Ligand Pharmaceuticals Incorporated — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts below are in millions of dollars unless noted. The filing is unaudited.
Business context and reporting period
Ligand describes itself as a biopharmaceutical company focused on acquiring or developing royalty-generating assets and operating with a lean cost structure. Revenue comes primarily from partner royalties, licenses and milestones, research collaborations, and sales of CAPTISOL. The January 2011 acquisition of CyDex added CAPTISOL technology and material sales, as well as marketed-product royalties and development programs.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $5.7 | $7.8 | $17.1 | $19.6 |
| Operating loss | $(3.4) | $(15.7) | $(6.4) | $(23.3) |
| Income (loss) from continuing operations | $(3.9) | $(11.9) | $4.7 | $(15.1) |
| Net income (loss) | $(3.9) | $(11.8) | $4.7 | $(14.9) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(8.2) | $(25.8) |
- Nine-month revenue included royalties of $6.6 million, CAPTISOL material sales of $5.7 million, and collaborative research and other revenue of $4.8 million. Q3 amounts were $2.4 million, $1.7 million, and $1.6 million, respectively.
- Q3 revenue declined about 26% year over year; nine-month revenue declined about 13%. Royalty growth, principally from PROMACTA and CyDex-licensed products, was offset by lower collaboration revenue and AVINZA royalties.
- Research and development expense fell to $7.7 million for nine months from $18.9 million, mainly after collaboration terminations and late-2010 staff reductions. General and administrative expense increased to $12.1 million from $9.4 million, largely due to CyDex acquisition and operating costs.
- Nine-month net income included a $13.6 million income-tax benefit from releasing valuation allowances following the CyDex acquisition. It should not be viewed as evidence of positive operating cash generation: Ligand used $8.2 million in operating cash.
- At September 30, cash and cash equivalents were $2.3 million and short-term investments were $10.0 million, totaling $12.3 million. This compares with $22.7 million at December 31, 2010. Working capital was negative $15.6 million, versus positive $3.5 million at year-end.
- Total assets were $122.5 million and total liabilities $111.8 million. Stockholders’ equity was $2.4 million. Debt included a $20 million Oxford term loan and $10 million drawn under a Square 1 revolving facility; the balance sheet showed $10 million current bank debt and $20.2 million long-term note payable.
- CAPTISOL material sales contributed to revenue, but the filing does not provide a clear gross-margin figure. The company reported an operating loss.
Material changes and notable items
- CyDex acquisition accounting added substantial goodwill and intangible assets; goodwill and identifiable intangible assets totaled $72.2 million at quarter-end. CyDex consideration included a $4.3 million payment due in January 2012 and contingent payments tied to milestones and revenue.
- Q3 included $2.3 million of non-cash in-process research and development impairment charges: $1.1 million associated with MedImmune’s termination of the MEDI-528 collaboration and $1.2 million related to Merck’s TRPV1 program termination notice.
- The sharply lower operating loss versus 2010 mainly reflects the absence of 2010 lease exit and termination charges of $15.9 million. In 2011, lease exit costs were immaterial.
- The company recorded a $19.0 million fair-value liability for CyDex contingent value rights at September 30. The CyDex shareholders’ representative disputed payment calculations for the first two quarters and alleged Ligand exceeded a debt limit in the CVR agreement. Ligand disagreed; unresolved claims could go to arbitration.
- Ligand filed a shelf registration statement in October 2011 for up to $30 million of equity or other securities; no securities had been issued under it as of the filing.
Outlook, risks and contingencies
- Management believed available cash, investments, and expected royalties, license and milestone revenue would fund anticipated operating and capital needs, including the January 2012 CyDex payment, for at least 12 months. This outlook depends on CAPTISOL sales, royalty growth, new license revenue, and potential expense reductions; management cautioned there can be no assurance.
- Liquidity is constrained by negative working capital, operating cash use, the $4.3 million near-term CVR payment, additional possible CVR payments, and debt maturities. The Square 1 facility matures March 29, 2012 and may become immediately payable if the required $5 million cash balance at the bank is not maintained.
- Key business risks include dependence on partners and product royalties, clinical and regulatory uncertainty, integration of CyDex, and reliance on Hovione as the sole CAPTISOL supplier. Ligand disclosed a $15 million total CAPTISOL purchase commitment through 2019 and approximately $11.5 million spent toward it.
- AVINZA royalties and PROMACTA royalties represent a substantial portion of revenue. Ligand also remains liable to Organon for AVINZA-related termination payments if King defaults; the related liability was $28.6 million.
- The company reported no off-balance-sheet arrangements. Disclosure controls and procedures were concluded effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether CAPTISOL sales and partner royalties can grow enough to improve operating cash flow and reduce reliance on external financing.
- The timing and amount of CyDex CVR obligations, the outcome of the payment and debt-limit dispute, and the January 2012 payment.
- Debt repayment and liquidity requirements, including the Square 1 cash-balance covenant and March 2012 maturity.
- The scale and durability of revenue exposure to PROMACTA, AVINZA, and CyDex-licensed products, and the impact of partner decisions or product setbacks.
- Whether CAPTISOL supply, licensing, and product-development programs can continue without interruption, particularly given the sole-source supplier and recent collaboration terminations.
- The effect of the $13.6 million tax benefit and acquisition-related accounting on comparisons of reported earnings with underlying operating performance.