Ligand Pharmaceuticals Incorporated — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless stated otherwise. Ligand is a biopharmaceutical company whose revenues include royalties, Captisol material sales, and license and milestone payments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $33.4 | $21.6 | $90.6 | $70.8 |
| Operating income | $16.5 | $5.5 | $39.7 | $24.5 |
| Net income | $8.4 | $1.1 | $19.6 | $1.5 |
| Diluted EPS | $0.36 | $0.05 | $0.84 | $0.07 |
| Operating cash flow | Not reported quarterly | $62.3 | $42.0 |
Q3 revenue rose 54%; royalties increased 40% to $21.9 million, material sales rose 82% to $7.7 million, and license, milestone and other revenue increased 122% to $3.8 million. Management attributed royalty growth mainly to Promacta, Kyprolis and Evomela. Nine-month revenue rose 28%, principally from royalties, while license, milestone and other revenue fell 9% to $15.9 million. Operating margin was approximately 49% in Q3 (25% in Q3 2016) and 44% for the nine months (35% in 2016).
Q3 operating costs and expenses were $16.9 million, up from $16.2 million; nine-month costs were $50.9 million, up from $46.3 million. Nine-month R&D increased to $18.3 million from $14.8 million. Interest expense was $8.6 million for the nine months, primarily non-cash accretion of the convertible-note discount. The nine-month equity-method loss from Viking was $3.4 million, versus $14.1 million in 2016.
Financial position and liquidity
At September 30, 2017, Ligand had $32.7 million cash and cash equivalents and $169.5 million short-term investments, totaling $202.3 million. Total assets were $662.3 million and stockholders’ equity was $403.2 million. Working capital was negative $7.5 million, principally reflecting the classification of the convertible notes as current. Management said available funds, operating cash generation and access to financing should meet anticipated needs, while noting there can be no assurance.
Operating cash flow for the nine months was $62.3 million, compared with $42.0 million a year earlier. Investing activities used $48.0 million, including $5.0 million in contingent-value-right and other contingency payments; financing activities used $0.3 million. Cash increased $14.0 million from year-end 2016.
The company had $245.0 million principal amount of 0.75% convertible senior notes due August 2019. Their net carrying amount was $221.6 million, classified as current at quarter-end because the stock-price conversion condition was met; $21.6 million was presented as mezzanine equity. Notes may require substantial cash payment upon conversion or redemption. Ligand had not repurchased shares in Q3 and had $195.6 million remaining under its repurchase authorization.
Changes, outlook and notable items
- Management expects continued cash generation, citing royalty growth, Captisol sales, product approvals and potential new licenses and milestones. The filing gives no specific revenue or earnings guidance.
- Ligand expects ASC 606 adoption on January 1, 2018, using the modified retrospective method. It anticipates a material impact, principally earlier royalty recognition—recording estimated royalties in the same quarter partners report sales rather than one quarter later—and potentially earlier milestone recognition.
- In October 2017, after quarter-end, Ligand acquired Crystal Bioscience for $25 million cash, with up to $10.5 million in research and business milestones and additional revenue sharing. Purchase accounting was incomplete at filing.
- A correction to the effective-interest accounting for CorMatrix commercial license rights was recorded in Q2 2017. Management judged the historical error immaterial; it had understated 2016 and Q1 2017 revenue by $1.3 million and $0.4 million, respectively. The correction had no Q3 impact but, as reported, overstated nine-month 2017 revenue by $1.3 million and net income by $0.8 million, or $0.04 per diluted share.
- Disclosure controls were deemed ineffective, and a material weakness in tax accounting controls for complex transactions remained unremediated. Management was implementing additional review and training controls.
- Patent risk includes paragraph IV challenges from Dr. Reddy’s and Aurobindo to Ligand’s Captisol-related patent covering Kyprolis. A 2012 securities case remained on appeal; outcome was not determinable. The 2016 putative class action was dismissed without prejudice in May 2017.
- Other principal risks include dependence on partner products and Captisol (including a sole-source supplier), clinical and regulatory uncertainty, partner termination or disputes, potential generic competition, convertible-note cash and dilution exposure, acquisition integration, and investment and foreign-exchange risks. The company reported no off-balance-sheet arrangements.
Investor verification points
- Reconcile the CorMatrix correction and its $1.3 million nine-month revenue and $0.8 million net-income effects with reported results.
- Track Promacta, Kyprolis and Evomela sales and royalties, Captisol demand, and customer and supplier concentration.
- Monitor the 2019 notes’ conversion status, cash settlement exposure, and the distinction between principal, carrying value and mezzanine equity.
- Assess ASC 606 implementation, royalty estimates based on partner reports, and progress remediating the tax-accounting material weakness.
- Review the Crystal acquisition’s final purchase accounting, milestone obligations and revenue-sharing economics, as well as Kyprolis patent challenges.