Ligand Pharmaceuticals Incorporated — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are also summarized below. Amounts are in U.S. dollars.
Business context
Ligand is a biopharmaceutical licensing and technology company. Revenue is primarily royalties on partner products, Captisol material sales, and license fees and milestones. Its partners fund development and commercialization for most of its portfolio. The company reported more than 165 partnered programs and over 95 partners.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $141.1 million | $109.0 million |
| Royalties | $88.7 million | $59.4 million |
| Captisol material sales | $22.1 million | $22.5 million |
| License, milestone and other revenue | $30.3 million | $27.0 million |
| Operating income | $68.1 million | $43.9 million |
| Net income (loss) | $12.6 million | ($1.6 million) |
| Operating cash flow | $93.6 million | $63.0 million |
- Revenue rose 29%, mainly from Promacta, Kyprolis and Evomela royalties. Royalties increased 49%; material sales declined 2% amid timing differences in customer purchases.
- Operating costs and expenses increased 12% to $73.0 million, including research and development of $26.9 million, up 27%, and intangible amortization of $12.1 million.
- Operating margin was approximately 48% (operating income divided by revenue). Net income included a $44.7 million income-tax expense, including a provisional $32.4 million charge related primarily to remeasuring deferred taxes under the Tax Act.
- At year-end, cash and cash equivalents were $20.6 million and short-term investments were $181.0 million. Current assets were $237.0 million versus current liabilities of $238.9 million, producing a $1.8 million working-capital deficit. Management said available funds, operating cash flow and financing access should be sufficient for anticipated needs.
- The company had $245.0 million principal amount of 0.75% convertible senior notes due August 2019; the balance-sheet carrying amount, net of discount, was $224.5 million and classified as current. The notes may require substantial cash at redemption or maturity; conversion and settlement are subject to their terms.
Fourth quarter: Revenue was $50.5 million and net loss was $7.0 million, including $37.7 million of income-tax expense.
Material changes versus the prior comparable period
- Royalties grew from $59.4 million to $88.7 million. Promacta royalties were $62.9 million versus $43.0 million, and Kyprolis royalties were $16.4 million versus $12.1 million.
- Operating income improved to $68.1 million from $43.9 million; net results moved from a $1.6 million loss to $12.6 million income. The change also reflects lower losses associated with Viking and other non-operating items, alongside the significant 2017 tax charge.
- Operating cash flow increased by $30.6 million. Investing activities used $84.2 million, including short-term investment purchases and the Crystal acquisition; financing activities used $7.5 million.
- Ligand acquired Crystal Bioscience for total consideration of $35.7 million, including $26.9 million cash paid, assumed liabilities and $8.4 million estimated contingent consideration. The acquisition added OmniChicken antibody-discovery technology.
Outlook, commentary and risks
- Management expected cash to build, citing anticipated operating cash flow and potential growth in royalties, Captisol sales, licenses and milestones. The filing provides no specific 2018 revenue or earnings guidance.
- Partner-product milestones included positive Phase 3 brexanolone results, with Sage planning an FDA filing in 2018, and FDA approval of Baxdela, which triggered a $1.5 million milestone and a 2.5% royalty on sales. Ligand’s internally developed LGD-6972 reported positive Phase 2 results in type 2 diabetes.
- Revenue is concentrated: two partners accounted for 46% and 19% of 2017 revenue. Promacta and Kyprolis are important revenue sources, leaving results exposed to partner performance, product competition, reimbursement, regulatory and patent developments.
- Captisol production depends on a single supplier, Hovione, despite production at two of its sites. Supply disruption could affect material sales and partner programs.
- Teva challenged Captisol-related patents associated with Evomela; Ligand’s subsidiary sued Teva in December 2017. The filing does not predict the outcome.
- Ligand reported that a material weakness in tax-accounting controls identified previously was remediated by year-end 2017; management and its auditor concluded internal control over financial reporting was effective at that date. Ligand had restated earlier financial statements. A separate immaterial correction shifted $1.3 million of revenue and $0.8 million of net income from 2017 to 2016.
- Ligand planned to adopt ASC 606 in 2018 and expected an approximately $33 million decrease to opening accumulated deficit, primarily reflecting earlier recognition of royalties and potentially certain milestones. Estimates and final accounting could change.
Key facts for investors to verify
- Royalty growth and the continuing sales trends for Promacta, Kyprolis and Evomela, including product and partner concentration.
- 2019 convertible-note cash obligations, conversion status and the company’s plan to meet or refinance them.
- Final ASC 606 transition adjustment and the effect of same-quarter royalty estimates on reported revenue.
- Outcome and potential financial impact of the Evomela patent litigation, plus Captisol supply continuity.
- Tax Act estimates, use limitations on tax attributes, and continued effectiveness of remediated financial controls.