LIGAND PHARMACEUTICALS INC quarterly report, Q2 FY2017

Business context and reporting period

Ligand Pharmaceuticals Incorporated filed this Form 10-Q for the quarter and six months ended June 30, 2017. Ligand’s business centers on licensing drug-development technologies and programs; revenue comes primarily from royalties, license and milestone payments, and Captisol material sales. Partners bear development and commercialization costs for most partnered programs.

Financial performance and position

Q2 operating margin was approximately 46.5%, versus 20.3% a year earlier; first-half operating margin was approximately 40.6%, versus 38.8%. First-half cash and cash equivalents increased to $60.2 million from $18.8 million at year-end 2016. Cash, cash equivalents and short-term investments totaled $172.6 million at June 30. Total assets were $640.0 million, total liabilities $230.6 million, and stockholders’ equity $385.1 million.

Ligand had $245.0 million principal amount of 0.75% convertible senior notes due August 2019. Their carrying amount, net of discount, was $218.6 million and they were classified as current because the stock-price conversion condition was met. A further $24.3 million related equity component was classified as mezzanine equity. The company reported a $28.7 million working-capital deficit, which includes the currently redeemable notes.

Material changes versus prior periods

• Q2 revenue rose 43%; first-half revenue rose 16%. Royalties increased 46% for Q2 and 59% for the half, mainly from Promacta, Kyprolis and Evomela.
• First-half material sales declined 28%, reflecting timing of Captisol purchases. License, milestone and other revenue declined 23%, principally because a $6.0 million FDA approval milestone was received in Q1 2016.
• Q2 net income improved from a loss to profit. Lower losses from Viking were a major factor: the prior-year quarter included a $10.0 million reduction in the carrying value of Ligand’s Viking investment following a financing.
• First-half operating expenses increased to $34.0 million from $30.1 million, including higher R&D expense; Q2 expenses declined to $15.0 million from $15.6 million.
• First-half operating cash flow increased to $34.6 million from $23.5 million. Investing cash flow was positive $8.5 million versus negative $61.5 million in 2016, which included acquisition and commercial-license-rights purchases.

Outlook, commentary, risks and unusual items

• Management said available funds, operating cash flow and financing access should be sufficient for anticipated operating, capital and debt-service requirements, and expects cash to build. This is not specific numerical earnings guidance; actual results are subject to partner sales, approvals, milestones and other uncertainties.
• Ligand expected to report Phase 2 topline results for its LGD-6972 glucagon receptor antagonist program in September 2017.
• Under a May 2017 agreement tied to CorMatrix product assets sold to Aziyo, Ligand received $5 million in June and was scheduled to receive another $5 million by year-end. The agreement reduced the royalty rate on those products from 20% to 5%, provides up to $10 million in sales-based milestones, and extends the royalty term by one year. Separate CorMatrix pipeline-product terms include a 5% royalty.
• Melinta’s FDA approval of Baxdela generated a $1.5 million milestone for Ligand and a 2.5% royalty on IV sales. Ligand also disclosed new Captisol and OmniAb licenses, which may produce future royalties, milestones or material sales.
• Ligand corrected an accounting error related to income recognition for a CorMatrix commercial license financial asset. The company said the historical errors were immaterial: 2016 and Q1 2017 revenue had been understated by $1.3 million and $0.4 million, respectively. The Q2 correction increased reported Q2 revenue by $1.7 million and net income by $1.1 million; the six-month correction increased revenue by $1.3 million and net income by $0.8 million.
• Management anticipated that ASC 606, to be adopted January 1, 2018 using the modified retrospective method, would materially affect reported results by accelerating recognition of royalties and potentially some contingent milestones.
• Disclosure controls were reported ineffective as of June 30, 2017 because an unremediated material weakness remained in review and supervision of tax accounting for complex transactions. Remediation measures were underway, but management said they had not operated long enough to conclude the weakness was remediated.
• Key risks include dependence on partner products and Captisol sales, clinical and regulatory uncertainty, and patent challenges. Ligand disclosed receiving a paragraph IV certification challenging a Captisol patent related to Kyprolis generic applications; Amgen had filed litigation. A securities lawsuit dismissed by the district court remained on appeal; a separate shareholder class action was dismissed without prejudice in May 2017.

Investor verification points

• Assess the effect of the CorMatrix accounting correction on reported Q2 growth and compare results with the company’s stated immateriality conclusion.
• Track Promacta, Kyprolis and Evomela sales, Captisol demand, and customer concentration or supply risks.
• Review the $245 million notes’ conversion and cash-settlement exposure, current classification, and the working-capital deficit.
• Monitor remediation of the tax-accounting material weakness and implementation of ASC 606.
• Follow the Kyprolis-related patent litigation and the progress of partnered and internal clinical programs, including LGD-6972.