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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0160744
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10275 SCIENCE CENTER DRIVE 92121-1117
SAN DIEGO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 550-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of February 28, 1999 was $448,563,405. For purposes of this
calculation, shares of Common Stock held by directors, officers and 5%
stockholders known to the Registrant have been deemed to be owned by affiliates
which should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
As of February 28, 1999 the registrant had 46,151,837 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed not later than 120
days after December 31, 1998, in connection with the Registrant's 1999 Annual
Meeting of Stockholders, referred to herein as the "Proxy Statement," are
incorporated by reference into Part III of this Form 10-K. Certain exhibits
filed with the Registrant's prior registration statements and period reports
under the Securities Exchange Act of 1934 are incorporated herein by reference
into Part IV of this Report.
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PART 1
ITEM 1. BUSINESS
The discussion of the Company's business contained in this annual report on
form 10-K may contain certain projections, estimates and other forward-looking
statements that involve a number of risks and uncertainties, including those
discussed below at "Risks and Uncertainties." While this outlook represents
management's current judgment on the future direction of the business, such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. The Company undertakes 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
annual report.
The Company's trademarks, trade names and service marks referenced in this
annual report include ONTAK(TM), Panretin(R) and Targretin(R). Each other
trademark, trade name or service mark appearing in this annual report belongs to
its holder.
References to Ligand Pharmaceuticals Incorporated ("Ligand" or the
"Company") include its wholly owned subsidiaries -- Glycomed Incorporated;
Ligand (Canada) Incorporated; Ligand Pharmaceuticals International,
Incorporated; Marathon Biopharmaceuticals, Incorporated; and Seragen,
Incorporated.
OVERVIEW
Ligand's goal is to build a profitable pharmaceutical company which
discovers, develops and markets new drugs that address critical unmet medical
needs of patients in the areas of cancer, men's and women's health and skin
diseases, as well as osteoporosis, metabolic, cardiovascular and inflammatory
diseases. The Company strives to develop drugs that are more effective and/or
safer than existing therapies and that are more convenient (taken orally or
topically administered) and cost effective. Ligand pursues the discovery,
development, approval and marketing of new drugs through internal and
collaborative research and development programs, and through the licensing or
acquisition of late-stage development products. Internal and collaborative
programs utilize Ligand's proprietary science technology. (See "Technology.")
In-licensing and acquisition programs focus on products which have near-term
prospects of FDA approval, and which can be marketed by a small specialty cancer
and HIV-center sales force.
In February 1999, the Company was granted United States ("U.S.") Food and
Drug Administration ("FDA") marketing approval for its first two
products -- Panretin(R) gel for the topical treatment of cutaneous AIDS-related
Kaposi's sarcoma ("KS") and ONTAK(TM) for the treatment of patients with
persistent or recurrent cutaneous T-cell lymphoma ("CTCL") whose malignant cells
express the CD25 component of the Interleukin-2 ("IL-2") receptor. In late 1998
and early 1999, Ligand assembled a 26-member specialty oncology and HIV-center
sales force in the U.S. to launch Panretin(R) gel and ONTAK(TM) in the U.S. In
addition, the Company established a subsidiary, Ligand Pharmaceuticals
International, Inc., with a branch in London, England to manage its European
operations. A Canadian sales force, which has been in place since 1995,
currently markets two in-licensed cancer products in Canada.
Ligand's drug discovery and development programs are based on its
leadership position in gene transcription technology. Ligand's proprietary
technologies involve two natural mechanisms that regulate gene activity: (1)
non-peptide hormone activated Intracellular Receptors ("IRs") and (2) cytokine
and growth factor activated Signal Transducers and Activators of Transcription
("STATs"). (See "Technology.") Ligand applies IR technology to the discovery and
development of small molecule drugs to enhance therapeutic and safety profiles
and to address unmet patient needs in certain cancers, men's and women's health,
skin diseases, osteoporosis, cardiovascular and metabolic diseases, and
inflammatory disorders. Similarly, STATs influence many biological processes,
including those associated with cancer, other metabolic diseases, and
inflammation and blood cell formation. Through its acquisition of Seragen
Incorporated ("Seragen") in August 1998 and Glycomed Incorporated ("Glycomed")
in May 1995, Ligand also has proprietary technology in fusion proteins and
complex carbohydrates. (See "Strategic Transactions" and "Inflammatory
Disease.") Fusion protein technology was used in the development of ONTAK(TM).
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Ligand uses an innovative combination of internal and collaborative
programs to develop and market potential drugs. Ligand has 25 compounds in
various stages of internal development. (See "Ligand Products in Clinical
Development" and "Ligand Research and Development Programs.") Targretin(R)
capsules and Targretin(R) gel are in late-stage human testing for treatment of
patients with CTCL. Targretin(R) gel is in earlier-stage human testing for the
treatment of actinic keratoses and skin cancer. Targretin(R) capsules are in
early-stage human testing for the treatment of patients with breast cancer,
psoriasis and diabetes. Other internal programs include the post-marketing
trials for ONTAK(TM), which the FDA required in connection with its accelerated
approval. A Phase II trial for ONTAK(TM) is ongoing in the treatment of
psoriasis. Ligand's compound LGD1550 is in early-stage human testing for the
treatment of patients with advanced cancer. Ligand has established several
corporate collaborations, with 23 compounds in development, which may generate
future royalty-based revenue. The table below highlights the Company's
collaborations to date:
INITIATION OF
CORPORATE COLLABORATOR COLLABORATION DISEASE/INDICATION
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Eli Lilly and Company November 1997 Metabolic and cardiovascular diseases
SmithKline Beecham Corporation February 1995 Oncological uses, anemia
Wyeth-Ayerst, the pharmaceutical September 1994 Osteoporosis, breast cancer, oral
division of American Home contraception, endometriosis, uterine
Products fibroids, hormone replacement therapy
Abbott Laboratories July 1994 Rheumatoid arthritis, inflammatory bowel
disease, asthma, dermatitis
Sankyo Company, Ltd. June 1994 Inflammation
Glaxo-Wellcome plc September 1992 Atherosclerosis and other cardiovascular
diseases
Allergan, Inc. June 1992 Type II diabetes, skin disorders
Pfizer Inc. May 1991 Osteoporosis
Ligand also seeks to in-license and/or acquire cancer and other medical
specialty drugs, which are in late-stage clinical development or have been
approved by regulatory authorities. During 1998, Ligand acquired ONTAK(TM), a
treatment for CTCL, in its acquisition of Seragen and in-licensed rights in the
U.S. and Canada to Morphelan(TM) from Elan Corporation, plc ("Elan").
Morphelan(TM), a once-daily, oral, sustained-release product for the management
of pain in oncology and HIV patients, is in Phase III clinical trials in the
U.S. (See "Strategic Transactions.")
STRATEGY
Business Strategy. The Company's strategic goals are to build a marketing
and sales presence in the U.S., Canada and Western Europe, focus on initial
regulatory approval for smaller indications that bring products to market
quickly, expand the markets for its products through additional indication
approvals, and license or acquire technology and/or products in advanced stages
of development. Ligand's internal efforts have been focused primarily on the
discovery and development of retinoids, sex steroid receptor agonists and
antagonists and cytokine agonists for use in specialty market applications,
principally cancer, gynecological disorders and male hormonal imbalances. An
outgrowth of this research has led to a development program in cardiovascular
and metabolic disease. Ligand has developed a cancer product pipeline that
includes two products marketed in the U.S., two in-licensed products marketed in
Canada, and four late-stage products nearing NDA submission.
Ligand has entered into research and development collaborations with major
pharmaceutical companies, with the goal of building a future royalty-based
business. Ligand's collaborative programs focus on discovering drugs for certain
cardiovascular, inflammatory, metabolic and other diseases, as well as broad
applications for women's and men's health. (See "Corporate Collaborations.")
Ligand believes its collaborators have the resources, including clinical and
regulatory experience, manufacturing capabilities and marketing infrastructure,
needed to develop and commercialize drugs for these markets. The arrangements
generally provide for collaborative discovery programs funded largely by the
corporate partners aimed at discovering
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new therapies for diseases treated by primary care physicians. In general, drugs
resulting from these collaborations will be developed, manufactured and marketed
by the corporate partners. Ligand's collaborative agreements provide for
research revenue during the drug discovery stage, milestone revenue for
compounds successfully moving through clinical development, and royalty revenue
from the sale of drugs developed through collaborative efforts.
Ligand also seeks to in-license products from other companies that provide
a strategic fit with the Company's product portfolio. Products in-licensed by
the Company to date are Morphelan(TM), PHOTOFRIN(R), and Proleukin(R). (See
"Elan Strategic Alliance" and "Marketed Products.")
Sales and Marketing. Ligand's sales strategy is to create a targeted sales
force specializing in cancer, to sell its products and those it in-licenses. In
1998 and early 1999, Ligand created a 26-member U.S.-based specialty cancer
sales force. The team includes two national account managers, four regional
managers, and 20 senior cancer sales specialists. To further support the launch
of the Company's first two cancer products, Ligand recently established a
Medical Science Liaison Group to work closely with clinical investigators and
the specialty cancer sales force to coordinate post-marketing clinical trials.
Ligand services its Canadian sales through a Canadian cancer sales team. In
early 1999, the Company laid the groundwork for global commercialization with
the initiation of European operations through its subsidiary, Ligand
Pharmaceuticals International, Inc. For a discussion of the risks associated
with sales and marketing see "Risks and Uncertainties."
Technology. Ligand uses three proprietary technologies in its current
internal product development, IRs and STATs and fusion proteins. Ligand's drug
discovery and development programs have established a leadership position in
gene transcription technology through proprietary technologies involving two
natural mechanisms that regulate gene activity: (1) non-peptide
hormone-activated IRs and (2) cytokine and growth factor activated STATs. Ligand
applies IR technology to the discovery and development of small molecule drugs
that address unmet patient needs and enhance the therapeutic and safety profiles
of marketed medications in certain cancers, men's and women's health, skin
diseases, osteoporosis, cardiovascular and metabolic diseases, and inflammatory
disorders. STAT technology is being used to discover new treatments for diseases
such as cancer, metabolic diseases, inflammation and blood cell formation. The
recently acquired fusion protein technology has led to the discovery of a number
of molecules developed by Seragen, a wholly owned subsidiary of Ligand.
Potential indications for this technology include the treatment of cancers
including CTCL, autoimmune diseases such as rheumatoid arthritis, psoriasis, and
HIV infection/AIDS. ONTAK(TM), approved in 1999 for the treatment of patients
with persistent or recurrent cutaneous CTCL whose malignant cells express the
CD25 component of the IL-2 receptor, was developed using fusion protein
technology.
Currently, Ligand has five retinoid products in its cancer pipeline,
Panretin(R) gel, Panretin(R) capsules, Targretin(R) gel, Targretin(R) capsules
and LGD1550, all of which were developed using IR technology. (See
"Technology.") Retinoids may offer important clinical advantages over currently
available cancer therapies by triggering natural mechanisms to halt or reverse
the progress of various forms of cancer. Retinoids selectively target cells that
express retinoid receptors. Accordingly, they offer potentially less toxic side
effect profiles compared to some chemotherapeutic agents, which kill rapidly
growing cells, cancerous or not. IR technology was instrumental in the
development of Ligand's first approved product by the FDA in early 1999,
Panretin(R) gel.
Ligand also in-licenses technologies to pursue the development of its core
technologies. As such, when a drug is discovered at Ligand, the Company may be
obligated to pay milestone payments, royalties, and/or license fees under the
terms of certain agreements. Ligand has entered into licensing agreements with
Baylor College of Medicine ("Baylor"), The Salk Institute of Biological Studies
("Salk Institute"), and Rockefeller University ("Rockefeller") for certain
rights to IR and STAT technologies. (See "Academic Collaborations.")
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STRATEGIC TRANSACTIONS
In 1998, Ligand acquired rights to ONTAK() through the acquisition of
Seragen and the concurrent execution of related agreements with Lilly. Also in
1998, Ligand in-licensed Morphelan() from Elan, a late-stage development product
for the management of pain in cancer and HIV patients.
COMPANY NAME PRODUCT DISEASE/INDICATION STATUS MARKETING RIGHTS
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Elan Morphelan(TM) Pain management in Phase III U.S., Canada; Europe
HIV/Cancer (co-promotion
option)
Seragen ONTAK(TM) CTCL Marketed in U.S. Worldwide
Elan Strategic Alliance. In September 1998, the Company and Elan signed a
binding letter of agreement and in November 1998 signed definitive documents for
a strategic alliance, which provides Ligand with financing through December 31,
1999 of up to $130.0 million. As of December 31, 1998, Elan had provided
approximately $60.0 million of the potential $130.0 million in financing.
$50.0 million of the $60.0 million in financing was provided by Elan
through the purchase of approximately $20.0 million of the Company's common
stock (1,716,738 shares, valued at $11.65 per share) in two installments and
$30.0 million in issue price of zero coupon convertible senior notes due 2008
with an 8.0% per annum yield to maturity. Interest will accrue during the term
of the notes. The remaining available notes may be used to finance the final
payments for the Seragen merger due in August 1999, as well as other
acquisitions of complementary technologies, subject to the consent of Elan.
In conjunction with the strategic alliance, Elan licensed to Ligand
exclusive rights to market Elan's proprietary product Morphelan(TM) in the U.S.
and Canada for pain management in cancer and HIV patients. Ligand also has an
option to co-promote Morphelan(TM) in continental Europe for the same
indications. Morphelan(TM), a once-daily, oral capsule form of morphine, may
provide sustained pain management for HIV and cancer patients as compared to
current therapies requiring frequent dosage treatment. Morphelan(TM) is
currently in Phase III clinical trials in the U.S. Ligand can market and sell
Morphelan(TM), if approved, through its existing specialty cancer and HIV-center
sales force.
Under the license agreement, Ligand paid Elan $15.0 million, in the form of
$5.0 million of common stock (429,185 shares, valued at $11.65 per share) and
$10.0 million in notes (a portion of the $60.0 million of financing provided to
date). The $15.0 million consideration was written off in 1998 as in-process
technology as a one-time charge to results of operations. Milestone payments
will be made based upon the occurrence of certain events up to and including the
approval of the NDA in the U.S. Payment may be in cash or, subject to certain
conditions, in common stock or notes.
Seragen. In May 1998, Ligand announced an agreement to acquire Seragen;
Seragen became a wholly owned subsidiary of Ligand in August 1998. In August
1998, Seragen signed an agreement with Ligand and Lilly in which Lilly assigned
its rights and obligations with Seragen to Ligand, including its sales and
marketing rights to ONTAK(TM). (See "Marketed Products.") Under the terms of the
merger agreement, Ligand paid merger consideration at closing of $30.0 million,
$4.0 million in cash and $26.0 million in the form of the Company's common stock
(1,858,515 shares, valued at $13.99 per share). The merger agreement required an
additional $37.0 million to be paid, at the Company's option in cash and/or
common stock, six months after the date of receipt of final FDA clearance to
market ONTAK(TM). In February 1999, the FDA approved ONTAK(TM) with certain
post-marketing requirements. Under the Company's agreement with Lilly, Ligand
paid $5.0 million (434,546 shares, valued at $11.51 per share) in March 1999 in
the form of common stock as a milestone payment to Lilly as a result of the
FDA's marketing approval for ONTAK(TM). Upon certain other events, Lilly could
receive an additional $5.0 million in milestone payments.
In connection with the Seragen merger, the Company entered into a
definitive asset purchase agreement to acquire substantially all the assets of
Marathon Biopharmaceuticals, LLC, which provided manufacturing and other
services to Seragen under a service agreement. In January 1999, the Company
purchased the assets. Ligand paid, at closing, $5.0 million in the form of the
common stock (402,820 shares, valued at $12.41 per
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share) with an additional $3.0 million to be paid in August 1999, six months
after FDA approval of ONTAK(TM).
Ligand's strategic intent in the acquisition of Seragen was to acquire the
technology of Seragen, including ONTAK(TM), a late-stage product that
represented a good fit with Ligand's developing cancer product portfolio. The
technology acquired from Seragen includes fusion protein expertise and the
patent estate related to this technology. (See "Technology -- Fusion Protein
Technology.") The patent estate provides Ligand with a potential royalty stream
beginning in 2001 for Simulect(R), a Novartis Pharmaceuticals Corporation
product. The FDA approved Simulect(R) in May 1998 for acute rejection episodes
in renal transplant recipients. (See "Out-licensed Products.")
MARKETED PRODUCTS
Ligand currently markets four products that are approved for the treatment
of various cancers -- ONTAK(TM), Panretin(R) gel, PHOTOFRIN(R) and Proleukin(R).
ONTAK(TM) and Panretin(R) gel are marketed in the U.S. by Ligand's specialty
cancer sales force. PHOTOFRIN(R) and Proleukin(R) are in-licensed products
marketed solely in Canada by Ligand's Canadian sales force, which was
established in 1995.
PRODUCT APPROVED INDICATION(1) MARKETING RIGHTS
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ONTAK(TM) CTCL Worldwide
Panretin(R) Kaposi's sarcoma Worldwide
gel
PHOTOFRIN(R) Esophageal cancer, Canada Only
Superficial bladder cancer
Proleukin(R) Metastatic renal cell Canada Only
carcinoma,
Metastatic malignant melanoma
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(1) For a discussion of clinical trials being conducted with ONTAK(TM) and
Panretin(R) gel, see "Ligand Products in Clinical Development."
ONTAK(TM). ONTAK(TM), approved by the FDA for the treatment of patients
with persistent or recurrent cutaneous CTCL whose malignant cells express the
CD25 component of the IL-2 receptor, was developed using Seragen's fusion
protein technology. ONTAK(TM) is the first product commercialized by Ligand for
the treatment of CTCL, and the first treatment to be approved for CTCL in nearly
10 years.
CTCL is a type of non-Hodgkin's lymphoma ("NHL") that appears initially in
the skin, but over time may involve other organs. The disease can be extremely
disfiguring and debilitating, and median survival for late-stage patients is
less than three years. The prognosis for CTCL is based in part on the stage of
the disease when diagnosed. CTCL is most commonly a slowly progressing cancer,
and many patients live with the complications of CTCL for 10 or more years after
diagnosis. However, some patients have a much more aggressive form of this
disease. CTCL affects an estimated 16,000 people in the U.S.
ONTAK(TM) was granted priority review designation by the FDA in February
1998, and in February 1999, the FDA granted marketing approval for ONTAK(TM)
under the accelerated approval regulations for the treatment of patients with
persistent or recurrent cutaneous CTCL whose malignant cells express the CD25
component of the IL-2 receptor. ONTAK(TM) is manufactured and marketed by
Ligand.
Human clinical studies indicated that ONTAK(TM) was safe and effective for
the treatment of patients with previously treated CTCL. The Phase III
intent-to-treat analysis of 71 patients showed that 30% of patients treated with
ONTAK(TM) had a reduction in tumor burden of 50% or greater and approximately
10% of the patients showed complete resolution of all evidence of the disease
for a median duration of nine months. As expected in patients receiving an
intravenous infusion of foreign protein, significant adverse events were
reported in all patients in the clinical trials including flu-like symptoms
(91%); acute hypersensitivity-type reactions (69%); nausea and vomiting (64%);
infections (48%) and vascular leak syndrome (27%).
The FDA acted under the accelerated approval regulations in its approval of
ONTAK(TM) and requested that the Company conduct certain post-approval clinical
and research studies to further document the safety, efficacy and
pharmacokinetic profile of this drug.
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Panretin(R) gel. Panretin(R) gel, a topical retinoid developed utilizing IR
technology, was approved for marketing by the FDA in February 1999 for the
topical treatment of cutaneous lesions of patients with AIDS-related KS. The
active substance in Panretin(R) gel is a small molecule, non-peptide hormone
isolated and characterized in 1991 as 9-cis retinoic acid by scientists at
Ligand in collaboration with scientists at The Salk Institute and Baylor. 9-cis
retinoic acid is the first non-peptide hormone discovered in over 25 years and
appears to be a natural hormone for both the RAR and RXR subfamilies of retinoid
receptors. (See "Technology -- Intracellular Receptor Technology.") Panretin(R)
gel is one of five proprietary retinoid products in advanced stages of clinical
development.
Clinical trials for Panretin(R) gel were launched in June 1994, with Phase
III trials commencing in the U.S. in the second quarter of 1996 and
internationally in the third quarter of 1996. In June 1998, the Company reported
the final analysis of data from the North American and international pivotal
Phase III studies at the 12th International AIDS Conference in Geneva,
Switzerland. Data from the Phase III pivotal studies demonstrated that
Panretin(R) gel is clinically effective in treating the dermal lesions of
AIDS-related KS in up to 50% of patients studied, confirming the positive
results from the interim analyses reported in December 1997. In February 1999,
the FDA approved Panretin(R) gel for the treatment of cutaneous lesions of
patients with AIDS-related KS. Panretin(R) gel has received orphan drug
designation in this indication.
Ligand is also pursuing approval of Panretin(R) gel for the treatment of
cutaneous lesions of patients with AIDS-related KS in Canada and Europe. Ligand
filed a New Drug Submission ("NDS") with the Canadian Health Protection Branch
("CHPB") in September 1998 and submitted a Marketing Authorization Application
("MAA") with the European Agency for the Evaluation of Medicinal Products in
February 1999. The NDS for Panretin(R) gel has been accepted for priority review
in Canada. The NDS filing in Canada and the MAA submission in Europe are based
on the pivotal Phase III clinical trials included in the NDA submitted to the
FDA for Panretin(R) gel in May 1998. In January 1999, Ligand announced the
formation of Ligand Pharmaceuticals International, Inc. and the appointment of
its president of European Operations in anticipation of the submission of the
MAA for Panretin(R) gel in Europe.
PHOTOFRIN(R). In March 1995, Ligand acquired from QLT PhotoTherapeutics,
Inc. ("QLT") exclusive Canadian marketing rights to PHOTOFRIN(R), a
laser-activated drug for use in photodynamic therapy for esophageal cancer and
superficial bladder cancer, and began distribution of the product in July 1995.
Each year over 3,500 new cases of superficial bladder cancer and 1,200 new cases
of esophageal cancer are diagnosed in Canada. In addition, Ligand has the rights
to sell the product for any other approved indications in Canada. In August
1997, QLT filed a supplemental NDS with the CHPB for PHOTOFRIN(R) in
advanced-stage lung cancer.
Proleukin(R). In September 1994, Ligand acquired from Cetus Oncology
Corporation, a subsidiary of Chiron Corporation, exclusive Canadian marketing
rights to Proleukin(R), a recombinant human Interleukin-2 for the treatment of
metastatic renal cell carcinoma, and began distribution of the product in April
1995. Nearly 3,900 new cases of kidney cancer are reported in Canada each year.
Proleukin(R) is also being tested with interferon alpha to determine if
additional indications are feasible. In January 1999, the CHPB issued a Notice
of Compliance for Proleukin(R) for the treatment of patients with metastatic
malignant melanoma.
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LIGAND PRODUCTS IN CLINICAL DEVELOPMENT
Ligand is developing several proprietary products for which it has
worldwide rights for a variety of cancers and skin diseases. These product
development programs are based on retinoids discovered through Ligand's IR
technology and ONTAK(TM) which was developed using Seragen's fusion protein
technology. (See "Technology.") The table below provides a summary of clinical
development programs currently being conducted by Ligand.
PROGRAM DISEASE/INDICATION DEVELOPMENT PHASE
- ----------------- ------------------------------------- -------------------
ONTAK(TM) Non-Hodgkin's lymphoma (NHL) Phase II
Psoriasis Phase II
Panretin(R) gel Skin cancers Phase II
(Under development)
Panretin(R) Kaposi's sarcoma (KS) Phase II
capsules Pediatric cancers, Breast cancer Phase II
Myelodysplastic syndrome (MDS) Phase II
Severe plaque psoriasis Phase II
Bronchial metaplasia Phase II
Targretin(R) CTCL, Lung cancer (minimal disease) Phase II/III
capsules Breast cancer Phase II
Moderate-to-severe psoriasis Phase II
Lung cancer (combination therapy) Phase II
Head and neck cancer Phase II
Type II diabetes mellitus (Diabetes) Phase II
Targretin(R) gel CTCL Phase III
Actinic keratoses Phase II
Skin cancers Phase II
(Under development)
LGD1550 capsules Advanced cancer Phase I/II
Head and neck cancer, Cervical cancer Phase II
(Under development)
Development phase refers to the current stage of development of the most
advanced indication. Clinical trials are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into humans, the emphasis is on testing for adverse effects,
dosage tolerance, absorption, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a representative patient population
to determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance and optimal dosage and to identify
related adverse side effects and safety risks. Once a compound is found to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to evaluate clinical efficacy further and to
further test for safety. Sometimes Phase I and II trials or Phase II and III
trials are combined. In the U.S., the FDA reviews both the clinical plans and
the results of the trials and may discontinue the trials at any time if there
are significant safety issues.
In connection with the exercise of the buyback of ALRT and the exclusive
licensing arrangement with Allergan, Inc. ("Allergan") (see "Corporate
Collaborations -- Allergan Inc."), Ligand acquired the exclusive right to
develop and commercialize Panretin(R) capsules, Panretin(R) gel, LGD1550,
LGD1268 and LGD1324.
In connection with the corporate collaboration with Lilly described in
"Corporate Collaborations -- Eli Lilly and Company," Lilly received worldwide,
exclusive rights to Targretin(R), other Ligand compounds and
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technology associated with the RXR receptor, HNF4, PPAR modulators and the ob
gene pathway in all fields other than cancer and dermatology. In early 1999,
Lilly opted not to proceed with the development of certain first generation
compounds, including Targretin(R), in the RXR program for diabetes. As a result
of this decision, all rights to the oral form of Targretin(R) reverted to Ligand
and LGD1268 and LGD1324 returned to the pool of eligible RXR modulators for
possible use in oncology in combination with a selective estrogen receptor
modulator ("SERM") under the separate collaboration agreement between Ligand and
Lilly.
ONTAK(TM). ONTAK(TM) is the first of a new class of targeted cytotoxic
biologic agents called fusion proteins. In addition to the use of ONTAK(TM) in
CTCL, a Phase II trial for the treatment of patients with NHL is under
development by the Eastern Cooperative Oncology Group. Nearly 300,000 people in
the U.S. are affected by NHL. Two Phase III trials are currently in progress to
evaluate the use of ONTAK(TM) in patients with CTCL who have received two to
four previous therapies. A Phase II trial with ONTAK(TM) for the treatment of
severe psoriasis, a condition which affects an estimated 1.4 to 1.9 million
people in the U.S., is ongoing.
Retinoids. Five of the products in Ligand's proprietary product development
programs are retinoids, discovered and developed using Ligand's proprietary IR
technology. Retinoids have the ability to trigger natural mechanisms to halt or
reverse various forms of cancer. (See "Technology -- Retinoid Responsive IRs.")
Retinoids selectively target cells that express retinoid receptors and offer
potentially less toxic side effect profiles compared to some chemotherapeutic
agents, which may kill rapidly growing cells indiscriminately, cancerous or not.
The five retinoid products currently under clinical development by Ligand are
Panretin(R) gel, Panretin(R) capsules, Targretin(R) capsules, Targretin(R) gel
and LGD1550 capsules.
Panretin(R) gel. Panretin(R) gel incorporates 9-cis retinoic acid, a
retinoid isolated and characterized by Ligand in 1991 in collaboration with
scientists at The Salk Institute and Baylor. 9-cis retinoic acid is the first
non-peptide hormone discovered in over 25 years and appears to be a natural
ligand for the RAR and RXR subfamilies of retinoid receptors. (See
"Technology -- IR Technology.") A Phase II trial is under development for use of
Panretin(R) gel in patients with basal cell carcinoma, a disease with an
estimated 600,000 new cases diagnosed in the U.S. each year.
Panretin(R) capsules. Panretin(R) capsules also contain 9-cis retinoic acid
and have demonstrated clinical promise for the systemic treatment of cutaneous
AIDS-related KS, other cancers and skin disorders. In completed Phase I/II human
clinical trials, Panretin(R) capsules were tolerated at doses up to 140
mg/m(2)/day (milligrams per square meter of body surface per day). At the
maximum tolerated dose, side effects, including headaches, elevated triglyceride
levels, hypercalcemia and mucocutaneous irritation, were dose limiting
toxicities.
In February and June 1998, favorable results were reported in two Phase II
trials with Panretin(R) capsules in patients with KS. The two Phase II studies
were similar in design, with one conducted by the AIDS Malignancy Consortium
("AMC") sponsored by the National Cancer Institute ("NCI") and the other
conducted by Ligand. In the studies, Panretin(R) capsules were administered once
daily at doses increasing from 60 mg/m(2) to 140 mg/m(2). Study participants had
to have biopsy-proven KS associated with AIDS and at least five skin lesions
that were assessed every two weeks for response. Response was determined by
applying standard AIDS Clinical Trial Group criteria for complete and partial
response based on the indicator lesions. The overall response rate at final
analysis following the 16-week treatment period for patients meeting the
criteria for evaluation was 37% (19 of 50) in the AMC study and included one
complete responder. Drug-associated side effects were generally manageable, with
some patients requiring dose reductions due to side effects of headache, dry
skin, rash, alopecia, peeling/flaking skin and hyperlipidemia as the most common
events. The study conducted by Ligand enrolled 57 patients at five study
centers. The overall response rate for all patients was 39% (22 of 57), and for
patients who met the protocol-defined criteria for evaluation, the overall
response rate was 62% (21 of 34). One patient demonstrated a complete response.
Almost all patients were on highly active antiretroviral therapy, including at
least one protease inhibitor, prior to the start of Panretin(R) capsules
therapy. The side effect profile was similar to that in the AMC study. For the
22 responders, two patients relapsed and 20 continued to respond at the time of
the study's analysis. The studies' conclusions suggest that patient responses to
Panretin(R) capsules occurred independent of their pretreatment
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CD4(+)counts, concurrent antiretroviral therapy and prior treatment for
AIDS-related KS with systemic chemotherapy.
Ligand is conducting discussions with the FDA regarding the adequacy of the
data from these two Phase II clinical trials to support the filing of an NDA for
Panretin(R) capsules in AIDS-related KS. Panretin(R) capsules have not shown the
more significant side effects observed with commonly prescribed chemotherapies
used to treat KS. In addition, chemotherapeutic agents must be administered to
KS patients by injection or through intravenous infusion. Panretin(R) capsules
may provide patients with an effective way to control the disease in an easily
administered oral form.
Phase II trials with Panretin(R) capsules are ongoing in breast and
pediatric cancers, and in bronchial metaplasia. Ligand has completed Phase II
trials in myelodysplastic syndrome and in severe plaque psoriasis, and the
NCI-Canada has evaluated the results of a Phase I/II trial using Panretin(R)
capsules in combination with interferon alpha for renal cell carcinoma.
Targretin(R) capsules and Targretin(R) gel. Bexarotene, the active
substance in Targretin(R), is a synthetic retinoid developed by Ligand that
shows selective retinoid receptor subtype activity that is different from that
of 9-cis retinoic acid, the active substance in Panretin(R). (See
"Technology -- Retinoid Responsive IRs.") Targretin(R) selectively activates a
subclass of retinoid receptors called retinoid X receptors ("RXRs"). RXRs play
an important role in the control of a variety of cellular functions. Ligand's
preclinical research indicates that bexarotene has utility in the treatment of
psoriasis, solid tumors and tamoxifen-resistant breast tumors, as well as in
treatment and prevention models of breast cancer. In addition, preclinical
studies indicate bexarotene's utility in metabolic disorders, such as type II
diabetes mellitus, as these studies demonstrate the ability of bexarotene to
decrease blood glucose and insulin levels.
Ligand is developing Targretin(R) capsules for the treatment of patients
with refractory or persistent early-stage or refractory advanced-stage CTCL and
Targretin(R) gel for the treatment of patients with refractory or persistent
early-stage CTCL. If approved, Targretin(R) capsules and Targretin(R) gel, along
with the already approved ONTAK(TM), would result in the availability of Ligand
products for treating every stage of CTCL. Ligand has completed three trials for
the treatment of patients with CTCL with Targretin(R), two Phase II/III trials
with Targretin(R) capsules and one Phase III trial with Targretin(R) gel.
Interim findings based on analysis of Phase II/III clinical data for
Targretin(R) capsules from the first 84 patients with advanced stage CTCL who
were resistant to previous therapies and who received the dose believed
appropriate for marketing (300 mg/m(2)/day) showed a 49% (41 of 84 patients)
response rate using the Physician's Global Assessment score. Some early-stage
patients received a low dose (6.5 mg/m(2)/day) of Targretin(R) capsules; only
one of the 15 patients (7%) who received the low dose achieved a response,
suggesting that higher doses are required. Formal analyses in preparation for
the submission of an NDA are ongoing.
An interim assessment of a Phase I/II study for Targretin(R) gel in
patients with CTCL demonstrated that 59% (36 of 61 patients) showed a 50% or
greater improvement in the disease using the Physician's Global Assessment
score. A Phase III study of patients with refractory or persistent early-stage
CTCL accrued 51 patients. An interim assessment of the first 16 patients who
completed the protocol-specified evaluation period for this trial had a response
rate of 56% using the Physician's Global Assessment score. Patient enrollment in
these trials is complete and formal analyses in preparation for the submission
of an NDA are ongoing.
Ligand has completed Phase IIA trials with Targretin(R) gel for the
treatment of patients with actinic keratoses, a condition that is estimated to
affect up to 5 million people in the U.S. A Phase II trial with Targretin(R) gel
for the treatment of patients with non-melanoma skin cancer is under
development.
Ligand is also conducting a Phase II trial with Targretin(R)capsules for
the treatment of patients with moderate to severe psoriasis, a condition that is
estimated to affect between 1.4 and 1.9 million people in the U.S., as well as a
Phase II trial in patients with KS. A Phase II study in patients with head and
neck cancers has been completed. A Phase II/III trial is also ongoing in lung
cancer.
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In November 1998, Ligand initiated a Phase II trial with Targretin(R)
capsules for the treatment of patients with advanced breast cancer. The purpose
of this open-label study is to assess the efficacy, safety and tolerability of
Targretin(R) capsules at two dose levels in up to 180 patients at approximately
30 sites at leading cancer centers throughout the U.S. This year, experts
predict that more than 180,000 cases of breast cancer will be diagnosed, making
it the most common non-skin malignancy in the U.S. among women. The prevalence
of breast cancer in the U.S. is estimated to have reached more than 2 million.
Tamoxifen is currently the most widely prescribed breast cancer therapy.
A Phase II multicenter trial with Targretin(R) capsules in type II diabetes
in Europe is near completion. This trial demonstrated the insulin sensitizing
effects of the RXR-selective drug in humans. In November 1997, Ligand initiated
a collaboration with Lilly for the development of certain compounds in metabolic
disease, including type II diabetes. In the first quarter of 1999, Lilly decided
to focus the collaboration's research effort on second generation RXR modulators
which show an improved side effect profile in diabetes and opted not to proceed
with the development of Targretin(R) capsules and two other first generation
compounds in the RXR program in diabetes. As a result of this decision, all
rights to Targretin(R) capsules under the agreement relating to its development
reverted to Ligand. (See "Corporate Collaborations -- Eli Lilly and Company.")
LGD1550 capsules. LGD1550 is a potent retinoic acid receptor ("RAR")
agonist that strongly inhibits growth of several human cancer cell lines. (See
"Technology -- Intracellular Receptor Technology.") Phase I/IIA clinical trials
in advanced cancer have shown that LGD1550 capsules were well tolerated.
Investigators observed dose-limiting skin toxicities, diarrhea and abdominal
cramps. Dose-limiting toxicities, such as headache and lipid abnormalities,
frequently observed with other retinoids have not been observed with LGD1550.
Unlike all-trans retinoic acid, a retinoid approved for the treatment of acute
promyelocytic leukemia, LGD1550 does not appear to induce its own metabolism
over the dose range tested since blood levels are maintained with continued
therapy. Phase II studies with LGD1550 in combination with chemotherapy for the
treatment of patients with cervical and head and neck cancers are being
designed. The prevalence of cervical cancer cases in the U.S. is estimated at
205,000 cases, while the prevalence of head and neck cancer in the U.S. is
estimated at more than 210,000 cases.
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LIGAND RESEARCH AND DEVELOPMENT PROGRAMS
Ligand is pursuing several major internally funded and collaborative drug
discovery programs based on specific IRs (sex hormone, PPAR and glucocorticoid
receptor programs for cancer, skin and eye disease, metabolic disease, men's and
women's health and inflammatory disease) and STATs (interferon, hematopoietic
growth factor and cytokine programs for cancer and immunological diseases). (See
"Technology.")
PROGRAM DISEASE/INDICATION DEVELOPMENT PHASE MARKETING RIGHTS
------- ------------------ ----------------- ----------------
SEX HORMONE MODULATORS
Droloxifene Osteoporosis Phase II Pfizer
CP336,156 Osteoporosis Phase II Pfizer
TSE-424 Post-menopausal Phase II AHP
osteoporosis
ERA-923 Breast cancer Phase I AHP
Progesterone Antagonists Contraception, Reproductive Lead compounds selected AHP/Ligand
disorders
Progesterone Agonists Hormone replacement therapy Lead compounds selected AHP/Ligand
(HRT)
Androgen Antagonists Acne, Hirsutism, Alopecia, Development candidate Ligand worldwide
(LGD1331) Prostate cancer, Benign
prostatic hyperplasia (BPH)
Androgen Agonists Male HRT, Cachexia, AIDS- Lead compounds selected Ligand worldwide
wasting, Osteoporosis
CARDIOVASCULAR/METABOLIC DISEASE
LDL-lowering Compound Atherosclerosis Lead compounds selected Glaxo
PPAR Modulators Cardiovascular disease Lead compounds selected Glaxo
PPAR Modulators Diabetes, Metabolic disease Lead compounds identified Lilly
RXR Modulators Diabetes, Metabolic disease Lead compounds identified Lilly
HNF-4 Modulators Diabetes, Metabolic disease Research Lilly
ob-gene Pathway Metabolic disease Research Lilly
ob-Leptin Metabolic disease Research SmithKline Beecham
AGN4204 and AGN4326 Type II diabetes mellitus Lead compounds selected Allergan
(Diabetes)
INFLAMMATORY DISEASE
Glucocorticoid Agonists Inflammation Preclinical Abbott/Ligand
AGN4310 Psoriasis, Mucotaneous Development candidate Allergan
toxicity
STATS
Hematopoietic Growth Oncology, Anemia Lead compounds selected SmithKline
Factors Beecham/Ligand
Interferon Agonists Cancer, Infectious disease, Lead compounds identified Ligand worldwide
Multiple sclerosis
Cytokine Cancer, Immunology, Growth Research Ligand worldwide
Agonists/Antagonists disorders
Development phase refers to the current stage of development of the most
advanced indication. Research activities include research related to specific IR
and STATs targets and the identification of lead compounds. Lead compounds are
chemicals that have been identified that meet pre-selected criteria in cell
culture models for activity and potency against IR or STATs targets. More
extensive evaluation is then undertaken to determine if the compound should be
selected to enter into preclinical development. Once a lead compound is
selected, chemical modification of the compound is then undertaken to create the
best drug candidate.
The preclinical phase includes pharmacology and toxicology testing in
preclinical models (in vitro and in vivo), formulation work and manufacturing
scale-up to gather necessary data to comply with applicable regulations prior to
commencement of human clinical trials. Development candidates are lead compounds
that have successfully undergone in vitro and in vivo evaluation to demonstrate
that they have an acceptable profile, which justifies taking them through
preclinical development with the intention of filing an IND and initiating human
clinical testing. Clinical trials are typically conducted in three sequential
phases that may overlap. (See "Ligand Products in Clinical Development.")
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Droloxifene is a Pfizer compound for which Ligand performed work at
Pfizer's request. CP336,156 is a compound discovered through the Company's
collaborative relationship with Pfizer to which Pfizer has retained marketing
rights. (See "Corporate Collaborations -- Pfizer Inc.")
In connection with the corporate collaboration with Lilly described in
"Corporate Collaborations -- Eli Lilly and Company," Lilly received worldwide,
exclusive rights to Targretin(R), other Ligand compounds and technology
associated with the RXR receptor, HNF-4, PPAR modulators and the obgene pathway
in all fields other than cancer and dermatology.
In connection with the exercise of the buyback of ALRT and the exclusive
licensing arrangement with Allergan, Allergan acquired rights to AGN4204,
AGN4326 and AGN4310. Ligand has retained certain compound rights in its
collaborations with AHP, SmithKline Beecham and Abbott. (See "Corporate
Collaborations.")
SEX HORMONE MODULATORS DEVELOPMENT PROGRAMS
The primary objective of Ligand's sex hormone modulators programs is to
develop drugs for hormonally responsive cancers of men and women, hormone
replacement therapies and the treatment and prevention of diseases affecting
women's health, as well as hormonal disorders prevalent in men. Ligand's
programs in the sex hormone modulators area target development of
tissue-selective modulators of the progesterone receptor ("PR") and estrogen
receptor ("ER") for uses including hormone replacement therapy and various
chronic disease indications and the development of androgen receptor ("AR")
agonists and antagonists for use in cancer and a number of benign indications.
Lead compounds or development candidates have been identified in each of these
project areas.
Selective Estrogen Receptor Modulators. Through the Company's
collaborations with Pfizer and AHP, four SERMs are in advanced stages of
development. (See "Corporate Collaborations.") Droloxifene and CP336,156 have
resulted from the Pfizer collaboration and may be used to prevent or treat
osteoporosis and reduce the risk of cardiovascular disease in post-menopausal
women. These SERMs have also been shown to reduce bone loss and decrease
low-density lipoprotein levels ("LDL", or "bad" cholesterol). Droloxifene is an
estrogen antagonist-partial agonist compound while CP336,156 is an estrogen
partial agonist compound. Both compounds are in Pfizer-sponsored Phase II trials
for osteoporosis, with at least one compound targeted to enter Phase III
clinical trials according to Pfizer. Two SERMs have also resulted from Ligand's
collaboration with AHP -- TSE-424 and ERA-923. TSE-424 is being developed for
the treatment of post-menopausal osteoporosis, with Phase I trials completed and
Phase II trial protocols under development. ERA-923 is being developed for the
treatment of breast and reproductive cancers. AHP filed an IND for ERA-923 for
the treatment of women with breast cancer in December 1998 and Phase I trial
protocols are under development.
Osteoporosis, the targeted indication for droloxifene, CP336,156 and
TSE-424, is a disease characterized by significant loss of bone mass.
Osteoporosis, which predominantly affects post-menopausal women, leads to a
greater susceptibility to traumatic bone fractures and can lead to curved spine
("dowager's hump") or hip fractures in elderly women. In the U.S., it is
estimated that 10 million people have osteoporosis and 18 million more have low
bone mass, placing them at increased risk for osteoporosis. Osteoporosis is
ordinarily treated by giving women therapeutic doses of estrogen or other
steroidal analogues of estrogen. Estrogen therapy is associated with significant
side effects, including an increased risk of developing uterine cancer and a
concern about a potential increase in breast cancer risk. Estrogen therapy is
not well-tolerated by all women and approximately 60% of women abandon the
therapy within the first year due to side effects, such as nausea, vomiting,
vaginal bleeding and fluid retention, and concern about an increased risk of
cancer. Due to their improved side effect profile, the SERMs being developed by
Ligand and its collaborators, if commercialized, may provide an improved
alternative to estrogen therapy for the treatment of osteoporosis.
PR Modulators. Ligand is developing novel non-steroidal PR antagonists,
partial agonists and agonists internally and in collaboration with AHP, for use
in hormone replacement therapy, contraception, reproductive disorders and other
applications in women's health. (See "Corporate Collaborations -- American Home
Products.") Exploratory clinical research indicates that PR antagonists may have
utility in contraception and in a variety of chronic diseases, including
endometriosis and cancer. Although PR antagonists currently are
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used clinically for acute contraceptive indications, their use in chronic
diseases is likely to be limited by their cross-reaction with the glucocorticoid
receptor, which is anticipated to produce adverse side effects with long-term
administration. Ligand believes that more selective PR antagonists may be useful
in the treatment of many hormone responsive diseases, including gynecological
and malignant disorders, such as breast and uterine cancer, uterine fibroids
(benign smooth muscle tumors) and endometriosis. Because of the very close
structural similarity of the IRs for progesterone and glucocorticoids, it has
proven difficult to find compounds that do not interact with both.
Ligand has discovered, based on its proprietary tools and approaches,
specific PR antagonists that do not cross-react with the IR for glucocorticoids.
Ligand has also discovered several additional nonsteroidal lead compounds that
are PR modulators. In addition, Ligand has discovered closely related compounds
that are full agonists of the PR, which may be useful in contraception,
reproductive disorders, and hormone replacement therapy.
Selective Androgen Receptor Modulators ("SARMs.") The primary objective of
Ligand's SARMs program is to develop novel tissue-selective AR agonists or
antagonists for male hormone replacement therapy and the treatment of skin
disorders, osteoporosis, prostate cancer, benign prostatic hyperplasia ("BPH")
and other diseases. The growth of most prostate cancers appears to be stimulated
by or dependent upon androgens. The use of androgen antagonists has shown
efficacy in the treatment of prostate cancer, with three androgen antagonists
currently approved by the FDA for use in the treatment of prostate cancer.
Ligand believes that there is a substantial medical need for improved androgen
modulators for use in the treatment of prostate cancer, as currently available
agents appear to have significant side effects.
AR antagonists with an improved side effect profile may provide utility in
the treatment of BPH, prostate cancer, acne, hirsutism and male-pattern
baldness. AR agonists with distinct tissue selectivity are being developed by
Ligand. These novel molecules may have utility for hormone replacement therapy
in men and women, male osteoporosis and in the treatment of cachexia associated
with chronic disease (e.g., cancer, autoimmune disorders and AIDS). Ligand has
identified non-steroidal lead compounds from its internal screening programs. An
internally directed medicinal chemistry effort has produced potent, selective,
patentable AR agonists that show pharmacological activity in vivo in rodents and
AR antagonists that show pharmacological activity in vivo in rodents and dogs.
Compounds from these series are being optimized and will be further evaluated as
potential preclinical candidates. Ligand intends to pursue the specialty
applications emerging from these projects internally, but may seek a
collaboration with a pharmaceutical company to exploit broader clinical
applications.
Ligand researchers have identified an orally available, non-steroidal AR
antagonist, LGD1331, which preclinical studies indicate may have utility for
treating acne and hirsutism disorders that affect a significant number of women.
This compound may be a promising agent for antiandrogen therapy for prostate
cancer, balding in men and BPH. In vivo studies of LGD1331 have revealed
favorable characteristics, including indirect evidence of diminished effects on
the central nervous system, compared with currently marketed drugs of this type
for the treatment of these conditions.
CARDIOVASCULAR/METABOLIC DISEASE DEVELOPMENT PROGRAMS
Ligand scientists are exploring the role of certain orphan IRs in disorders
affecting the cardiovascular system. Data suggest that these receptors regulate
the expression of apolipoprotein A1 ("ApoA1.") ApoA1 is the major protein
constituent of high-density lipoprotein ("HDL"), and recent data link increased
levels of ApoA1 to prevention of atherosclerosis.
PPARs, another subfamily of orphan IRs, have been implicated in processes
that regulate plasma levels of very low density lipoproteins ("LDL") and
triglycerides. (See "Technology -- Intracellular Receptor Technology.") Data
implicate PPARs in the mechanism of action of lipid lowering drugs such as
Lopid(R). There are three subtypes of the PPAR subfamily with defined novel
aspects of their action -- alpha, beta and gamma. The subtype PPAR alpha appears
to regulate the metabolism of certain lipids and is useful in treating
hyperlipidemia. PPAR gamma plays a role in fat cell differentiation and cellular
responses to insulin. Modulators of PPAR gamma activity (e.g., the glitazone
class of insulin sensitizers) have utility in the
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management of type II diabetes. PPARs are believed to function in cells in
partnership with RXRs. In addition to compounds that act directly on PPARs and
that may have utility in various cardiovascular and metabolic disorders, certain
retinoids are able to activate this RXR:PPAR complex (e.g., Targretin(R)
capsules and LGD1268) and they may also have utility in these disorders. Studies
have demonstrated that Targretin(R) capsules have beneficial effects in
preclinical models of diabetes.
In September 1992, Ligand entered into a collaboration with Glaxo to
discover and develop drugs for the prevention or treatment of atherosclerosis
and other disorders affecting the cardiovascular system. In collaboration with
Glaxo, Ligand worked to discover drugs which produce beneficial alterations in
lipid and lipoprotein metabolism in projects focused on: (1) regulation of
cholesterol biosynthesis and expression of a receptor which removes cholesterol
from the blood stream, (2) the IRs influencing circulating HDL levels, and (3)
PPARs, the subfamily of IRs activated by the clofibrate class of lipid lowering
drugs, Lopid(R) and Atromid-S. The collaboration with Glaxo has identified a
novel lead structure that activates selected PPAR subfamily members. A different
lead compound showing activity in preclinical models has been selected for
lowering LDL cholesterol by up-regulating LDL receptor gene expression in liver
cells. Glaxo is responsible for the subsequent research necessary to optimize
the leads to produce clinical candidates. (See "Corporate
Collaborations -- Glaxo-Wellcome plc.")
In November 1997, the Company and Lilly entered into a strategic alliance
for the discovery and development of products based upon Ligand's IR technology.
The collaboration focuses on products with broad applications across metabolic
diseases, including diabetes, obesity, dislipidemia, insulin resistance and
cardiovascular diseases associated with insulin resistance and obesity. (See
"Corporate Collaborations -- Eli Lilly and Company.")
In March 1998, Ligand and SmithKline Beecham initiated a new collaboration
to develop small molecule drugs that modulate the signaling pathway controlled
by leptin as a means of discovering orally available drugs for the treatment of
obesity. (See "Corporate Collaborations -- SmithKline Beecham.")
INFLAMMATORY DISEASE DEVELOPMENT PROGRAM
In collaboration with Abbott, Ligand is seeking novel small molecule
anti-inflammatory drugs. The collaborative program includes molecular approaches
to discovering modulators of glucocorticoid receptor activity that have
significantly improved therapeutic profiles relative to currently known
anti-inflammatory steroids such as prednisone and dexamethasone. The
collaboration is focused on the development of novel non-steroidal
glucocorticoids with full anti-inflammatory activity and reduced or eliminated
side effect profiles. A number of lead compounds have been identified and are
currently being optimized for further drug development. (See "Corporate
Collaborations -- Abbott Laboratories.")
STAT DEVELOPMENT PROGRAMS
Ligand's proprietary STAT technology is distinct from Ligand's IR
technology platform. STATs are activated through a receptor located on the
surface of the cell rather than through an intracellular receptor. STAT
technology provides Ligand with a second broadly enabling drug discovery
platform that has potential applications in cancer, inflammation, asthma,
allergy, infectious disease, anemia, obesity, diabetes and growth disorders.
(See "Technology -- STAT Technology.") Ligand is pursuing product development
opportunities based on its STAT technology through a collaboration with
SmithKline Beecham and internally funded programs focusing on interferon
agonists and other cytokine agonists and antagonists.
The SmithKline Beecham collaborative research program, initiated in 1995
and expanded in 1998, uses Ligand's STAT technology to discover and characterize
small molecule, orally bioavailable drugs to control hematopoiesis, the
formation and development of blood cells, for the treatment of a variety of
blood cell deficiencies. In the July 10, 1998 issue of the journal Science,
Ligand and SmithKline Beecham scientists announced the discovery of the first
non-peptide small molecule that mimics the activity of Granulocyte-Colony
Stimulating Factor ("G-CSF"), a natural hormone that stimulates production of
infection-fighting neutrophils (a type of white blood cell). This molecule could
lead to the development of an orally active drug that could replace recombinant
G-CSF (sold by Amgen as Neupogen(TM)), a drug that must be administered
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by injection. While the lead compound has only been shown to be active in mice,
its discovery is a major scientific milestone and suggests that orally active,
small molecule mimics can be developed not only for G-CSF, but for other
cytokines as well. Ligand and SmithKline Beecham continue to pursue development
of this compound series. (See "Corporate Collaborations -- SmithKline Beecham.")
Ligand's program to discover and develop small molecule, orally available
drugs to act as interferon agonists for potential application in various cancers
and viral diseases is ongoing. Ligand scientists are currently studying small
molecule mimics for both interferon alpha, which has approved indications in the
treatment of chronic viral diseases, such as Hepatitis B and C and cancer, and
interferon beta, which is approved for the treatment of relapsing-remitting
multiple sclerosis. A number of lead compounds with strong efficacy in
preclinical in vitro antiviral studies have been identified and are undergoing
further characterization.
Ligand continues its internal preclinical program aimed at discovering
novel immunomodulatory drugs. Clinically, it is well established that a variety
of immune disorders are characterized by unbalanced helper T-cell responses.
(Helper T-cells are white blood cells critical to immune response.) Several
cytokines play a key role in regulating the proper balance of helper T-cell
responses, including interleukin-4 ("IL-4") and interleukin-12 ("IL-12.")
Regulating helper T-cell responses through modulation of IL-4 or IL-12 signaling
pathways may have application in allergy and asthma in the case of IL-4, and
transplant rejection and autoimmune diseases in the case of IL-12. Compelling in
vivo evidence suggests that pharmacological intervention in the JAK/STAT
signaling pathways activated by IL-4 or IL-12 could result in drugs with novel
mechanisms of action that may not only complement, but also greatly improve on
current therapies.
OUT-LICENSED PRODUCTS
Ligand has licensed certain patent rights to Cytel related to Cylexin(R)
and to Novartis related to Simulect(R).
COMPANY NAME PRODUCT DISEASE/INDICATION DEVELOPMENT PHASE
- ------------ ------- ------------------ -----------------
Cytel Cylexin(R) Reperfusion injury Phase II/III
Novartis Simulect(R) Kidney transplant rejection Marketed
Cylexin(R). In February 1998, Glycomed, a wholly owned subsidiary of
Ligand, entered into a non-exclusive licensing agreement with Cytel Corporation.
As a result, Cytel received the right to a series of Glycomed-owned patents
relating to certain carbohydrate compounds for the treatment of acute
inflammation. This agreement covers Cytel's most advanced product, Cylexin(R),
which is being studied in an ongoing Phase II/III trial to evaluate the safety
and efficacy of Cylexin(R) in preventing reperfusion injury in infants
undergoing cardiopulmonary by-pass surgery to facilitate surgical repair of
life-threatening congenital heart defects. Glycomed is eligible for milestone
payments upon certain regulatory filings and approvals.
Simulect(R). Seragen has a license agreement with Novartis that provides
for the payment of royalties to Seragen beginning in 2001 for sales of
Simulect(R) in the U.S. and Canadian transplantation markets. In May 1998, the
FDA approved Simulect(R) for acute rejection episodes in renal transplant
recipients. Simulect(R) is a two-dose high-affinity monoclonal antibody. Results
of clinical trials in the U.S., Canada and Europe demonstrate that Simulect(R)
reduces the rate of acute rejection episodes by one-third.
ACADEMIC COLLABORATIONS
To date, Ligand has licensed technology from The Salk Institute, Baylor and
Rockefeller University and developed relationships with key scientists to
further the Company's development of its core IR and STAT technologies.
The Salk Institute of Biological Studies. In October 1988, Ligand
established an exclusive relationship with The Salk Institute, which is one of
the research centers in the area of IR technology. Dr. Ronald Evans, who cloned
and characterized the first IR in 1985 and who invented the co-transfection
assay used by Ligand, is a professor in the Gene Expression Laboratory of The
Salk Institute and an Investigator of the Howard
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Hughes Medical Institute. Under the agreement, Ligand has an exclusive,
worldwide license to the IR technology developed by Dr. Evans' laboratory at The
Salk Institute. Subject to compliance with the terms of the agreement, the term
of the license extends for the life of the patents covering such developments.
Under the agreement, Ligand made an initial payment to The Salk Institute and
issued common stock as partial consideration for the license. Ligand is also
obligated to make certain royalty payments based on sales of certain products
developed using the licensed technology, as well as certain minimum annual
royalty payments.
In May 1998, Ligand submitted a NDA to the FDA for Panretin(R) gel for the
treatment of AIDS-related KS. In connection with the submission, Ligand
exercised an option to acquire a fully paid up license for the patent rights to
Panretin(R) and paid approximately $4.1 million as a one-time license fee to The
Salk Institute.
Ligand also entered into exclusive consulting agreements with Dr. Evans
that continue through July 2001. Under these agreements, Dr. Evans purchased
common stock and has been granted options to purchase common stock. As a
consultant, Dr. Evans meets on a regular basis with Company personnel to review
ongoing research and to assist Ligand in defining the technical objectives of
future research. Dr. Evans is also involved in identifying new developments made
in other leading academic laboratories that relate to Ligand's research
interests. Dr. Evans serves as Chairman of Ligand's Scientific Advisory Board.
Baylor College of Medicine. In January 1990, Ligand established an
exclusive relationship with Baylor, which is a center of IR technology. Dr. Bert
W. O'Malley is a professor and the Chairman of the Department of Cell Biology at
the Baylor College of Medicine and the Director of the Center for Reproductive
Biology who leads IR research at that institution. Important features of
Ligand's co-transfection assay were developed in Dr. O'Malley's laboratory and
are exclusively licensed by Ligand. Ligand has entered into a series of
agreements with Baylor under which it has an exclusive, worldwide license to IR
technology developed at Baylor and to future improvements made in Dr. O'Malley's
laboratory through September 1999. Subject to compliance with the terms of the
agreements, the term of the license may extend for the life of the patents
covering such developments.
Ligand works closely with Dr. O'Malley and Baylor in scientific IR
research, particularly in the area of sex steroids and orphan IRs. Under the
agreement, Ligand is obligated to make payments to Baylor College of Medicine in
support of research done in Dr. O'Malley's laboratory for the period from April
1992 through September 1999. Ligand is also obligated to make certain royalty
payments based on the sales of products developed using the licensed technology.
Ligand has entered into an exclusive consulting agreement with Dr. O'Malley
through September 2002. Dr. O'Malley is a member of Ligand's Scientific Advisory
Board. Dr. O'Malley has purchased common stock and has been granted options to
purchase common stock.
Rockefeller University. In September 1992, Ligand entered into a worldwide,
exclusive license agreement with Rockefeller University and exclusive consulting
agreements with Dr. James Darnell of Rockefeller University and Dr. David Levy
of NYU to develop and commercialize certain technology involving STATs to
control gene expression. Dr. Darnell is one of the leading investigators of the
control of gene expression by STATs. Rockefeller University received payments
upon the transfer of the technology to Ligand and upon the first four
anniversary dates of the agreement and, subject to a vesting schedule, shares of
common stock and warrants to purchase shares of common stock. In addition,
Rockefeller University will receive a royalty on any commercialized products. In
consideration of related technology assigned by NYU to Rockefeller University
and covered by the license agreement with Ligand, NYU received, subject to a
vesting schedule, shares of common stock and warrants to purchase shares of
common stock. Subject to a vesting schedule tied to their consulting agreements,
Dr. Darnell and Dr. Levy received shares of common stock. In addition, in
October 1994 Ligand granted Dr. Darnell options to purchase shares of common
stock.
In addition to the collaborations discussed above, the Company also has a
number of other consulting, licensing, development and academic agreements by
which it strives to advance its technology.
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TECHNOLOGY
Ligand and its exclusive academic collaborators have advanced the
understanding of the activities of hormones and hormone-related drugs and have
made scientific discoveries relating to IR and STAT technologies. Ligand
believes that its expertise in these technologies will enable the Company to
develop novel, small-molecule drugs acting through IRs or STATs with more
target-specific properties than currently available drugs, resulting in either
improved therapeutic and side effect profiles and new indications for IRs or
novel mechanisms of action and oral activity for STATs.
In addition to the Company's proprietary IR and STAT technologies, Ligand
has acquired fusion protein technology, which was utilized by Seragen in the
development of ONTAK(TM).
INTRACELLULAR RECEPTOR ("IR") TECHNOLOGY
Hormones occur naturally within the body and control processes such as
reproduction, cell growth and differentiation. Hormones generally fall into two
general classes, the peptide hormones and non-peptide hormones. The non-peptide
hormones include the retinoids, sex steroids (estrogens, progestins and
androgens), adrenal steroids (glucocorticoids and mineralocorticoids), vitamin D
and thyroid hormone. These non-peptide hormones act by binding to their
corresponding IRs to regulate the expression of genes in order to maintain and
restore balanced cellular function within the body. Hormonal imbalances can lead
to a variety of diseases. The hormones themselves and drugs which mimic or block
hormone action may be useful in the treatment of these diseases. Furthermore,
hormone mimics (agonists) or blockers (antagonists) can be used in the treatment
of diseases in which the underlying cause is not hormonal imbalance.
The effectiveness of the IRs as drug targets has been demonstrated by
currently available drugs acting through IRs for many of these diseases.
However, the use of most of these drugs has been limited by their often
significant side effects. Examples of currently marketed hormone-related drugs
acting on IRs are glucocorticoids (steroids used to treat inflammation), natural
and synthetic estrogens and progesterones (used for hormone replacement therapy
and contraception), tamoxifen (an estrogen antagonist used in the treatment of
breast cancer), and various retinoids such as Accutane(R) and Retin-A(R) (used
to treat acne and others to treat psoriasis).
The understanding of non-peptide hormones and their actions has increased
substantially in the last 15 years. Driving this rapid expansion of knowledge
has been the discovery of the family of IRs through which all the known
small-molecule, non-peptide hormones act. Dr. Ronald Evans at The Salk
Institute, Ligand's scientific co-founder and exclusive consultant, was the
first to clone and characterize a functional human IR in 1985. Since that time,
approximately 75 IRs have been defined and characterized, some by Ligand's
scientists or its exclusive collaborators.
Ligand and its collaborators and consultants have made major discoveries
pertaining to IRs and small molecule hormones and compounds, which interact with
these IRs. These discoveries include: (1) the identification of the IR
superfamily, (2) the recognition of IR subtypes, (3) the discovery of orphan IRs
and (4) the heterodimer biology of RXR selective compounds. Ligand believes that
each of these broad areas of knowledge provides important opportunities for drug
discovery.
The receptors for all the non-peptide hormones are closely related members
of a superfamily of proteins known as IRs. The IRs are similar in both structure
and mechanisms of action. Human IRs for all of the known non-peptide hormones
have now been cloned, in many cases by Ligand's scientists or its collaborators,
building an understanding of the similar underlying mechanisms of action shared
by the non-peptide hormones. Because they have a common mechanism of action,
drug discovery insights about one IR can often be directly applied to other
members of the IR superfamily, bringing synergy to Ligand's IR-focused drug
discovery efforts. First generation drugs were developed and commercialized for
their therapeutic benefits prior to the discovery of IRs and often cross-react
with the IRs for hormones other than the intended target, resulting in often
significant side effects. The understanding that IRs are structurally similar
has enabled Ligand to determine the basis for the side effects of some first
generation drugs and to discover improved drug candidates.
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For some of the non-peptide hormones, several closely related but
non-identical IRs, known as IR subtypes, have been discovered. These include six
subtypes of the IRs for retinoids, two subtypes of the IRs for thyroid hormone,
two subtypes for the ER, and three subtypes for the PPARs. Patent applications
covering many of these IR subtypes have been exclusively licensed by Ligand.
Ligand believes that drugs that activate a subset of IR subtypes will allow more
specific pharmacological intervention better matched to therapeutic need.
Ligand's clinical candidate Targretin(R), an RXR selective molecule, was
discovered as a result of Ligand's understanding of retinoid receptor subtypes.
Over 50 additional members of the IR superfamily, which do not interact
with the known non-peptide hormones, have been discovered. These members of the
IR superfamily have been designated orphan receptors. Ligand believes that among
the orphan IRs may be receptors for uncharacterized small molecule hormones and
that the physiological roles of the various orphan IRs are likely to be diverse.
Ligand has devised strategies to isolate small molecules that interact with
orphan IRs.
RXRs can form a dimer with numerous IRs, such as the retinoic acid receptor
("RAR"), thyroid hormone receptor and vitamin D receptor. While RXRs are widely
expressed, their IR partners are more discrete, being expressed in selective
tissues, such as liver, fat or muscle. As a result, compounds that bind RXRs
offer the unique potential to be broadly active compounds that can treat a
variety of diseases, including cancer and metabolic diseases. In preclinical
models of type II diabetes, RXR agonists appear to stimulate the physiological
pathways responsive to RXR-PPAR receptor partners expressed in key target
tissues that are involved in glucose metabolism. As a result, a discrete set of
genes is activated in these tissues resulting in a decrease in serum glucose
levels and insulin.
Ligand has built a strong proprietary position and accumulated substantial
expertise in IRs applicable to drug discovery and development. Building on its
recent scientific findings about the molecular basis of hormone action, Ligand
has created proprietary new tools to explore and manipulate non-peptide hormone
action for potential therapeutic benefit. The Company has exclusive
relationships in the field of IRs with Dr. Ronald Evans, a professor in the Gene
Expression Laboratory of The Salk Institute, and Dr. Bert O'Malley, a professor
and Chairman of the Department of Cell Biology and Director of the Center for
Reproductive Biology at Baylor, where many of the core discoveries in IR
research have been made. The Company has exclusively licensed most of these
discoveries.
Retinoid Responsive IRs ("RRs.") Retinoic acid, a derivative of Vitamin A,
is one of the body's natural regulatory hormones that has a broad range of
biological actions, influencing cell growth, differentiation, programmed cell
death and embryonic development. Many chemical analogues of retinoic acid,
called retinoids, also have biological activity.
Specific retinoids have been approved by the FDA for the treatment of
psoriasis and certain severe forms of acne. Evidence also suggests that
retinoids can be used to arrest and, to an extent, reverse the effects of skin
damage arising from prolonged exposure to the sun. Other evidence suggests that
retinoids are useful in the treatment of a variety of cancers, including kidney
cancer and certain forms of leukemia. For example, all-trans-Retinoic-acid has
been approved by the FDA for the treatment of acute promyelocytic leukemia.
Retinoids have also shown an ability to reverse precancerous (premalignant)
changes in tissues, reducing the risk of development of cancer, and may have
potential as preventive agents for a variety of epithelial malignancies,
including skin, head and neck, bladder and prostate cancer. Currently marketed
retinoids cause significant side effects, such as severe birth defects if fetal
exposure occurs, severe irritation of the skin and mucosal surfaces, elevation
of plasma lipids, headache and skeletal abnormalities. Currently marketed
retinoids were developed and commercialized prior to the discovery of
retinoid-responsive IRs.
The six RRs that have been identified to date can be grouped in two
subfamilies -- Retinoic Acid Receptors ("RARs") and RXRs. Patent applications
covering members of both families of RRs have been licensed exclusively to
Ligand primarily from The Salk Institute. The RR subtypes appear to have
different functions, based on their distribution in the various tissues within
the body and data arising from in vitro and in vivo studies including studies of
transgenic mice. Several of the retinoids currently in commercial use are either
non-selective in their pattern of RR subtype activation or are not ideal drugs
for other reasons. Ligand is
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developing chemically synthesized retinoids that, by selectively activating RR
subtypes, may preserve desired therapeutic effects while reducing side effects.
Ligand has one retinoid product approved by the FDA (Panretin(R) gel), five
retinoid products in clinical trials (Panretin(R) gel, Panretin(R) capsules,
Targretin(R) capsules, Targretin(R) gel and LGD1550 capsules), and five retinoid
compounds in advanced preclinical evaluation through its corporate partners.
SIGNAL TRANSDUCERS AND ACTIVATORS OF TRANSCRIPTION ("STAT") TECHNOLOGY.
STATs are a recently discovered family of proteins that are a key part of
the signal transduction pathway for a variety of biologically important
polypeptide hormones (e.g., interferons, interleukins, leptin and hematopoietic
growth factors). STATs play a role in the biology of cytokines and growth
factors functionally analogous to that played by IRs in the biology of the
non-peptide hormones. Both STATs and IRs are families of transcription factors
that change cell function by selectively turning on or off particular genes in
response to circulating signals that impinge on cells. When various cytokines or
growth factors bind to their receptors on the cell surface, this triggers the
activation of specific members of the Janus Kinase family of tyrosine protein
kinases ("JAKs"), which in turn activate specific STATs. The activated STATs
enter the cell nucleus and bind to the control regions of specific target genes
and increase their expression, thereby modulating physiologic or
pathophysiologic processes.
Many diseases, such as certain inflammatory conditions, may be the result
of excessive activity of certain cytokines. In these conditions it may prove
beneficial to block the actions of specific cytokines. In other pathological
states there is insufficient activity of specific cytokines. For example, in
patients with chronic renal failure, diminished erythropoietin ("EPO") release
by the damaged kidneys results in the inadequate production of red blood cells,
causing anemia. Recombinant human EPO protein (Epogen(R)) can be administered to
correct this anemia effectively, but must be injected. Many other cytokines are
useful as injected protein medicines, including interferons (Intron-A(R),
Roferon(R), Betaseron(R)), interleukins (e.g., Proleukin(R), which Ligand
markets in Canada), and hematopoietic growth factors (Epogen(R), Neupogen(R)).
Each of these and many other cytokines appear to exert their actions through
JAK/STAT signal transduction pathways.
Ligand is utilizing JAK/STAT technologies to seek low molecular weight
compounds able to mimic or block the actions of medically relevant cytokines for
uses in various pathological conditions, including cancer, inflammation and
disorders of blood cell formation. Because these compounds are small molecules,
whereas the cytokines themselves are proteins, they offer potentially
significant advantages over current cytokine-based compounds, including oral
bioavailability, greater ease of manufacture and improved stability.
The discovery of STATs, the elucidation of their roles in interferon signal
transduction, and the first cloning of genes encoding STATs were all
accomplished by Ligand's exclusive collaborator, Dr. James Darnell at
Rockefeller University, and were described initially in August 1992. A total of
seven members of the STAT family have been identified and a large number of
peptide hormones have been shown to utilize STAT signaling pathways. These
peptide hormones include the interferons (alpha, beta and gamma), the
hematopoietic colony stimulating factors (interleukin-3, EPO, G-CSF, GM-CSF and
thrombopoietin), many of the interleukins and the related Oncostatin M and
Leukemia Inhibitory Factor, the cytokine leptin, growth hormone and prolactin.
Ligand believes that its JAK/STAT drug discovery technology can produce
drug candidates to control gene expression to address a broad range of uses,
including treating cancer, providing hematopoietic support for cancer patients
undergoing chemotherapy or bone marrow transplantation, combating inflammation,
treating viral or other infections, treating anemia in chronically ill patients
(e.g., those with renal failure), treating dwarfism and related disorders of
stature, and enhancing immune function.
Ligand is using its high throughput screening assays to discover small
molecule drugs to act as interferon agonists for potential application in
various cancers and viral diseases and that act as cytokine agonists and
antagonists in cancer and immunology. Ligand has also established a
collaboration with SmithKline Beecham to discover and characterize small
molecule drugs to modulate specific JAK/STAT pathways to control the
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formation of red and white blood cells for treating patients with cancer or
anemia. Ligand has additional assays under development to allow high throughput
screening for and subsequent optimization of small molecule drugs that act
through JAK/STAT signaling pathways to block or mimic other medically
significant cytokine and growth factors.
FUSION PROTEIN TECHNOLOGY
Ligand's fusion protein technology was developed by Seragen. Seragen's
fusion proteins consist of fragments of diphtheria toxin genetically fused to a
ligand that targets specific receptors on the surface of target cells. The
fusion proteins are designed to bind to specific receptors on the surface of
target cells and penetrate and destroy the target cells' ability to manufacture
proteins, thereby killing the target cells. Using this platform, Seragen has
genetically engineered six fusion proteins, each of which consists of fragments
of diphtheria toxin fused to a different targeting ligand, such as a polypeptide
hormone or growth factor. ONTAK(TM), which is approved in the U.S. for the
treatment of patients with persistent or recurrent CTCL, is a fusion protein
consisting of fragments of diphtheria toxin genetically fused to the
interleukin-2 ("IL-2") receptor. In addition to CTCL, fusion proteins may have
utility in oncology, dermatology, infectious diseases and autoimmune diseases.
Seragen has entered into exclusive license agreements with Harvard
University and other parties for patents related to fusion protein technology.
In addition, Seragen has been prosecuting a patent application family directed
to its core fusion protein technology, which technology represents an
improvement in the technology licensed from Harvard University. Four U.S.
patents have issued directed to these improvements.
LIGAND'S PROPRIETARY CELL-CULTURE BASED ASSAY SYSTEM
Ligand has developed a hybrid approach to lead compound identification that
retains the best features and avoids the pitfalls of traditional methods to
discover leads. Traditional drug discovery generally uses animal models or
biochemical screening systems for lead compound identification. Animal models
are relatively slow, complicated and expensive; and results in animals do not
always correlate to those obtained in humans. Biochemical assays are fast and
inexpensive, but give limited information and frequently identify poor lead
compounds.
Ligand's hybrid approach is a proprietary cell-culture based assay system
for small molecules that can modulate IRs, referred to as the co-transfection
assay. The co-transfection assay system simulates the actual cellular processes
controlled by IRs and is able to detect whether a compound interacts with a
particular human IR and whether this interaction mimics or blocks the effects of
the natural regulatory molecules on target gene expression. The system is: (1)
fast, compared to animal models; (2) capable of cost-effective, high throughput
screening of thousands of compounds per week; (3) generally predictive of in
vivo pharmacology of both agonists and antagonists; (4) able to separate complex
targets, such as receptor subtypes; and (5) conducted using the actual human
receptors which are the ultimate drug targets. Ligand's co-transfection assay is
a key component of Ligand's IR drug discovery and development programs, and
facilitates both the identification of lead compounds and their optimization as
clinical candidates. Ligand has developed similar automated high throughput
assays to identify lead compounds acting as agonists or antagonists of selected
JAK/STAT signaling pathways for interferons, certain interleukins and selected
hematopoietic growth factors.
Once Ligand verifies a lead compound for a particular target, the next
critical process is optimization of the compound to achieve specificity and
appropriate properties as a drug. Specificity is achieved when the compound
interacts only with the intended target molecule and not with related but
unintended molecules. Ligand's unique and comprehensive ability to assess
compounds preclinically for interactions with all the known human IRs and in
various STAT pathways is a significant advantage in obtaining specificity in a
lead compound. Optimization of a lead compound is an iterative process in which
analogues of the lead compound, designed and synthesized by medicinal chemists,
are assayed for activity. The results obtained with each set of analogues guide
the medicinal chemists in the design of compounds with greater specificity. The
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co-transfection assay produces results that enhance the accuracy and efficiency
of this iterative optimization process.
Ligand believes that its combination of modern molecular and traditional
approaches to drug discovery will accelerate its progress to develop new drug
candidates. To that end, Ligand has built a strong multidisciplinary team,
consisting of endocrinologists, molecular biologists, medicinal chemists,
pharmacologists and specialists in drug metabolism and distribution, and other
pharmaceutical scientists.
CORPORATE COLLABORATIONS
Ligand has initiated eight significant collaborations with corporate
partners since the inception of the Company to further the research and
development of compounds based on the Company's IR and STAT technologies.
Eli Lilly and Company. In November 1997, the Company and Lilly entered into
a strategic alliance for the discovery and development of products based upon
Ligand's IR technology. The collaboration focuses on products with broad
applications across metabolic diseases, including diabetes, obesity,
dislipidemia, insulin resistance and cardiovascular diseases associated with
insulin resistance and obesity. At the inception of the agreement, Lilly
invested $37.5 million by purchasing the Company's common stock and made an
upfront nonrefundable milestone payment to Ligand of $12.5 million. Ligand is
entitled to additional milestones upon the successful development of certain
products. If certain products are approved, Ligand may receive double-digit
royalties on net sales of the most advanced products and single-digit royalties
on net sales of earlier compounds. Ligand may also qualify to receive
milestones, royalties and options to obtain certain co-development and
co-promotion rights for the Lilly-selected RXR compound in combination with a
SERM.
Under the alliance Lilly received worldwide, exclusive rights to
Targretin(R) and other Ligand compounds and technology associated with the RXR
receptor in the field. Lilly received additional rights to use Ligand technology
to develop an RXR compound in combination with a SERM in cancer. Ligand retains
exclusive rights to independently research, develop and commercialize
Targretin(R) and other RXR compounds in the fields of cancer and dermatology.
Lilly also received worldwide, exclusive rights in certain areas to Ligand's
PPAR technology, along with rights to use PPAR research technology with the RXR
technology. Lilly and Ligand also intend to begin research programs aimed at
discovering novel compounds that therapeutically activate PPAR subtypes for
treatment of cardiovascular disease. Finally, Lilly received exclusive rights to
Ligand's HNF4 receptor and the obesity gene promoter technology. Ligand has the
option to obtain selected rights to one of Lilly's specialty pharmaceutical
products. The product would fit into a current area of strategic focus for
Ligand. Should Ligand elect to obtain selected rights to the product, Lilly
could receive milestones of up to $20 million in common stock. In connection
with the acquisition of Seragen, Ligand obtained from Lilly its rights to
ONTAK(TM) in satisfaction of Ligand's option to obtain selected rights to one of
Lilly's specialty pharmaceutical products.
Lilly has the right to terminate the development of compounds under the
agreements, with Ligand receiving rights to certain of such compounds in return
for a royalty to Lilly, the rate of which is dependent on the stage at which the
development is terminated. In addition, either party may terminate the
agreements if a material breach by the other remains uncured for 90 days.
In early 1999, Lilly chose not to proceed with the development efforts for
three first generation compounds in the RXR program in diabetes. Instead, Lilly
and Ligand have agreed to focus their efforts on the RXR modulator second
generation program, which has compounds with improved therapeutic indices
relative to the three first generation compounds, and on co-agonists of the PPAR
receptor program. As a result of this decision, all rights to the oral form of
Targretin(R) relating to its development reverts to Ligand. Compounds LGD1268
and LGD1324 return to the pool of eligible RXR modulators for possible use in
oncology in combination with a selective estrogen receptor modulator under the
separate collaboration agreement between Lilly and Ligand. The decision not to
proceed with full development of the first generation compounds was based upon a
thorough review of the pre-clinical and Phase II clinical date on Ligand's RXR
modulators, Targretin(R), LGD1268 and LGD1324. As of December 31, 1998, Lilly
had funded approximately $11.0 million of the total of $49.0 million in
potential research funding under the agreement.
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SmithKline Beecham. In February 1995, Ligand entered into a collaborative
agreement with SmithKline Beecham providing for a three-year research program
(with an option to extend the program for two years at SmithKline Beecham's
election). Under the agreement, SmithKline Beecham will utilize Ligand's
proprietary STATs technology to discover and characterize small molecule, oral
drugs to control hematopoiesis (the formation and development of blood cells).
Under the terms of the agreement, SmithKline Beecham was granted exclusive
worldwide rights for products resulting from the collaboration in certain
targeted areas. In exchange, SmithKline Beecham agreed to provide Ligand up to
$9.0 million in research funding and up to $12.5 million in equity investments.
SmithKline Beecham will make additional milestone payments to Ligand as the
compounds progress in clinical development and will also make royalty payments
on product sales.
Ligand has the right to select up to three compounds related to
hematopoietic targets for development as anti-cancer products other than those
compounds selected for development by SmithKline Beecham. SmithKline Beecham has
the option to co-promote these products with Ligand in North America and to
develop and market them outside North America. SmithKline Beecham can terminate
the research program upon 60 days notice in the event of any breach by Ligand or
upon six months notice at any time after August 1996.
In April 1998, Ligand and SmithKline Beecham formed a new collaboration to
develop small molecule drugs that modulate the signaling pathway controlled by
leptin as a means of discovering orally available drugs for treatment or
prevention of obesity. As part of the leptin-obesity collaboration, SmithKline
Beecham purchased $5.0 million of common stock and also purchased a $1.0 million
warrant exercisable into common stock. The warrant expires in five years, and
Ligand may require SmithKline Beecham to exercise the warrant under certain
conditions after three years. Under the new agreement, SmithKline Beecham
obtained exclusive worldwide rights to products resulting from the obesity
collaboration and has agreed to make milestone payments to Ligand as compounds
progress through preclinical and clinical development, and royalty payments on
sales, if products result from the research. As of December 31, 1998, SmithKline
Beecham had funded approximately $11.4 million of the total of $11.5 million in
potential research funding under the agreement.
American Home Products. In September 1994, Ligand entered into a
collaborative research agreement with Wyeth-Ayerst Laboratories, the
pharmaceutical division of AHP, providing for a three-year research program
(with an option to extend the program for two years at AHP's election). The
purpose of the agreement was to discover and develop drugs that interact with
estrogen or progesterone receptors for use in hormone replacement therapy,
anti-cancer therapy, gynecological diseases, central nervous system disorders
associated with menopause and fertility control. AHP has been granted exclusive
worldwide rights to all products discovered in the collaboration that are
agonists or antagonists to the PRs and ERs for application in the fields of
women's health and cancer therapy. Under the agreement, AHP agreed to provide
$21.5 million in research funding and up to $25.0 million in equity and
convertible notes, in addition to milestone and royalty payments to Ligand for
such products.
An important additional aspect of this collaboration is Ligand's right to
assay AHP's extensive chemical library for activity against a selected set of
targets of Ligand's internal programs. Ligand may select up to 24 lead compounds
for internal development to which Ligand has worldwide rights. In January 1996,
AHP exercised its option to include compounds discovered by Ligand that modulate
PRs and to expand the collaboration to encompass the treatment or prevention of
osteoporosis through the ER. In connection with the exercise of the option, the
Company received $2.5 million in additional research revenue and funding
commitments. Ligand's proprietary PR modulators added to the collaboration
includes three series: LG121046 (Series A), LG120527 (Series B) and LG120716
(Series C). In 1997, Ligand regained rights to the series B and series C
compounds in the AHP collaboration. Series A compounds formed the basis for
additional drug discovery in the AHP alliance, leading to both PR agonists and
antagonists. In May 1996, AHP expanded the collaboration to include four
advanced chemical compound series from its internal ER-osteoporosis program. The
research phase of the collaboration ended in August 1998. AHP has ongoing
studies with two other compounds, TSE-424, a potential treatment for
osteoporosis and ERA-923, a potential treatment for breast cancer. The IND
filing of both compounds in 1998 and early 1999 triggered two separate
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milestone payments to Ligand. (See "Technology.") As of December 31, 1998, AHP
had funded approximately $17.9 million of the total of $21.5 million in
potential research funding under the agreement.
Abbott Laboratories. In July 1994, Ligand entered into a collaborative
research agreement with Abbott providing for a five-year research program to
discover and develop small molecule compounds for the prevention or treatment of
inflammatory diseases. The collaborative program includes several approaches to
discovering modulators of glucocorticoid receptor activity to treat
inflammation. (See "Inflammatory Disease.")
Abbott has also committed significant internal resources to the
collaboration. Abbott was granted exclusive worldwide rights for all products
discovered in the collaboration for use in inflammation. Ligand was granted
exclusive worldwide rights for all anti-cancer products discovered in the
collaboration. Abbott will make milestone and royalty payments on products
targeted at inflammation resulting from the collaboration, while Ligand will
make milestone and royalty payments on products targeted at anti-cancer
resulting from the collaboration. Each party will be responsible for the
development, registration and commercialization of the products in its
respective field. Abbott can terminate the research program at any time upon 90
days notice in the event of any breach by Ligand or upon four months notice at
any time. As of December 31, 1998, Abbott had funded approximately $9.2 million
of the total of $16.0 million in potential research funding under the agreement.
Sankyo Company, Ltd. As part of the Merger with Glycomed, the Company
acquired a collaborative research agreement with Sankyo that Glycomed had
entered into in June 1994 providing for a three-year research program. Under the
agreement, Sankyo reimburses a portion of the Company's research expenses
related to the collaboration up to an aggregate of $8.9 million. The agreement
also provides that upon being presented with a target compound arising from the
research collaboration with the Company, Sankyo will notify the Company whether
it wishes to pursue development of the compound. In October 1997, the research
program was terminated. As of December 31, 1998, Sankyo had funded all of the
total of $8.9 million in potential research funding under the agreement.
Glaxo-Wellcome plc. In September 1992, Ligand entered into a five-year
collaborative research agreement with Glaxo to develop drugs for the prevention
or treatment of cardiovascular disease. Glaxo committed significant internal
resources to the collaboration and funded one-half of Ligand's research expenses
to support 18 Ligand scientists assigned to the collaboration. Ligand and Glaxo
screened compounds to identify potential lead compounds. Once leads have been
identified, Glaxo has primary responsibility for pharmacology, medicinal
chemistry to optimize the drug candidates and preclinical testing. Glaxo also
has responsibility for conducting clinical trials of the drug candidates for
marketing approval by the FDA and certain other regulatory agencies. Ligand will
receive milestone payments as the compounds progress through the development
cycle and a royalty on any commercialized products. Ligand has retained the
right to develop and commercialize products arising from the collaboration in
markets not exploited by Glaxo or where Glaxo is not developing a product for
the same indication. The collaborative research program was completed in
September 1997. Glaxo is responsible for the subsequent research necessary to
optimize the leads to produce clinical candidates. As of December 31, 1998,
Glaxo had funded approximately $9.2 million of the total of $10.0 million in
potential research funding under the agreement.
Allergan Inc. In June 1992, Ligand and Allergan formed Allergan-Ligand
Joint Venture ("the Joint Venture"), owned 50% by each party, to discover,
develop and commercialize retinoid drugs. In December 1994, the Company and
Allergan formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue
the research and development activities previously conducted by the Joint
Venture. In June 1995, the joint venture was dissolved and the Company and ALRT
completed a public offering of 3,250,000 units (the "Units") totaling $32.5
million. Each Unit consisted of one share of ALRT's Callable Common Stock and
two warrants entitling the holder to purchase one share of Common stock. The
$32.5 million aggregate proceeds ("the ALRT Offering") and cash contributions by
Allergan and Ligand of $50.0 million and $17.5 million, respectively, provided
net proceeds of $94.3 million for retinoid product research and development. As
part of the ALRT Offering, all rights held by the Joint Venture were licensed to
ALRT. The Company, Allergan and ALRT entered into certain other various
agreements in connection with the funding
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of ALRT, including a Technology License Agreement, a Research and Development
Agreement, a Commercialization Agreement, and a Services and Administrative
Agreements.
Ligand's $17.5 million in cash, as well as warrants were in exchange for:
(1) a right to acquire all of the Callable Common Stock at specified future
dates and amounts (the "Stock Purchase Option") and (2) a right to acquire all
rights to the Panretin(R) (ALRT 1057) product, jointly with Allergan (the "1057
Option.") Allergan's $50.0 million cash contribution to ALRT was in exchange
for: (1) the right to acquire one-half of technologies and other assets in the
event Ligand exercised its right to acquire all of the Callable Common Stock
(the "Asset Purchase Option"), (2) a similar right to acquire all of the
Callable Common Stock if Ligand did not exercise its right and (3) a right to
acquire all rights to Panretin(R) (ALRT 1057) product, jointly with Ligand.
In September 1997, Ligand exercised the option to purchase all of the
Callable Common Stock of ALRT. At the same time, Allergan exercised the option
to purchase certain assets of ALRT. In November 1997, Ligand issued 3,166,567
shares of the Company's common stock along with cash payments totaling $25.0
million, to holders of the Callable common stock. In November 1997, Allergan
made a cash payment of $8.9 million to ALRT, which was used by Ligand to pay a
portion of the Stock Purchase Option. The excess of the purchase price over the
fair value of net assets acquired was allocated to in-process technology and
written off resulting in a one time non-cash charge to operations of $65.0
million in 1997.
In November 1997, ALRT became a wholly owned subsidiary of the Company.
Also during 1997, Ligand and Allergan agreed to restructure the terms and
conditions relating to research, development, and commercialization and
sublicense rights for the ALRT compounds. Under the restructured arrangement,
Ligand received exclusive, worldwide development, commercialization and
sublicense rights to Panretin(R) capsules and Panretin(R) gel, LGD1550, LGD268
and LGD324. Allergan received exclusive, worldwide development,
commercialization and sublicense rights to LGD4310, an RAR antagonist being
developed for topical application against mucocutaneous toxicity associated with
currently marketed retinoids as well as for psoriasis. Allergan also received
LGD326 and LGD4204 (two advanced preclinical RXR selective compounds). In
addition, Ligand and Allergan participated in a lottery for each of the
approximately 2,000 retinoid compounds existing in the ALRT compound library as
of the closing date, with each party acquiring exclusive, worldwide development,
commercialization and sublicense rights to the compounds which they select.
Ligand and Allergan will each pay the other a royalty based on net sales of
products developed from the compounds selected by each in the lottery and the
other ALRT compounds to which each acquires exclusive rights. Ligand will also
pay to Allergan royalties based on Ligand's net sales of Targretin(R) for uses
other than oncology and dermatology indications. In the event that Ligand
licenses commercialization rights to Targretin(R) to a third party, Ligand will
pay to Allergan a percentage of royalties payable to Ligand with respect to
sales of Targretin(R) other than in oncology and dermatology indications. Under
the restructured arrangement, on the closing of the exercise of the Stock
Purchase Option and the Asset Purchase Option, Ligand paid Allergan a
non-refundable cash payment in the amount of $4.5 million. ALRT had provided
approximately $52.0 million in research funding to Ligand under the Research and
Development Agreement. Since 1992, Allergan Ireland, a wholly owned subsidiary
of Allergan, has made $30.0 million in equity investments in Ligand.
Pfizer Inc. In May 1991, Ligand entered into a five-year collaborative
research and development and license agreement with Pfizer to develop better
alternative therapies for osteoporosis. Pfizer agreed to provide up to $3.0
million per year in research funding to Ligand in addition to committing
significant internal resources. In November 1993, Ligand and Pfizer announced
the successful completion of the research phase of their alliance with the
identification of a development candidate and backups for the prevention and
treatment of osteoporosis. In preclinical studies, the candidates from the
program mimic the beneficial effects of estrogen on bone and have an impact on
blood serum lipids often associated with cardiac benefits without increasing
uterine or breast tissue proliferation. Under the terms of the collaboration,
Pfizer has primary responsibility for pharmacology, medicinal chemistry to
optimize the drug candidates, pre-clinical testing and clinical trials of drug
candidates for marketing approval by the FDA and certain other regulatory
agencies.
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Ligand has granted Pfizer exclusive worldwide rights to manufacture and market
any compounds jointly developed for osteoporosis. Ligand is to receive up to
$7.5 million in milestone payments as development objectives are achieved, in
addition to royalties on sales of successful drugs that emerge from the
alliance.
In December 1994, Ligand filed suit against Pfizer in the Superior Court of
California in San Diego County. The suit was filed for breach of contract and
for a declaration of future rights as they relate to droloxifene, a compound
upon which Ligand performed work at Pfizer's request during the collaboration
between Pfizer and Ligand to develop drugs in the field of osteoporosis. Ligand
and Pfizer entered into a settlement agreement with respect to the lawsuit in
April 1996. Under the terms of the settlement agreement, Ligand is entitled to
receive milestone and royalty payments if Pfizer continues development and
eventually commercializes droloxifene. To date, Ligand has received
approximately $1.3 million in milestone payments from Pfizer as a result of the
continued development of droloxifene. These milestones were paid in the form of
the Company's common stock by Pfizer and were subsequently retired from treasury
stock in September 1996. According to announcements by Pfizer, droloxifene has
entered Phase II clinical trials for osteoporosis. As of December 31, 1998,
Pfizer had made a total of $7.5 million of equity investments in Ligand and had
funded approximately $9.4 million in research funding.
MANUFACTURING
Ligand currently has no manufacturing facilities outside of Marathon's
facility for the manufacturing of ONTAK(TM), and accordingly relies on third
parties, including its collaborative partners, for clinical or commercial
production of any products or compounds under consideration as products. For a
discussion of the risks associated with manufacturing see "Risks and
Uncertainties."
RAW MATERIALS
Certain raw materials necessary for the Company's commercial manufacturing
of its products are custom and must be obtained from a specific sole source. The
Company currently attempts to manage the risk associated with such sole source
raw materials by active inventory management and supply agreements. Ligand
attempts to remain appraised of the financial condition of its suppliers and
their ability to supply the company's needs. Unavailability of certain materials
from current sources could cause an interruption in production pending
establishment of new sources, or in some cases, implementation of alternative
processes.
QUALITY ASSURANCE
The Company's success depends in great measure upon customer confidence in
the quality of the Company's products and in the integrity of the data that
support their safety and effectiveness. The quality of the Company's products
arises from the total commitment to quality in all parts of the Company,
including research and development, purchasing, manufacturing, and distribution.
Quality-assurance procedures have been developed relating to the quality and
integrity of the Company's scientific information and production processes.
Control of production processes involves rigid specifications for
ingredients, equipment, and facilities, manufacturing methods, packaging
materials, and labeling. Control tests are made at various stages of production
processes and on the final product to assure that the product meets all
regulatory requirements and the Company's standards. These tests may involve
chemical and physical microbiological testing, preclinical testing, human
clinical trials, or a combination of these trials.
SALES AND MARKETING
The Company recently developed a 26-person specialty cancer sales force in
the United States in 1998 and early 1999. For markets outside Ligand's current
marketing strategy, the Company will rely initially on other companies to
distribute and market Panretin(R) gel and ONTAK(TM). A Canadian sales force,
which has been in place since 1995, currently markets two in-licensed cancer
products in Canada. In early 1999, Ligand established a subsidiary, Ligand
Pharmaceuticals International, Inc., with a branch in London, England to
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manage its European marketing and operations. For a discussion of the risks
associated with sales and marketing see "Risks and Uncertainties."
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $70.3 million, $72.4 million and
$59.6 million in fiscal 1998, 1997 and 1996, respectively, of which
approximately 75%, 29%, and 38%, was sponsored by the Company and the remainder
of which was funded pursuant to product development collaboration arrangements.
(See "Notes to Financial Statements.")
COMPETITION
Some of the drugs, which Ligand is developing, will compete with existing
therapies. In addition, a number of companies are pursuing the development of
novel pharmaceuticals, which target the same diseases that Ligand is targeting.
A number of pharmaceutical and biotechnology companies are pursuing IR-related
or STAT-related approaches to drug discovery and development. Furthermore,
academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection with respect to
potentially competing products or technologies and may establish collaborative
arrangements with competitors of Ligand.
Ligand's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales. For a discussion of the risks associated with competition see "Risks and
Uncertainties."
GOVERNMENT REGULATION
The manufacturing and marketing of Ligand's products and its ongoing
research and development activities are subject to regulation for safety and
efficacy by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceuticals are subject to rigorous
regulation by federal and various state authorities, including FDA. The Federal
Food, Drug, and Cosmetic Act and the Public Health Service Act govern the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of Ligand's products. There are often
comparable regulations, which apply at the state level. Product development and
approval within this regulatory framework takes a number of years and involves
the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (1) preclinical laboratory tests, (2) the submission to
the FDA of an IND, which must become effective before human clinical trials may
commence, (3) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug, (4) the submission of a NDA to the FDA and
(5) the FDA approval of the NDA prior to any commercial sale or shipment of the
drug. A company must pay a one-time user fee for NDA submissions, and annually
pay user fees for each approved product and manufacturing establishment. In
addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with the FDA and in
California, with the Food and Drug Branch of California. Domestic manufacturing
establishments are subject to pre-approved inspections by the FDA prior to
marketing approval and then to biennial inspections and must comply with current
Good Manufacturing Practices ("cGMP"). To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in existing
regulations could have a material adverse effect on Ligand.
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For marketing outside the United States before FDA approval to market, the
Company must submit an export permit application to the FDA. The Company also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for drugs. The requirements relating to the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country and there can be no assurance that the Company or
any of its partners will meet and sustain any such requirements. For a
discussion of the risks associated with government regulations see "Risks and
Uncertainties."
PATENTS AND PROPRIETARY RIGHTS
Ligand believes that patents and other proprietary rights are important to
its business. Ligand's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. Ligand also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
To date, Ligand has filed or participated as licensee in the filing of
approximately 105 currently pending patent applications in the United States
relating to Ligand's technology, as well as foreign counterparts of certain of
these applications in many countries. In addition, Ligand owns or is the
exclusive licensee to rights covered by approximately 250 patents issued,
granted or allowed worldwide to Ligand, The Salk Institute, Baylor and other
licensors. Subject to compliance with the terms of the respective agreements,
Ligand's rights under its license with The Salk Institute and other exclusive
licensors extend for the life of the patents covering such developments. For a
discussion of the risks associated with patent and proprietary rights see "Risks
and Uncertainties."
PRODUCT LIABILITY AND INSURANCE
Ligand's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of human drugs. Ligand
has recently increased its product liability insurance in connection with the
launching of two marketed drugs. The Company's product liability insurance also
provides coverage for products in development and in clinical trials. However,
there can be no assurance that Ligand will be able to maintain such insurance on
acceptable terms or that such insurance will provide adequate coverage against
potential liabilities. To the extent that Ligand's current product liability
insurance, if available, does not cover potential claims, the Company will be
required to self-insure the risks associated with such claims. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on the Company. For a discussion of the risks
associated with product liability see "Risks and Uncertainties."
HUMAN RESOURCES
As of December 31, 1998, Ligand had 418 full-time employees, of whom 295
were involved directly in scientific research and development activities. Of
these employees, approximately 87 hold Ph.D. or M.D. degrees.
RISKS AND UNCERTAINTIES
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
and 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 REVENUES FROM THE SALE OF PRODUCTS SUFFICIENT TO
BECOME PROFITABLE.
We were founded in 1987 and have not generated any revenues from the sale
of products that we or our collaborative partners have developed. To become
profitable, we must successfully develop, clinically test, market and sell our
products. In February 1999, we were granted FDA marketing approval for our first
two products, Panretin(R) gel for the topical treatment of cutaneous
AIDS-related KS, and ONTAK(TM) for the
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treatment of patients with persistent or recurrent cutaneous CTCL whose
malignant cells express the CD25 component of the IL-2 receptor.
Most of our other products will require extensive additional development,
including preclinical testing and human studies, as well as regulatory
approvals, before we can market them. We do not expect that any additional
products resulting from our product development efforts or the efforts of our
collaborative partners will be available for sale until the end of the 1999
calendar year at the earliest, if at all. There are many reasons that we may
fail in our efforts to develop our other potential products, including the
possibility that:
- we may discover during preclinical testing or human studies that they are
ineffective or cause harmful side effects,
- the products may fail to receive necessary regulatory approvals from the
FDA or other foreign authorities in a timely manner or at all,
- we may fail to produce the products, if approved, in commercial
quantities or at reasonable costs, or
- the proprietary rights of other parties may prevent us from marketing the
products.
We also will rely, at least initially, on another company to distribute our
approved products and have only recently developed a sales force. Therefore,
even though two of our products have been approved for marketing, we still may
not be able to successfully market these products or potential products in the
territories chosen for marketing.
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 what we refer to as
our IR and STATs technologies. Even though certain marketed drugs 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, our business could be adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY
CONTINUE.
We have incurred significant losses since our inception in 1987. At
December 31, 1998, our accumulated deficit was approximately $396.0 million. To
date, we have received almost all of our revenues from our collaborative
arrangements. We expect to incur additional losses as we continue our research
and development, testing and regulatory activities and as we establish
manufacturing and sales and marketing capabilities.
OUR DRUG DEVELOPMENT PROGRAMS WILL REQUIRE SUBSTANTIAL ADDITIONAL FUTURE CAPITAL
AND WE MAY NEED MORE CAPITAL.
Our drug development programs require substantial capital expenses,
including expenses to:
- conduct research, preclinical testing and human studies,
- establish pilot scale and commercial scale manufacturing processes and
facilities, and
- establish and develop quality control, regulatory, marketing, sales
and administrative capabilities.
Our future capital needs will depend on many factors, including:
- the pace of scientific progress in our research and development
programs and the magnitude of these programs,
- the scope and results of preclinical testing and human studies,
- the time and costs involved in obtaining regulatory approvals,
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- the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims,
- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in our existing collaborations,
- the cost of manufacturing scale-up, and
- the effectiveness of our commercialization activities.
WE MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.
To date, we have not generated any revenue from the sales of products we or
our collaborative partners have developed. We may not be able to successfully
develop, manufacture or market any products or ever achieve profitability.
Moreover, 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 collaborative
arrangements and other sources. Some of these fluctuations may be significant.
We believe our available cash, cash equivalents, marketable securities and
existing sources of funding will be adequate to satisfy out anticipated capital
requirements through 1999. Our future capital requirements will depend on many
factors, including: (1) the pace of scientific progress in our research and
development programs, (2) the magnitude of these programs, (3) the scope and
results of preclinical testing and clinical trials, (4) the time and costs
involved in obtaining regulatory approvals, (5) the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, (6) competing
technological and market developments, (7) the ability to establish additional
collaborations or changes in existing collaborations, (8) the cost of
manufacturing scale-up and (9) the effectiveness of our commercialization
activities.
WE MAY NOT BE ABLE TO PAY AMOUNTS DUE ON OUR OUTSTANDING INDEBTEDNESS.
We may not have sufficient cash to make required payments due under our
existing debt. Our subsidiary, Glycomed, is obligated to make payments under
certain debentures in the total principal amount of $50.0 million. The
debentures bear interest at a rate of 7 1/2% per annum and are due in 2003.
Glycomed may not have the funds necessary to pay the interest on and the
principal of these debentures when due. If Glycomed does not have adequate
funds, it will be forced to refinance the debentures and may not be successful
in doing so. In addition, in November 1998, we issued notes with a total issue
price of $40.0 million to Elan. Glycomed's failure to make payments when due
under its debentures would cause us to default under the notes we have issued or
may issue to Elan.
WE MAY REQUIRE ADDITIONAL STOCK OR DEBT FINANCINGS TO FUND OUR OPERATIONS WHICH
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We have incurred losses since our inception and do not expect to generate
positive cash flow to fund our operations for the 1999 calendar year and perhaps
for one or more subsequent years. As a result, we may need to complete
additional equity or debt financings in the near future to fund our operations.
These financings may not be available on acceptable 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, the notes we issued
to Elan are convertible into common stock at the option of Elan, subject to some
limitations. In addition, we may issue additional notes to Elan with up to a
total issue price of $70.0 million, which also would be convertible into common
stock. 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 certain technologies or drug candidates
that we would not otherwise
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relinquish. Our inability to obtain additional financing or to satisfy our
obligations or the obligations of our subsidiaries under outstanding
indebtedness could adversely affect our business.
WE NEED TO BUILD MARKETING AND SALES FORCES IN THE UNITED STATES AND EUROPE
WHICH WILL BE AN EXPENSIVE AND TIME-CONSUMING PROCESS.
Developing the sales force to market and sell products is a difficult,
expensive and time-consuming process. To market any of our products directly, we
will need to either develop a marketing and sales force with technical expertise
and distribution capability or contract with other companies with distribution
systems and direct sales forces. We recently developed a sales force and will,
at least initially, rely on another company to distribute our products. The
distributor will be responsible for providing many marketing support services,
including customer service, order entry, shipping and billing, and customer
reimbursement assistance. In addition, in Canada we are the sole marketer of two
cancer products other companies have developed. We may not be able to continue
to establish and maintain the necessary sales and marketing capabilities. 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 failure to establish an effective sales force, either
directly or through others, could adversely affect our business.
OUR SUCCESS WILL DEPEND ON THIRD-PARTY REIMBURSEMENT AND MAY BE IMPACTED BY
HEALTH CARE REFORM.
The efforts of governments and third party payors to contain or reduce the
cost of health care will continue to affect the business and financial condition
of drug companies. A number of legislative and regulatory proposals to change
the health care system have been discussed in recent years. 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.
Sales of prescription drugs depend significantly on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. These third party payors frequently require drug
companies to provide predetermined discounts from list prices, and they are
increasingly challenging the prices charged for medical products and services.
If we succeed in bringing one or more products to the market, these 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.
WE FACE SUBSTANTIAL COMPETITION WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
Some of the drugs that we are developing 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. 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. Any of these companies, academic institutions,
government agencies or research organizations may develop and introduce products
and processes that compete with or are better than ours. As a result, our
products may become noncompetitive or obsolete.
The products we are developing target a broad range of markets. Our ability
to compete will depend on the uses for which our products are developed and
ultimately approved by regulatory authorities. For some of our potential
products, an important factor in competition may be the timing of market
introduction.
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Important competitive factors include the speed at which we develop products,
complete the clinical trials and regulatory approval processes, and
commercialize the products. In addition, we expect that competition among
products approved for sale will be based on product safety, effectiveness,
reliability, availability, and price and patent position. Our competitive
position also will depend on whether we can attract and retain qualified
personnel, obtain patent protection or otherwise develop proprietary products or
processes, and secure sufficient capital resources.
OUR PRODUCTS MUST CLEAR SIGNIFICANT REGULATORY HURDLES PRIOR TO MARKETING.
Before we obtain the approvals necessary to sell any of our potential
products, we must show through preclinical studies and clinical trials that each
product is safe and effective. 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 post approval, 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 clinical supplies 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. Delays in patient enrollment may result in
increased costs and longer development times. In addition, some of 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 RELY HEAVILY ON COLLABORATIVE RELATIONSHIPS AND TERMINATION OF ANY OF THESE
PROGRAMS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our strategy for developing and commercializing many of our potential
products includes entering into collaborations with corporate partners,
licensors, licensees and others. To date, we have entered into collaborations
with Lilly, SmithKline Beecham, American Home Products, Abbott, Sankyo, Glaxo-
Wellcome, Allergan and Pfizer. 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. We cannot be
certain that our collaborations will 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 certain
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. The delay or termination of any of the collaborations could
adversely affect our business.
We may have disputes in the future with our collaborators, including
disputes concerning who 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
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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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN AND MAINTAIN OUR PATENTS AND OTHER
PROPRIETARY RIGHTS.
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, if we breach our licenses, we may lose rights to
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 patent
applications 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 are
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. 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
license 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, which would adversely affect our business.
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 Hoffman LaRoche, Inc. has received a United States
patent and has made patent filings in foreign countries that relate to our
Panretin(R) capsules and gel products. We filed a patent application with an
earlier filing date than Hoffman LaRoche's patent, which we believe is broader
than, but overlaps in part with, Hoffman LaRoche's patent. We currently are
investigating the scope and validity of Hoffman LaRoche's patent to determine
its impact upon our products. The Patent and Trademark Office has informed
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us that the overlapping claims are patentable to us and has initiated a
proceeding to determine whether we or Hoffman LaRoche 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. While we believe that the Hoffman LaRoche patent does not
cover the use of Panretin(R) capsules and gel for most of our planned uses, if
we do not prevail, the Hoffman LaRoche patent might block our use of Panretin(R)
capsules and gel in certain cancers.
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. Any of these actions might adversely affect our
business.
WE CURRENTLY HAVE LIMITED MANUFACTURING CAPABILITY AND WILL RELY ON THIRD-PARTY
MANUFACTURERS.
We currently have no manufacturing facilities outside of Marathon's
facility and rely on Marathon and others for clinical or commercial production
of our potential products. To be successful, we will need to manufacture our
products, either directly or through others, in commercial quantities, in
compliance with regulatory requirements and at acceptable cost. If we are unable
to develop our own facilities or contract with others for manufacturing
services, our ability to conduct preclinical testing and human clinical trials
will be adversely affected. This in turn could 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. Any of these events would adversely
affect our business.
Our 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. Any extended and unplanned manufacturing
shutdowns could be expensive and could result in inventory and product
shortages.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY RISKS AND WE MAY NOT HAVE
SUFFICIENT INSURANCE TO COVER ANY CLAIMS.
Our business exposes us to potential product liability risks. A successful
product liability claim or series of claims brought against us could adversely
affect our 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 have arranged to increase our product
liability insurance coverage in connection with the planned launch of two of our
potential products; however, 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. We expect to purchase additional insurance
when more of our products progress to a later stage of development and if we
license any rights to use later-stage products in the future. 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 ARE DEPENDENT ON OUR KEY EMPLOYEES, THE LOSS OF WHOSE SERVICES COULD
ADVERSELY AFFECT US.
We depend on our key scientific and management staff, the loss of whose
services could adversely affect our business. Furthermore, we are currently
experiencing a period of rapid growth, which requires us to hire many new
scientific, management and operational personnel. Accordingly, recruiting and
retaining qualified management, operations and scientific personnel to perform
research and development work also is critical to our success. Although we
believe we will successfully attract and retain the necessary personnel, we may
not be able to attract and retain such personnel on acceptable terms given the
competition among numerous drug companies, universities and other research
institutions for such personnel.
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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. For example,
as we previously mentioned, retinoids as a class are known to contain compounds,
which can cause birth defects. We cannot completely eliminate the risk of
accidental contamination or injury from the handling and disposing of hazardous
materials. In the event of any accident, we could be held liable for any damages
that result, which could be significant. In addition, we may incur substantial
costs to comply with environmental regulations. Any of these events could
adversely affect our business.
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. Future announcements concerning us or our competitors may impact
the market price of our common stock. These announcements might include the
results of research, development testing, technological innovations, new
commercial products, government regulation, receipt of regulatory approvals by
competitors, our failure to receive regulatory approvals, developments
concerning proprietary rights, litigation or public concern about the safety of
the products.
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, and we do
not anticipate paying cash dividends in the foreseeable future. Accordingly,
other than through a sale of your shares, you may not receive a return.
OUR CHARTER DOCUMENTS AND SHAREHOLDER RIGHTS PLAN MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO YOU.
Our shareholder rights plan and certain provisions contained in our
certificate of incorporation and bylaws may discourage transactions involving an
actual or potential change in our ownership, including transactions in which you
might otherwise receive a premium for your shares over then-current market
prices. These provisions also may limit your ability to approve transactions
that you deem to be in your best interests. 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.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED AND WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
For a discussion of the risks associated with our year 2000 readiness,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
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ITEM 2. PROPERTIES
Ligand currently leases and occupies three facilities in San Diego,
California, and one facility in Hopkinton, Massachusetts.
In July 1994, the Company entered into a 20-year lease related to the
construction of a new build-to-suit laboratory facility. This 52,800 square foot
facility was completed and occupied in August 1995. In March 1997, the Company
entered into a 17-year lease for laboratory and administrative office space for
a second build-to-suit facility. This 82,000 square foot facility was completed
and occupied in December 1997. The third facility in San Diego is occupied under
a lease of approximately 7,500 square feet of laboratory space, which continues
through February 2001.
In January 1999, Ligand purchased all the assets of Marathon
Biopharmaceuticals in Hopkinton, Massachusetts. Marathon has 13 years remaining
on a lease for a 64,000 square foot facility which is used for manufacturing and
administrative office space.
The Company believes these facilities will be adequate to meet the
Company's near-term space requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to litigation arising in the
normal course of business. As of the date of the filing, the Company is not a
party to any litigation which would have a material effect on its financial
position or business operations taken as a whole.
On August 4, 1998, a lawsuit was filed in the Court of Chancery of the
State of Delaware which sought to enjoin the acquisition of Seragen by Ligand.
The injunction was denied and the acquisition occurred on August 12, 1998. An
amended complaint was filed on or about December 18, 1998 against Seragen,
Seragen Technology, Inc., certain former directors and officers and Seragen
investors, Boston University and certain of its trustees, Marathon
Biopharmaceuticals L.L.C., Ligand and Knight Acquisition Corp., a wholly owned
subsidiary of Ligand at the time of the merger with Seragen ("Knight"). Ligand
and Knight were not named as defendants in the original complaint. The amended
complaint alleges claims of self-dealing and breach of fiduciary duties of
disclosure, loyalty and care by the individual defendants and Seragen investors,
and seeks damages on behalf of a class of shareholders who purchased Seragen
common stock during the period April 1992 through August 12, 1998. The lawsuit
also challenges the fairness of Ligand's acquisition of Seragen, and the
allocation of the merger proceeds among the individual defendants, Seragen's
investors and minority shareholders. We believe that the lawsuit is without
merit and intend to defend against it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKETS FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
(A) MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "LGND." The following table sets forth the
high and low sales prices for the Company's common stock on the Nasdaq National
Market for the periods indicated.
PRICE RANGE
------------
HIGH LOW
---- ----
YEAR ENDING DECEMBER 31, 1997:
1st Quarter................................................. $17 $10 1/4
2nd Quarter................................................. 14 1/2 9 1/8
3rd Quarter................................................. 17 3/4 11 5/8
4th Quarter................................................. 18 3/8 11 1/4
YEAR ENDING DECEMBER 31, 1998:
1st Quarter................................................. $16 5/8 $10 7/8
2nd Quarter................................................. 16 3/8 12 1/8
3rd Quarter................................................. 13 1/4 5 1/2
4th Quarter................................................. 12 3/8 6 15/16
(B) HOLDERS
As of February 28, 1999, there were approximately 1,944 holders of record
of the common stock.
(C) DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not intend to pay any cash dividends in the foreseeable future.
The Company currently intends to retain its earnings, if any, to finance future
growth. The Company has no contractual restrictions on paying dividends.
(D) RECENT SALES OF UNREGISTERED SECURITIES
None.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated financial statements has been derived from the audited financial
statements. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this filing.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Collaborative research and
development
Related parties................. $ -- $ 18,997 $ 18,641 $ 11,972 $ 8,342
Unrelated parties............... 17,267 32,284 17,994 12,424 4,893
Other.............................. 406 418 207 120 74
---------- ---------- ---------- ---------- ----------
Total revenues................ 17,673 51,699 36,842 24,516 13,309
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Research and development........... 70,739 72,426 59,494 41,636 27,205
Selling, general and
administrative.................. 16,568 10,108 10,205 8,181 6,957
Write-off of acquired in-process
technology...................... 45,000 64,970 -- 19,564 --
ALRT contribution.................. -- -- -- 17,500 --
---------- ---------- ---------- ---------- ----------
Total operating expenses...... 132,307 147,504 69,699 86,881 34,162
---------- ---------- ---------- ---------- ----------
Loss from operations................. (114,634) (95,805) (32,857) (62,365) (20,853)
Interest income...................... 3,070 3,743 3,704 3,603 1,298
Interest expense..................... (8,322) (8,088) (8,160) (5,410) (679)
Realized gain on sale of
investments........................ 2,000 -- -- -- --
Equity in operations of joint
venture............................ -- -- -- -- (6,845)
---------- ---------- ---------- ---------- ----------
Net loss............................. $ (117,886) $ (100,150) $ (37,313) $ (64,172) $ (27,079)
========== ========== ========== ========== ==========
Basic and diluted net loss per
Share.............................. $ (2.92) $ (3.02) $ (1.30) $ (2.70) $ (1.57)
---------- ---------- ---------- ---------- ----------
Shares used in computing net loss per
share.............................. 40,392,421 33,128,372 28,780,914 23,791,542 17,240,535
========== ========== ========== ========== ==========
AT DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short term
investments and restricted cash.... $ 72,521 $ 86,287 $ 84,179 $ 76,903 $ 38,403
Working capital...................... 51,098 62,399 71,680 57,349 33,567
Total assets......................... 156,020 107,423 102,140 93,594 46,696
Long-term debt....................... 51,185 14,751 19,961 18,585 12,285
Convertible subordinated
debentures......................... 39,302 36,628 33,953 31,279 --
Accumulated deficit.................. (395,630) (277,744) (177,594) (140,281) (76,108)
Total stockholders' equity
(deficit).......................... (11,362) 34,349 34,461 28,071 26,335
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
This annual report on Form 10-K may contain predictions, estimates and
other forward-looking statements that involve a number of risks and
uncertainties, including those discussed in Item 1 above at "Risks and
Uncertainties." This outlook represents our current judgment on the future
direction of our business. Any risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. 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 annual report.
OVERVIEW
Since January 1989, we have devoted substantially all of our resources to
our intracellular receptor and signal transducers and activators of
transcription drug discovery and development programs. We have been unprofitable
since our inception. We expect to incur substantial additional operating losses
until the approval and commercialization of our products, begun in 1999,
generate sufficient revenues to cover our expenses. These losses will be due to
continued capital requirements for: (1) research and development, (2)
preclinical testing, (3) clinical trials, (4) regulatory activities (5)
establishment of manufacturing processes and (6) sales and marketing
capabilities. 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 collaborative arrangements and future product sales. Some
of these fluctuations may be significant. As of December 31, 1998, our
accumulated deficit was $395.6 million.
In February 1999, the FDA granted us marketing approval for our first two
products, Panretin(R) gel for the treatment of patients with cutaneous
AIDS-related Kaposi's sarcoma and ONTAK(TM) for the treatment of patients with
persistent or recurrent cutaneous CTCL whose malignant cells express the CD25
component of the IL-2 receptor.
In August 1998, we completed a merger with Seragen, Inc. We currently
operate Seragen as one of our subsidiaries. Also, in August 1998, Seragen signed
an agreement with Eli Lilly and Company and us under which Lilly assigned to us
Lilly's rights and obligations under its agreements with Seragen, including its
sales and marketing rights to ONTAK(TM).
We paid Seragen shareholders $30.0 million, $4.0 million of which was in
cash and $26.0 million of which was in the form of approximately 1,858,515
shares of common stock. We must pay an additional $37.0 million to Seragen
shareholders in cash and/or common stock, at our option. The additional payment
must be made in August 1999.
Additionally, our agreement with Lilly calls for up to $5.0 million,
payable in cash or common stock, at our option, in milestone payments to Lilly,
upon ONTAK(TM) approval by the FDA. Upon certain other events, Lilly could
receive an additional $5.0 million in milestone payments.
In January 1999, we purchased substantially all of the assets of Marathon
Biopharmaceuticals for $5.0 million through the issuance of 402,820 shares of
our common stock, at $12.41 per share with an additional $3.0 million to be paid
in August 1999.
The transactions with Seragen shareholders, Marathon, and Lilly represent
our cost to acquire all of the rights to manufacture, market and sell ONTAK(TM),
and we accounted for using the purchase method of accounting. The purchase
price, totaling $84.1 million, which includes liabilities assumed of $2.3
million was allocated to the fair value of the assets acquired. This included an
allocation to in-process technology which was written off, resulting in a
one-time non-cash charge to results of operations of approximately $30.0
million.
In September 1998, we signed a binding letter of agreement with Elan
Corporation, plc. In September 1998, Elan purchased 1,278,970 shares of common
stock for $14.9 million ($11.65 per share). In November 1998, Elan purchased an
additional 437,768 shares for $5.1 million ($11.65 per share).
In addition, in November 1998, Elan purchased from us $40.0 million in
issue price of zero coupon convertible senior notes, due 2008 with an 8.0% per
annum yield to maturity. Of these notes, $30.0 million are convertible into
common stock at $14.00 per share. The balance issued of $10.0 million along with
up to an
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additional $70.0 million of notes which Elan may also purchase in the future is
convertible into common stock. The conversion price is determined by the average
of the closing prices of common stock for the 20 trading days immediately prior
to the issuance of a note plus a premium. However, the conversion price will
never be less than $14.00 per share or more than $20.00 per share. Interest will
accrue during the term of the notes. The notes may be used to finance the final
payments for the Seragen merger and Marathon acquisition which are due in August
1999, as well as other acquisitions of complementary technologies, subject to
the consent of Elan.
Elan also exclusively licensed to us in the United States and Canada its
proprietary product Morphelan(TM). At the closing, we paid Elan $5.0 million
through the issuance of 429,185 shares of common stock ($11.65 per share) and
$10.0 million through the issuance of notes for these rights to Morphelan(TM).
The total $15.0 in million payments was written off as in-process technology in
a one-time charge to operations. We will also pay Elan milestone payments upon
the occurrence of certain events up to and including the approval of the new
drug application in the United States. These payments may be in cash or, subject
to certain conditions, in common stock or notes.
In December 1994, we formed Allergan Ligand Retinoid Therapeutics, Inc.
with Allergan, Inc. to continue the research and development activities
previously conducted by a joint venture with Allergan. In June 1995, Allergan
Ligand and we completed a public offering of 3,250,000 units with aggregate
proceeds of $32.5 million and cash contributions by Allergan of $50.0 million
and by us of $17.5 million. Allergan Ligand received net proceeds of $94.3
million for retinoid product research and development. Each unit consisted of
one share of Allergan Ligand callable common stock and two warrants, each
warrant entitling the holder to purchase one share of our common stock. In
September 1997, we exercised our option to purchase all of the callable common
stock. At the same time, Allergan exercised its option to purchase certain
assets of Allergan Ligand. Our exercise of the stock purchase option required
the issuance of 3,166,567 shares of our common stock, along with cash payments
totaling $25.0 million, to holders of the callable common stock in November
1997. Allergan made a cash payment of $8.9 million to Allergan Ligand in
November 1997, which was used by us to pay a portion of the stock purchase
option. Prior to September 1997, cash received from Allergan Ligand was recorded
as contract revenue. As a result of our exercise of the stock purchase option,
research expenditures incurred related to Allergan Ligand activities are no
longer reimbursed, eliminating the Allergan Ligand contract revenue recognition.
The buyback of Allergan Ligand was accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of net assets
acquired was allocated to in-process technology and written off resulting in a
one time non-cash charge to operations of $65.0 million in 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 ("1998"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1997 ("1997")
We had revenues of $17.7 million for 1998 compared to revenues of $51.7
million for 1997. The decrease in revenues is primarily due to: (1) the buyback
of Allergan Ligand which resulted in reduced revenue of $19.0 million in 1998
compared to 1997, (2) completion of the Glaxo-Wellcome, plc and Sankyo Company
Ltd. collaborations in 1997 resulting in reduced revenues in 1998 of $1.3
million for Glaxo and $2.3 million for Sankyo compared to 1997, (3) completion
of the American Home Products Corporation collaboration in 1998 resulting in
reduced revenue of $2.7 million compared to 1997 and (4) a reduction in revenue
from Lilly of $9.3 million. The Lilly reduction was due to a $12.5 million
up-front non refundable milestone payment received in 1997 and $6.25 million
which was recognized in 1997 revenue upon the execution of the Lilly
collaboration agreement, offset by a full year of collaboration revenue from
Lilly recognized in 1998. Revenues in 1998 were derived from the Company's
research and development agreements with: (1) Lilly of $10.4 million, (2)
SmithKline Beecham Corporation of $3.7 million, (3) American Home Products of
$1.3 million (4) Abbott Laboratories of $1.2 million, as well as from product
sales of in-licensed products by our Canadian subsidiary of $406,000 and a
one-time license fee payment of $686,000. Revenues for 1997 were derived from
our research and development agreements with: (1) Lilly of $19.7 million (2)
Allergan Ligand of $19.0 million, (3) American Home Products of $4.0 million,
(4) SmithKline Beecham of $3.2 million,
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(5) Sankyo of $2.3 million, (6) Abbott of $1.7 million, (7) Glaxo-Wellcome of
$1.3 million, as well as from product sales of in-licensed products by our
Canadian subsidiary of $418,000.
For 1998, research and development expenses decreased to $70.7 million from
$72.4 million in 1997. The decrease in expenses was primarily due to initial
drug product validation costs incurred in 1997 and the closure of Glycomed's
Alameda facility and completion of the research portion of the Sankyo
collaboration in October 1997. The decrease in these expenses was offset by an
increase in expenses related to completion of Phase III trials and NDA
preparation and submission for our lead product candidates. Selling, general and
administrative expenses increased to $16.6 million in 1998 from $10.1 million in
1997. This increase was primarily attributable to personnel additions and
increased expenses in preparation for commercialization activities. Interest
income decreased to $3.1 million in 1998 from $3.7 million in 1997 due to the
use of cash to fund development and clinical programs and to support the growth
in commercialization activities, offset by cash received from the Elan notes and
the $20.0 million equity investment by Elan in second half of 1998. Interest
expense increased to $8.3 million in 1998 from $8.1 million in 1997. The
increase is due to interest payable in connection with the receipt of the Elan
notes. A $2.0 million gain was realized from the sale of investment securities
in 1998.
A one-time charge of $30.0 million for in process technology was incurred
in 1998 from the merger with Seragen, and an additional one-time charge of $15.0
million related to the licensing of Morphelan(TM) from Elan.
We have significant net operating loss carryforwards for federal and state
income taxes which are available subject to Internal Revenue Code Sections 382
and 383 carryforward limitations. We do not believe the limitations will have a
material impact upon the future utilization of these carryforwards. See note 13
to our consolidated financial statements included elsewhere in this annual
report.
YEAR ENDED DECEMBER 31, 1997 ("1997"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
We had revenues of $51.7 million for 1997 compared to revenues of $36.8
million for 1996. The increase in revenues is primarily due to the Lilly
collaboration revenues of $19.7 million in 1997, offset by decreased revenues
from the research and development collaboration with American Home Products, due
to a one-time payment of $1.5 million in 1996, which expanded and amended the
research and development agreement, as well as a $1.3 million milestone payment
received from Pfizer Inc. in 1996. Revenues in 1997 were derived from our
research and development agreements as discussed above. Revenues for 1996 were
derived from our research and development agreements with: (1) Allergan Ligand
of $18.6 million, (2) American Home Products of $6.9 million, (3) Sankyo of $2.7
million, (4) Abbott of $2.5 million, (5) SmithKline Beecham of $2.4 million, (6)
Glaxo-Wellcome of $2.1 million as well as from a milestone payment received from
Pfizer of $1.3 million, product sales of in-licensed products by our Canadian
subsidiary of $207,000 and revenues from a National Institutes of Health grant
of $99,000.
For 1997, research and development expenses increased to $72.4 million from
$59.5 million in 1996. These expenses increased primarily due to expansion of
our clinical and development activities, as well as related additions of
clinical and development personnel. Selling, general and administrative expenses
decreased to $10.1 million in 1997 from $10.2 million in 1996. The decrease was
primarily attributable to higher legal expenses incurred in 1996 related to the
settlement of future product rights litigation offset by additions to personnel
in 1997 to support expanded clinical and development activities. Interest income
was $3.7 million for 1997 and 1996. Interest expense decreased slightly to $8.1
million for 1997, from $8.2 million in 1996, due to conversion of $7.5 million
convertible notes from American Home Products to equity in 1997, offset by the
addition of $2.5 million of convertible notes from SmithKline Beecham in 1997
and increases in capital lease obligations used to finance equipment.
A one-time charge of $65.0 million was incurred in 1997 for the write off
of in-process technology related to the exercise of the Allergan Ligand stock
purchase option.
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through private and public offerings of our
equity securities, collaborative research revenues, capital and operating lease
transactions, issuance of convertible notes, investment income and product
sales. From inception through December 31, 1998, we have raised cash proceeds of
$234.4 million from sales of equity securities: $78.2 million from public
offerings and a total of $156.2 million from private placements and the exercise
of options and warrants.
As of December 31, 1998, we had acquired a total of $36.5 million in
property, laboratory and office equipment (including Marathon) and $5.0 million
in tenant leasehold improvements. Of these totals, $7.9 million was recorded in
the merger with Seragen and will be paid in cash or common stock, at the
Company's option, while substantially all of the balance has been funded through
capital lease and equipment note obligations. In addition, we lease our office
and laboratory facilities. In July 1994, we entered into a long-term lease
related to the construction of a new laboratory facility, which was completed
and occupied in August 1995. In March 1997, we entered into a long-term lease,
related to a second build-to-suit facility and loaned the construction
partnership $3.7 million at an annual interest rate of 8.5% which will be paid
back monthly over a 10-year period. The second build-to-suit facility was
completed and occupied in December 1997. In February 1997, the Company signed a
master lease agreement to finance future capital equipment up to $1.5 million.
This master lease agreement was expanded and extended in July 1997 and again in
December 1998 and is currently available until March 31, 2000. Each individual
schedule under the master lease agreement will be paid back monthly with
interest over a five-year period. As of December 31, 1998, we had $4.5 million
available to finance future capital equipment.
Working capital decreased to $51.1 million as of December 31, 1998, from
$62.4 million at the end of 1997. The decrease in working capital resulted from
a decrease in cash and increases in accounts payable and accruals at year end
1998, due to increases in clinical trials, product development expenses and
increased selling expenses in preparation for commercialization activities. This
decrease in working capital was offset by the $20.0 million equity investment by
Elan in the second half of 1998 and $30 million in the notes received from Elan
in November 1998. For the same reasons, cash and cash equivalents, short-term
investments and restricted cash decreased to $72.5 million at December 31, 1998
from $86.3 million at December 31, 1997. We primarily invest our cash in United
States government and investment grade corporate debt securities.
In April 1998, we initiated a new collaboration with SmithKline Beecham to
develop small molecule drugs for the treatment or prevention of obesity. As part
of the collaboration, SmithKline Beecham purchased 274,423 shares of common
stock for $5.0 million ($18.22 per share), a 20% premium over a 15-day average
of the daily closing price of common stock prior to execution of the agreement.
The premium has been deferred and will be recognized as revenue over the
two-year period in which services will be provided under the collaborative
agreement. SmithKline Beecham also purchased for $1.0 million a warrant to
purchase 150,000 shares of common stock at $20.00 per share. The warrant expires
in five years, and we may require SmithKline Beecham to exercise the warrant
under certain circumstances after three years. SmithKline Beecham will also
purchase additional common stock at a 20% premium if a certain research
milestone is achieved and will make cash payments to us if subsequent milestones
are met.
In June 1998, we converted $3.8 million of the convertible notes
outstanding to American Home Products into 374,625 shares of common stock at a
$10.01 conversion price.
In August 1998, we paid Seragen shareholders $30.0 million, $4.0 million of
which was cash and $26.0 million of which was in the form of approximately
1,858,515 shares of common stock. We must pay an additional $37.0 million to
Seragen shareholders in cash and/or common stock, at our option. The additional
payment must be made in August 1999.
In January 1999, we purchased substantially all of the assets of Marathon
Biopharmaceuticals for $5.0 million through the issuance of 402,820 shares of
our common stock, at $12.41 per share with an additional $3.0 million to be paid
in August 1999.
In September 1998, Elan purchased 1,278,970 shares of common stock for
$14.9 million ($11.65 per share). An additional 437,768 shares for $5.1 million
($11.65 per share) was purchased by Elan in November
41
43
1998. Elan also purchased from us in November 1998 $40.0 million in issue price
of notes. At our option, Elan may also purchase up to an additional $70.0
million of notes which will be convertible into common stock at $14.00 to $20.00
per share.
Elan also exclusively licensed to us in the United States and Canada its
proprietary product Morphelan(TM). At the closing, we paid Elan $5.0 million
through the issuance of 429,185 shares of common stock ($11.65 per share) and
$10.0 million through the issuance of notes for these rights to Morphelan(TM).
The total $15.0 million payment was written off as in-process technology in a
one-time charge to operations. We will also pay Elan milestone payments upon the
occurrence of certain events up to and including the approval of the new drug
application in the United States. These payments may be in cash or, subject to
certain conditions, in common stock or notes
We believe our available cash, cash equivalents, marketable securities and
existing sources of funding will be adequate to satisfy our anticipated capital
requirements through 1999. Our future capital requirements will depend on many
factors, including: (1) the pace of scientific progress in our research and
development programs, (2) the magnitude of these programs, (3) the scope and
results of preclinical testing and clinical trials, (4) the time and costs
involved in obtaining regulatory approvals, (5) the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, (6) competing
technological and market developments, (7) the ability to establish additional
collaborations or changes in existing collaborations, (8) the cost of
manufacturing scale-up and (9) the effectiveness of our commercialization
activities.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded computer chip technology, including, building controls,
security systems or laboratory equipment. It may also impact the ability to
obtain products or services if the provider encounters and fails to resolve year
2000 related problems.
We have established an active program to identify and resolve year 2000
related issues. This program includes the review and assessment of our
information technology and non-information technology systems, as well as third
parties with whom we have a material relationship. This program consists of four
phases: inventory, risk assessment, problem validation and problem resolution.
The inventory phase identified potential risks we face. They include among
others computer software, computer hardware, telecommunications systems,
laboratory equipment, facilities systems (security, environment control, alarm),
service providers (contract research organizations, consultants, product
distribution), and other third parties. The risk assessment phase categorizes
and prioritizes each risk by its potential impact. The problem validation phase
tests each potential risk, according to priority, to determine if an action risk
exists. In the case of critical third parties, this step will include a review
of their year 2000 plans and activities. The problem resolution phase will, for
each validated risk, determine the method/strategy for alleviating the risk. It
may include anything from replacement of hardware or software to process
modification to selection of alternative vendors. This step also includes the
development of contingency plans.
We initiated this program in 1998. The inventory and risk assessment phases
were completed in 1998 while the problem validation phase was completed in 1998
for all areas, except for evaluating specific pieces of research equipment and
the assessment of some critical third parties. We expect that we will complete
the last portion of the problem validation phase by the end of the second
calendar quarter of 1999. Contingency plans are being developed. We expect to
have those plans completed by the end of the second quarter of 1999. We expect
the problem resolution phase to be completed by the end of the third quarter in
1999.
To date, we have determined that some of our internal information
technology and non-information technology systems are not year 2000 compliant.
However, we have not completed our full assessment of the critical third-party
service providers we utilize. This assessment is taking place as part of the
current problem validation phase.
42
44
We are actively correcting problems as we identify them. These corrections
include the replacement of hardware and software systems, the identification of
alternative service providers and the creation of contingency plans. We
currently estimate that the cost of identified problems will be approximately
$100,000 for hardware and software upgrades or modifications. In addition, we
estimate that we will incur approximately $400,000 of internal personnel costs
to complete the remaining phases of the project. We do not believe that the cost
of these actions will have a material adverse affect on our business. We expect
that we will be able to resolve any problems we identify in the remaining phases
of the project as part of normal operating expenses.
Any failure of our internal computer systems or of third-party equipment or
software we use, or of systems maintained by our suppliers, to be year 2000
compliant may adversely effect our business. In addition, adverse changes in the
purchasing patterns of our potential customers as a result of year 2000 issues
affecting them may adversely effect our business. These expenditures by
potential customers may result in reduced funds available to purchase our
products, which could adversely effect our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998 our investment portfolio includes fixed-income
securities of $40.3 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. However, due to the short
duration of our investment portfolio, an immediate 10% change in interest rates
would have no material impact on our financial condition or results of
operations.
We generally conduct business including sales to foreign customers, in 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 not
have a material impact on our financial condition or results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections labeled "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
1999 Annual Meeting of Stockholders are incorporated herein by reference (the
"Proxy Statement.")
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation and Other Information"
appearing in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Principal Stockholders" and "Security Ownership of
Directors and Management" appearing in the Proxy Statement are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Executive Compensation and Other Information" and
"Certain Relationships and Related Transactions" appearing in the Proxy
Statement are incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this report.
CONSOLIDATED FINANCIAL STATEMENTS OF LIGAND PHARMACEUTICALS INCORPORATED
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998............... F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............... F-6
Notes to Consolidated Financial Statements.................. F-7
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
# 2.1 Agreement of Merger, dated February 7, 1995 by and among
Ligand Pharmaceuticals Incorporated, LG Acquisition Corp.
and Glycomed Incorporated (other Exhibits omitted, but will
be filed by the Company with the Commission upon request).
# 2.2 Form of Plan of Merger.
### 2.3 Agreement and Plan of Reorganization dated May 11, 1998, by
and among the Company, Knight Acquisition Corp. and Seragen,
Inc. (Exhibit 2.1).
### 2.4 Form of Certificate of Seragen Merger. (Exhibit 2.2).
### 3.1 Amended and Restated Certificate of Incorporation of the
Company. (Exhibit 3.2)
### 3.2 Bylaws of the Company, as amended. (Exhibit 3.3)
### 3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of the
Company. (Exhibit 3.4).
# 10.1 The Company's 1992 Stock Option/Stock Issuance Plan, as
amended.
* 10.2 Form of Stock Option Agreement.
* 10.3 Form of Stock Issuance Agreement.
* 10.7 The Company's 1988 Stock Option Plan, as amended.
* 10.8 Form of Incentive Stock Option Agreement (Installment
Vesting).
* 10.9 Form of Non-Qualified Stock Option Agreement (Installment
Vesting).
* 10.10 Form of Consultant Non-Qualified Stock Option Agreement
(Immediate Vesting).
* 10.12 1992 Employee Stock Purchase Plan.
* 10.13 Form of Stock Purchase Agreement.
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46
EXHIBIT
NUMBER DESCRIPTION
------- -----------
* 10.29 Consulting Agreement, dated October 20, 1988, between the
Company and Dr. Ronald M. Evans, as amended by Amendment to
Consulting Agreement, dated August 1, 1991, and Second
Amendment to Consulting Agreement, dated March 6, 1992.
* 10.30 Form of Proprietary Information and Inventions Agreement.
Research and License.
* 10.31 Agreement, dated March 9, 1992, between the Company and
Baylor College of Medicine (with certain confidential
portions omitted).
* 10.33 License Agreement, dated November 14, 1991, between the
Company and Rockefeller University (with certain
confidential portions omitted).
* 10.34 License Agreement and Bailment, dated July 22, 1991, between
the Company and the Regents of the University of California
(with certain confidential portions omitted).
* 10.35 Agreement, dated May 1, 1991, between the Company and Pfizer
Inc (with certain confidential portions omitted).
* 10.36 License Agreement, dated July 3, 1990, between the Company
and the Brigham and Woman's Hospital, Inc. (with certain
confidential portions omitted).
* 10.37 Compound Evaluation Agreement, dated May 17, 1990, between
the Company and SRI International (with certain confidential
portions omitted).
* 10.38 License Agreement, dated January 5, 1990, between the
Company and the University of North Carolina at Chapel Hill
(with certain confidential portions omitted).
* 10.40 License Agreement, dated January 4, 1990, between the
Company and Baylor College of Medicine (with certain
confidential portions omitted).
* 10.41 License Agreement, dated October 1, 1989, between the
Company and Institute Pasteur (with certain confidential
portions omitted).
* 10.42 Sublicense Agreement, dated September 13, 1989, between the
Company and AndroBio Corporation (with certain confidential
portions omitted).
* 10.43 License Agreement, dated June 23, 1989, between the Company
and La Jolla Cancer Research Foundation (with certain
confidential portions omitted).
* 10.44 License Agreement, dated October 20, 1988, between the
Company and the Institute for Biological Studies, as amended
by Amendment to License Agreement dated September 15, 1989,
Second Amendment to License Agreement, dated December 1,
1989 and Third Amendment to License Agreement dated October
20, 1990 (with certain confidential portions omitted).
* 10.45 Agreement dated June 12, 1989, between the Company and the
Regents of the University of California.
* 10.46 Form of Indemnification Agreement between the Company and
each of its directors.
* 10.47 Form of Indemnification Agreement between the Company and
each of its officers.
* 10.50 Consulting Agreement, dated October 1, 1991, between the
Company and Dr. Bert W. O'Malley.
* 10.53 Stock And Warrant Purchase Agreement, Dated June 30, 1992
Between The Company And Allergan, Inc. And Allergan
Pharmaceuticals (Ireland) Ltd., Inc.
* 10.58 Stock Purchase Agreement, dated September 9, 1992, between
the Company and Glaxo, Inc.
* 10.59 Research and Development Agreement, dated September 9, 1992,
between the Company and Glaxo, Inc. (with certain
confidential portions omitted).
45
47
EXHIBIT
NUMBER DESCRIPTION
------- -----------
* 10.60 Stock Transfer Agreement, dated September 30, 1992, between
the Company and the Rockefeller University.
* 10.61 Stock Transfer Agreement, dated September 30, 1992, between
the Company and New York University.
* 10.62 License Agreement, dated September 30, 1992, between the
Company and the Rockefeller University (with certain
confidential portions omitted).
* 10.63 Professional Services Agreement, dated September 30, 1992,
between the Company and Dr. James E. Darnell.
* 10.64 Letter Agreement, dated August 24, 1992, between the Company
and Dr. Howard T. Holden.
* 10.65 Letter Agreement, dated August 20, 1992, between the Company
and Dr. George Gill.
* 10.67 Letter Agreement, dated September 11, 1992, between the
Company and Mr. Paul Maier.
!! 10.69 Form of Automatic Grant Option Agreement.
** 10.73 Supplementary Agreement, dated October 1, 1993, between the
Company and Pfizer, Inc. to Agreement, dated May 1, 1991.
! 10.76 Amended Registration Rights Agreement, dated June 24, 1994,
between the Company and the individuals listed on attached
Schedule A, as amended (Exhibit 4.1).
! 10.77 First Addendum to Amended Registration Rights Agreement,
dated July 6, 1994, between Company and Abbott Laboratories.
(Exhibit 4.2).
*** 10.78 Research, Development and License Agreement, dated July 6,
1994, between the Company and Abbott Laboratories (with
certain confidential portions omitted). (Exhibit 10.75).
*** 10.79 Stock and Note Purchase Agreement, dated September 2, 1994,
between the Company and American Home Products Corporation
(with certain confidential portions omitted).
*** 10.80 Unsecured Convertible Promissory Note dated September 2,
1994, in the face amount of $10,000,000 executed by the
Company in favor of American Home Products Corporation (with
certain confidential portions omitted). (Exhibit 10.78).
*** 10.81 Second Addendum to Amended Registration Rights Agreement,
dated September 2, 1994, between the Company and American
Home Products Corporation.
*** 10.82 Research, Development and License Agreement, dated September
2, 1994, between the Company and American Home Products
Corporation, as represented by its Wyeth-Ayerst Research
Division (with certain confidential portions omitted).
(Exhibit 10.77).
*** 10.83 Option Agreement, dated September 2, 1994, between the
Company and American Home Products Corporation, as
represented by its Wyeth-Ayerst Research Division (with
certain confidential portions omitted). (Exhibit 10.80).
*** 10.84 Distribution and Marketing Agreement, dated September 16,
1994, between the Company and Cetus Oncology Corporation, a
wholly owned subsidiary of the Chiron Corporation (with
certain confidential portions omitted). (Exhibit 10.82).
& 10.93 Indemnity Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
& 10.94 Tax Allocation Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
& 10.95 Stock Purchase Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Pharmaceuticals
(Ireland), Ltd.
46
48
EXHIBIT
NUMBER DESCRIPTION
------- -----------
& 10.97 Research, Development and License Agreement, dated December
29, 1994, between SmithKline Beecham Corporation and the
Company (with certain confidential portions omitted).
& 10.98 Stock and Note Purchase Agreement, dated February 2, 1995,
between SmithKline Beecham Corporation, S.R. One Limited and
the Company (with certain confidential portions omitted).
& 10.99 Third Addendum to Amended Registration Rights Agreement,
dated February 3, 1995, between S. R. One, Limited and the
Company.
# 10.100 PHOTOFRIN(R) Distribution Agreement, dated March 8, 1995,
between the Company and Quadra Logic Technologies Inc. (with
certain confidential portions omitted).
10.119(1) Option and Development Agreement, dated August 15, 1990,
between Glycomed and Dr. Richard E. Galardy and Dr. Damian
Grobelny with exhibit thereto (with certain portions
omitted). (Exhibit 10.20).
10.120(1) Option and Development Agreement, dated November 27, 1989,
between Glycomed and the President and Fellows of Harvard
College with appendices thereto (with certain confidential
portions omitted). (Exhibit 10.21)
10.121(1) Option and Development Agreement, dated January 1, 1991,
between Glycomed and UAB Research Foundation with exhibits
thereto (with certain confidential portions omitted).
(Exhibit 10.22).
10.122(1) Joint Venture Agreement, dated December 18, 1990, among
Glycomed, Glyko, Inc., Millipore Corporation, Astroscan,
Ltd., Astromed, Ltd., Gwynn R. Williams and John Klock,
M.D., with exhibits thereto (with certain confidential
portions omitted). (Exhibit 10.23).
10.127(2) Research and License Agreement, dated April 29, 1992,
between Glycomed and the Alberta Research Council with
Appendix thereto (with certain confidential portions
omitted). (Exhibit 10.28).
10.130(3) Amendment to Research and License Agreement, dated July 12,
1993, (confidential portions omitted). (Exhibit 10.32).
10.131(4) Amendments to Research and License Agreement, dated October
22, 1993, December 16, 19 and May 9, 1994 between Glycomed
and the Alberta Research Council (with certain confidential
portions omitted). (Exhibit 10.33).
10.132(4) License Agreement, dated February 14, 1994 between Glycomed
and Sankyo Company, Ltd., for the Far East marketing rights
of ophthalmic indications of Galardin(TM) MPI and analogs
(with certain confidential portions omitted). (Exhibit
10.34).
10.133(4) Collaborative Technology Research and Development Agreement
between Glycomed and Sankyo Company, Ltd., dated June 27,
1994 (with certain confidential portions omitted). (Exhibit
10.35).
10.136(5) Amendment to Research and License Agreement, dated September
22, 1994 between Glycomed and Alberta Research Council (with
certain confidential portions omitted). (Exhibit 10.38).
# 10.137 First Supplemental Indenture among the Company, Glycomed and
Chemical Trust Company of California, Trustee. (Exhibit
10.133).
%% 10.140 Promissory Notes, General Security Agreements and a Credit
Terms and Conditions letter dated March 31, 1995, between
the Company and Imperial Bank (Exhibit 10.101).
-- 10.142 Stock Purchase Agreement, dated June 27, 1995, between the
Company and Sankyo Company, Ltd.
47
49
EXHIBIT
NUMBER DESCRIPTION
------- -----------
-- 10.143 Fifth Addendum to Amended Registration Rights Agreement,
dated September 11, 1995 between the Company and Sankyo
Company Limited.
-- 10.144 Stock Purchase Agreement, dated August 28, 1995, between the
Company and Abbott Laboratories.
-- 10.145 Sixth Addendum to Amended Registration Rights Agreement,
dated August 31, 1995, between the Company and Abbott
Laboratories.
-- 10.146 Amendment to Research and Development Agreement, dated
January 16, 1996, between the Company and American Home
Products Corporation, as amended.
-- 10.147 Amendment to Stock Purchase Agreement, dated January 16,
1996, between the Company and American Home Products
Corporation.
-- 10.148 Lease, dated July 6, 1994, between the Company and
Chevron/Nexus partnership, First Amendment to lease dated
July 6, 1994.
x 10.149 Successor Employment Agreement, signed May 1, 1996, between
the Company and David E. Robinson.
10.150(6) Master Lease Agreement, signed May 30, 1996, between the
Company and USL Capital Corporation.
x 10.151 Settlement Agreement and Mutual Release of all Claims,
signed April 20, 1996, between the Company and Pfizer, Inc.
(with certain confidential portions omitted).
x 10.152 Letter Amendment to Abbott Agreement, dated March 14, 1996,
between the Company and Abbott Laboratories (with certain
confidential portions omitted).
Xx 10.153 Letter Agreement, dated August 8, 1996, between the Company
and Dr. Andres Negro-Vilar.
## 10.154 Preferred Shares Rights Agreement, dated as of September 13,
1996, by and between Ligand Pharmaceuticals Incorporated and
Wells Fargo Bank, N.A. (Exhibit 10.1).
10.155(6) Letter Agreement, dated November 4, 1996, between the
Company and William Pettit.
10.156(6) Letter Agreement, dated February 6, 1997, between the
Company and Russell L. Allen.
10.157(6) Master Lease Agreement, signed February 13, 1997, between
the Company and Lease Management Services.
10.158(6) Lease, dated March 7, 1997, between the Company and Nexus
Equity VI LLC.
10.159(6) Eighth Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
February 10, 1997.
10.160(6) Seventh Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
November 10, 1995.
10.161(7) Settlement Agreement, License and Mutual General Release
between Ligand Pharmaceuticals and SRI/LJCRF, dated August
23, 1995 (with certain confidential portions omitted).
10.162(8) Limited Extension of Collaborative Technology Research,
Option and Development Agreement between Ligand
Pharmaceuticals and Sankyo Company Limited, dated June 24,
1997.
10.163(8) Extension of Master Lease Agreement between Lease Management
Services and Ligand Pharmaceuticals dated July 29, 1997.
10.164(9) Third Amendment to Agreement, dated September 2, 1997,
between the Company and American Home Products Corporation.
48
50
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.165(10) Amended and Restated Technology Cross License Agreement,
dated September 24, 1997, among the Company, Allergan, Inc.
and Allergan Ligand Retinoid Therapeutics, Inc.
10.166(10) Transition Agreement, dated September 24, 1997, among the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
10.167(10) Development and License Agreement, dated November 25, 1997,
between the Company and Eli Lilly and Company (with certain
confidential portions omitted).
10.168(10) Collaboration Agreement, dated November 25, 1997, among the
Company, Eli Lilly and Company, and Allergan Ligand Retinoid
Therapeutics, Inc. (with certain confidential portions
omitted).
10.169(10) Option and Wholesale Purchase Agreement, dated November 25,
1997, between the Company and Eli Lilly and Company (with
certain confidential portions omitted).
10.170(10) Stock Purchase Agreement, dated November 25, 1997, between
the Company and Eli Lilly and Company.
10.171(10) First Amendment to Option and Wholesale Purchase Agreement
dated February 23, 1998, between the Company and Eli Lilly
and Company (with certain confidential portions omitted).
10.172(10) Second Amendment to Option and Wholesale Purchase Agreement,
dated March 16, 1998, between the Company and Eli Lilly and
Company (with certain confidential portions omitted).
10.173(11) Ninth Addendum to Amended Registration Rights Agreement,
dated June 24, 1994, between the Company and SmithKline
Beecham plc., and is effective as of April 24, 1998.
10.174(11) Leptin Research, Development and License Agreement, dated
March 17, 1998, between the Company and SmithKline Beecham,
plc (with certain confidential portions omitted).
10.175(11) Stock and Warrant Purchase Agreement, dated March 17, 1998,
among the Company, SmithKline Beecham, plc. and SmithKline
Beecham Corporation (with certain confidential portions
omitted).
10.176(12) Secured Promissory Note, dated March 7, 1997, in the face
amount of $3,650,000, payable to the Company by Nexus Equity
VI LLC. (Filed as Exhibit 10.1).
10.177(12) Amended memorandum of Lease effective March 7, 1997, between
the Company and Nexus Equity VI LLC. (filed as exhibit 10.2)
10.178(12) First Amendment to Lease, dated March 7, 1997, between the
Company and Nexus Equity VI LLC. (filed as exhibit 10.3)
10.179(12) First Amendment to secured Promissory Note, date March 7,
1997, payable to the Nexus Equity VI LLC. (filed as exhibit
10.4)
10.180(13) Form of Seragen Stockholder Voting Agreement. (Exhibit
10.1).
10.181(13) Form of Irrevocable Proxy to Vote Seragen, Inc. stock.
(Exhibit 10.2).
### 10.182(14) Option and Asset Purchase Agreement, dated May 11, 1998, by
and among the Company, Marathon Biopharmaceuticals, LLC, 520
Commonwealth Avenue Real Estate Corp. and 660 Corporation.
(Exhibit 10.3).
10.183(15) Extension Option Agreement, dated May 11, 1998, by and among
the Company, Seragen, Inc., Marathon Biopharmaceuticals,
LLC, 520 Commonwealth Avenue Real Estate Corp. and 660
Corporation. (Exhibit 99.5)
49
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.184(15) Letter agreement, dated May 11, 1998, by and among the
Company, Eli Lilly & Company and Seragen, Inc. (Exhibit
99.6).
### 10.185 Amendment No. 3 to Option and Wholesale Purchase Agreement,
dated May 11, 1998, by and between Eli Lilly and Company and
the Company. (Exhibit 10.6).
### 10.186 Agreement, dated May 11, 1998, by and among Eli Lilly and
Company, the Company and Seragen, Inc. (Exhibit 10.7).
### 10.187 Form of Escrow Agreement to be entered into by and among
Lehman Brothers Inc., Shoreline Pacific Institutional
Finance, Seragen LLC, Reed R. Prior, Jean C. Nichols,
Elizabeth C. Chen, Robert W. Crane, Leon C. Hirsch, Turi
Josefsen, Gerald S.J. Cassidy and Loretta P. Cassidy, the
Company, Knight Acquisition Corporation, Seragen, Inc. and
State Street Bank and Trust Company. (Exhibit 10.8).
10.188(15) Settlement Agreement, dated May 1, 1998, by and among
Seragen, Inc., Seragen Biopharmaceuticals Ltd./Seragen
Biopharmaceutique Ltee, Sofinov Societe Financiere
D'Innovation Inc., Societe Innovatech Du Grand Montreal, MDS
Health Ventures Inc., Canadian Medical Discoveries Fund
Inc., Royal Bank Capital Corporation and Health Care and
Biotechnology Venture Fund (Exhibit 99.2).
10.189(15) Accord and Satisfaction Agreement, dated May 11, 1998, by
and among Seragen, Inc., Seragen Technology, Inc., Trustees
of Boston University, Seragen LLC, Marathon
Biopharmaceuticals, LLC, United States Surgical Corporation,
Leon C. Hirsch, Turi Josefsen, Gerald S.J. and Loretta P.
Cassidy, Reed R. Prior, Jean C. Nichols, Elizabeth C. Chen,
Robert W. Crane, Shoreline Pacific Institutional Finance,
Lehman Brothers Inc., 520 Commonwealth Avenue Real Estate
Corp. and 660 Corporation (Exhibit 99.4).
### 10.190 Amendment No. 1 to Service Agreement, dated as of May 11,
1998, by and between Seragen, Inc. and Marathon
Biopharmaceuticals, LLC. (Exhibit 10.11)
10.191(12) Letter of Agreement dated September 28, 1998 among the
Company, Elan Corporation, plc and Elan International
Services, Ltd. (with certain confidential portions omitted),
(filed as exhibit 10.5)
10.192(12) Stock Purchase Agreement dated September 30, 1998 between
the Company and Elan International Services, Ltd. (with
certain confidential portions omitted), (filed as exhibit
10.6)
10.193(12) Tenth Addendum to Registration Rights Agreement dated
September 30, 1998 between the Company and Elan
International Services Ltd. (filed as exhibit 10.7)
10.194 Eleventh Addendum to Registration Rights Agreement dated
November 9, 1998 between the Company and Elan International
Services Ltd.
10.195 Zero Coupon Convertible Senior Note Due 2008 dated November
9, 1998 between the Company and Elan International Services
Ltd., No. R-1.
10.196 Zero Coupon Convertible Senior Note Due 2008 dated November
9, 1998 between the Company and Elan International Services
Ltd., No. R-2.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 53).
27.1 Financial Data Schedule.
- ---------------
* These exhibits were previously filed as part of, and are
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.
50
52
% These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1992.
** These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
*** These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit (except as otherwise noted) filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 1994.
! These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the exhibit filed with
the Company's Form 8-K, filed on July 14, 1994.
!! This exhibit was previously filed as part of, and is hereby
incorporated by reference to Exhibit 99.1 filed with the
Company's Form S-8 (No. 33-85366), filed on October 17,
1994.
& These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Registration Statement on Form
S-1/S-3 (No. 33-87598 and 33-87600) filed on December 20,
1994, as amended.
# These exhibits were previously filed as part of, and are
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.
%% This exhibit was previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly report on Form 10-Q for the
period ended September 30, 1995.
- -- These exhibits were filed previously, and are hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
x These exhibits were previously filed as part of, and are
hereby incorporated by reference to the same numbered
exhibit filed with the Company's Quarterly report on Form
10-Q for the period ended June 30, 1996.
Xx This exhibit was previously filed as part of, and are hereby
incorporated by reference at the same numbered exhibit filed
with the Company's Quarterly report on Form 10-Q for the
period ended September 30, 1996.
## These exhibits were previously filed as part of, and are
hereby incorporated by reference, the same numbered exhibit
filed with the Company's Registration Statement on Form S-3
(No. 333-12603) filed on September 25, 1996, as amended.
### These exhibits were previously filed as part of, and are
hereby incorporated by reference to the same numbered
exhibit filed with the Company's Registration Statement on
Form S-4 (No. 333-58823) filed on July 9, 1998.
(1) Filed as an exhibit to Glycomed's Registration Statement on
Form S-1 (No. 33-39961) filed on or amendments thereto and
incorporated herein by reference.
(2) Filed as an exhibit to Glycomed's Annual Report on Form 10-K
(File No. 0-19161) filed on September 25, 1992 and
incorporated herein by reference.
(3) Filed as an exhibit to Glycomed's Annual Report on Form 10-K
(File No. 0-19161) filed on September 13, 1993 and
incorporated herein by reference.
(4) Filed as an amendment to Glycomed's Annual Report on Form
10-K (File No. 0-19161) filed on September 27, 1994 and
incorporated herein by reference.
(5) Filed as an exhibit to Glycomed's Quarterly Report on Form
10-Q (File No. 0-19161) filed on February 10, 1995 and
incorporated herein by reference.
51
53
(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, 1996.
(7) 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, 1997.
(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 Quarterly Report on Form 10-Q for the
period ended June 30, 1997.
(9) 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 September 30, 1997.
(10) 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, 1997.
(11) These exhibits were 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, 1998.
(12) These exhibits were previously filed as part of and is
hereby incorporated by reference to the numbered exhibit
filed with the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(13) Previously filed as, and hereby incorporated by reference
to, Exhibit A filed with the Schedule 13D of the Company
filed with the Commission on May 21, 1998 for Seragen, Inc.
(14) The schedules referenced in this agreement have not been
included because they are either disclosed in such agreement
or do not contain information which is material to an
investment decision. The Company agrees to furnish a copy of
such schedules to the Commission upon request.
(15) Previously filed as, and hereby incorporated by reference
to, the same-numbered exhibit filed with the Current Report
on Form 8-K of Seragen, Inc. filed with the Commission on
May 15, 1998 (except as otherwise noted).
52
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ DAVID E. ROBINSON
------------------------------------
David E. Robinson,
President and Chief Executive
Officer
Date: March 31, 1999
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints David E. Robinson or Paul V. Maier, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID E. ROBINSON Chairman of the Board, President, March 26, 1999
- --------------------------------------------- Chief Executive Officer and
David E. Robinson Director
(Principal Executive Officer)
/s/ PAUL V. MAIER Senior Vice President, March 24, 1999
- --------------------------------------------- Chief Financial Officer
Paul V. Maier (Principal Financial and
Accounting Officer)
/s/ HENRY F. BLISSENBACH Director March 24, 1999
- ---------------------------------------------
Henry F. Blissenbach
/s/ ALEXANDER D. CROSS Director March 23, 1999
- ---------------------------------------------
Alexander D. Cross
/s/ JOHN GROOM Director March 24, 1999
- ---------------------------------------------
John Groom
/s/ IRVING S. JOHNSON Director March 23, 1999
- ---------------------------------------------
Irving S. Johnson
/s/ CARL C. PECK Director March 23, 1999
- ---------------------------------------------
Carl C. Peck
/s/ VICTORIA R. FASH Director March 30, 1999
- ---------------------------------------------
Victoria R. Fash
53
55
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ligand Pharmaceuticals Incorporated
We have audited the accompanying consolidated balance sheets of Ligand
Pharmaceuticals Incorporated as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ligand
Pharmaceuticals Incorporated at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
February 5, 1999
F-2
57
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
-------------------
1998 1997
-------- --------
Current assets:
Cash and cash equivalents................................. $ 32,801 $ 62,252
Short-term investments.................................... 37,166 20,978
Inventories............................................... 6,166 --
Other current assets...................................... 1,860 864
-------- --------
Total current assets.............................. 77,993 84,094
Restricted short-term investments......................... 2,554 3,057
Property and equipment, net............................... 23,722 14,853
Acquired technology....................................... 40,312 --
Notes receivable from officers and employees.............. 544 559
Other assets.............................................. 10,895 4,860
-------- --------
$156,020 $107,423
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 12,363 $ 10,717
Accrued liabilities....................................... 7,216 5,609
Deferred revenue.......................................... 4,115 2,616
Current portion of obligations under capital leases....... 3,201 2,753
-------- --------
Total current liabilities......................... 26,895 21,695
Long-term obligations under capital leases.................. 8,165 8,501
Convertible subordinated debentures......................... 39,302 36,628
Accrued acquisition obligation.............................. 50,000 --
Convertible note............................................ 2,500 6,250
Zero coupon convertible senior notes........................ 40,520 --
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value, 5,000,000
shares authorized; none issued......................... -- --
Common stock, $0.001 par value; 80,000,000 shares
authorized, 45,690,067 shares and 38,504,459 shares
issued at December 31, 1998 and 1997, respectively..... 46 39
Paid-in capital........................................... 384,715 311,681
Adjustment for unrealized gains (losses) on
available-for-sale securities.......................... (482) 384
Accumulated deficit....................................... (395,630) (277,744)
-------- --------
(11,351) 34,360
Less treasury stock, at cost (1,114 shares in 1998 and
1997).................................................. (11) (11)
-------- --------
Total stockholders' equity (deficit).............. (11,362) 34,349
-------- --------
$156,020 $107,423
======== ========
See accompanying notes.
F-3
58
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Collaborative research and development:
Related parties.................................... $ -- $ 18,997 $ 18,641
Unrelated parties.................................. 17,267 32,284 17,994
Other................................................. 406 418 207
----------- ----------- -----------
17,673 51,699 36,842
Costs and expenses:
Research and development.............................. 70,739 72,426 59,494
Selling, general and administrative................... 16,568 10,108 10,205
Write-off of acquired in-process technology........... 45,000 64,970 --
----------- ----------- -----------
Total operating expenses...................... 132,307 147,504 69,699
----------- ----------- -----------
Loss from operations.................................... (114,634) (95,805) (32,857)
Interest income......................................... 3,070 3,743 3,704
Interest expense........................................ (8,322) (8,088) (8,160)
Realized gain on sale of investments.................... 2,000 -- --
----------- ----------- -----------
Net loss................................................ $ (117,886) $ (100,150) $ (37,313)
=========== =========== ===========
Basic and diluted net loss per share.................... $ (2.92) $ (3.02) $ (1.30)
=========== =========== ===========
Shares used in computing net loss per share............. 40,392,421 33,128,372 28,780,914
See accompanying notes.
F-4
59
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ADJUSTMENT
FOR UNREALIZED
GAINS (LOSSES) DEFERRED
COMMON STOCK WARRANT ON AVAILABLE- COMPENSATION
------------------- PAID-IN SUBSCRIPTION FOR-SALE ACCUMULATED AND
SHARES AMOUNT CAPITAL RECEIVABLE SECURITIES DEFICIT CONSULTING
---------- ------ -------- ------------ -------------- ----------- ------------
Balance at December 31, 1995... 27,800,597 $28 $173,452 $(4,524) $ 217 $(140,281) $(819)
Issuance of Common Stock..... 3,999,020 4 41,082 -- -- -- --
Amortization of deferred
compensation and consulting
fees....................... -- -- -- -- -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities................. -- -- -- -- (295) -- --
Receipt of Common Stock for
milestone revenue.......... -- -- -- -- -- -- --
Retirement of shares......... -- -- -- -- -- -- --
Purchase of treasury
shares..................... -- -- -- -- -- -- --
Issuance of Common Stock held
in Treasury................ -- -- -- -- -- -- --
Option term extension........ -- -- 353 -- -- -- --
Amortization of warrant
subscription receivable.... -- -- -- 2,071 -- -- --
Net loss..................... -- -- -- -- -- (37,313) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1996... 31,799,617 32 214,887 (2,453) (78) (177,594) (322)
Issuance of Common Stock..... 6,704,842 7 96,794 -- -- -- --
Amortization of deferred
compensation and consulting
fees....................... -- -- -- -- -- -- 322
Amortization of warrant
subscription receivable.... -- -- -- 1,535 -- -- --
Write-off of warrant
subscription receivable.... -- -- -- 918 -- -- --
Adjustment of unrealized
gains (losses) on
available-for-sale
securities................. -- -- -- -- 462 -- --
Net loss..................... -- -- -- -- -- (100,150) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1997... 38,504,459 39 311,681 -- 384 (277,744) --
Issuance of Common Stock..... 7,185,608 7 73,034 -- -- -- --
Adjustment of unrealized
gains (losses) on available
for-sale securities........ -- -- -- -- (866) -- --
Net loss..................... -- -- -- -- -- (117,886) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1998... 45,690,067 $46 $384,715 $ -- $(482) $(395,630) $ --
========== === ======== ======= ===== ========= =====
TOTAL
TREASURY STOCK STOCKHOLDERS'
-------------------- EQUITY COMPREHENSIVE
SHARES AMOUNT (DEFICIT) INCOME
-------- --------- ------------- -------------
Balance at December 31, 1995... (4,986) $ (2) 28,071 $ --
Issuance of Common Stock..... -- -- 41,086
Amortization of deferred
compensation and consulting
fees....................... -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities................. -- -- (295) (295)
Receipt of Common Stock for
milestone revenue.......... (101,011) (1,320) (1,320)
Retirement of shares......... 101,011 1,320 1,320
Purchase of treasury
shares..................... (3,164) (23) (23)
Issuance of Common Stock held
in Treasury................ 7,036 14 14
Option term extension........ -- -- 353
Amortization of warrant
subscription receivable.... -- -- 2,071
Net loss..................... -- -- (37,313) (37,313)
-------- --------- --------- ---------
Balance at December 31, 1996... (1,114) (11) 34,461 $ (37,608)
=========
Issuance of Common Stock..... -- -- 96,801
Amortization of deferred
compensation and consulting
fees....................... -- -- 322
Amortization of warrant
subscription receivable.... -- -- 1,535
Write-off of warrant
subscription receivable.... -- -- 918
Adjustment of unrealized
gains (losses) on
available-for-sale
securities................. -- -- 462 462
Net loss..................... -- -- (100,150) (100,150)
-------- --------- --------- ---------
Balance at December 31, 1997... (1,114) (11) 34,349 $ (99,688)
=========
Issuance of Common Stock..... -- -- 73,041
Adjustment of unrealized
gains (losses) on available
for-sale securities........ -- -- (866) (866)
Net loss..................... -- -- (117,886) (117,886)
-------- --------- --------- ---------
Balance at December 31, 1998... (1,114) $ (11) $ (11,362) $(118,752)
======== ========= ========= =========
See accompanying notes.
F-5
60
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(117,886) $(100,150) $(37,313)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 4,326 4,133 3,879
Amortization of notes receivable from officers and
employees............................................. 188 230 235
Amortization of warrant subscription receivable......... -- 2,453 2,071
Write-off of acquired in-process technology............. 45,000 64,970 --
Amortization of deferred compensation and consulting.... -- 322 497
Accretion of debt discount and interest on zero coupon
convertible senior note............................... 3,194 2,675 2,674
Company stock received for milestone revenue............ -- -- (1,320)
Gain (loss) on sale of property and equipment........... 69 (6) --
Change in operating assets and liabilities, net
Other current assets.................................... (1,031) 856 (1,129)
Receivable from a related party....................... -- 3,087 (801)
Inventory............................................. (2,899) -- --
Accounts payable and accrued liabilities.............. 891 7,605 (1,638)
Deferred revenue...................................... 1,499 465 (457)
--------- --------- --------
Net cash used in operating activities....................... (66,649) (13,360) (33,302)
INVESTING ACTIVITIES
Purchases of short-term investments......................... (52,245) (35,033) (53,123)
Proceeds from short-term investments........................ 35,191 60,339 61,188
Purchase of property and equipment.......................... (2,362) (4,278) (399)
Proceeds from sale of property and equipment................ 92 109 --
Increase in note receivable from officers and employees..... (180) (270) (350)
Payment of notes receivable from officers and employees..... 8 16 66
Increases in other assets................................... (4,282) (4,036) (2)
Decreases in other assets................................... 917 130 118
Net cash paid for exercise of ALRT stock purchase option.... -- (12,661) --
Net cash paid for Seragen acquisition....................... (5,756) -- --
--------- --------- --------
Net cash (used in) provided by investing activities......... (28,617) 4,316 7,498
FINANCING ACTIVITIES
Principal payments on obligations under capital leases...... (2,983) (3,210) (2,561)
Net change in restricted short-term investment.............. 503 470 3,232
Net proceeds from the issuance of convertible note.......... -- 2,500 5,000
Net proceeds from issuance of zero coupon convertible senior
note...................................................... 30,000 -- --
Net proceeds from sale of common stock...................... 38,295 36,706 39,000
--------- --------- --------
Net cash provided by financing activities................... 65,815 36,466 44,671
--------- --------- --------
Net (decrease) increase in cash and cash equivalents........ (29,451) 27,422 18,867
Cash and cash equivalents at beginning of period............ 62,252 34,830 15,963
--------- --------- --------
Cash and cash equivalents at end of period.................. $ 32,801 $ 62,252 $ 34,830
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 5,736 $ 5,444 $ 5,559
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Additions to obligations under capital leases............... $ 3,095 $ 3,146 $ 2,888
Issuance of common stock to purchase Seragen................ 25,996 -- --
Conversion of convertible note to common stock.............. 3,750 7,500 3,750
Issuance of common stock for technology license............. 5,000 -- --
Issuance of zero coupon convertible senior note for
technology license........................................ 10,000 -- --
Retirement of treasury stock................................ $ -- $ -- $ 1,320
See accompanying notes.
F-6
61
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"
or "Ligand"), is a biopharmaceutical company primarily committed to the
discovery and development of new drugs that regulate hormone activated
intracellular receptors and Signal Transducers and Activators of Transcription.
The Company includes its wholly owned subsidiaries, Glycomed Incorporated
("Glycomed"), Ligand Pharmaceuticals (Canada) Incorporated, Allergan Ligand
Retinoid Therapeutics, Inc. ("ALRT") and Seragen, Inc. ("Seragen").
In February 1999, the Company was granted U.S. Food and Drug Administration
("FDA") marketing approval for its first two products, Panretin(R) gel
("Panretin") for the treatment of Kaposi's sarcoma in AIDS Patients and
ONTAK(TM) ("ONTAK") for treatment of patients with persistent or recurrent
cutaneous T-cell lymphoma ("CTCL").
The Company's other potential products are in various stages of
development. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons. Substantially all
of the Company's revenues to date have been derived from its research and
development agreements with major pharmaceutical collaborators. Prior to
generating product revenues from these products, the Company must complete the
development of its products in the human health care market. No assurance can be
given that: (1) product development efforts will be successful (2) required
regulatory approvals for any indication will be obtained (3) any products, if
introduced will be capable of being produced in commercial quantities at
reasonable costs or that (4) patient and physician acceptance of these products
will be achieved. There can be no assurance that Ligand will ever achieve or
sustain profitability.
The Company faces risks common to companies whose products are in various
stages of development. These risks include, among others, the Company's need for
additional financing to complete its research and development programs and
commercialize its technologies. The Company expects to incur substantial
additional research and development expenses, including continued increases in
personnel and costs related to preclinical testing, clinical trials, and sales
and marketing expenses related to product sales. The Company intends to seek
additional funding sources of capital and liquidity through collaborative
arrangements, collaborative research or through public or private financing.
There is no assurance such financing would be available under favorable terms,
if at all.
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The patent positions of
pharmaceutical and biotechnology firms, including the Company, are uncertain and
involve complex legal and technical questions for which important legal
principles are largely unresolved.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 consolidated financial
statements. Actual results could differ from those estimates.
F-7
62
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist primarily of cash, certificates of
deposit, treasury securities and repurchase agreements with original maturities
at the date of acquisition of less than three months.
The Company invests its excess cash principally in United States government
debt securities, investment grade corporate debt securities and certificates of
deposit. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. In January 1996, the Company adopted the disclosure requirements of
SFAS 123, Accounting for Stock-Based Compensation (Note 9).
New Accounting Standards
As of January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement has no impact on the Company's net income or shareholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and the foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.
As of January 1, 1998, the Company adopted SFAS 131, Segment Information.
SFAS 131 amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. The Company
currently operates in one business and operating segment and the adoption of
this standard did not have a material impact on the Company's financial
statements as reported.
Research and Development Revenues and Expenses
Collaborative research and development revenues are recorded as earned
based on the performance criteria of each contract. Payments received which have
not met the appropriate criteria are recorded as deferred revenue. Research and
development costs are expensed as incurred.
For the years ended December 31, 1998, 1997 and 1996, costs and expenses
related to collaborative research and development agreements were $17.3 million,
$51.3 million, $36.6 million, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in-first-out method.
Raw materials............................... $2,382
Work-in-process............................. 3,634
Finished goods.............................. 150
------
$6,166
======
F-8
63
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The products Panretin(R) and ONTAK(TM) received approval for marketing by
the FDA in early February 1999. The Company outsources all manufacturing related
to the production of commercial inventory. Inventory also includes Targretin(R)
("Targretin") for which a New Drug Application ("NDA") will be filed in 1999. In
preparation for the approval by the FDA, if received, Ligand has manufactured
commercial quantities of Targretin of approximately $1.3 million of
work-in-process inventory as of December 31, 1998. If the FDA does not approve
the NDA, and Targretin is not approved for commercial sale, any capitalized
costs related to Targretin will be expensed.
Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
DECEMBER 31,
--------------------
1998 1997
-------- --------
Property............................................... $ 2,649 $ 2,649
Equipment and leasehold improvements................... 38,854 26,662
Less accumulated depreciation and amortization......... (17,781) (14,458)
-------- --------
Net property and equipment............................. $ 23,722 $ 14,853
======== ========
Depreciation of equipment and leasehold improvements is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to fifteen years. Assets acquired pursuant to capital lease
arrangements and leasehold improvements are amortized over their estimated
useful lives or their related lease term, whichever is shorter.
3. INVESTMENTS
Investments are recorded at estimated fair market value at December 31,
1998 and 1997, and consist principally of United States government debt
securities, investment grade corporate debt securities and certificates of
deposit with maturities at the date of acquisition of three months or longer.
The Company has
F-9
64
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
classified all of its investments as available-for-sale securities. The
following table summarizes the various investment categories at (in thousands):
GROSS UNREALIZED ESTIMATED FAIR
COST GAINS (LOSSES) VALUE
------- ---------------- --------------
DECEMBER 31, 1998
Available-for-Sale:
U.S. Government Securities............... $13,240 $ 5 $13,245
Corporate Obligations.................... 19,262 63 19,325
Certificates of Deposit.................. 4,596 -- 4,596
------- ----- -------
37,098 68 37,166
Certificates of Deposit-restricted....... 2,554 -- 2,554
Equity securities........................ 693 (550) 143
------- ----- -------
$40,345 $(482) $39,863
======= ===== =======
DECEMBER 31, 1997
Available-for-Sale:
U.S. Government Securities............... $11,790 $ 9 $11,799
Corporate Obligations.................... 7,085 2 7,087
Certificates of Deposit.................. 2,093 (1) 2,092
------- ----- -------
20,968 10 20,978
Certificates of Deposit-restricted....... 3,057 -- 3,057
Equity securities........................ 440 374 814
------- ----- -------
$24,465 $ 384 $24,849
======= ===== =======
Equity securities are included in long-term other assets.
The realized gains on sales of available-for-sale securities for the year
ended December 31, 1998 is $2.0 million. There were no material realized gains
or losses for the year ended December 31, 1997.
The amortized cost and estimated fair value of debt and marketable
securities at December 31, 1998 and 1997, by contractual maturity, are shown
below (in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties.
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------- ---------- ------- ----------
Due in one year or less................... $24,270 $24,291 $17,148 $17,151
Due after one year through three years.... 15,382 15,429 6,782 6,792
Due after three years..................... -- -- 94 92
------- ------- ------- -------
39,652 39,720 24,025 24,035
Equity securities......................... 693 143 440 814
------- ------- ------- -------
$40,345 $39,863 $24,465 $24,849
======= ======= ======= =======
4. MERGER WITH SERAGEN
In August 1998, the Company completed a merger with Seragen (the "Merger").
In addition, the Company had previously announced that it had signed a
definitive asset purchase agreement to acquire substantially all the assets of
Marathon Biopharmaceuticals, LLC, ("Marathon") which currently provides
F-10
65
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
manufacturing services to Seragen under a service agreement. Finally, in August
1998 Seragen signed an agreement with the Company and Eli Lilly and Company
("Lilly") under which Lilly assigned to the Company Lilly's rights and
obligations under its agreements with Seragen, including its sales and marketing
rights to ONTAK(TM).
Under the terms of the merger agreement, Ligand paid merger consideration
at closing in the amount of $30.0 million, $4.0 million of which was in cash and
$26.0 million of which was in the form of approximately 1,858,515 shares of the
Company's Common Stock valued at $13.99 per share. The valuation of the
Company's Common Stock for this portion of the transaction is based on the
average closing share price for the five trading days prior to signing of the
definitive agreement in May 1998.
The merger agreement also calls for an additional $37.0 million payment in
cash and/or the Company's Common Stock, at the Company's option, to be paid six
months after the date of receipt of final FDA clearance to market ONTAK. The
final FDA clearance occurred in February 1999.
Additionally, the Company's agreement with Lilly calls for up to $5.0
million, payable in cash or the Company's Common Stock, at the Company's option,
in potential milestone payments to Lilly, upon ONTAK approval by the FDA. Upon
certain other events, Lilly could receive an additional $5.0 million in
milestone payments.
On January 30, 1999, the Company purchased substantially all of the assets
of Marathon for $5.0 million, through the issuance of 402,820 shares of the
Company's Common Stock, at $12.41 per share, with an additional $3.0 million to
be paid in August 1999, six months after the FDA approval of ONTAK.
The Merger was accounted for using the purchase method of accounting. The
purchase price, totaling $84.1 million, which includes liabilities assumed of
$2.3 million was allocated to the fair value of the assets acquired.
The purchase price is composed of and allocated to the fair value of assets
acquired as follows (in thousands):
Issuance of common stock (including transaction costs)...... $25,996
Amounts due to Seragen shareholders, Marathon and Lilly,
payable in common stock or cash........................... 50,000
Liabilities assumed......................................... 2,360
Net cash paid............................................... 5,756
-------
$84,112
=======
Inventory................................................... $ 3,230
Property and equipment...................................... 7,905
Identifiable intangible assets:
In-process technology..................................... 30,000
Acquired technology....................................... 40,312
Other intangibles......................................... 2,665
-------
$84,112
=======
The following pro forma condensed statement of operations information has
been prepared to give effect to the merger as if such transaction had occurred
at the beginning of the periods presented. The historical results of operations
have been adjusted to reflect (1) adjustment for depreciation resulting from
adjusting the basis of certain property and equipment to fair value and
amortization over 10 years, (2) amortization of acquired technology over 15
years, (3) elimination of Seragen stock issuance costs (1997) and compensation
expense amortization (1998), (4) elimination of interest income for Seragen and
reduction of Ligand interest
F-11
66
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
income resulting from use of $6.0 million for the Merger at an annual interest
rate of 5.5%, and (5) elimination of interest expense related to certain Seragen
liabilities. The information presented is not necessarily indicative of the
results of future operations of the merged companies.
Included in the 1998 net loss is a one-time charge of $30.0 million related
to in-process research and development included in the intangibles acquired.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
Revenues............................................. $ 20,477 $ 56,413
Net loss............................................. (124,867) $(118,675)
Weighted average shares outstanding.................. 40,392 34,987
Loss per share....................................... (3.09) (3.39)
5. OTHER ASSETS AND ACCRUED LIABILITIES
Other assets are comprised of the following (in thousands):
DECEMBER 31,
-----------------
1998 1997
------- ------
Deferred rent............................................. $ 3,429 $3,676
Prepaid royalty buyout.................................... 4,080 --
Intangible assets acquired................................ 2,665 --
Investment in equity securities........................... 143 814
Other..................................................... 578 370
------- ------
$10,895 $4,860
======= ======
Accrued liabilities are comprised of the following (in thousands):
DECEMBER 31,
----------------
1998 1997
------ ------
Accrued legal.............................................. $1,140 $ 451
Accrued interest........................................... 1,972 2,088
Accrued compensation....................................... 1,784 1,446
Other...................................................... 2,320 1,624
------ ------
$7,216 $5,609
====== ======
6. CONVERTIBLE SUBORDINATED DEBENTURES
In May 1995, Glycomed Incorporated ("Glycomed") was merged into a
wholly-owned subsidiary of the Company (the "Glycomed Merger"). In conjunction
with the Glycomed Merger, the Company adjusted the carrying value of the
Glycomed 7 1/2% Convertible Subordinated Debentures due 2003 (the "Debentures")
issued by Glycomed in 1992 in the original amount of $50 million to $29.6
million, which was their fair market value at the date of the Glycomed Merger.
The current carrying value approximates fair market value. The Company has
entered into a supplemental indenture which provides for conversion of the
Debentures into the Company's Common Stock at $26.52 per share. Debentures pay
interest semi-annually at 7.5% per annum and are due in 2003. The difference
between the face value and the fair market value at the acquisition date
F-12
67
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
will be accreted up to the face value over the remaining term of the Debentures
and the accretion is charged to interest expense.
7. STRATEGIC ALLIANCE AND FINANCING
On September 1998, the Company and Elan Corporation, plc ("Elan") signed a
binding letter of agreement. Elan purchased approximately $20.0 million of the
Company's Common Stock in two installments. In September 1998, Elan purchased
1,278,970 shares of the Company's Common Stock for $14.9 million ($11.65 per
share). The second installment to purchase 437,768 shares for $5.1 million
($11.65 per share) occurred at the closing of the transaction on November 9,
1998.
Elan purchased from the Company at the closing, $40.0 million in issue
price of Zero Coupon Convertible Senior Notes, due 2008 with an 8.0% per annum
yield to maturity (the "Notes"). Of these Notes, $30.0 million are convertible
into the Company's Common Stock at $14.00 per share. The balance issued of $10.0
million along with up to an additional $70.0 million of Notes which Elan may
also purchase will be convertible into the Company's Common Stock at a price
which is the average of the closing prices of the Company's Common Stock for the
20 trading days immediately prior to the issuance of a Note plus a premium;
however, in no event will the conversion price be less than $14.00 per share or
more than $20.00 per share. Interest will accrue during the term of the Notes,
and the Notes may be used to finance the final payments for the Seragen merger
expected in 1999 as well as other acquisitions of complementary technologies,
subject to the consent of Elan.
Elan also agreed to exclusively license to the Company in the United States
and Canada its proprietary product Morphelan(TM). For the rights to
Morphelan(TM) the Company will pay Elan certain license fees at the closing of
the transaction, and milestone payments upon the occurrence of certain events up
to and including the approval of the NDA in the United States. Payment may be in
cash or subject to certain conditions in the Company's Common Stock or Notes. At
closing, the Company paid Elan $5.0 million through the issuance of 429,185
shares of the Company's Common Stock ($11.65 per share) and $10.0 million from
the issuance of Notes. The total $15.0 million consideration was written off as
in-process technology in a one-time charge to operations.
8. COMMITMENTS
Leases and Equipment Notes Payable
The Company has entered into capital lease and equipment note payable
agreements which require monthly payments through January 2004. The carrying
value of equipment under these agreements at December 31, 1998 and 1997 was
$17.3 million and $16.9 million, respectively. At December 31, 1998 and 1997,
accumulated amortization was $7.3 million and $6.0 million, respectively.
The Company has also entered into operating lease agreements for office and
research facilities with varying terms through August 2015. The agreements also
provide for increases in annual rentals based on changes in the Consumer Price
Index or fixed percentage increases varying from 3% to 6%. One of these leases
requires an irrevocable standby letter of credit of $1.3 million to secure the
performance of the Company's lease obligations.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $3.2
million, $3.4 million and $3.1 million, respectively.
F-13
68
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, annual minimum rental payments due under the
Company's leases and equipment notes payable are as follows (in thousands):
OBLIGATIONS
UNDER
CAPITAL LEASES AND
EQUIPMENT NOTES
PAYABLE OPERATING LEASES
------------------ ----------------
1999.......................................... $4,104 $ 3,114
2000.......................................... 4,071 3,174
2001.......................................... 2,845 2,802
2002.......................................... 1,607 2,812
2003.......................................... 682 2,867
Thereafter.................................... -- 34,920
------ -------
Total minimum lease payments........ 13,309 $49,689
=======
Less amounts representing interest............ (1,943)
------
Present value of minimum lease payments....... 11,366
------
Less current portion.......................... 3,201
------
$8,165
======
In 1997, one of the Company's main operating lease agreements for office
and research facilities expired, and the Company moved into a second
build-to-suit facility. In early 1997, the Company entered into a 17-year lease
and the Company loaned the construction partnership $3.7 million which will be
repaid with interest over a 10-year period.
Royalty Agreements
The Company has entered into royalty agreements requiring payments ranging
from 1% to 20% of net sales and 10% to 30% of license and other income for
certain products developed by the Company. Currently, the Company is making
minimum royalty payments under three agreements, of $45,000 per year. Royalty
expense under the agreements for the years ended December 31, 1998, 1997 and
1996 was $75,000, $276,000 and $261,000, respectively.
In May 1998, the Company elected to make a final one-time $4.1 million
royalty payment to the Salk Institute as an alternative to paying future royalty
payments based on total net sales of defined potential products. The one-time
payment will be amortized over the remaining life of the related patents.
No royalty payments have been received by the Company.
9. STOCKHOLDERS' EQUITY
Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
4,486,404 shares of the Company's Common Stock, of which 4,228,154 warrants
relate to the ALRT transaction ("ALRT warrants") (see Note 11). The ALRT
warrants have an exercise price of $7.12 per share, the additional warrants have
exercise prices ranging from $1.80 to $20.0 per share and expire at various
dates through April 24, 2003.
In December 1998, the Company received net proceeds of approximately $12.5
million from investors who elected to exercise their ALRT warrants to purchase
2,267,836 shares. The Company agreed to pay a cost of money incentive to the
investors for the early exercise of those warrants.
F-14
69
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Stock Plans
The Company's 1992 Stock Option Stock Issuance Plan incorporates all
outstanding stock options and unvested share issuances under a prior plan. In
May of years 1993 through 1998 inclusive, the plan was amended to increase the
aggregate shares available for grant or issuance to 8,088,457 shares of Common
Stock. The large majority of the options granted have 10 year terms and vest and
become fully exercisable at the end of four years of continued employment. As
part of this plan, on the date of the Glycomed Merger, all outstanding
in-the-money stock options from Glycomed's stock option plan were converted into
options to purchase 470,008 shares of the Company's Common Stock based on the
exchange ratio in effect. The Company's employee stock purchase plan also
provides for the sale of up to 260,000 shares of the Company's Common Stock.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the dates of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996:
1998 1997 1996
------------ ------------ ------------
Risk free interest rates............ 4.1% - 5.5% 6.1% - 6.9% 5.3% - 6.6%
Dividend yields..................... -- -- --
Volatility.......................... 62.0% 42.7% 44.4%
Weighted average expected life...... 5 or 7 years 5 or 7 years 5 or 7 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
Net loss as reported..................... $(117,886) $(100,150) $(37,313)
Net loss pro forma....................... (121,916) (102,929) (39,210)
Net loss per share as reported........... (2.92) (3.02) (1.30)
Net loss per share pro forma............. (3.01) (3.11) (1.36)
The pro forma effect on net loss for 1998, 1997 and 1996 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
F-15
70
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Following is a summary of the Company's stock option plans activity and
related information:
WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- ----------------
Balance at December 31, 1995....................... 3,604,106 $ .29 - 11.59 $ 7.33
Granted.......................................... 974,015 10.31 - 16.38 12.85
Exercised........................................ (498,456) .22 - 12.75 5.61
Cancelled........................................ (282,783) 3.89 - 13.31 7.91
--------- -------------- ------
Balance at December 31, 1996....................... 3,796,882 .22 - 16.38 9.55
Granted.......................................... 875,339 9.50 - 16.06 12.75
Exercised........................................ (384,340) .68 - 14.50 8.59
Cancelled........................................ (219,375) 5.50 - 16.06 10.65
--------- -------------- ------
Balance at December 31, 1997....................... 4,068,506 .68 - 16.06 10.26
Granted.......................................... 1,584,604 9.31 - 15.00 11.10
Exercised........................................ (211,524) .68 - 16.13 7.52
Cancelled........................................ (396,567) .68 - 16.38 11.30
--------- -------------- ------
Balance at December 31, 1998....................... 5,045,019 $ .68 - 16.38 $10.56
========= ============== ======
Options exercisable at December 31, 1998......... 2,814,876 $ .68 - 16.38
========= ==============
Of the total options granted from 1995 through 1998, 4,923,491 were granted
at a price equal to the fair value of the options at the time of grant, and
58,012 were granted at a price below the fair value of the options at the time
of grant.
Following is a further breakdown of the options outstanding as of December
31, 1998:
WEIGHTED
AVERAGE
OPTIONS REMAINING LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE
------------------------ ----------- -------------- ----------------
$ .68 - $ .79............... 2,740 1.43 $ .72
4.68 - 9.21............... 1,389,481 5.56 7.74
9.31 - 11.25............... 1,767,495 7.98 10.09
11.26 - 13.31............... 1,484,516 8.11 12.45
$14.50 - $16.38............... 400,787 8.76 15.37
--------- ------
5,045,019 $10.56
========= ======
At December 31, 1998, 240,807 shares were available under the plans for
future grants of stock options or sale of stock.
For certain shares issued under these plans and certain other issuances of
stock, the Company has recognized as compensation and consulting expense the
excess of the deemed value for accounting purposes over the aggregate issue
price for such shares. The compensation expense is amortized ratably over the
vesting period of each share.
Amortization of deferred compensation and consulting for the years ended
December 31, 1998, 1997 and 1996 was none, $322,000 and $497,000, respectively.
F-16
71
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Shareholder Rights Plan
In September 1996, the Company's Board of Directors adopted a preferred
shareholder rights plan (the "Shareholder Rights Plan"), as amended, which
provides for a dividend distribution of one preferred share purchase right (a
"Right") on each outstanding share of the common stock. Each Right entitles
stockholders to buy 1/1000th of a share of Ligand Series A Participating
Preferred Stock at an exercise price of $100, subject to adjustment. The Rights
will become exercisable following the tenth day after a person or group
announces an acquisition of 20% or more of the Common Stock, or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 20% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $0.01 per Right at any time on or
before the earlier of the tenth day following acquisition by a person or group
of 20% or more of the common stock and September 13, 2006.
10. COLLABORATIVE RESEARCH AGREEMENTS
Eli Lilly and Company
In November 1997, the Company entered into a strategic alliance with Eli
Lilly and Company ("Lilly") for the discovery and development of products based
on Ligand's Intracellular Receptor technology. Lilly made an investment of $37.5
million by purchasing 2,176,279 shares of the Company's Common Stock at $17.23
per share at the inception of the agreement. The price per share included a 20%
premium to the market value as defined in the agreement. The 20% premium was in
recognition of Ligand's past research and development efforts and accordingly,
$6.25 million (the premium) was included in 1997 revenues. Ligand also received
a $12.5 million up-front non-refundable milestone payment following inception of
the agreement. Under the agreement, Lilly also agreed to support up to $49
million in research funding. Revenues for research funding are recognized
ratably over the term of the agreement. Revenues recognized under the agreement
for the years ended December 31, 1998 and 1997 were $10.0 and $19.7 million,
respectively. The Company also has the option to obtain selected rights to one
Lilly specialty pharmaceutical product. Should the Company elect to obtain
selected rights to the product, Lilly could receive milestone payments of up to
$20 million payable in the Company's Common Stock. In the event that Ligand does
not exercise this product option during the first 120 days after the effective
date of the agreements, the Company will sell an additional $20 million in
equity to Lilly at a 20% premium to the then current market price, and the
Company will qualify for certain additional royalties of up to 1.5% on net sales
of the Company's choice of Targetin(R) (LGD1069), LGD1268 or LGD1324.
SmithKline Beecham Corporation
In February 1995, the Company entered into a research collaboration with
SmithKline Beecham Corporation ("SmithKline Beecham") to discover and
characterize small molecule drugs to control hematopoiesis. Revenues under the
agreement are recognized ratably over the term of the agreement. Revenues
recognized under the agreement for the years ended December 31, 1998, 1997 and
1996 were $3.7 million, $3.2 million and $2.4 million, respectively. SmithKline
Beecham has agreed to provide the Company up to $21.5 million in research
funding and equity investments. SmithKline Beecham made an investment of $5.0
million by purchasing 674,127 shares of the Company's Common Stock at $7.41 per
share at the inception of the agreement. In November 1995, a second equity
investment of $2.5 million by purchasing 260,200 shares of the Company's Common
Stock at $9.60 per share, was provided to the Company upon the achievement of
certain milestones. In January 1997, a third installment of equity investment of
$2.5 million by purchasing 164,474 shares of the Company's Common Stock at
$15.20 per share was provided to the Company as a result of SmithKline Beecham's
election to expand the scope of research as defined. The final installment of
$2.5 million was provided in October 1997 as a convertible note as a result of
SmithKline
F-17
72
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Beecham's election to extend the collaboration. The note is convertible into the
Company's Common Stock at $13.56 per share and is due October 2002 unless
converted into the Company's Common Stock earlier. The interest rate on the note
is payable semi-annually at prime.
In April 1998, SmithKline Beecham plc. and the Company initiated a new
collaboration to develop small molecule drugs for the treatment or prevention of
obesity. As part of the collaboration, SmithKline Beecham plc. purchased 274,423
shares of Ligand Common Stock for $5.0 million ($18.22 per share), a 20 percent
premium over a 15-day average of the daily closing price of the Company's Common
Stock prior to execution of the agreement, which premium has been deferred and
will be recognized as revenue over two years and also purchased for $1 million a
warrant to purchase 150,000 shares of Ligand Common Stock at $20 per share. The
warrant expires in five years, and Ligand may require SmithKline Beecham plc. to
exercise the warrant under certain circumstances after three years. SmithKline
Beecham plc. will also purchase additional Ligand Common Stock at a 20 percent
premium if a certain research milestone is achieved and will make cash payments
to Ligand if subsequent milestones are met.
American Home Products Corporation
In September 1994, the Company entered into a collaborative research
agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of
American Home Products ("AHP"), to discover and develop drugs which interact
with the estrogen or progesterone receptors. AHP agreed to provide up to $19.0
million of the Company's research activities, to invest $5.0 million by
purchasing 574,513 shares of the Company's Common Stock at $8.70 per share, and
to provide, in three installments, up to $20.0 million in convertible notes over
the life of the agreement.
In January 1996, the Company and AHP expanded and amended the research and
development collaboration. The Company received $1.5 million in additional
research revenue from AHP, AHP expanded the research funding by $1.0 million in
years two and three of the agreement, the contract-specified milestone payments
increased, AHP granted rights to the Company to cause the conversion of the
convertible note into Common Stock, and the parties agreed to extend the period
for Ligand to draw down the second convertible note installment until December
1996.
Revenues under the agreement, which was completed in September 1998, were
recognized ratably over the term of the agreement. Revenues recognized under the
agreement for the years ended December 31, 1998, 1997 and 1996 were $1.3
million, $4.0 million and $6.9 million, respectively. The $5.0 million equity
investment plus the initial $10.0 million convertible note was provided to the
Company upon inception of the agreement. In the second quarter of 1995, the
Company achieved certain milestones which qualified the Company to receive the
second installment of a $5.0 million convertible note, which the Company elected
to receive in December 1996. The final convertible note installment of $5.0
million will be provided if the collaboration agreement is extended from three
to five years. The first two notes are convertible into the Company's Common
Stock at $10.01 per share and the final note is convertible at $10.88 per share.
The conversion prices are subject to adjustment if certain dilutive events occur
to the Company's outstanding Common Stock. In August 1996, March 1997, July
1997, December 1997 and again in June 1998, the Company converted $3.8 million,
$3.8 million, $2.5 million, $1.3 million and $3.8 million of the convertible
notes outstanding into 374,626, 374,626, 249,749, 124,875 and 374,626 shares of
Common Stock, at the $10.01 conversion price. These were no convertible notes
outstanding at December 31, 1998.
Abbott Laboratories
In July 1994 the Company entered into a long-term collaborative research
agreement with Abbott Laboratories ("Abbott") to discover and develop drugs for
the prevention or treatment of inflammatory
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73
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
diseases. Abbott agreed to support up to $16.0 million of the Company's research
activities over a five-year period in connection with the agreement.
Revenues under the agreement are recognized ratably over the term of the
agreement and for the years ended December 31, 1998, 1997 and 1996 revenues were
$1.2 million, $1.7 million and $2.5 million, respectively. Abbott made an equity
investment of $5.0 million by purchasing 571,305 shares of the Company's Common
Stock at $8.75 per share at the inception of the agreement, and in August 1995
Abbott made another equity investment of $5.0 million by purchasing 516,129
shares of the Company's Common Stock at $9.68 per share, as provided in the
contract.
Sankyo Company, Limited
As part of the Glycomed Merger in May 1995, the Company acquired a
collaborative research agreement with Sankyo Company, Limited ("Sankyo") which
Glycomed had entered into in June 1994. Under the agreement, Sankyo reimbursed a
portion of the Company's research expenses related to the collaboration up to an
aggregate of $8.9 million. Revenues under the agreement were recognized ratably
over the term of the agreement. Revenues recognized under the agreement and for
the years ended December 31, 1997 and 1996 were $2.3 million and $2.7,
respectively.
In connection with the collaborative research agreement, in September 1995,
Sankyo purchased 189,274 shares of the Company's Common Stock at $7.92 per share
for net proceeds of $1.5 million. In June 1997, the collaborative research
agreement was extended through October 1997.
Glaxo-Wellcome plc
In September 1992 the Company entered into a five-year collaborative
research agreement with Glaxo-Wellcome plc ("Glaxo") to develop drugs for the
treatment of cardiovascular disease. Under the agreement, Glaxo reimbursed a
portion of the Company's research expenses related to the collaboration to a
maximum of approximately $2.0 million annually. Revenues under the agreement are
recognized ratably over the term of the agreement. Revenues recognized under the
agreement for the years ended December 31, 1997 and 1996 were $1.3 million and
$2.1 million, respectively. In connection with the agreement, Glaxo purchased
662,755 shares of the Company's Common Stock at $11.31 per share for net
proceeds of $7.5 million. Glaxo also purchased 315,465 shares of the Company's
Common Stock at $7.92 per share as part of the Company's initial public offering
for net proceeds of $2.5 million.
Pfizer Inc.
In 1991, the Company entered into a collaborative research and development
and license agreement with Pfizer Inc. ("Pfizer") to perform services related to
the joint development of pharmaceuticals for the treatment of osteoporosis. Due
to the early success in meeting research-stage objectives for drug candidates,
the two companies phased out the ongoing research collaboration by July 1, 1994.
In connection with the collaborative research agreement, Pfizer purchased
1,353,125 shares of the Company's Common Stock for $5.54 per share for net
proceeds of $7.5 million.
In December 1994, the Company filed suit against Pfizer in the Superior
Court of California in San Diego County for breach of contract and for a
declaration of future rights as they relate to droloxifene, a compound upon
which the Company performed work at Pfizer's request during a collaboration
between Pfizer and the Company to develop drugs in the field of osteoporosis.
Droloxifene is an estrogen antagonist/partial against with potential indications
in the treatment of osteoporosis and breast cancer as well as other
applications. The Company and Pfizer entered into a settlement agreement with
respect to the lawsuit in April 1996. Under the terms of the settlement
agreement, the Company is entitled to receive milestone payments if
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74
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Pfizer continues development and royalties if Pfizer commercializes droloxifene.
At the option of either party, milestone and royalty payments owed the Company
can be satisfied by Pfizer transferring to the Company shares of Common Stock at
an exchange ratio of $12.375 per share. At the time of the settlement, the
Company received approximately $1.3 million in milestone payments from Pfizer as
a result of the continued development of droloxifene. These milestones were paid
in the form of an aggregate of 101,011 shares of Common Stock, which were
subsequently retired from treasury stock in September 1996. According to prior
announcements by Pfizer, droloxifene is in Phase II clinical trials for
osteoporosis.
11. ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. -- RELATED PARTY
In December 1994, the Company and Allergan, Inc. ("Allergan") formed
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research
and development activities previously conducted by Allergan-Ligand Joint Venture
("the Joint Venture"). In June 1995, the Company and ALRT completed a public
offering of 3,250,000 units (the "Units") with aggregate proceeds of $32.5
million (the "ALRT Offering") and cash contributions by Allergan and Ligand of
$50.0 million and $17.5 million, respectively, providing for net proceeds of
$94.3 million for retinoid product research and development. Ligand's $17.5
million in cash contribution, as well as warrants were in exchange for (1) a
right to acquire all of the Callable Common Stock at specified future dates and
amounts and (2) a right to acquire all rights to the Panretin(R) (ALRT 1057)
product, jointly with Allergan. Allergan's $50.0 million cash contribution to
ALRT was in exchange for (1) the right to acquire one-half of technologies and
other assets in the event Ligand exercises its right to acquire all of the
Callable Common Stock, (2) a similar right to acquire all of the Callable Common
Stock if Ligand does not exercise its right and (3) a right to acquire all
rights to the Panretin (ALRT1057) product, jointly with Ligand. Each Unit
consisted of one share of ALRT's callable common stock and two warrants, each
warrant entitling the holder to purchase one share of the Company's Common
Stock. Immediately prior to the consummation of the ALRT Offering, Allergan
Pharmaceuticals (Ireland) Ltd., Inc. made a $6.0 million investment by
purchasing 994,819 shares of the Company's Common Stock at $6.03 per share. The
Company's $17.5 million cash contribution resulted in a one-time charge to
operations. The Company also recorded a warrant subscription receivable and
corresponding increase in paid-in capital of $5.9 million (6,500,000 warrants
valued at $.90 per warrant) pursuant to the ALRT Offering. From June 3, 1995
through September 23, 1997, cash received from ALRT pursuant to a Research and
Development Agreement was prorated between contract revenue and the warrant
subscription receivable based on their respective values. In 1997 and 1996, $1.5
million and $2.1 million, respectively, of the proceeds received from ALRT were
applied to the warrant subscription receivable. In conjunction with the
consummation of the ALRT Offering, all rights held by the Joint Venture were
licensed to ALRT.
In September 1997, the Company and Allergan exercised their respective
options to purchase the Callable Common Stock (the "Stock Purchase Option") and
certain assets (the "Asset Purchase Option") of ALRT. The Company's exercise of
the Stock Purchase Option required the issuance of 3,166,567 shares of the
Company's Common Stock along with cash payments totaling $25.0 million to
holders of the Callable Common Stock in November 1997.
Allergan's exercise of the Asset Purchase Option required a cash payment of
$8.9 million which was used by the Company to pay a portion of the Stock
Purchase Option.
In November 1997, ALRT became a wholly owned subsidiary of the Company. The
transaction was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
allocated to in-process technology and was written off, resulting in a one-time
non-cash charge to results of operations of $65.0 million.
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75
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Details of the acquisition are as follows (in thousands):
Total consideration:
Common stock.............................................. $52,595
Liabilities assumed....................................... 1,010
Warrant subscription receivable write-off................. 918
Net cash paid for ALRT net of cash received............... 12,661
-------
$67,184
=======
Less:
Deferred liabilities write-off............................ $ 2,214
Write-off of in-process technology........................ 64,970
-------
$67,184
=======
12. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has advanced funds to certain officers and employees in
connection with various employment agreements. The agreements provide for
forgiveness of the advances over four-year and five-year periods. If an
individual terminates the relationship with the Company, the unforgiven portion
of the advances and any accrued interest are due and payable upon termination.
The notes are secured by shares of the Company's Common Stock owned by the
individual or second trust deeds on the personal residences of the respective
employees.
13. INCOME TAXES
At December 31, 1998, the Company had consolidated federal and combined
California income tax net operating loss carryforwards of approximately $354.6
million and $21.9 million, respectively. The difference between the federal and
California tax loss carryforwards is primarily attributable to the
capitalization of research and development expenses for California income tax
purposes and the 50% limitation on California loss carryforwards. The Company
also had foreign net operating loss carryforwards of approximately $3.1, which
will begin to expire in 2001 unless previously utilized.
The federal tax loss carryforward will begin to expire in 2002, unless
previously utilized. The California tax loss carryforwards began expiring in
1998 (approximately $4.0 expired in 1998). The Company also had consolidated
federal and combined California research tax credit carryforwards of
approximately $14.3 million and $4.5 million, respectively, which will begin to
expire in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of a portion of
net operating loss and credit carryforwards will be limited because of
cumulative changes in ownership of more than 50% which occurred within three
year periods during 1989, 1992 and 1996. However, the Company does not believe
the limitations will have a material impact upon the future utilization of these
carryforwards. In addition, use of Glycomed's and Seragen's preacquisition tax
net operating and credit carryforwards will also be limited because the
acquisitions by the Company represent changes in ownership of more than 50%.
Such tax net operating losses and credit carryforwards have been reduced,
including the related deferred tax assets.
F-21
76
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are shown below. A valuation allowance has been recognized to
fully offset the deferred tax assets as of December 31, 1998 and 1997 as
realization of such assets is uncertain.
1998 1997
--------- ---------
(IN THOUSANDS)
Deferred tax liability:
Acquired subordinated debt........................... $ 4,387 $ 5,483
Purchased intangible assets.......................... 17,621 --
Fixed assets......................................... 2,684 --
--------- ---------
Total deferred tax liabilities............. 24,692 5,483
Deferred tax assets:
Net operating loss carryforwards..................... 126,771 82,552
Research and development credits..................... 17,218 9,979
Capitalized research and development................. 13,604 10,252
Capitalized license.................................. 6,150 --
Other................................................ 2,940 3,472
--------- ---------
Total deferred tax assets.................. 166,683 106,255
Valuation allowance for deferred tax assets.......... (141,991) (100,772)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
Approximately $2.1 million of the valuation allowance for deferred tax
assets relates to benefits of stock option deductions which, when recognized,
will be allocated directly to paid-in capital.
F-22