Ligand Pharmaceuticals Incorporated — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods. Ligand earns royalties, milestone and licensing revenue, and Captisol material sales. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $17.7 | $15.0 | $50.7 | $41.5 |
| Operating income | $8.6 | $3.5 | $16.3 | $10.0 |
| Operating margin | 48.6% | 23.6% | 32.2% | 24.0% |
| Income before taxes | $7.3 | $0.9 | $29.5 | $4.3 |
| Net income | $224.5 | $1.3 | $248.9 | $5.0 |
| Operating cash flow | Not separately presented for the quarter | $28.1 | $10.3 |
- Q3 revenue rose 18%; nine-month revenue rose 22%. Royalties increased to $9.8 million for the quarter and $26.6 million year to date, primarily from Promacta and Kyprolis. Captisol material sales were $6.0 million in Q3 and $20.5 million year to date; the year-to-date increase reflected greater clinical and commercial purchases.
- Q3 operating income improved primarily alongside higher revenue and lower G&A costs. Nine-month R&D expense increased $1.7 million, primarily due to timing of internal program costs; G&A increased $1.1 million, primarily from stock compensation and business development costs.
- Net income is not representative of recurring operating performance: it includes a $217.3 million Q3 tax benefit, mainly from releasing most of the deferred-tax valuation allowance. The nine-month result also includes that tax benefit and a $28.2 million gain on Viking deconsolidation. Q3 net income was also affected by a $2.2 million equity-method loss from Viking.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $93.8 million and short-term investments were $93.5 million; combined, $187.3 million, versus $167.3 million at December 31, 2014. Working capital was $194.1 million.
- Total assets were $521.7 million, including $206.4 million of deferred tax assets and a $31.8 million Viking investment. Total liabilities were $229.5 million.
- Nine-month operating cash flow was $28.1 million. Investing activities used $101.4 million, mainly reflecting purchases of short-term investments, a $9.0 million Viking stock purchase, commercial license rights and contingent-liability payments. Financing activities provided $6.9 million. Cash and cash equivalents declined $66.4 million, largely reflecting investment purchases.
- Convertible notes due 2019 had $245.0 million principal outstanding and a $203.0 million net carrying amount. The notes bear 0.75% cash interest; reported nine-month net interest expense was $8.9 million, including non-cash debt discount and issuance-cost amortization. The notes’ estimated fair value was $318.6 million, above carrying value.
Material changes and unusual items
- In May 2015, following Viking’s IPO, Ligand deconsolidated Viking and began equity-method accounting. Ligand reported a $28.2 million deconsolidation gain for the nine-month period and $3.0 million of equity-method losses year to date. Its Viking investment’s carrying value was $31.8 million; the disclosed market value was $28.0 million.
- The company released a majority of its deferred-tax valuation allowance after concluding that a substantial portion of deferred tax assets was more likely than not to be realized. A remaining $9.1 million valuation allowance was reported. Ligand cautioned that a later reassessment could require re-establishing an allowance and recording tax expense.
- Ligand identified and corrected an immaterial clerical error in contingent-liability projections: the correction reduced Q3 2015 net income by $0.6 million, or $0.03 per share, and corrected a prior-quarter liability understatement.
- The board authorized a common-stock repurchase program of up to $200 million over as long as three years. Ligand repurchased 6,120 shares for approximately $0.5 million through September 30.
Outlook, risks and contingencies
- Management said available funds, operating cash generation and financing access should be sufficient for anticipated operating, capital and debt-service needs, and expected cash to build as royalties, licenses, milestones and Captisol sales grow. It also stated there can be no assurance; the filing gives no numeric revenue or earnings guidance.
- Key revenue exposures include Promacta and Kyprolis royalties and Captisol sales. Risks include partner execution or termination, regulatory and clinical setbacks, product competition, Captisol’s sole-source supplier, customer concentration, and patent challenges or expirations. Ligand also noted that partners control many development and commercialization activities.
- Contingent liabilities totaled $15.2 million: $10.5 million related to CyDex and $4.7 million to Metabasis. Payments and fair-value estimates may vary materially. Ligand estimated an approximately $2.6 million Metabasis CVR payment for January 2016.
- A securities class action and derivative lawsuit remained unresolved; Ligand said the outcome was not presently determinable and that it intended to defend the claims.
- Disclosure controls and internal control over financial reporting were judged ineffective at September 30 due to a material weakness in management review of projections used to value contingent liabilities. The company was developing revised controls and review procedures.
- As a subsequent event, Ligand agreed in November to terminate its then-current headquarters lease by April 30, 2016, subject to surrender conditions, and entered a new San Diego headquarters lease expected to begin in May 2016.
Important facts for investors to verify
- How much of reported earnings and deferred-tax assets depends on the valuation-allowance release, and what evidence supports future realization?
- Whether the contingent-liability valuation-control weakness has been remediated and whether revised estimates or disclosures result.
- Trends in Promacta and Kyprolis royalties, Captisol demand, and reliance on key partners and the sole-source Captisol supplier.
- Viking’s ability to repay or otherwise settle Ligand’s note, and the implications of its equity-method losses and investment valuation.
- Cash generation and liquidity after investment purchases, CVR payments, the planned repurchase program, and obligations on the 2019 convertible notes.