Ligand Pharmaceuticals Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; amounts below are in U.S. dollars unless noted. Ligand is a biotechnology company focused on drug discovery, development, licensing and partner-generated royalties. The January 2011 CyDex acquisition added CAPTISOL technology and material sales.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $7.46 million | $5.84 million | $11.36 million | $11.80 million |
| Operating loss | $0.81 million | $3.63 million | $3.03 million | $7.65 million |
| Continuing-operations income (loss) | $(0.91) million | $(0.29) million | $8.57 million | $(3.28) million |
| Net income (loss) | $(0.91) million | $(0.28) million | $8.58 million | $(3.03) million |
| Operating cash flow | Not provided separately | Not provided separately | $(7.13) million | $(18.36) million |
- Q2 revenue rose about 28%; first-half revenue declined about 4%. First-half royalties increased to $4.17 million from $3.56 million. Newly recorded material sales were $2.98 million for Q2 and $4.03 million for the first half, reflecting CyDex.
- First-half collaborative research and other revenue fell to $3.16 million from $8.23 million, principally because research obligations under agreements ended; $1.2 million of deferred revenue was recognized after a partner abandoned a product.
- R&D expense decreased to $5.22 million from $13.96 million for the first half, primarily due to terminated collaborations, lower staffing and lower internal-program costs; CyDex operating costs partly offset the decline. G&A rose to $8.03 million from $6.34 million, including CyDex operating and transaction costs.
- The first-half $13.64 million income-tax benefit, primarily tied to deferred tax accounting for the CyDex acquisition, drove reported continuing-operations income despite an operating loss. It is not indicative of operating profitability.
- At June 30, cash and cash equivalents were $3.44 million and short-term investments were $10.00 million. Working capital was negative $14.2 million, versus positive $3.5 million at year-end 2010. Total assets were $127.4 million and total liabilities $113.8 million.
- Debt included a $20 million Oxford term loan and $10 million drawn on a Square 1 revolving facility; the balance sheet reports approximately $20.1 million long-term note payable and $10 million current bank line. The Oxford loan bears fixed 8.64% interest during its interest-only period; Square 1 interest floats at prime plus 2%, and its facility matures March 29, 2012.
- First-half investing cash outflow was $22.7 million, including $32.0 million for CyDex net of acquired cash; financing provided $29.9 million, principally from debt. Cash and cash equivalents increased by $0.10 million during the period.
Material changes, outlook and risks
- CyDex was acquired in January for total purchase consideration of approximately $50.8 million, including cash, contingent consideration and a scheduled $4.3 million payment due in January 2012. The agreement also provides for revenue-linked payments and milestone payments. CyDex-related contingent consideration was carried at $19.2 million at June 30 and is subject to fair-value changes.
- Ligand licensed its CAPTISOL-enabled intravenous clopidogrel formulation to The Medicines Company in June. It received $1.8 million upfront and is eligible for up to $22 million in milestones and royalties; $0.9 million of the upfront payment went to CyDex shareholders under the CVR agreement. The filing also reports a Chiva license and a July 2011 Fablyn patent license.
- Management said available cash, investments and expected royalty, license and milestone revenues should fund anticipated operating and capital needs, including the $4.3 million CyDex payment, for at least 12 months. This depends on expected revenue growth and cost reductions; management cautioned that there are no assurances and identified a risk to the company’s ability to continue as a going concern if it cannot generate sufficient operating cash or obtain funding.
- No numerical full-year earnings or revenue guidance is provided. Management described eight partner-marketed products expected to generate revenue in 2011 and a portfolio of more than 50 additional programs, but R&D cost and timing estimates were not provided due to uncertainty.
- Key risks include negative working capital and operating cash use; dependence on partner royalties and licensing; integration and performance of CyDex; reliance on a sole-source CAPTISOL supplier and contract manufacturers; product development, clinical and regulatory uncertainty; patent protection and competition; and potential cash requirements from debt, leases and CVRs. The company reported no off-balance-sheet arrangements and said disclosure controls were effective.
- Management identified no specific material litigation outcome with a reasonably estimable impact. The filing notes ongoing or possible disputes and litigation risks; an AVINZA patent suit against Actavis was dismissed in July 2011, while proceedings in a separate Sandoz case were stayed through November 2, 2011.
Important facts for investors to verify
- Reconcile the filing’s 2010 comparative earnings: the primary statements show first-half continuing-operations income of $8.57 million in 2011 and a $3.28 million loss in 2010, while an EPS note contains conflicting comparative figures, including a $10.91 million continuing-operations loss and a $4.98 million net loss for 2010.
- Confirm the liquidity and covenant position, particularly the Square 1 requirement to maintain at least $5 million cash at the bank, the March 2012 facility maturity, and the CVR agreement’s cash threshold and default provisions.
- Track CAPTISOL sales, royalties and supply continuity, including whether the sole-source supplier can meet demand and whether alternative manufacturing capacity is qualified.
- Assess CyDex revenue growth against the thresholds for revenue-sharing payments, the scheduled $4.3 million payment, potential milestone obligations and the carrying value of contingent consideration.
- Evaluate recurring operating cash needs, lease commitments, partner product performance and the extent to which reported first-half net income depends on the one-time tax benefit.