UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___ . COMMISSION FILE NUMBER: 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0160744
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9393 TOWNE CENTRE DRIVE 92121
SAN DIEGO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619)535-3900
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No _____
As of October 31, 1997 the registrant had 32,994,999 shares of
Common Stock outstanding.
<PAGE>
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS
COVER PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three and nine
months ended September 30, l997 and 1996 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, l997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk *
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings *
ITEM 2. Changes in Securities *
ITEM 3. Defaults upon Senior Securities *
ITEM 4. Submission of Matters to a Vote of Security Holders *
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
* No information provided due to inapplicability of item.
2
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PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,437 $ 34,830
Short-term investments 37,121 45,822
Receivable from a related party 3,146 3,087
Other current assets 1,102 1,706
--------- ---------
Total current assets 54,806 85,445
Restricted short-term investments 3,056 3,527
Property and equipment, net 14,991 11,680
Notes receivable from officers and
employees 553 534
Other assets 4,533 954
--------- ---------
$ 77,939 $ 102,140
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,601 $ 4,137
Accrued liabilities 4,732 4,870
Deferred revenue 909 2,151
Current portion of obligations under
capital leases 2,917 2,607
--------- ---------
Total current liabilities 12,159 13,765
Long-term obligations under capital leases 8,711 8,711
Convertible subordinated debentures 35,959 33,953
Convertible note 5,000 11,250
Stockholders' equity:
Convertible preferred stock, $.001 par
value; 5,000,000 shares authorized;
none issued -- -- -- --
Common stock, $.001 par value;
80,000,000 shares authorized;
32,977,938 shares and 31,799,617
shares issued at September 30, l997
and December 31, 1996, respectively 33 32
Paid-in capital 226,719 214,887
Warrant subscription receivable (924) (2,453)
Adjustment for unrealized gains (losses)
on available-for-sale securities 4 (78)
Accumulated deficit (209,711) (177,594)
Deferred compensation and consulting -- -- (322)
--------- ---------
16,121 34,472
Less treasury stock, at cost (1,114
shares at September 30, 1997 and
December 31, 1996) (11) (11)
--------- ---------
Total stockholders' equity 16,110 34,461
--------- ---------
$ 77,939 $ 102,140
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
3
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<TABLE>
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Collaborative research
and development:
Related parties $ 6,710 $ 5,522 $ 18,923 $ 12,784
Unrelated parties 3,363 4,529 10,652 14,407
Other 99 43 325 161
-------- -------- -------- --------
10,172 10,094 29,900 27,352
Costs and expenses:
Research and
development 18,038 15,093 51,353 42,174
Selling, general and
administrative 2,501 2,106 7,379 7,278
-------- -------- -------- --------
Total operating
expenses 20,539 17,199 58,732 49,452
-------- -------- -------- --------
Loss from operations (10,367) (7,105) (28,832) (22,100)
Interest income 798 730 2,800 2,729
Interest expense (1,995) (2,039) (6,085) (6,162)
-------- -------- -------- --------
Net loss $ (11,564) $ (8,414) $ (32,117) $ (25,533)
======== ======== ======== ========
Net loss per share $ (.35) $ (.30) $ (.99) $ (.91)
======== ======== ======== ========
Shares used in computing
net loss per share 32,800 28,237 32,484 28,073
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
4
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<TABLE>
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (32,117) $ (25,533)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 3,037 2,907
Amortization of notes receivable from
officers and employees 185 174
Amortization of deferred compensation
and consulting fees 322 378
Amortization of warrant subscription
receivable 1,529 1,420
Accretion of debt discount 2,006 2,006
Company stock received for milestone
revenue -- -- (1,320)
Gain on sale of property and equipment (69) -- --
Change in operating assets and
liabilities:
Other current assets 696 (1,830)
Receivable from a related party (59) (384)
Accounts payable and accrued
liabilities (674) (4,707)
Deferred revenue (1,242) (122)
-------- --------
Net cash used in operating activities (26,386) (27,011)
INVESTING ACTIVITIES
Purchase of short-term investments (18,584) (37,486)
Proceeds from short-term investments 27,367 52,508
Increase in notes receivable from officers
and employees (220) (180)
Payment of notes receivable from officers
and employees 16 63
Increase in deposits and other assets (3,668) (2)
Decrease in deposits and other assets 89 88
Purchase of property and equipment (3,727) (511)
Proceeds from sale of property and
equipment 32 -- --
-------- --------
Net cash provided by investing activities 1,305 14,480
FINANCING ACTIVITIES
Principal payments on obligations under
capital leases (2,366) (1,726)
Net change in restricted short-term
investment 471 3,233
Net proceeds from sale of common stock 5,583 2,075
-------- --------
Net cash provided by financing activities 3,688 3,582
-------- --------
Net decrease in cash and cash equivalents (21,393) (8,949)
Cash and cash equivalents at beginning of
period 34,830 15,963
-------- --------
Cash and cash equivalents at end of period $ 13,437 $ 7,014
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 5,142 $ 5,292
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Additions to obligations under capital
leases $ 2,676 $ 1,928
Conversion of note to common stock $ 6,250 $ 3,750
Retirement of treasury stock -- -- $ 1,320
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The consolidated financial statements of Ligand Pharmaceuticals
Incorporated (the "Company") for the three and nine months ended
September 30, 1997 and 1996 are unaudited. These financial
statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are
necessary to fairly present the consolidated financial position
as of September 30, 1997 and the consolidated results of
operations for the three and nine months ended September 30, 1997
and 1996. The results of operations for the periods ended
September 30, 1997 are not necessarily indicative of the results
to be expected for the year ending December 31, 1997. For more
complete financial information, these financial statements, and
the notes thereto, should be read in conjunction with the audited
consolidated financial statements for the year ended December 31,
1996 included in the Ligand Pharmaceuticals Incorporated Form 10-
K filed with the Securities and Exchange Commission.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", ("Statement 128") which
is effective for fiscal periods ending after December 15, 1997.
At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all
prior periods presented. Under the new requirements for
calculating primary earnings per share, which will be renamed
basic earnings per share, stock options, warrants and convertible
securities will always be excluded. The impact of Statement 128
on the calculation of basic and diluted earnings per share for
the quarters ended September 30, 1997 and 1996 will have no
effect.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number
of common shares outstanding.
3. CONVERSION OF CONVERTIBLE NOTE
In March 1997, and again in July 1997, the Company converted $3.8
million and $2.5 million, respectively, of the convertible notes
outstanding with American Home Products Corporation, into 374,626
and 249,749 shares, respectively, of the Company's Common Stock
at a $10.01 conversion price.
4. COLLABORATION FINANCING INVESTMENTS
In February 1997, SmithKline Beecham Corporation ("SmithKline
Beecham") provided a third installment equity investment of $2.5
million by purchasing 164,474 shares of the Company's Common
Stock as a result of their election to expand the scope of
research under its research agreement with the Company. The
final installment of $2.5 million was provided in October 1997 to
the Company as a convertible note as a result of SmithKline
Beecham's election to extend the collaboration. The note is
convertible into the Company's Common Stock at $13.56 per share
and is due October 2002 unless converted into the Company's
Common Stock earlier. The interest rate on the note is payable
semi-annually at prime.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report may contain predictions, estimates and
other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "Risks and
Uncertainties." While this outlook represents management's
current judgment on the future direction of the business, such
risks and uncertainties could cause actual results to differ
materially from any future performance suggested below. The
Company undertakes no obligation to release publicly the results
of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date hereof.
OVERVIEW
Since January 1989, the Company has devoted substantially all of
its resources to its Intracellular Receptor ("IR") and Signal
Transducers and Activators of Transcription ("STATs") drug
discovery and development programs. The Company has been
unprofitable since its inception and expects to incur substantial
additional operating losses for the next several years, due to
continued requirements for research and development, preclinical
testing, clinical trials, regulatory activities, establishment of
manufacturing processes and sales and marketing capabilities.
The Company expects that losses will fluctuate from quarter to
quarter as a result of differences in the timing of expenses
incurred and the revenues earned from collaborative arrangements.
Some of these fluctuations may be significant. As of September
30, 1997, the Company's accumulated deficit was approximately
$209.7 million.
Upon the closing of the exercise of the option (the "Stock
Purchase Option") to acquire all the outstanding shares of
Allergan Ligand Retinoid Therapuetics, Inc. ("ALRT") Callable
Common Stock, as further described in Item 5, the Company will
record a one-time charge to operations for the write-off of in-
process technology currently estimated at approximately $53.0
million, related to the excess of the aggregate of the Stock
Purchase Option exercise price over the fair value of the assets
acquired. In addition, continuation of development and
commercialization of products previously under development by
ALRT, to which the Company will acquire exclusive rights, will
require substantive additional expenditures by the Company. The
Company believes that its available cash, cash equivalents,
marketable securities and existing sources of funding will be
adequate to satisfy anticipated capital requirements through
1999, assuming the Company exercises the Stock Purchase Option
for the combination of stock and cash as contemplated in the
Registration Statement filed with the Securities and Exchange
Commission ("SEC") on September 26, 1997, as further amended.
Any increase in cash paid in connection with the Stock Purchase
Option would reduce the Company's capital resources. The Company
reserves the right, at any time prior to the closing of the
exercise of the Stock Purchase Option, to make payment of a
greater amount of the Stock Purchase Option exercise price in
cash than set forth in the formal Notice of Exercise.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 ("1997"), COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1996 ("1996")
The Company had revenues of $10.2 million for 1997 compared to
revenues of $10.1 million for 1996. The slight increase in
revenues is primarily due to increased contract research and
development revenues from ALRT in 1997, offset by a milestone
payment received from Pfizer Inc. ("Pfizer") in 1996. Revenues
in 1997 were derived from the Company's research and development
agreements with (i) ALRT of $6.7 million, (ii) American Home
Products Corporation ("AHP") of $1.0 million, (iii) SmithKline
Beecham Corporation ("SmithKline Beecham") of $1.0 million, (iv)
Sankyo Company Ltd. ("Sankyo") of $667,000, (v) Glaxo-Wellcome
plc ("Glaxo") of $432,000, (vi) Abbott Laboratories ("Abbott") of
$300,000, as well as from product sales of Ligand Pharmaceuticals
(Canada) Incorporated ("Ligand (Canada)") in-licensed products of
$99,000. Revenues in 1996 were derived from the Company's
research and development agreements with (i) ALRT of $5.5
million, (ii) AHP of $1.2 million, (iii) Sankyo of $692,000, (iv)
SmithKline Beecham of $588,000, (v) Abbott of $540,000, (vi)
Glaxo of $518,000, as well as from milestone payment received
from Pfizer of $883,000, product sales of Ligand (Canada) in-
licensed products of $43,000 and revenues from a National
Institute of Health ("NIH") grant of $99,000.
For 1997, research and development expenses increased to $18.0
million from $15.1 million in 1996. These expenses increased
primarily due to expansion of the Company's clinical retinoid
program activities, as well as related additions of clinical and
development personnel. Selling, general and administrative
expenses increased to $2.5 million in 1997 from $2.1 million in
1996. The increase in selling, general and administrative
expenses is due to personnel additions to support expanded
clinical retinoid program activities. Interest income increased
to $798,000 in 1997 from $730,000 in 1996. The increase was due
to the completion of a public offering with net proceeds of
approximately $35.2 million in October 1996, offset by usage of
cash to support expansion of the clinical retinoid program
activities. Interest expense was $2.0 million in
7
<PAGE>
both 1997 and 1996, and consisted of interest required by the
Company's wholly-owned subsidiary, Glycomed Incorporated,
("Glycomed"), under its Convertible Subordinated Debentures
("Debentures"), accretion of debt discount under the Debentures,
interest required under the convertible note to AHP, and capital
lease obligations used to finance equipment.
NINE MONTHS ENDED SEPTEMBER 30, 1997 ("1997"), COMPARED WITH NINE
MONTHS ENDED SEPTEMBER 30, 1996 ("1996")
The Company had revenues of $29.9 million for 1997 compared to
revenues of $27.4 million for 1996. The increase in revenues is
primarily due to a $6.1 million increase in contract research and
development revenues from ALRT, offset by decreased revenues from
the research and development agreement with AHP, due to a one
time payment of $1.5 million in 1996, which expanded and amended
the research and development agreement, as well as a $1.3 million
milestone payment received from Pfizer in 1996. Revenues in 1997
were derived from the Company's research and development
agreements with (i) ALRT of $18.9 million, (ii) AHP of $3.4
million, (iii) SmithKline Beecham of $2.5 million, (iv) Sankyo
of $2.1 million, (v) Abbott of $1.4 million, (vi) Glaxo of $1.3
million and product sales of Ligand (Canada) in-licensed products
of $325,000. Revenues in 1996 were derived from the Company's
research and development agreements with (i) ALRT of $12.8
million, (ii) AHP of $5.6 million, (iii) Abbott of $2.0 million,
(iv) Sankyo of $2.1 million, (v) SmithKline Beecham of $1.8
million, (vi) Glaxo of $1.6 million, as well as from milestone
payment received from Pfizer of $1.3 million, products sales of
Ligand (Canada) in-licensed products of $161,000 and revenues
from an NIH grant of $99,000.
For 1997, research and development expenses increased to $51.4
million from $42.2 million in 1996. These expenses increased
primarily due to expansion of the Company's clinical and
development retinoid program activities, as well as related
additions of clinical and development personnel. Selling,
general and administrative expenses increased to $7.4 million in
1997 from $7.3 million in 1996. The increase was primarily
attributable to additions to personnel in 1997 to support
expanded clinical and development retinoid program activities,
offset by higher legal expenses incurred in 1996 related to the
settlement of future product rights litigation. Interest income
increased to $2.8 million in 1997 from $2.7 million in 1996. The
slight increase was due to the completion of a public offering in
October 1996, offset by usage of cash to support expansion of the
clinical and development retinoid program activities. Interest
expense decreased slightly to $6.1 million in 1997 from $6.2
million in 1996 due to conversion of the AHP convertible notes
to equity in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private and
public offerings of its equity securities, collaborative research
revenues, capital and operating lease transactions, issuance of
convertible notes, investment income and product sales. From
inception through September 1997, the Company has raised $163.9
million from sales of equity securities: $78.2 million from the
Company's public offerings and an aggregate of $85.7 million from
private placements and the exercise of options and warrants.
In March 1997 and again in July 1997, the Company converted $3.8
million and $2.5 million, respectively, of the convertible notes
outstanding to AHP into 374,626 and 249,749 shares, respectively,
of the Company's Common Stock at a $10.01 conversion price,
resulting in an outstanding balance of convertible notes to AHP
of $5.0 million.
In February 1997, SmithKline Beecham provided a third installment
equity investment of $2.5 million by purchasing 164,474 shares of
the Company's Common Stock as a result of their election to
expand the scope of research under its research agreement with
the Company. The final installment of $2.5 million was provided
in October 1997 to the Company as a convertible note as a result
of SmithKline Beecham's election to extend the collaboration.
The note is convertible into the Company's Common Stock at $13.56
per share and is due October 2002 unless converted into the
Company's Common Stock earlier. The interest rate on the note is
payable semi-annually at prime.
As of September 30, 1997, the Company had acquired an aggregate
of $24.2 million in property, laboratory and office equipment,
and $4.7 million in tenant leasehold improvements, substantially
all of which has been funded through capital lease and equipment
note obligations and which also includes laboratory and office
equipment acquired in the Company's merger with Glycomed in May
1995. In addition, the Company leases its office and laboratory
facilities under operating leases. In July 1994, the Company
entered into a long-term lease related to the construction of a
new laboratory facility, which was completed and occupied in
August 1995. Prior to the end of 1997, the Company anticipates
the closure of its Alameda facility at the expiration of its
lease. Such closure will have no material effect on the
Company's financial position. At the end of 1997, one of the
Company's main operating lease agreements for office and research
facilities
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expires, at which time the Company plans to move into its second
build-to-suit facility. In March 1997, the Company entered into
a long-term lease, related to the build-to-suit facility and
loaned the construction partnership $3.7 million which will be
paid back monthly at an interest rate of 8.5% over a 10-year
period. In February 1997, the Company signed a master lease
agreement to finance future capital equipment up to $1.5 million,
and in July 1997, the master lease agreement was extended to
December 1998 to include up to an additional $4.5 million. Each
individual schedule under the extended master lease agreement
will be paid back monthly with interest over a five-year period.
As of September 30, 1997, the Company had $4.1 million available
to finance future capital equipment.
Working capital decreased to $42.6 million as of September 30,
1997, from $71.7 million at the end of 1996. The decrease in
working capital resulted from an increase in cash from
collaborative research agreements and equity investments, offset
by an increase in operating expenses, as described above, semi-
annual interest payments due on the Debentures and interest paid
on convertible notes. For the same reasons, cash and cash
equivalents, short-term investments, and restricted cash
decreased to $53.6 million at September 30, 1997 from $84.2
million at December 31, 1996. The Company primarily invests its
cash in United States government and investment grade corporate
debt securities.
The Company believes that its available cash, cash equivalents,
marketable securities and existing sources of funding will be
adequate to satisfy its anticipated capital requirements through
1999, assuming the Company exercises the Stock Purchase Option
for the combination of stock and cash as contemplated in the
Registration Statement filed with the SEC on September 26, 1997,
as further amended. The Company has the ability to increase the
amount of cash paid in connection with the Stock Purchase Option
from the amount contained in the notice of the Company's exercise
of the Stock Purchase Option at any time prior to the closing of
the exercise of the Stock Purchase Option. Any such increase in
cash would reduce the Company's capital resources.
The Company's future capital requirements will depend on many
factors, including the pace of scientific progress in research
and development programs, the magnitude of these programs, the
scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the
costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, competing technological and market
developments, the ability to establish additional collaborations,
changes in the existing collaborations, the cost of manufacturing
scale-up and the effectiveness of the Company's commercialization
activities.
RISKS AND UNCERTAINTIES
THE FOLLOWING ARE AMONG THE FACTORS THAT SHOULD ALSO BE
CONSIDERED CAREFULLY IN EVALUATING LIGAND AND ITS WHOLLY-OWNED
SUBSIDIARIES GLYCOMED INC. AND LIGAND (CANADA) INC. ("LIGAND" OR
THE "COMPANY") AND ITS BUSINESS.
EARLY STAGE OF PRODUCT DEVELOPMENT;TECHNOLOGICAL UNCERTAINTY.
Ligand was founded in 1987 and has not generated any revenues
from the sale of products developed by Ligand or its
collaborative partners. To achieve profitable operations, the
Company, alone or with others, must successfully develop,
clinically test, market and sell its products. Any products
resulting from the Company's or its collaborative partners'
product development efforts are not expected to be available for
sale for at least several years, if at all.
The development of new pharmaceutical products is highly
uncertain and subject to a number of significant risks. Potential
products that appear to be promising at early stages of
development may not reach the market for a number of reasons.
Such reasons include the possibilities that potential products
are found during preclinical testing or clinical trials to be
ineffective or to cause harmful side effects, that they fail to
receive necessary regulatory approvals, are difficult or
uneconomical to manufacture on a large scale, fail to achieve
market acceptance or are precluded from commercialization by
proprietary rights of third parties. To date, Ligand's resources
have been substantially dedicated to the research and development
of potential pharmaceutical products based upon its expertise in
IR and STATs technologies. Even though certain pharmaceutical
products act through IRs, some aspects of the Company's IR
technologies have not been used to produce marketed products. In
addition, the Company is not aware of any drugs that have been
developed and successfully commercialized that interact directly
with STATs. Much remains to be learned about the location and
function of IRs and STATs. Most of the Company's potential
products will require extensive additional development, including
preclinical testing and clinical trials, as well as regulatory
approvals, prior to commercialization. No assurance can be given
that the Company's product development efforts will be
successful, that required regulatory approvals from the FDA or
equivalent foreign authorities for any indication will be
obtained or that any products, if introduced, will be capable of
being produced in commercial quantities at reasonable costs or
will be successfully marketed. Further, the Company has no sales
and only limited marketing capabilities outside Canada, and even
if the Company's products in internal development are approved
for
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marketing, there can be no assurance that the Company will be
able to develop such capabilities or successfully market such
products.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; FUTURE CAPITAL
NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. Ligand has experienced
significant operating losses since its inception in 1987. As of
September 30, 1997, Ligand had an accumulated deficit of
approximately $209.7 million. To date, substantially all of
Ligand's revenues have consisted of amounts received under
collaborative arrangements. The Company expects to incur
additional losses at least over the next several years and
expects losses to increase as the Company's research and
development efforts and clinical trials progress.
The discovery and development of products will require the
commitment of substantial resources to conduct research,
preclinical testing and clinical trials, to establish pilot scale
and commercial scale manufacturing processes and facilities, and
to establish and develop quality control, regulatory, marketing,
sales and administrative capabilities. The future capital
requirements of the Company will depend on many factors,
including the pace of scientific progress in its research and
development programs, the magnitude of these programs, the scope
and results of preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, competing technological and market
developments, the ability to establish additional collaborations,
changes in existing collaborations, the cost of manufacturing
scale-up and the effectiveness of the Company's commercialization
activities. To date, Ligand has not generated any revenue from
the sales of products developed by Ligand or its collaborative
partners. There can be no assurance that Ligand independently or
through its collaborations will successfully develop, manufacture
or market any products or ever achieve or sustain revenues or
profitability from the commercialization of such products.
Moreover, even if profitability is achieved, the level of that
profitability cannot be accurately predicted. Ligand expects that
operating results will fluctuate from quarter to quarter as a
result of differences in the timing of expenses incurred and the
revenues received from collaborative arrangements and other
sources. Some of these fluctuations may be significant. The
Company believes that its available cash, cash equivalents,
marketable securities and existing sources of funding will be
adequate to satisfy its anticipated capital requirements through
1998, assuming the Company does not increase the amount of cash
payable in connection with its exercise of the Stock Purchase
Option.
Glycomed's outstanding indebtedness includes $50 million
principal amount of 7 1/2% Convertible Subordinated Debentures
Due 2003 (the "Debentures"). There can be no assurance that
Glycomed will have the funds necessary to pay the interest on and
the principal of the Debentures or, if not, that it will be able
to refinance the Debentures.
The Company expects that it will seek any additional capital
needed to fund its operations through new collaborations, the
extension of existing collaborations, or through public or
private equity or debt financings. There can be no assurance that
additional financing will be available on acceptable terms, if at
all. Any inability of the Company to obtain additional financing
or of Glycomed to service its obligations under the Debentures
could have a material adverse effect on the Company.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining
required regulatory approvals for the commercial sale of each
product under development, the Company and its collaborators must
demonstrate through preclinical studies and clinical trials that
such product is safe and efficacious for use. The results of
preclinical studies and initial clinical trials are not
necessarily predictive of results that will be obtained from
large-scale clinical trials, and there can be no assurance that
clinical trials of any product under development will demonstrate
the safety and efficacy of such product or will result in a
marketable product. The safety and efficacy of a therapeutic
product under development by the Company must be supported by
extensive data from clinical trials. A number of companies have
suffered significant setbacks in advanced clinical trials,
despite promising results in earlier trials. The failure to
demonstrate adequately the safety and efficacy of a therapeutic
drug under development would delay or prevent regulatory approval
of the product and could have a material adverse effect on the
Company. In addition, the FDA may require additional clinical
trials, which could result in increased costs and significant
development delays.
The rate of completion of clinical trials of the Company's
products is dependent upon, among other factors, obtaining
adequate clinical supplies and the rate of patient accrual.
Patient accrual is a function of many factors, including the size
of the patient population, the proximity of patients to clinical
sites and the eligibility criteria for the trial. Delays in
planned patient enrollment in clinical trials may result in
increased costs, program delays or both, which could have a
material adverse effect on the Company. In addition, some of the
Company's current collaborative partners have certain rights to
control the planning and execution of product development and
clinical programs, and there can be no assurance that such
corporate partners' rights to control aspects of such programs
will not impede the Company's ability to conduct such programs in
accordance with the schedules and in the manner currently
contemplated by the Company for such programs. There can be no
assurance that, if clinical trials are completed, the Company or
its collaborative partners will submit an
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NDA with respect to any potential products or that any such
application will be reviewed and approved by the FDA in a timely
manner, if at all.
RELIANCE ON COLLABORATIVE RELATIONSHIPS. The Company's strategy
for the development, clinical testing, manufacturing and
commercialization of certain of its potential products includes
entering into collaborations with corporate partners, licensors,
licensees and others. To date, Ligand has entered into drug
discovery and development collaborations with SmithKline Beecham,
AHP, Abbott, Sankyo, Glaxo, ALRT (which collaboration continues
the work previously undertaken with Allergan through the Allergan
Ligand Joint Venture) and Pfizer. These collaborations provide
Ligand with funding and research and development resources for
potential products for the treatment or control of hematopoiesis,
women's health disorders, inflammation, cardiovascular disease,
cancer and skin disease, and osteoporosis, respectively. The
Company's collaborative agreements allow its collaborative
partners significant discretion in electing to pursue or not to
pursue any development program. There can be no assurance that
the Company's collaborations will continue or that the
collaborations will be successful. In addition, there can be no
assurance that Ligand's collaborators will not pursue alternative
technologies either on their own or in collaboration with others
as a means of developing drugs competitive with the types of
drugs currently being developed in collaboration with Ligand, and
any such action may result in the withdrawal of support and
increased competition for the Company's programs. In addition, if
products are approved for marketing under these programs, any
revenues to Ligand from these products will be dependent on the
manufacturing, marketing and sales efforts of its collaborators,
which generally retain commercialization rights under the
collaborative agreements. Ligand's current collaborators also
generally have the right to terminate their respective
collaborations under certain circumstances. If any of the
Company's collaborative partners were to breach or terminate its
agreements with the Company or otherwise fail to conduct its
collaborative activities successfully, the development of the
Company's products under such agreements would be delayed or
terminated. The delay or termination of any of the collaborations
could have a material adverse effect on Ligand.
There can be no assurance that disputes will not arise in the
future with Ligand's collaborators, including with respect to the
ownership of rights to any technology developed. For example, the
Company was involved in litigation with Pfizer, which was settled
in April 1996, with respect to Ligand's rights to receive
milestones and royalties based on the development and
commercialization of droloxifene. These and other possible
disagreements between collaborators and the Company could lead to
delays in the achievement of milestones or receipt of milestone
payments or research revenue, to delays or interruptions in, or
termination of, collaborative research, development and
commercialization of certain potential products, or could require
or result in litigation or arbitration, which could be time
consuming and expensive and could have a material adverse effect
on the Company.
UNCERTAINTY OF PATENT PROTECTION; DEPENDENCE ON PROPRIETARY
TECHNOLOGY. The patent positions of pharmaceutical and
biopharmaceutical firms, including Ligand, are uncertain and
involve complex legal and technical questions for which important
legal principles are largely unresolved. In addition, the
coverage sought in a patent application can be significantly
reduced before or after a patent is issued. This uncertain
situation is also affected by revisions to the United States
patent law adopted in recent years to give effect to
international accords to which the United States has become a
party. The extent to which such changes in law will affect the
operations of Ligand cannot be ascertained. In addition, there is
currently pending before Congress legislation providing for other
changes to the patent law which may adversely affect
pharmaceutical and biopharmaceutical firms. If such pending
legislation is adopted, the extent to which such changes would
affect the operations of the Company cannot be ascertained.
Ligand's success will depend in part on its ability to obtain
patent protection for its technology both in the United States
and other countries. A number of pharmaceutical and biotechnology
companies and research and academic institutions have developed
technologies, filed patent applications or received patents on
various technologies that may be related to Ligand's business.
Some of these patent applications, patents or technologies may
conflict with Ligand's technologies or patent applications. Any
such conflict could limit the scope of the patents, if any, that
Ligand may be able to obtain or result in the denial of Ligand's
patent applications. In addition, if patents that cover Ligand's
activities are issued to other companies, there can be no
assurance that Ligand would be able to obtain licenses to such
patents at a reasonable cost, if at all, or be able to develop or
obtain alternative technology. The Company has from time to time
had, continues to have and may have in the future discussions
with its current and potential collaborators regarding the scope
and validity of the Company's patent and other proprietary rights
to its technologies, including the Company's co-transfection
assay. If a collaborator or other party were successful in having
substantial patent rights of the Company determined to be
invalid, it could adversely affect the ability of the Company to
retain existing collaborations beyond their expiration or, where
contractually permitted, encourage their termination. Such a
determination could also adversely affect the Company's ability
to enter into new collaborations. If any disputes should arise in
the future with respect to the rights in any technology developed
with a collaborator or with respect to other matters involving
the collaboration, there could be delays in the achievement of
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milestones or receipt of milestone payments or research revenues,
or interruptions or termination of collaborative research,
development and commercialization of certain potential products,
and litigation or arbitration could result. Any of the foregoing
matters could be time consuming and expensive and could have a
material adverse effect on the Company.
Ligand owns or has exclusively licensed over 190 currently
pending patent applications in the United States relating to
Ligand's technology, as well as foreign counterparts of certain
of these applications in many countries. There can be no
assurance that patents will issue from any of these applications
or, if patents do issue, that claims allowed will be sufficient
to protect Ligand's technology. In addition, Ligand is the owner
or exclusive licensee of rights covered by approximately 150
worldwide patents issued or allowed to it or to The Salk
Institute of Biological Studies, Baylor College of Medicine and
other licensors. Further, there can be no assurance that any
patents issued to Ligand or to licensors of Ligand's technology
will not be challenged, invalidated, circumvented or rendered
unenforceable based on, among other things, subsequently
discovered prior art, lack of entitlement to the priority of an
earlier, related application, or failure to comply with the
written description, best mode, enablement or other applicable
requirements, or that the rights granted under any such patents
will provide significant proprietary protection or commercial
advantage to Ligand. The invalidation, circumvention or
unenforceability of any of Ligand's patent protection could have
a material adverse effect on the Company.
The commercial success of Ligand will also depend in part on
Ligand's not infringing patents issued to competitors and not
breaching technology licenses that cover technology used in
Ligand's products. It is uncertain whether any third-party
patents will require Ligand to develop alternative technology or
to alter its products or processes, obtain licenses or cease
certain activities. If any such licenses are required, there can
be no assurance that Ligand will be able to obtain such licenses
on commercially favorable terms, if at all. Failure by Ligand to
obtain a license to any technology that it may require to
commercialize its products could have a material adverse effect
on Ligand. Litigation, which could result in substantial cost to
Ligand, may also be necessary to enforce any patents issued or
licensed to Ligand or to determine the scope and validity of
third-party proprietary rights. There can be no assurance that
Ligand's patents or those of its licensors, if issued, would be
held valid by a court or that a competitor's technology or
product would be found to infringe such patents. If any of its
competitors have filed patent applications in the United States
which claim technology also invented by Ligand, Ligand may be
required to participate in interference proceedings declared by
the U.S. Patent and Trademark Office ("PTO") in order to
determine priority of invention and, thus, the right to a patent
for the technology, which could result in substantial cost to
Ligand to determine its rights.
Ligand has learned that a United States patent has been issued
to, and foreign counterparts have been filed by, Hoffman LaRoche
("Roche") that include claims to a formulation of 9-cis-Retinoic
acid (Panretin (ALRT1057)) and use of that compound to treat
epithelial cancers. Ligand had previously filed an application
which has an earlier filing date than the Roche patent and which
has claims that the Company believes are broader than but overlap
in part with claims under the Roche patent. Ligand's rights under
its patent application have been exclusively licensed to ALRT.
In connection with the exercise of the Stock Purchase Option and
the exclusive licensing arrangement with Allergan described in
"Liquidity and Capital Resources," Ligand will acquire the
exclusive right to develop and commercialize Oral and Topical
Panretin (ALRT1057). Ligand and ALRT are currently investigating
the scope and validity of this patent to determine its impact
upon the Oral and Topical Panretin (ALRT1057) products. The PTO
has informed Ligand that the overlapping claims are patentable to
Ligand and stated its intention to initiate an interference
proceeding to determine whether Ligand or Roche is entitled to a
patent by having been first to invent the common subject matter.
The Company cannot be assured of a favorable outcome in the
interference proceeding because of factors not known at this time
upon which the outcome may depend. In addition, the interference
proceeding may delay the decision of the PTO regarding the
Company's application with claims covering the Oral and Topical
Panretin (ALRT1057) products. While the Company believes that the
Roche patent does not cover the use of Oral and Topical Panretin
(ALRT1057) to treat leukemias such as APL and sarcomas such as
KS, or the treatment of skin diseases such as psoriasis, if the
Company and ALRT do not prevail in the interference proceeding,
the Roche patent might block the Company's use of Oral and
Topical Panretin (ALRT1057) in certain cancers, and the Company
may not be able to obtain patent protection for the Oral and
Topical Panretin (ALRT1057) products.
Ligand also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop
and maintain its competitive position. There can be no assurance
that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to or
disclose such information regarding Ligand. It is Ligand's policy
to require its employees, certain contractors, consultants,
members of its Scientific Advisory Board and parties to
collaborative agreements to execute confidentiality agreements
upon the commencement of employment or consulting relationships
or a collaboration with Ligand. There can be no assurance that
these agreements will not be breached, that they will provide
meaningful protection of Ligand's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such
information or that Ligand's trade secrets will not otherwise
become known or be independently discovered by its competitors.
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EXERCISE OF STOCK PURCHASE OPTION. If Ligand does not
successfully complete the Stock Purchase Option, Allergan will
have the right to acquire all of the outstanding Callable Common
Stock and Ligand will have no further rights in the compounds or
assets developed by ALRT. In addition, the recently-announced
strategic alliance with Lilly is contingent upon Ligand
successfully closing the exercise of the Stock Purchase Option
and successfully closing the restructure with Allergan of the
terms and conditions relating to research, development,
commercialization and sublicense rights for the ALRT compounds.
The number of Shares to be delivered in payment of a portion of
the Stock Purchase Option Exercise Price shall be determined by
dividing the portion of the Stock Purchase Option Exercise Price
to be paid in Shares by the average of the closing price of a
Share on the Nasdaq National Market for the 20 trading days
immediately preceding the day prior to the closing of the Stock
Purchase Option Exercise (the "Average Value"). If the Stock
Purchase Option Exercise closed on November 3, 1997, the Average
Value of the Ligand Common Stock would be $16.396875, resulting
in a total of 2,830,417 shares of Ligand Common Stock being
issued in connection with the Stock Purchase Option Exercise.
Ligand has the ability to increase the amount of cash paid in
connection with the Stock Purchase Option from the amount
contained in the notice of Ligand's exercise of the Stock
Purchase Option. Any such increase in cash would reduce
Ligand's capital resources.
Upon the closing of the exercise of the Stock Purchase Option,
Ligand will record a one-time charge to operations for the write-
off of in-process technology currently estimated at approximately
$53.0 million, related to the excess of the aggregate of the
Stock Purchase Option Exercise Price over the fair value of the
assets acquired.
In addition, continuation of development and commercialization of
Oral and Topical Panretin (ALRT1057) and other products under
development by ALRT to which Ligand will acquire exclusive rights
under its exclusive licensing arrangement with Allergan will
require substantial additional expenditures by Ligand. If Ligand
does not successfully complete its exercise of the Stock Purchase
Option prior to expiration, the Company may lose valuable rights,
including rights to Oral and Topical Panretin (ALRT1057) and
other ALRT assets.
LACK OF MANUFACTURING CAPABILITY; RELIANCE ON THIRD-PARTY
MANUFACTURERS. Ligand currently has no manufacturing facilities
and, accordingly, relies on third parties, including its
collaborative partners, for clinical or commercial production of
any compounds under consideration as products. Ligand is
currently constructing and validating a cGMP pilot manufacturing
capability in order to produce sufficient quantities of products
for preclinical testing and initial clinical trials. If Ligand is
unable to develop or contract on acceptable terms for
manufacturing services, Ligand's ability to conduct preclinical
testing and human clinical trials will be adversely affected,
resulting in the delay of submission of products for regulatory
approval and delay of initiation of new development programs,
which in turn could materially impair Ligand's competitive
position. Although drugs acting through IRs and STATs have been
manufactured on a commercial scale by other companies, there can
be no assurance that Ligand will be able to manufacture its
products on a commercial scale or that such products can be
manufactured by Ligand or any other party on behalf of Ligand at
costs or in quantities to make commercially viable products.
LIMITED SALES AND MARKETING CAPABILITY. The creation of
infrastructure to commercialize pharmaceutical products is a
difficult, expensive and time-consuming process. Ligand currently
has no sales and only limited marketing capability outside
Canada. In Canada, Ligand has been appointed as the sole
distributor of two oncology products, Proleukin(R), which was
developed by Cetus Oncology Corporation and PHOTOFRIN(R), which was
developed by QLT PhotoTherapeutics, Inc. To market any of its
products directly, the Company will need to develop a marketing
and sales force with technical expertise and distribution
capability or contract with other pharmaceutical and/or health
care companies with distribution systems and direct sales forces.
There can be no assurance that the Company will be able to
establish direct or indirect sales and distribution capabilities
or be successful in gaining market acceptance for proprietary
products or for other products. To the extent the Company enters
into co-promotion or other licensing arrangements, any revenues
received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that any such efforts will
be successful.
SUBSTANTIAL COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE.
Some of the drugs which Ligand is developing will compete with
existing therapies. In addition, a number of companies are
pursuing the development of novel pharmaceuticals which target
the same diseases that Ligand is targeting as well as IR-related,
STAT-related and complex carbohydrate-related approaches to drug
discovery and development. Many of Ligand's existing or potential
competitors, particularly large pharmaceutical companies, have
substantially greater financial, technical and human resources
than Ligand and may be better equipped to develop, manufacture
and market products. In addition, many of these companies have
extensive experience in preclinical testing and human clinical
trials, obtaining FDA and other regulatory approvals and
manufacturing and marketing pharmaceutical products. Academic
institutions, governmental agencies and other public and private
research
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organizations are conducting research to develop technologies and
products that may compete with those under development by the
Company. These institutions are becoming increasingly aware of
the commercial value of their findings and are becoming more
active in seeking patent protection and licensing arrangements to
collect royalties for the use of technology that they have
developed. These institutions also may market competitive
commercial products on their own or through joint ventures and
will compete with the Company in recruiting highly qualified
scientific personnel. Any of these companies, academic
institutions, government agencies or research organizations may
develop and introduce products and processes competitive with or
superior to those of Ligand. The development by others of new
treatment methods for those indications for which Ligand is
developing products could render Ligand's products noncompetitive
or obsolete.
Ligand's products under development target a broad range of
markets. Ligand's competition will be determined in part by the
potential indications for which Ligand's products are developed
and ultimately approved by regulatory authorities. For certain of
Ligand's potential products, an important factor in competition
may be the timing of market introduction of Ligand's or
competitors' products. Accordingly, the relative speed at which
Ligand or its existing or future corporate partners can develop
products, complete the clinical trials and regulatory approval
processes, and supply commercial quantities of the products to
the market is expected to be an important competitive factor.
Ligand expects that competition among products approved for sale
will be based, among other things, on product efficacy, safety,
reliability, availability, price and patent position.
Ligand's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection
or otherwise develop proprietary products or processes, and
secure sufficient capital resources.
EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY
APPROVAL. The manufacturing and marketing of Ligand's products
and its ongoing research and development activities are subject
to and regulation for safety and efficacy by numerous
governmental authorities in the United States and other
countries. Prior to marketing, any drug developed by the Company
must undergo rigorous preclinical and clinical testing and an
extensive regulatory approval process mandated by the FDA and
equivalent foreign authorities. These processes can take a number
of years and require the expenditure of substantial resources.
The time required for completing such testing and obtaining such
approvals is uncertain, and there is no assurance that any such
approval will be obtained. The Company or its collaborative
partners may decide to replace a compound in testing with a
modified or optimized compound, thus extending the test period.
In addition, delays or rejections may be encountered based upon
changes in FDA policy during the period of product development
and FDA review of each submitted new drug application or product
license application. Similar delays may also be encountered in
other countries. There can be no assurance that even after such
time and expenditures, regulatory approval will be obtained for
any products developed by the Company. Moreover, prior to
receiving FDA or equivalent foreign authority approval to market
its products, the Company may be required to demonstrate that its
products represent improved forms of treatment over existing
therapies. If regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which
the product may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and
its manufacturing facilities are subject to continual review and
periodic inspections, and subsequent discovery of previously
unknown problems with a product, manufacturer or facility may
result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM.
Ligand's commercial success will be heavily dependent upon the
availability of reimbursement for the use of any products
developed by the Company or its collaborative partners. There
can be no assurance that Medicare and third-party payors will
authorize or otherwise budget reimbursement for the prescription
of any of Ligand's potential products. Additionally, third-party
payors, including Medicare, are increasingly challenging the
prices charged for medical products and services and may require
additional cost-benefit analysis data from the Company in order
to demonstrate the cost-effectiveness of its products. There can
be no assurance that the Company will be able to provide such
data in order to gain market acceptance of its products with
respect to pricing and reimbursement.
In the United States, the Company expects that there will
continue to be a number of federal and state proposals to
implement government control of pricing and profitability of
prescription pharmaceuticals. In addition, increasing emphasis
on managed health care will continue to put pressure on such
pricing. Cost control initiatives could decrease the price that
the Company or any of its collaborative partners or other
licensees receives for any drugs it or they may discover or
develop in the future and, by preventing the recovery of
development costs, which could be substantial, and an appropriate
profit margin, could have a material adverse effect on the
Company. Further, to the extent that cost control initiatives
have a material adverse effect on the Company's collaborative
partners, the Company's ability to commercialize its products and
to
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realize royalties may be adversely affected. Furthermore, federal
and state regulations govern or influence the reimbursement to
health care providers of fees and capital equipment costs in
connection with medical treatment of certain patients. If any
actions are taken by federal and/or state governments, such
actions could adversely affect the prospects for sales of the
Company's products. There can be no assurance that action taken
by federal and/or state governments, if any, with regard to
health care reform will not have a material adverse effect on the
Company.
PRODUCT LIABILITY AND INSURANCE RISKS. Ligand's business exposes
it to potential product liability risks which are inherent in the
testing, manufacturing and marketing of human therapeutic
products. Certain of the compounds the Company is investigating
could be injurious to humans. For example, retinoids as a class
are known to contain compounds which can cause birth defects.
Ligand currently has limited product liability insurance;
however, there can be no assurance that Ligand will be able to
maintain such insurance on acceptable terms or that such
insurance will provide adequate coverage against potential
liabilities. The Company expects to procure additional insurance
when its products progress to a later stage of development and if
any rights to later-stage products are in-licensed in the future.
To the extent that product liability insurance, if available,
does not cover potential claims, the Company will be required to
self-insure the risks associated with such claims. A successful
product liability claim or series of claims brought against the
Company could have a material adverse effect on the Company.
DEPENDENCE ON KEY EMPLOYEES. Ligand is highly dependent on the
principal members of its scientific and management staff, the
loss of whose services might impede the achievement of
development objectives. Furthermore, Ligand is currently
experiencing a period of rapid growth which requires the hiring
of significant numbers of scientific, management and operational
personnel. Accordingly, recruiting and retaining qualified
management, operations and scientific personnel to perform
research and development work in the future will also be critical
to Ligand's success. Although Ligand believes it will be
successful in attracting and retaining skilled and experienced
management, operational and scientific personnel, there can be no
assurance that Ligand will be able to attract and retain such
personnel on acceptable terms given the competition among
numerous pharmaceutical and biotechnology companies, universities
and other research institutions for such personnel.
USE OF HAZARDOUS MATERIALS. Ligand's research and development
involves the controlled use of hazardous materials, chemicals and
various radioactive compounds. For example, retinoids as a class
are known to contain compounds which can cause birth defects.
Although the Company believes that its current safety procedures
for handling and disposing of such materials, chemicals and
compounds, comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In
the event of any accident, the Company could be held liable for
any damages that result and any such liability could be
significant. The Company may incur substantial costs to comply
with environmental regulations. Any such event could have a
material adverse effect on the Company.
VOLATILITY OF STOCK PRICE. The market prices and trading volumes
for securities of emerging companies, like Ligand, have
historically been highly volatile and have experienced
significant fluctuations unrelated to the operating performance
of such companies. Future announcements concerning the Company or
its competitors may have a significant impact on the market price
of the Common Stock. Such announcements might include the results
of research, development testing, technological innovations, new
commercial products, government regulation, developments
concerning proprietary rights, litigation or public concern as to
the safety of the products.
ABSENCE OF CASH DIVIDENDS. No cash dividends have been paid on
the Company's Common Stock to date, and Ligand does not
anticipate paying cash dividends in the foreseeable future.
EFFECT OF SHAREHOLDER RIGHTS PLAN AND CERTAIN ANTI-TAKEOVER
PROVISIONS. In September 1996, the Company's Board of Directors
adopted a preferred shares rights plan (the "Shareholder Rights
Plan") which provides for a dividend distribution of one
preferred share purchase right (a "Right") on each outstanding
share of the Common Stock. Each Right entitles stockholders to
buy 1/1000th of a share of Ligand Series A Participating
Preferred Stock at an exercise price of $100, subject to
adjustment. The Rights will become exercisable following the
tenth day after a person or group announces acquisition of 20% or
more of the Company's Common Stock, or announces commencement of
a tender offer, the consummation of which would result in
ownership by the person or group of 20% or more of the Company's
Common Stock. The Company will be entitled to redeem the Rights
at $0.01 per Right at any time on or before the earlier of the
tenth day following acquisition by a person or group of 20% or
more of the Company's Common Stock and September 13, 2006.
Ligand's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") includes a provision that
requires the approval of the holders of 66 2/3% of Ligand's
voting stock as a condition to a merger or certain other business
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transactions with, or proposed by, a holder of 15% or more of
Ligand's voting stock, except in cases where certain directors
approve the transaction or certain minimum price criteria and
other procedural requirements are met (the "Fair Price
Provision"). The Certificate of Incorporation also requires that
any action required or permitted to be taken by stockholders of
Ligand must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in
writing. In addition, special meetings of the stockholders of
Ligand may be called only by the Board of Directors, the Chairman
of the Board or the President of Ligand or by any person or
persons holding shares representing at least 10% of the
outstanding Common Stock of the Company. The Shareholder Rights
Plan, the Fair Price Provision and other charter provisions may
discourage certain types of transactions involving an actual or
potential change in control of Ligand, including transactions in
which the stockholders might otherwise receive a premium for
their shares over then current market prices, and may limit the
ability of the stockholders to approve transactions that they may
deem to be in their best interests. In addition, the Board of
Directors has the authority to fix the rights and preferences of
and issue shares of preferred stock, which may have the effect of
delaying or preventing a change in control of Ligand without
action by the stockholders.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
EXERCISE OF ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. STOCK AND
ASSET PURCHASE OPTIONS
In December 1994, the Company and Allergan, Inc. ("Allergan")
formed ALRT to continue the research and development activities
previously conducted by the Allergan Ligand Joint Venture (the
"Joint Venture"). In June 1995, the Company and ALRT completed a
public offering of 3,250,000 units (the "Units") with aggregate
proceeds of $32.5 million (the "ALRT Offering") and cash
contributions by Allergan and the Company of $50.0 million and
$17.5 million, respectively, providing for net proceeds of $94.3
million for retinoid product research and development. Each Unit
consisted of one share of ALRT's Callable Common Stock and two
warrants, each warrant entitling the holder to purchase one share
of the Company's Common Stock. Immediately prior to the
consummation of the ALRT Offering, Allergan Pharmaceuticals
(Ireland) Ltd., Inc. made a $6.0 million investment by purchasing
994,819 shares of the Company's Common Stock at $6.03 per share.
The Company's $17.5 million cash contribution resulted in a one-
time charge to operations. The Company also recorded a warrant
subscription receivable and corresponding increase in paid-in
capital of $5.9 million (6,500,000 warrants valued at $.90 per
warrant) pursuant to the ALRT Offering. Since June 3, 1995, cash
received from ALRT pursuant to a Research and Development
Agreement was prorated between contract revenue and the warrant
subscription receivable based on their respective values. In
1996 and for the first nine months of 1997 and 1996, $2.1
million, $1.5 million and $1.4 million, respectively, of the
proceeds received from ALRT were applied to the warrant
subscription receivable. In conjunction with the consummation of
the ALRT Offering, all rights held by the Joint Venture were
licensed to ALRT. The Company, Allergan and ALRT entered into
certain other agreements in connection with the funding of ALRT,
including, a Technology License Agreement, a Commercialization
Agreement and Services and Administrative Agreements, and ALRT
granted to the Company and Allergan an option to acquire certain
assets related to Oral and Topical Panretin (ALRT1057) and an
option to acquire all the outstanding shares of ALRT Callable
Common Stock. If the Company exercises the option, to acquire
all ALRT Callable Common Stock, Allergan has an option to
purchase an undivided 50% interest in all of the assets of ALRT.
On September 24, 1997, the Company and Allergan announced that
they had exercised their respective options to purchase the
Callable Common Stock and certain assets of ALRT. The Company's
notice of exercise of the Stock Purchase Option included a stock
purchase option exercise price of $21.97 per share of outstanding
Callable Common Stock, the original exercise price designated for
the exercise of the Stock Purchase Option at any time prior to
June 3, 1998. Allergan's notice of exercise of its Asset
Purchase Option included an aggregate asset purchase price of
$8.9 million (the "Asset Purchase Option Exercise Price"), the
original exercise price designated for the exercise of the Asset
Purchase Option at any time prior to June 3, 1998 under the
governing asset purchase agreement (the "Asset Purchase
Agreement"). The Asset Purchase Option Exercise Price will be
paid in cash to ALRT concurrently with the payment to holders of
ALRT Callable Common Stock of the Stock Purchase Option Exercise
Price and may be used to pay a portion of such Stock Purchase
Option Exercise Price.
The Company and Allergan also agreed to restructure the terms and
conditions relating to research, development, commercialization
and sublicense rights for the ALRT compounds in the period
following the closing of the exercise of the Company's Stock
Purchase Option and Allergan's Asset Purchase Option. Prior to
the restructuring and following the exercise of the Stock
Purchase Option and Asset Purchase Option, the Company (and ALRT)
and Allergan would have had equal, co-exclusive development,
commercialization and sublicense rights in the compounds and
assets developed by ALRT and a 50% interest in ALRT's
liabilities. The Company (and ALRT) will receive exclusive,
worldwide development, commercialization and sublicense rights to
Oral and Topical Panretin (ALRT1057) (currently in pivotal Phase
III clinical trials), ALRT1550 (currently in Phase I/IIa clinical
trials for oncology applications) and ALRT268 and ALRT324 (two
advanced preclinical RXR selective compounds); Allergan will
receive exclusive, worldwide development, commercialization and
sublicense rights to ALRT4310, an RAR antagonist being developed
for topical application against mucocutaneous toxicity associated
with currently marketed retinoids as well as for psoriasis.
Allergan will also receive ALRT326 and ALRT4204 (two advanced
preclinical Retinoid X Receptor ("RXR" selective compounds). In
addition, the Company and Allergan have participated in a lottery
for each of the approximately 2,000 retinoid compounds existing
in the ALRT compound library as of the closing date (the
"Lottery"), with each party to acquire exclusive, worldwide
development, commercialization and sublicense rights to the
compounds which they selected. The Company (and ALRT) and
Allergan will each pay the other a royalty based on net sales of
products developed from (i) the compounds selected by each in the
Lottery and (ii) the other ALRT compounds to which each acquires
exclusive rights. The Company will also pay to Allergan a royalty
based on the Company's net sales of Targretin for uses other than
oncology and dermatology
17
<PAGE>
indications; in the event that the Company licenses
commercialization rights to Targretin to a third party, the
Company will pay to Allergan a percentage of royalties payable to
the Company with respect to sales of Targretin other than in
oncology and dermatology indications. On the closing of the
exercise of the Stock Purchase Option and the Asset Purchase
Option, the Company will pay to Allergan a non-refundable cash
payment in the amount of $4.5 million.
COLLABORATION WITH ELI LILLY AND COMPANY
On October 20, 1997, the Company and Eli Lilly and Company
("Lilly") announced that they had entered into a strategic
alliance for the discovery and development of products based upon
the Company's IR technology. The collaboration will focus on
products with broad applications across metabolic diseases. The
closing of the transaction is subject to receipt of necessary
regulatory approvals and is contingent upon the Company
successfully closing the exercise of the Stock Purchase Option
and successfully closing the restructure of the terms and
conditions relating to research, development, commercialization
and sublicense rights for the ALRT compounds as described above.
Lilly will receive worldwide, exclusive rights to Targretin
(LGD1069) and other Company compounds and technology associated
with the RXR receptor. Lilly will receive additional rights to
use the Company's technology to develop an RXR compound in
combination with a Selective Estrogen Receptor Modulator ("SERM")
in cancer. The Company retains exclusive rights to independently
research, develop and commercialize Targretin (LGD1069) and other
RXR compounds in the fields of cancer and dermatology.
Lilly will also receive worldwide, exclusive rights in certain
areas to the Company's peroxisome proliferator activated receptor
("PPAR") technology, along with rights to use PPAR research
technology with the RXR technology. Lilly and the Company also
intend to begin research programs aimed at discovering novel
compounds which therapeutically activate PPAR subtypes for
treatment of cardiovascular disease. Finally, Lilly will receive
exclusive rights to the Company's hepatic nuclear factor 4
("HNF4") receptor and the obesity gene promoter technology.
The Company has the option to obtain selected rights to one Lilly
specialty pharmaceutical product. The product would fit into a
current area of strategic focus for the Company. Should the
Company elect to obtain selected rights to the product, Lilly
could receive milestones of up to $20 million in the Company
stock. In the event that the Company does not exercise this
product option during the first 90 days after the effective date
of the agreements, currently anticipated to occur one business
day following the closing of the exercise of the Stock Purchase
Option, the Company will sell an additional $20 million in equity
to Lilly at a 20% premium to the then market price, and the
Company will qualify for certain additional royalties of up to
1.5% on net sales of the Company's choice of Targretin (LGD1069),
ALRT268 (LGD1268) or ALRT324 (LGD1324).
The Company will receive double-digit royalties on net sales of
the most advanced products and single-digit royalties on net
sales of earlier compounds. The Company will also receive
milestones, royalties and options to obtain certain co-
development and co-promotion rights for the Lilly-selected RXR
compound in combination with a SERM.
Lilly will make a $37.5 million equity investment in the Company
upon the closing of the transaction and will, thereafter, pay to
the Company $12.5 million in upfront milestones.
ITEM 6 (A) EXHIBITS
Exhibit 10.164 Third Amendment to Agreement, dated September 2, 1997,
between the Company and American Home Products
Corporation.
Exhibit 27.0 Financial Data Schedule
ITEM 6 (B) REPORTS ON FORMS 8-K
None.
18
<PAGE>
LIGAND PHARMACEUTICALS INCORPORATED
September 30, 1997
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ligand Pharmaceuticals Incorporated
Date: November 13, 1997 By /s/ Paul V. Maier
----------------- --------------------------
Paul V. Maier
Senior Vice President and
Chief Financial Officer
19
[AMERICAN HOME PRODUCTS CORPORATION LETTERHEAD]
August 20, 1997
William L. Respess, Esq.
Senior Vice President
General Counsel, Government Affairs
Ligand Pharmaceuticals, Inc.
9393 Towne Centre Drive
San Diego, CA 92121
Dear Larry:
Enclosed please find one fully executed original of the Third Amendment to
the Agreement. Best regards.
Sincerely,
/s/ GARRETT L. STACKMAN
-----------------------
Garrett L. Stackman
cc: George Tarnowski, Esq.
Wyeth-Ayerst Laboratories
THIRD AMENDMENT TO AGREEMENT
This Third Amendment to Agreement, effective September 2, 1997, is by and
between AMERICAN HOME PRODUCTS CORPORATION ("AHP"), A Delaware corporation,
as represented by its Wyeth-Ayerst Research Division, having its principal
place of business at 533 East Lancaster Pike, St. Davids, Pennsylvania, and
LIGAND PHARMACEUTICALS INCORPORATED ("Ligand"), a Delaware corporation having
its principal place of business at 9393 Towne Centre Drive, San Diego,
California.
WHEREAS, AHP and Ligand have previously entered into a Research, Development
and License Agreement effective September 2, 1994 (the "Agreement") under
which inter alia, AHP sponsors research at Ligand with the goal of
discovering and or/designing small molecule compounds which act through the
estrogen and progesterone receptors and to develop pharmaceutical products
from such compounds;
WHEREAS, the scope of the Agreement was subject to an Option Agreement
effective September 2, 1994 under which AHP had the option exercisable on or
after January 1, 1996 inter alia, to expand the scope of research at Ligand,
which option was timely exercised by AHD;
WHEREAS, the Agreement was amended pursuant to an Amendment to Agreement
effective January 16, 1996, inter alia, to permit Wyeth-Ayerst to develop
certain compounds originating from Ligand;
Page 1 of 8
WHEREAS, the Agreement was amended pursuant to a Second Amendment to
Agreement effective May 24, 1996, inter alia, to bring within the scope of
the Agreement certain compounds under development by AHP;
WHEREAS, the Agreement as modified by exercise of the Option Agreement and by
adoption of the Amendment to the Agreement and Second Amendment to Agreement
defines a Research Program which is subject to a Research Program Term which
expires September 2, 1997, unless extended by AHP pursuant to Section 3.3 of
the Agreement or by mutual agreement of the parties; and
WHEREAS, the parties wish to extend the Research Program Term for an
additional year and otherwise amend the modified Agreement, inter alia, to
limit the research at Ligand supported by AHP to the discover and/or design of
drugs acting through the progesterone receptor.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
hereinafter set forth, it is agreed by AHP and Ligand as follows:
1. Terms not otherwise defined herein shall have the meanings given them in
the Agreement, the Option Agreement, the Amendment to Agreement or Second
Amendment to Agreement.
Page 2 of 8
2. The Research Program Term is extended until September 2, 1998. The
aggregate Annual Research Fee for contract year 4 shall be $2,000,000.
3. The composition of the PMC shall be as follows:
Ligand Representatives AHP Representatives
---------------------- -------------------
Dr. Leonard Fish Dr. Richard Lyttle
Dr. William Schrader Dr. Magid Abou-Gharbia
Dr. Todd Jones Dr. Richard Jackson
Dr. Andres Negro-Vilar (Alternate) Dr. Richard Winneker
(Alternate)
4. Effective September 3, 1997, Section 1.20 of the Agreement is amended
to read as follows:
1.20 "Research Compound" shall mean compound, including an Existing
Compound for which AHP acquires rights under Article 7 of this
Agreement, which is identified or confirmed as acting through or
mediating the activity of a Designated Receptor, provided further,
that (i) in the case of a compound which acts through or mediates the
estrogen receptor, identification or confirmation by Ligand must
occur prior to September 3, 1997 and by AHP prior to March 3, 1999
and (ii) in the case of a compound which acts through or mediates the
progesterone receptor (all isoforms and splice variants),
identification or
Page 3 of 8
confirmation must occur (a) during the term of the Research Program
or (b), except in the case of termination by AHP under Section 16.3,
below, by AHP within eighteen (18) months after expiration or earlier
termination of the Research Program.
5. Effective September 3, 1997, Section 3.3 of the Agreement is amended
by adding the following sentence at the end of that section:
Notwithstanding the foregoing, the one year extension of the Research
Program provided for in the Third Amendment to the Agreement does not
give rise to the obligation under the Stock and Note Purchase
Agreement to make the third installment as defined therein.
6. Effective September 3, 1997, Section 3.5.1 of the Agreement is
amended by deleting the last sentence and adding the following:
Additionally, except as expressly permitted under this Agreement,
Ligand shall not engage in any activity with any third party in the
Field prior to March 3, 1998 with respect to the discovery,
development or commercialization of a compound which acts through or
mediates the activity of the estrogen receptor (all isoforms and
splice variants).
Page 4 of 8
7. Effective September 3, 1997, Section 3.5.2 of the Agreement shall read
as follows:
3.5.2 Notwithstanding the provisions of Section 3.5.1 above, but subject
to AHP's license rights under Article 6 below and the parties'
confidentiality obligations set forth in Articles 13 and 14 below, during
the Research Program Term Ligand shall have the right to use Designated
Receptors to engage in (a) pilot internal research programs in the Field;
(b) compound screening with or for non-commercial third parties;
provided, however, that no screening shall be done with or for a non-
commercial third party under terms which do not provide Ligand with
material rights to progesterone ligands discovered in such screening
which would permit their adoption as Research Compounds under this
Agreement; and (c), alone or with any Affiliate or third party, to engage
in (i) cross-reactivity testing and (ii) toxicology testing. These
activities will not use a compound or information supplied by AHP or
information gained from screening compounds supplied by AHP. In the event
that a compound identified by Ligand as a part of the screening activity
under (a) or (b) above shares activity on the progesterone receptor and
another receptor, such a compound will be deemed a Research Compound if
so designated by the PMC.
Page 5 of 8
8. Effective September 3, 1997, Section 3.8 of the Agreement shall read
as follows:
Ligand-in-Licensed Compounds. Ligand retains the right to in-license from
third parties and develop and commercialize on its own behalf and through
third parties, including Affiliates and sublicensees, compounds which are
agonists or antagonists of the Designated Receptors; provided, however, that
until expiration of the Research Program Term, such in-licensed compounds
are, if they act through the progesterone receptor, at least development
stage compounds, but including more advanced compounds up to and including
compounds approved for marketing. As used in this Section 3.8, a "development
stage" compound is a compound requiring only process and scale-up development
and preclinical toxicology and pharmacology investigation to complete IND
requirements.
9. Effective September 3, 1997, Article 8 of the Agreement is amended by
the addition thereto of the following new Section 8.7:
8.7 Limited Extension of Designation of a Ligand Compound.
Ligand, having completed the screening of the WARD compound library in
accordance with Section 8.1 and 8.2 of the Agreement, has provided AHP with a
list of screened compounds it has identified as a result of that screening.
Section 8.3 of the Agreement provides that Ligand must give notice to AHP of
its intention to designate any screened compound(s) as lead compound(s)
within one year of
Page 6 of 8
Ligand's initial screening of the compound(s). As of the date of this Third
Amendment, Ligand has not given AHP any notice as described above.
Accordingly, in order to provide Ligand additional time to complete a full
evaluation of the compounds it has identified from the WARD compound library,
AHP shall extend the time for Ligand to designate a screened compound as a
lead compound for further development by a period not to exceed six (6)
months from the effective date of this Third Amendment. During that six (6)
month period, Ligand can request resupply of compounds as provided under the
last sentence of Section 8.2 of the Agreement that it has previously
screened.
10. Except as expressly amended or supplemental by this Third Amendment
to Agreement, all of the terms and conditions of the Agreement, Option
Agreement, Amendment to Agreement, and Second Amendment to Agreement shall
remain in full force and effect in accordance with their terms. No agreement
or understanding bearing in this Third shall be binding on either party
hereto unless it shall be in writing and signed by the duly authorized
officers or represenatatives of each AHP and Ligand shall expressly refer to
this Third Amendment to Agreement.
Page 7 of 8
IN WITNESS WHEREOF, the parties have caused the Amendment to be executed
by their duly authorized representatives.
AMERICAN HOME PRODUCTS LIGAND PHARMACEUTICALS
CORPORATION INCORPORATED
BY: /s/ Gerald A. Jibilian BY: /s/ William L. Respess
----------------------- -----------------------
(Signature) (Signature)
Title: Vice President Titles: Sr. Vice President,
General Counsel,
Government Affairs
Page 8 of 8
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This schedule contains summary financial information extracted from SEC Form 10Q
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</LEGEND>
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