interferon, which is marketed by a number of companies, including Schering-Plough’s Intron® A. Products that will compete with Avinza include Purdue Pharma L.P.‘s OxyContin® and MS Contin®, Janssen Pharmaceutica Products, L.P.‘s Duragesic®, Roxane Laboratories, Inc.‘s Oramorph® SR and Purepac Phamaceutical Co.‘s Kadian®, each of which is currently marketed. Many of our existing or potential competitors, particularly large drug companies, have greater financial, technical and human resources than us and may be better equipped to develop, manufacture and market products. Many of these companies also have extensive experience in preclinical testing and human clinical trials, obtaining FDA and other regulatory approvals and manufacturing and marketing pharmaceutical products. In addition, academic institutions, governmental agencies and other public and private research organizations are developing products that may compete with the products we are developing. These institutions are becoming more aware of the commercial value of their findings and are seeking patent protection and licensing arrangements to collect payments for the use of their technologies. These institutions also may market competitive products on their own or through joint ventures and will compete with us in recruiting highly qualified scientific personnel.
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Third-party reimbursement and health care reform policies may reduce our future sales.
Sales of prescription drugs depend significantly on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. These third party payers frequently require drug companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for medical products and services. Our current and potential products may not be considered cost-effective and reimbursement to the consumer may not be available or sufficient to allow us to sell our products on a competitive basis. For example we have current and recurring discussions with insurers regarding reimbursement rates for our drugs, including Avinza which was recently approved for marketing. We may not be able to negotiate favorable reimbursement rates for our products, or may have to pay significant discounts to obtain favorable rates. Only one of our products, ONTAK, is currently eligible to be reimbursed by Medicare.
In addition, the efforts of governments and third-party payers to contain or reduce the cost of health care will continue to affect the business and financial condition of drug companies such as us. A number of legislative and regulatory proposals to change the health care system have been discussed in recent years, including price caps and controls for pharmaceuticals. These proposals could reduce and/or cap the prices for our products or reduce government reimbursement rates for products such as ONTAK. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on drug pricing. We cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts may have on our business. The announcement and/or adoption of such proposals or efforts could adversely affect our profit margins and business.
We rely heavily on collaborative relationships and termination of any of these programs could reduce the financial resources available to us.
Our strategy for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaborations with corporate partners, licensors, licensees and others. These collaborations provide us with funding and research and development resources for potential products for the treatment or control of metabolic diseases, hematopoiesis, women’s health disorders, inflammation, cardiovascular disease, cancer and skin disease, and osteoporosis. These agreements also give our collaborative partners significant discretion when deciding whether or not to pursue any development program. Our collaborations may not continue or be successful.
In addition, our collaborators may develop drugs, either alone or with others, that compete with the types of drugs they currently are developing with us. This would result in less support and increased competition for our programs. If products are approved for marketing under our collaborative programs, any revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaborators, who generally retain commercialization rights under the collaborative agreements. Our current collaborators also generally have the right to terminate their collaborations under specified circumstances. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully, our product development under these agreements will be delayed or terminated.
We may have disputes in the future with our collaborators, including disputes concerning which of us owns the rights to any technology developed. For instance, we were involved in litigation with Pfizer, which we settled in April 1996, concerning our right to milestones and royalties based on the development and commercialization of droloxifene. These and other possible disagreements between us and our collaborators could delay our ability and the ability of our collaborators to achieve milestones or our receipt of other payments. In addition, any disagreements could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.
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Challenges to, or failure to secure patents and other proprietary rights may significantly hurt our business.
Our success will depend on our ability and the ability of our licensors to obtain and maintain patents and proprietary rights for our potential products and to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. Patents may not be issued from any of these applications currently on file or, if issued, may not provide sufficient protection. In addition, disputes with licensors under our license agreements may arise which could result in additional financial liability or loss of important technology and potential products.
Our patent position, like that of many pharmaceutical companies, is uncertain and involves complex legal and technical questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, they may not adequately protect the technology we own or have licensed. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or license, and rights we receive under those patents may not provide competitive advantages to us. Further, the manufacture, use or sale of our products may infringe the patent rights of others.
Several drug companies and research and academic institutions have developed technologies, filed patent
applications or received patents for technologies that may be related to our business. Others have filed patentapplications and received patents that conflict with patents or patent applications we have licensed for our use, either by claiming the same methods or compounds or by claiming methods or compounds that could dominate those licensed to us. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, United States patent applications may be kept confidential while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published six months or more after filing. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. While we routinely receive communications or have conversations with the owners of other patents, none of these third parties have directly threatened an action or claim against us. If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.
We have had and will continue to have discussions with our current and potential collaborators regarding the scope and validity of our patent and other proprietary rights. If a collaborator or other party successfully establishes that our patent rights are invalid, we may not be able to continue our existing collaborations beyond their expiration. Any determination that our patent rights are invalid also could encourage our collaborators to terminate their agreements where contractually permitted. Such a determination could also adversely affect our ability to enter into new collaborations.
We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor’s rights. If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.
We have learned that Hoffmann-La Roche Inc. has received a United States patent and has made patent filings in foreign countries that relate to our Panretin capsules and gel products. We filed a patent application with an earlier filing date than Hoffmann-La Roche’s patent, which we believe is broader than, but overlaps in part with, Hoffmann-La Roche’s patent. We believe we were the first to invent the relevant technology and therefore are entitled to a patent on the application we filed. The Patent and Trademark Office has initiated a proceeding to determine whether we or Hoffmann-La Roche are entitled to a patent. We may not receive a favorable outcome in the proceeding. In addition, the proceeding may delay the Patent and Trademark Office’s decision regarding our earlier application. If we do not prevail, the Hoffmann-La Roche patent might block our use of Panretin capsules and gel in specified cancers.
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We have also learned that Novartis AG has filed an opposition to our European patent that covers the principal active ingredient of our ONTAK drug. We are currently investigating the scope and merits of this opposition. If the opposition is successful, we could lose our ONTAK patent protection in Europe which could substantially reduce our future ONTAK sales in that region. We could also incur substantial costs in asserting our rights in this opposition proceeding, as well as in other interference proceedings in the United States.
We also rely on unpatented trade secrets and know-how to protect and maintain our competitive position. We require our employees, consultants, collaborators and others to sign confidentiality agreements when they begin their relationship with us. These agreements may be breached and we may not have adequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.
Reliance on third-party manufacturers to supply our products risks supply interruption or contamination and difficulty controlling costs.
We currently have no manufacturing facilities and we rely on others for clinical or commercial production of our marketed and potential products. In addition, certain raw materials necessary for the commercial manufacturing of our products are custom and must be obtained from a specific sole source. Elan manufactures Avinza for us, Cambrex manufactures ONTAK for us and RP Scherer and Raylo manufacture Targretin capsules for us.
To be successful, we will need to ensure continuity of the manufacture of our products, either directly or through others, in commercial quantities, in compliance with regulatory requirements and at acceptable cost. Any extended and unplanned manufacturing shutdowns could be expensive and could result in inventory and product shortages. While we believe that we would be able to develop our own facilities or contract with others for manufacturing services with respect to all of our products, if we are unable to do so our revenues could be adversely affected. In addition, if we are unable to supply products in development, our ability to conduct preclinical testing and human clinical trials will be adversely affected. This in turn could also delay our submission of products for regulatory approval and our initiation of new development programs. In addition, although other companies have manufactured drugs acting through IRs and STATs on a commercial scale, we may not be able to do so at costs or in quantities to make marketable products.
The manufacturing process also may be susceptible to contamination, which could cause the affected manufacturing facility to close until the contamination is identified and fixed. In addition, problems with equipment failure or operator error also could cause delays in filling our customers’ orders.
Our business exposes us to product liability risks or our products may need to be recalled and we may not have sufficient insurance to cover any claims.
Our business exposes us to potential product liability risks. Our products also may need to be recalled to address regulatory issues. A successful product liability claim or series of claims brought against us could result in payment of significant amounts of money and divert management’s attention from running the business. Some of the compounds we are investigating may be harmful to humans. For example, retinoids as a class are known to contain compounds which can cause birth defects. We may not be able to maintain our insurance on acceptable terms, or our insurance may not provide adequate protection in the case of a product liability claim. To the extent that product liability insurance, if available, does not cover potential claims, we will be required to self-insure the risks associated with such claims. We believe that we carry reasonably adequate insurance for product liability claims.
We use hazardous materials which requires us to incur substantial costs to comply with environmental regulations.
In connection with our research and development activities, we handle hazardous materials, chemicals and various radioactive compounds. To properly dispose of these hazardous materials in compliance with environmental regulations, we are required to contract with third parties at substantial cost to us. Our annual cost of compliance with these regulations is approximately $600,000. We cannot completely eliminate the risk of accidental contamination or injury from the handling and disposing of hazardous materials, whether by us or by our third-party contractors. In the event of any accident, we could be held liable for any damages that result, which could be significant. We believe that we carry reasonably adequate insurance for toxic tort claims.
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Our stock price may be adversely affected by volatility in the markets.
The market prices and trading volumes for our securities, and the securities of emerging companies like us, have historically been highly volatile and have experienced significant fluctuations unrelated to operating performance. For example, since January 1, 2000, the daily last reported sale price of our common stock on the Nasdaq National Market has been as high as $25.43 and as low as $6.21. Future announcements concerning us or our competitors may impact the market price of our common stock. These announcements might include:
Future sales of our common stock may depress our stock price.
Sales of substantial amounts of our common stock in the public market could seriously harm prevailing market prices for our common stock. These sales might make it difficult or impossible for us to sell additional securities when we need to raise capital.
You may not receive a return on your shares other than through the sale of your shares of common stock.
We have not paid any cash dividends on our common stock to date. We intend to retain any earnings to support the expansion of our business and we do not anticipate paying cash dividends in the foreseeable future. Accordingly, other than through a sale of your shares, you will not receive a return on your investment in our common stock, and you should not rely on an investment in our common stock if you require dividend income.
Our shareholder rights plan and charter documents may hinder or prevent change of control transactions.
Our shareholder rights plan and provisions contained in our certificate of incorporation and bylaws may discourage transactions involving an actual or potential change in our ownership. In addition, our board of directors may issue shares of preferred stock without any further action by you. Such issuances may have the effect of delaying or preventing a change in our ownership. If changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our current board of directors to be removed and replaced, even if you or our other stockholders believe that such actions are in the best interests of us and our stockholders.
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At June 30, 2002, our investment portfolio included fixed-income securities of $16.0 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. This risk is mitigated, however, due to the conservative nature of our investments and relatively short effective maturities of the debt instruments in our investment portfolio. Accordingly, an immediate 10% change in interest rates would have no material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time will, however, reduce our interest income.
We do not have a significant level of transactions denominated in currencies other than U.S. dollars and as a result we have very limited foreign currency exchange rate risk. The effect of an immediate 10% change in foreign exchange rates would have no material impact on our financial condition, results of operations or cash flows.
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During the three month period ended June 30, 2002, we issued the following securities:
On April 17, 2002, we issued 4,252,500 shares of our common stock in an unregistered transaction to selected institutional and accredited investors, including several current Ligand investors, for aggregate consideration of $69.3 million. In connection with the placement of the shares, we paid $3.1 million in cash compensation to the placement agents. We subsequently registered the resale of all of these shares on a Form S-3 registration statement (No. 333-87110), filed on April 29, 2002, as amended June 6, 2002 and June 26, 2002, and declared effective on July 2, 2002. The shares were issued under a claim of exemption under Regulation D promulgated by the SEC or, alternatively, under Section 4(2) of the Securities Act.
This transaction did not involve a public offering. Appropriate legends were affixed to the stock certificates, as applicable, issued in such transactions. We believe each transferee had adequate access to information about us to make an informed investment decision and each transferee is an accredited investor within the meaning of Rule 501 of Regulation D.
Our Annual Meeting of Stockholders was held on May 15, 2002. The following elections and proposals were approved at the Annual Meeting:
VOTES VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTAINING NONVOTE
------------- ------------- ------------- ------------- -------------
1. Election of a Board of
Directors. The total number of
votes cast for, or withheld for each
nominee was
as follows:
Henry F. Blissenbach 54,994,499 -- -- 572,272 -- -- -- --
Alexander D. Cross, Ph.D. 54,988,999 -- -- 577,772 -- -- -- --
John Groom 54,993,512 -- -- 573,259 -- -- -- --
Irving S. Johnson, Ph.D. 50,073,761 -- -- 5,493,010 -- -- -- --
Carl C. Peck, M.D. 55,010,786 -- -- 555,985 -- -- -- --
David E. Robinson 54,960,022 -- -- 606,749 -- -- -- --
Michael A. Rocca 55,004,154 -- -- 562,617 -- -- -- --
2. Approval of a new 2002 Stock 44,461,429 10,969,250 -- -- 136,092 -- --
Option/Stock Issuance Plan to
increase the authorized number of
shares of common stock available for
issuance under such plan from
10,323,457 to 11,073,457.
3. Approval of a new 2002 54,559,648 887,437 -- -- 119,686 -- --
Employee Stock Purchase Plan to
increase the authorized number of
shares of common stock available for
purchase under such plan from
465,000 to 540,000.
4. Ratification of the 55,247,076 267,107 -- -- 52,588 -- --
appointment of Deloitte & Touche LLP
as the independent auditors for the
fiscal year ending December 31, 2002.
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| Exhibit 3.1 (1) | Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.2). |
| Exhibit 3.2 (1) | Bylaws of the Company, as amended (Filed as Exhibit 3.3). |
| Exhibit 3.3 (2) | Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Company. |
| Exhibit 3.5 (6) | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated June 14, 2000. |
| Exhibit 4.1 (8) | Specimen stock certificate for shares of Common Stock of the Company. |
| Exhibit 4.2 (3) | Preferred Shares Rights Agreement, dated as of September 13, 1996, by and between the Company and Wells Fargo Bank, N.A. (Filed as Exhibit 10.1) |
| Exhibit 4.3 (4) | Amendment to Preferred Shares Rights Agreement, dated as of November 9, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Filed as Exhibit 99.1). |
| Exhibit 4.4 (9) | Second Amendment to the Preferred Shares Rights Agreement, dated as of December 23, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Filed as Exhibit 1). |
| Exhibit 4.5 (7) | Indenture, dated as of December 23, 1992 by and between Glycomed Incorporated and Chemical Trust Company of California. (Filed as Exhibit 4.3). |
| Exhibit 4.6 (5) | First Supplement Indenture, dated as of May 18, 1995 by and among the Company, Glycomed Incorporated and Chemical Trust Company of California. (Filed as Exhibit 10.133). |
| Exhibit 10.246 | Amended and Restated License Agreement Between The Salk Institute for Biological Studies and the Company (with certain confidential portions omitted). |
| Exhibit 99.1 | Certification of Principal Executive Officer. |
| Exhibit 99.2 | Certification of Principal Financial Officer. |
__________________________________
| (1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-4 (No. 333-58823) filed on July 9, 1998. |
| (2) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1999. |
| (3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-3 (No. 333-12603) filed on September 25, 1996, as amended. |
| (4) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with, the Registration Statement on Form 8-A/A Amendment No. 1 (No. 0-20720) filed on November 10, 1998. |
| (5) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form S-4 (No. 33-90160) filed on March 9, 1995, as amended. |
| (6) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Annual Report on Form 10-K for the period ended December 31, 2000. |
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| (7) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form S-3 of Glycomed Incorporated (Reg. No. 33-55042) filed on November 25, 1992, as amended. |
| (8) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 33-47257) filed on April 16, 1992 as amended. |
| (9) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Registration Statement on Form 8-A/A Amendment No. 2 (No. 0-20720) filed on December 24, 1998. |
The following reports on Form 8-K were filed during the quarter ended June 30, 2002:
Date of Filing Description
- -------------- -----------
April 1, 2002 Item 5 and 7, Other Events - FDA Approves Avinza(TM)Once-Daily
for Chronic, Moderate to Severe
Pain
- Ligand, Elan Agree on Early
Conversion of $20 Million
Note, Early Exercise of Ligand
Warrants
- Ligand Notifies X-Ceptor That It
Will Extend X-Ceptor Purchase
Option.
April 4, 2002 Item 5 and 7, Other Events - Sale of Ligand Shares by
Collaborative Partner
April 12, 2002 Item 5 and 7, Other Events - Lilly, Ligand Extend Research
and Development Collaboration to
Discover and Develop Novel Drugs
for Metabolic Diseases
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Ligand Pharmaceuticals Incorporated By: /S/ PAUL V.MAIER Paul V. Maier Senior Vice President, Chief Financial Officer |
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