Ligand Pharmaceuticals Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
Ligand is a biopharmaceutical company that develops or acquires revenue-generating assets and earns royalties, license and milestone fees, and material sales. Its portfolio includes Captisol-enabled products and partnered drug programs. The company reports two segments: Ligand and CyDex.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $13.0m | $6.4m | $34.2m | $17.8m |
| Income (loss) from continuing operations | $2.0m | ($0.2m) | $7.0m | ($5.3m) |
| Net income (loss) | $2.0m | ($0.2m) | $9.6m | ($1.6m) |
| Operating cash flow | — | $8.7m | ($2.0m) |
- Revenue mix, nine months: royalties $16.5m, material sales $12.3m, and collaborative R&D and other revenue $5.5m. Royalty revenue rose primarily with Promacta and Kyprolis; material sales growth largely reflected the timing of Captisol customer purchases.
- Costs and margins: Nine-month cost of sales was $4.4m. Gross margin, calculated as revenue less cost of sales, was approximately 87% for the nine months and 80% for Q3. Operating income was $8.5m for the nine months and $3.1m for Q3.
- Balance sheet at September 30: cash and cash equivalents were $3.3m; restricted cash and investments were $5.0m; current assets were $16.6m and current liabilities $32.5m, resulting in negative working capital of $15.8m. Total assets were $101.7m, liabilities $56.9m, and stockholders’ equity $44.8m.
- Debt: $12.4m of note payable remained, all current and due August 1, 2014. The company prepaid $7.0m of its secured term loan in March and made $16.2m of debt repayments during the nine-month period. Nine-month net interest expense was $1.8m.
- Cash flow: Continuing operations generated $9.3m of operating cash; discontinued operations used $0.6m. Investing used $4.0m, primarily for commercial license rights; financing used $13.8m, primarily for debt repayment. Cash declined $9.1m from year-end 2012.
Material changes and notable items
- Total revenue increased approximately 104% in Q3 and 93% for the nine-month period versus 2012. Royalties increased in both periods; material sales also increased substantially.
- R&D expense declined to $6.9m for the nine months, while G&A rose to $13.6m, partly due to legal expenses, patent fees, share-based compensation, and headcount-related costs.
- Nine-month 2013 net income included a $2.6m gain from the discontinued Avinza product line; 2012 included a $3.7m gain. Excluding discontinued operations, continuing operations generated $7.0m in 2013 versus a $5.3m loss in 2012.
- The company recorded a $0.5m non-cash write-off of in-process R&D after The Medicines Company ended development of Captisol-enabled IV clopidogrel and returned the rights. A separate $0.5m Q3 increase in contingent-liability expense reflected, in part, a CyDex-related liability increase.
- Ligand acquired rights to future royalties and milestones from more than 15 Selexis programs for $4.6m, including $1.0m payable in April 2014. It also signed several licensing agreements and reported that Pfizer received FDA approval for Duavee in October 2013, triggering a $0.4m milestone to Ligand.
Outlook, risks, and contingencies
- Management said available cash and expected royalty, license, and milestone revenue should fund anticipated operating and capital needs for at least 12 months. It also cautioned that additional financing might be required if revenue or operating cash flow falls short; financing may not be available on acceptable terms. No numerical earnings or revenue guidance was provided.
- Management expects revenue support from Captisol sales and royalties, particularly from Promacta and Kyprolis, as well as anticipated licensing and milestone income. It may reduce discretionary expenses if results disappoint.
- Revenue depends significantly on partnered products and Captisol. Captisol is obtained from a sole-source supplier, Hovione; interruption could disrupt supply and revenue. Partners may alter, delay, or terminate development or commercial arrangements.
- Ligand had $12.9m of co-promotion termination liability associated with Avinza, matched by a receivable from Pfizer. Ligand remains legally liable to Organon if Pfizer defaults. Contingent liabilities also include potential CyDex and Metabasis CVR payments and CyDex revenue-sharing obligations.
- Disclosure controls were deemed ineffective as of September 30, 2013 because of material weaknesses involving non-routine transaction accounting and the valuation of contingent liabilities. The company added a corporate controller and described planned remediation; the weaknesses were not yet remediated.
- A securities lawsuit was dismissed with prejudice in August 2013, but the plaintiff appealed in September. The filing says the outcome was not determinable. The company also cited risks from clinical and regulatory outcomes, patents, product liability, and possible financing needs.
Investor verification points
- Check the sustainability and timing of Captisol sales and Promacta/Kyprolis royalties, including partner-reported sales and customer purchase patterns.
- Assess liquidity against the August 2014 debt maturity, negative working capital, lease obligations, and the company’s stated financing alternatives.
- Monitor remediation and independent testing of the disclosed internal-control material weaknesses, especially fair-value estimates for contingent liabilities.
- Review progress and economics of recently licensed programs, and the impact of terminated or delayed partner programs, including IV clopidogrel.
- Verify contingent payment obligations, the Pfizer/Organon co-promotion arrangement, and developments in the appealed securities litigation.