Ligand Pharmaceuticals Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Ligand’s model centers on royalties, licensing and Captisol material sales, with research and development conducted both internally and with partners.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $9.58 | $5.74 | $21.23 | $11.38 |
| Operating income (loss) | $1.51 | $(1.82) | $5.45 | $(2.65) |
| Continuing operations income (loss) | $3.69 | $(4.33) | $5.00 | $(5.07) |
| Net income (loss) | $6.09 | $(2.53) | $7.59 | $(1.40) |
| Operating cash flow | Not separately stated | Not separately stated | $9.02 | $(1.10) |
- Q2 revenue rose 67% year over year; six-month revenue rose 87%. Q2 royalties were $4.92 million, material sales $3.99 million and collaborative research, development and other revenue $0.67 million. For the six months, those categories were $10.74 million, $5.53 million and $4.96 million, respectively.
- Royalty growth was attributed primarily to Promacta and Kyprolis. Higher Captisol material sales reflected timing of customer purchases. Six-month collaborative and other revenue benefited primarily from the $3 million Spectrum Captisol-enabled melphalan license fee.
- Q2 operating margin was about 15.8% (operating income divided by revenue); six-month operating margin was about 25.7%. Reported net income also included Avinza discontinued-operations gains and changes in estimated contingent liabilities, so it should not be read as recurring operating earnings.
- For the six months, cash from continuing operations was $9.66 million; discontinued operations used $0.64 million, producing total operating cash flow of $9.02 million. Investing used $3.73 million, including the Selexis rights purchase; financing used $11.75 million, principally debt repayment.
- Cash and cash equivalents were $5.92 million at June 30, down from $12.38 million at year-end. Restricted cash and investments were $4.16 million. Current assets of $14.57 million were below current liabilities of $32.57 million, a negative working capital position of $18.0 million.
- Debt carrying value totaled approximately $15.57 million ($13.60 million current and $1.97 million long-term), with stated rates of 8.64% and 8.9012% and maturity on August 1, 2014. Ligand prepaid $7 million of the term loan in March.
- Total assets were $99.57 million, total liabilities $60.30 million, and stockholders’ equity $39.27 million. The filing does not provide a clear standalone recurring-profit margin.
Material changes and notable items
- Revenue and operating results improved substantially from the prior-year periods, with royalty growth, Captisol sales and licensing contributing. Research and development expense declined, while general and administrative expense increased, including from share-based compensation and headcount costs.
- Q2 net income included a $2.40 million Avinza-related gain recorded in discontinued operations. The six-month Avinza gain was $2.59 million. These gains arose from changes in estimates and liabilities relating to the 2007 sale.
- Q2 results included $2.74 million of net income from decreases in contingent liabilities. The filing attributes the major reduction to the Captisol-enabled clopidogrel program, partly offset by an increase in Metabasis CVR liabilities. These fair-value estimates may fluctuate.
- Ligand recorded a $0.48 million non-cash write-off of in-process research and development for Captisol-enabled IV clopidogrel after Medicines Company indicated it would terminate the program and return the rights. In July 2013, the parties formally terminated the license and supply agreements; the partner cited study findings and elected not to continue development.
- In April, Ligand acquired future royalty and milestone rights across more than 15 Selexis programs for $4.6 million, including $3.6 million paid at closing and $1 million due in April 2014. In March, it licensed Captisol-enabled melphalan to Spectrum for a nonrefundable $3 million fee, plus potential milestones and royalties.
- Other post-quarter developments included Azure and Ethicor lasofoxifene license agreements, orphan-drug designation for Captisol-enabled topiramate, and Merck’s July notice that it discontinued clinical development of dinaciclib for chronic lymphocytic leukemia.
Outlook, risks and contingencies
- Management said available cash and expected royalty, license and milestone revenues should fund anticipated operating and capital needs for at least 12 months. It also acknowledged possible need for additional financing if revenue or operating cash flow falls short, and said discretionary costs could be reduced. No quantified full-year revenue or earnings guidance was provided.
- Management expects cash generation to benefit from Captisol sales, royalties—particularly from Promacta and Kyprolis—and anticipated licensing and milestone revenue. These expectations depend on partner sales, product development and regulatory progress.
- Ligand disclosed that disclosure controls and procedures were not effective at June 30, 2013, due to material weaknesses involving non-routine transaction accounting and fair-value calculations for contingent liabilities. Remediation was underway, but the weaknesses would not be considered resolved until procedures were tested and shown to operate effectively. The filing also refers to prior restated reports.
- Key business risks include dependence on partner products and royalty streams, Captisol’s sole-source supplier, partner discretion to terminate or slow programs, clinical and regulatory uncertainty, patent challenges, and potential financing needs. The company reported a $675.2 million accumulated deficit.
- Outstanding obligations include operating leases of $17.13 million before expected sublease receipts, contingent value rights and other contingent payments, and the co-promotion obligation associated with Avinza. The matching co-promotion receivable and liability were each approximately $13.05 million; Ligand remains exposed if Pfizer defaults on payments to Organon.
- A securities lawsuit naming Ligand and its CEO sought unspecified damages and other relief; Ligand moved to dismiss and stated that the outcome was not presently determinable. The filing did not provide a reasonably estimable loss amount.
Important facts for investors to verify
- Whether Promacta and Kyprolis royalties and Captisol sales continue to grow, and how concentrated revenue remains in key products and partners.
- Whether positive operating cash flow can be sustained despite negative working capital, low unrestricted cash and the August 2014 debt maturity.
- Whether the disclosed internal-control weaknesses are remediated and whether contingent-liability fair-value estimates change materially.
- How the clopidogrel termination, returned rights and related CVR remeasurement affect future development prospects and cash obligations.
- Whether Selexis rights, Spectrum’s melphalan program and other partner programs produce the anticipated milestones, royalties or commercial revenue.