Ligand Pharmaceuticals Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 9, 2017. Ligand is a biopharmaceutical company whose revenue primarily comes from royalties, license and milestone payments, and Captisol material sales.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $29.3 million | $29.6 million | Down 1% |
| Royalties | $24.2 million | $14.4 million | Up 68% |
| Material sales | $1.1 million | $5.3 million | Down 79% |
| License fees, milestones and other revenue | $3.9 million | $9.9 million | Down 61% |
| Operating income | $10.2 million | $15.1 million | Down 32% |
| Net income | $5.1 million | $6.6 million | Down 23% |
| Diluted EPS | $0.22 | $0.30 | Down $0.08 |
| Operating cash flow | $24.2 million | $13.1 million | Up $11.1 million |
Operating margin was approximately 34.9%, versus 50.9% in Q1 2016; net margin was approximately 17.4%, versus 22.3%. Revenue was nearly flat as higher royalties, primarily from Promacta and Kyprolis, were offset by lower Captisol sales tied to customer purchase timing and the absence of a $6.0 million FDA approval milestone received in Q1 2016. Operating expenses rose 31% to $19.1 million, principally because R&D expense increased $4.7 million, including higher stock-based compensation and development costs.
At March 31, 2017, cash and cash equivalents were $10.6 million and short-term investments were $148.7 million, totaling $159.4 million. Working capital was negative $52.3 million, largely reflecting convertible notes classified as current. The notes have $245.0 million principal, a 0.75% coupon and an August 2019 maturity; $215.7 million was reported as current debt net of discount, with a further $26.9 million equity component classified as mezzanine equity. Total liabilities were $230.9 million. Management said available funds, operating cash flow and financing access should cover anticipated operating, capital and debt-service needs, while noting there can be no assurance.
Cash declined by $8.1 million during the quarter. Investing activities used $30.7 million, including net purchases of short-term investments and $5.0 million of CVR and other contingency payments; financing activities used $1.7 million, including $2.0 million of taxes on net share settlement of equity awards. The filing reports a 18% effective tax rate, versus 39% a year earlier; the current-period rate benefited from stock-award tax items, and was approximately 37% excluding discrete items.
Material developments and outlook
- Promacta/Revolade Q1 sales reported by Novartis were $175 million, up 34% year over year; Amgen reported Kyprolis sales of $190 million, up 23%. These partner product sales are not Ligand revenue, but are relevant to its royalty outlook.
- Ligand completed enrollment in its Phase 2 LGD-6972 glucagon receptor antagonist trial and expected topline results in September 2017.
- Partner and program developments included an FDA action date of June 19, 2017 for Baxdela, potential Ligand royalties and a milestone if approved, and new or expanded licenses involving bluebird bio, Sermonix, Marinus and Eisai. These are prospective opportunities, not reported Q1 revenue.
- Management expected cash to build as royalty, license and milestone revenue and Captisol sales continued, particularly if Promacta and Kyprolis sales grew. The filing gives no specific full-year revenue or earnings guidance.
- Ligand planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method. It anticipated a material impact, including earlier recognition of royalties in the quarter partners report sales and potentially earlier recognition of certain contingent milestones.
- On May 8, 2017, Ligand amended its Viking loan, extending the note maturity from May 21, 2017 to May 21, 2018 and requiring a $0.2 million payment by July 15, 2017, applied at a discounted rate against interest and principal.
Risks, contingencies and unusual items
- Convertible-note liquidity: The notes were classified as current because the share-price conversion condition was met at quarter-end. Their classification may change with the stock price. Management considered early conversion unlikely but disclosed that redemption could require substantial cash.
- Control weakness and restatement: Disclosure controls were deemed ineffective due to an unremediated material weakness in review and supervision of complex tax accounting prepared by third parties. Ligand had restated prior financial statements and was implementing additional controls, but had not operated them long enough to conclude the weakness was remediated.
- Litigation: A shareholder class action filed in 2016 relates generally to the prior restatement; Ligand considers it without merit and intends to defend it. An older securities and derivative matter remained on appeal, with outcome undetermined. The filing does not provide a clear estimate of potential loss.
- Revenue concentration and execution: Results depend substantially on partner products, especially Promacta and Kyprolis, and on Captisol sales. Partner termination, product setbacks, competition, patent challenges, regulatory delays, customer credit risk, or interruption of Captisol supply could adversely affect revenue. Captisol has a sole-source supplier.
- Other exposures: The filing identifies development and regulatory uncertainty across partnered programs, possible impairment of acquired intangible assets, market and foreign-exchange risks, and potential federal-law exposure related to a Captisol agreement for cannabinoid-based products.
- Accounting adoption: Adoption of ASU 2016-09 produced a $17.9 million cumulative retained-earnings adjustment and a $0.9 million discrete tax benefit in Q1 2017.
Most important facts for investors to verify
- Whether Promacta and Kyprolis growth translated into sustained Ligand royalty growth, and how partner sales and reporting timing affect recognized royalties.
- Whether Captisol demand, customer purchase timing and the sole-source supply arrangement support or constrain future material sales.
- Whether the 2019 notes remain classified as current, and the cash, refinancing or dilution implications under potential conversion or redemption scenarios.
- Progress in remediating the tax-accounting material weakness and any further developments in the restatement-related litigation.
- Clinical and regulatory milestones, including LGD-6972 results and partner-program approvals, and whether they generate payments to Ligand.