Ligand Pharmaceuticals Incorporated — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Unless otherwise noted, amounts are U.S. dollars.
Business context
Ligand is a biopharmaceutical technology and royalty company. It licenses drug-discovery and development platforms and partnered programs, and earns revenue primarily from royalties, Captisol material sales, and license and milestone payments. Partners generally fund development and commercialization. At year-end, the portfolio included more than 140 partnered programs at various stages.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $71.9 million | $64.5 million |
| Royalties | $38.2 million | $30.0 million |
| Captisol material sales | $27.7 million | $28.5 million |
| License, milestone and other revenue | $6.1 million | $6.1 million |
| Income from operations | $27.3 million | $19.6 million |
| Net income | $257.3 million | $12.0 million |
| Net income per diluted share | $12.12 | $0.56 |
| Cash provided by operating activities | $41.7 million | $20.6 million |
Revenue grew 11.4%, led by higher royalties, primarily from Promacta and Kyprolis; Captisol sales decreased modestly, mainly due to purchase timing. Gross profit after material costs was $66.1 million, or approximately 91.9% of revenue; operating margin was approximately 38.0%. Net income and net margin were unusually elevated by a $219.6 million income-tax benefit from releasing most of the deferred-tax-asset valuation allowance and a $28.2 million gain on Viking deconsolidation. Income before tax was $35.3 million, so reported net income is not a representative measure of recurring operating earnings.
Fourth quarter: Revenue was $21.2 million, versus $23.0 million in Q4 2014; operating costs and expenses were $10.2 million versus $13.4 million. Net income was $6.3 million versus $7.1 million. The filing does not provide quarterly cash-flow figures.
At December 31, 2015, cash and cash equivalents were $97.4 million and short-term investments were $102.8 million; working capital was $194.7 million. Cash and cash equivalents fell $62.8 million during the year, while investment purchases contributed to a shift into short-term investments. The company had $245.0 million principal amount of 0.75% convertible notes due in 2019, carried at $205.4 million net of discount. Management said available funds, operating cash flow and financing access were expected to meet anticipated operating, capital and debt-service needs.
Material changes and notable developments
- Royalty revenue increased 27% to $38.2 million; Captisol material sales declined 3% to $27.7 million.
- Ligand deconsolidated Viking after its May 2015 IPO, recorded a $28.2 million accounting gain, and subsequently accounted for its Viking investment under the equity method. At year-end the investment carrying value was $29.7 million; its disclosed market value was $16.3 million.
- In January 2016, Ligand acquired Open Monoclonal Technology (OMT), adding the OmniAb antibody platforms and 16 partnered programs, for $96.4 million cash and $85.4 million in Ligand shares. Purchase accounting was incomplete when the 10-K was filed.
- Operating cash flow was $41.7 million, compared with $20.6 million in 2014. The 2015 result includes substantial noncash adjustments, particularly the deferred-tax benefit and Viking gain.
Outlook, risks and contingencies
- No formal numerical revenue or earnings guidance is provided. Management expected cash generation to benefit from royalties and Captisol sales, including continued growth in Promacta and Kyprolis, and from product approvals, licenses and milestones.
- Ligand planned to advance its internal glucagon-receptor antagonist LGD-6972 into Phase 2 in 2016 following favorable Phase 1b results. Merck expected initial Phase 3 verubecestat data in mid-2017; additional partnered programs remained subject to clinical and regulatory outcomes.
- Revenue is concentrated: three partners each represented at least 10% of revenue and together accounted for 68% in 2015. Promacta, Kyprolis and Captisol revenue are important to results. Ligand also relies on Hovione as its sole Captisol supplier.
- Par filed an ANDA seeking approval for generic NOXAFIL-IV and challenged patents covering the product and Captisol. Merck sued Par in February 2016. An adverse outcome could affect related revenue and licensing opportunities.
- Ligand disclosed a federal securities lawsuit whose dismissal was appealed, and noted potential federal-law exposure related to its Captisol agreement for cannabinoid-based products. Outcomes and financial effects were not clear from the filing.
- A material weakness in interim controls over manual contingent-liability calculations was identified and remediation steps were taken. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015. The company also corrected immaterial interim-period errors, including a tax-related restatement.
Important facts for investors to verify
- How much of future growth and cash generation depends on Promacta, Kyprolis, Captisol sales, and a small group of partners.
- The sustainability of operating earnings and cash flow excluding the one-time tax benefit, Viking accounting gain, and other noncash items.
- The status and commercial impact of the NOXAFIL-IV ANDA and related patent litigation, as well as Captisol supply continuity and intellectual-property protection.
- The final purchase accounting, integration costs, and economics of the OMT acquisition, including dilution from the shares issued.
- Viking investment valuation and liquidity, the $245 million note principal due in 2019, and the terms and potential dilution of the convertible-note hedges and warrants.