Ligand Pharmaceuticals Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are U.S. dollars; financial statement figures are generally in millions unless noted. Comparative 2015 figures are restated.
Business context
Ligand operates a biopharmaceutical asset-development and licensing business, seeking royalties, milestones and other revenue while maintaining a lean cost structure. Its portfolio includes partner products and technologies such as Captisol and the OmniAb antibody platform. The January 2016 acquisition of OMT added OmniAb technology and 16 partnerships to the portfolio.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015, restated | Nine months 2016 | Nine months 2015, restated |
|---|---|---|---|---|
| Revenue | $21.6 | $17.7 | $70.8 | $50.7 |
| Operating income | $5.5 | $8.6 | $24.5 | $16.3 |
| Net income | $1.1 | $199.2 | $1.5 | $223.5 |
| Operating cash flow | — | $42.0 | $28.1 |
- Q3 revenue increased 22%; nine-month revenue rose 40%. Royalties grew 61% in Q3 and 50% year to date, mainly from Promacta and Kyprolis. Material sales fell 30% in Q3 and 34% year to date, primarily due to timing of Captisol customer purchases. License, milestone and other revenue rose substantially year to date, largely because of milestone/upfront payment timing and OmniAb partners.
- Operating expenses increased 77% in Q3 and 34% year to date. Higher intangible amortization followed the OMT acquisition; R&D and G&A increases reflected stock compensation, development costs, headcount and OMT expenses. Operating margin was approximately 25% in Q3 versus 49% a year earlier, and 35% year to date versus 32%.
- Net income comparisons are distorted by the 2015 release of a tax valuation allowance. Ligand restated 2015 results to reverse a $27.5 million tax benefit tied to acquired NOLs that did not meet the recognition threshold. The restatement reduced 2015 nine-month net income to $223.5 million from $251.0 million and did not affect cash flows.
- Cash and cash equivalents were $86.6 million and short-term investments $37.5 million at September 30, for $124.1 million combined. Working capital was a deficit of $85.4 million, primarily in the context of current classification of the convertible notes. Total assets were $600.9 million; stockholders’ equity was $338.3 million.
- The 2019 convertible notes had $245.0 million principal and a $210.1 million net carrying amount, bore 0.75% cash interest, and were classified as current because the stock-price conversion condition was met. Estimated fair value was $357.6 million. The company may have to repurchase notes for cash under specified circumstances.
- Operating cash flow was $42.0 million; investing cash outflow was $56.5 million, including $92.5 million net cash paid for OMT; financing cash inflow was $3.6 million. Cash and cash equivalents declined $10.8 million from year-end 2015.
Outlook, developments and risks
- No quantified revenue or earnings guidance is provided. Management said available funds, operating cash generation and financing access should be sufficient for anticipated operating, capital and debt-service needs, and expected cash generation to build; it cautioned that there can be no assurance.
- Management estimated a 42% 2016 effective tax rate for continuing operations, subject to significant variability from nondeductible contingent-consideration items and other permanent differences.
- Portfolio updates included Novartis-reported Q3 Promacta sales growth of 44% year over year to $168 million, and expanded Kyprolis approvals in Europe and Japan. Amgen reported that the Phase 3 CLARION trial did not meet its primary superiority endpoint. A generic Kyprolis patent challenge was also disclosed.
- Ligand reported new OmniAb licenses and other licensing agreements, and began a Phase 2 trial of its internal LGD-6972 program. Partner programs remain subject to clinical, regulatory, commercial and partner-execution risks.
- Material risks include reliance on Promacta, Kyprolis and Captisol-related revenue; Captisol’s sole-source supplier; product, patent and generic competition risks; partner termination or development delays; and potential impairment of acquired goodwill and intangibles. The filing also describes securities litigation on appeal and a confidential settlement in the NOXAFIL-IV Paragraph IV dispute.
- Management concluded disclosure controls were not effective. The company cited material weaknesses in tax accounting controls for complex transactions and in review of convertible-note presentation and disclosure; remediation work was underway, but the weaknesses were not yet considered remediated.
Important facts for investors to verify
- Whether Promacta, Kyprolis and Captisol revenues continue to grow, and how much revenue is concentrated in these products and partners.
- Current conversion or repurchase status and cash requirements of the $245.0 million notes, including the effect of their current classification on liquidity.
- Progress and financial contribution from OMT/OmniAb, including final purchase-price allocation and partner program advancement.
- Resolution of the disclosed material weaknesses, future restatement risk, and the implications of the $27.5 million tax correction and remaining uncertain tax positions.
- Developments in Kyprolis patent challenges, clinical programs, and other disclosed litigation and contingencies.