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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 NO. 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0160744
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10275 SCIENCE CENTER DRIVE 92121-1117
SAN DIEGO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 550-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of February 28, 1999 was $448,563,405. For purposes of this
calculation, shares of Common Stock held by directors, officers and 5%
stockholders known to the Registrant have been deemed to be owned by affiliates
which should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
As of February 28, 1999 the registrant had 46,151,837 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed not later than 120
days after December 31, 1998, in connection with the Registrant's 1999 Annual
Meeting of Stockholders, referred to herein as the "Proxy Statement," are
incorporated by reference into Part III of this Form 10-K. Certain exhibits
filed with the Registrant's prior registration statements and period reports
under the Securities Exchange Act of 1934 are incorporated herein by reference
into Part IV of this Report.
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PART 1
ITEM 1. BUSINESS
The discussion of the Company's business contained in this annual report on
form 10-K may contain certain projections, 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 of this
annual report.
The Company's trademarks, trade names and service marks referenced in this
annual report include ONTAK(TM), Panretin(R) and Targretin(R). Each other
trademark, trade name or service mark appearing in this annual report belongs to
its holder.
References to Ligand Pharmaceuticals Incorporated ("Ligand" or the
"Company") include its wholly owned subsidiaries -- Glycomed Incorporated;
Ligand (Canada) Incorporated; Ligand Pharmaceuticals International,
Incorporated; Marathon Biopharmaceuticals, Incorporated; and Seragen,
Incorporated.
OVERVIEW
Ligand's goal is to build a profitable pharmaceutical company which
discovers, develops and markets new drugs that address critical unmet medical
needs of patients in the areas of cancer, men's and women's health and skin
diseases, as well as osteoporosis, metabolic, cardiovascular and inflammatory
diseases. The Company strives to develop drugs that are more effective and/or
safer than existing therapies and that are more convenient (taken orally or
topically administered) and cost effective. Ligand pursues the discovery,
development, approval and marketing of new drugs through internal and
collaborative research and development programs, and through the licensing or
acquisition of late-stage development products. Internal and collaborative
programs utilize Ligand's proprietary science technology. (See "Technology.")
In-licensing and acquisition programs focus on products which have near-term
prospects of FDA approval, and which can be marketed by a small specialty cancer
and HIV-center sales force.
In February 1999, the Company was granted United States ("U.S.") Food and
Drug Administration ("FDA") marketing approval for its first two
products -- Panretin(R) gel for the topical treatment of cutaneous AIDS-related
Kaposi's sarcoma ("KS") and ONTAK(TM) for the treatment of patients with
persistent or recurrent cutaneous T-cell lymphoma ("CTCL") whose malignant cells
express the CD25 component of the Interleukin-2 ("IL-2") receptor. In late 1998
and early 1999, Ligand assembled a 26-member specialty oncology and HIV-center
sales force in the U.S. to launch Panretin(R) gel and ONTAK(TM) in the U.S. In
addition, the Company established a subsidiary, Ligand Pharmaceuticals
International, Inc., with a branch in London, England to manage its European
operations. A Canadian sales force, which has been in place since 1995,
currently markets two in-licensed cancer products in Canada.
Ligand's drug discovery and development programs are based on its
leadership position in gene transcription technology. Ligand's proprietary
technologies involve two natural mechanisms that regulate gene activity: (1)
non-peptide hormone activated Intracellular Receptors ("IRs") and (2) cytokine
and growth factor activated Signal Transducers and Activators of Transcription
("STATs"). (See "Technology.") Ligand applies IR technology to the discovery and
development of small molecule drugs to enhance therapeutic and safety profiles
and to address unmet patient needs in certain cancers, men's and women's health,
skin diseases, osteoporosis, cardiovascular and metabolic diseases, and
inflammatory disorders. Similarly, STATs influence many biological processes,
including those associated with cancer, other metabolic diseases, and
inflammation and blood cell formation. Through its acquisition of Seragen
Incorporated ("Seragen") in August 1998 and Glycomed Incorporated ("Glycomed")
in May 1995, Ligand also has proprietary technology in fusion proteins and
complex carbohydrates. (See "Strategic Transactions" and "Inflammatory
Disease.") Fusion protein technology was used in the development of ONTAK(TM).
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Ligand uses an innovative combination of internal and collaborative
programs to develop and market potential drugs. Ligand has 25 compounds in
various stages of internal development. (See "Ligand Products in Clinical
Development" and "Ligand Research and Development Programs.") Targretin(R)
capsules and Targretin(R) gel are in late-stage human testing for treatment of
patients with CTCL. Targretin(R) gel is in earlier-stage human testing for the
treatment of actinic keratoses and skin cancer. Targretin(R) capsules are in
early-stage human testing for the treatment of patients with breast cancer,
psoriasis and diabetes. Other internal programs include the post-marketing
trials for ONTAK(TM), which the FDA required in connection with its accelerated
approval. A Phase II trial for ONTAK(TM) is ongoing in the treatment of
psoriasis. Ligand's compound LGD1550 is in early-stage human testing for the
treatment of patients with advanced cancer. Ligand has established several
corporate collaborations, with 23 compounds in development, which may generate
future royalty-based revenue. The table below highlights the Company's
collaborations to date:
<TABLE>
<CAPTION>
INITIATION OF
CORPORATE COLLABORATOR COLLABORATION DISEASE/INDICATION
- -------------------------------- -------------- -------------------------------------------
<S> <C> <C>
Eli Lilly and Company November 1997 Metabolic and cardiovascular diseases
SmithKline Beecham Corporation February 1995 Oncological uses, anemia
Wyeth-Ayerst, the pharmaceutical September 1994 Osteoporosis, breast cancer, oral
division of American Home contraception, endometriosis, uterine
Products fibroids, hormone replacement therapy
Abbott Laboratories July 1994 Rheumatoid arthritis, inflammatory bowel
disease, asthma, dermatitis
Sankyo Company, Ltd. June 1994 Inflammation
Glaxo-Wellcome plc September 1992 Atherosclerosis and other cardiovascular
diseases
Allergan, Inc. June 1992 Type II diabetes, skin disorders
Pfizer Inc. May 1991 Osteoporosis
</TABLE>
Ligand also seeks to in-license and/or acquire cancer and other medical
specialty drugs, which are in late-stage clinical development or have been
approved by regulatory authorities. During 1998, Ligand acquired ONTAK(TM), a
treatment for CTCL, in its acquisition of Seragen and in-licensed rights in the
U.S. and Canada to Morphelan(TM) from Elan Corporation, plc ("Elan").
Morphelan(TM), a once-daily, oral, sustained-release product for the management
of pain in oncology and HIV patients, is in Phase III clinical trials in the
U.S. (See "Strategic Transactions.")
STRATEGY
Business Strategy. The Company's strategic goals are to build a marketing
and sales presence in the U.S., Canada and Western Europe, focus on initial
regulatory approval for smaller indications that bring products to market
quickly, expand the markets for its products through additional indication
approvals, and license or acquire technology and/or products in advanced stages
of development. Ligand's internal efforts have been focused primarily on the
discovery and development of retinoids, sex steroid receptor agonists and
antagonists and cytokine agonists for use in specialty market applications,
principally cancer, gynecological disorders and male hormonal imbalances. An
outgrowth of this research has led to a development program in cardiovascular
and metabolic disease. Ligand has developed a cancer product pipeline that
includes two products marketed in the U.S., two in-licensed products marketed in
Canada, and four late-stage products nearing NDA submission.
Ligand has entered into research and development collaborations with major
pharmaceutical companies, with the goal of building a future royalty-based
business. Ligand's collaborative programs focus on discovering drugs for certain
cardiovascular, inflammatory, metabolic and other diseases, as well as broad
applications for women's and men's health. (See "Corporate Collaborations.")
Ligand believes its collaborators have the resources, including clinical and
regulatory experience, manufacturing capabilities and marketing infrastructure,
needed to develop and commercialize drugs for these markets. The arrangements
generally provide for collaborative discovery programs funded largely by the
corporate partners aimed at discovering
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new therapies for diseases treated by primary care physicians. In general, drugs
resulting from these collaborations will be developed, manufactured and marketed
by the corporate partners. Ligand's collaborative agreements provide for
research revenue during the drug discovery stage, milestone revenue for
compounds successfully moving through clinical development, and royalty revenue
from the sale of drugs developed through collaborative efforts.
Ligand also seeks to in-license products from other companies that provide
a strategic fit with the Company's product portfolio. Products in-licensed by
the Company to date are Morphelan(TM), PHOTOFRIN(R), and Proleukin(R). (See
"Elan Strategic Alliance" and "Marketed Products.")
Sales and Marketing. Ligand's sales strategy is to create a targeted sales
force specializing in cancer, to sell its products and those it in-licenses. In
1998 and early 1999, Ligand created a 26-member U.S.-based specialty cancer
sales force. The team includes two national account managers, four regional
managers, and 20 senior cancer sales specialists. To further support the launch
of the Company's first two cancer products, Ligand recently established a
Medical Science Liaison Group to work closely with clinical investigators and
the specialty cancer sales force to coordinate post-marketing clinical trials.
Ligand services its Canadian sales through a Canadian cancer sales team. In
early 1999, the Company laid the groundwork for global commercialization with
the initiation of European operations through its subsidiary, Ligand
Pharmaceuticals International, Inc. For a discussion of the risks associated
with sales and marketing see "Risks and Uncertainties."
Technology. Ligand uses three proprietary technologies in its current
internal product development, IRs and STATs and fusion proteins. Ligand's drug
discovery and development programs have established a leadership position in
gene transcription technology through proprietary technologies involving two
natural mechanisms that regulate gene activity: (1) non-peptide
hormone-activated IRs and (2) cytokine and growth factor activated STATs. Ligand
applies IR technology to the discovery and development of small molecule drugs
that address unmet patient needs and enhance the therapeutic and safety profiles
of marketed medications in certain cancers, men's and women's health, skin
diseases, osteoporosis, cardiovascular and metabolic diseases, and inflammatory
disorders. STAT technology is being used to discover new treatments for diseases
such as cancer, metabolic diseases, inflammation and blood cell formation. The
recently acquired fusion protein technology has led to the discovery of a number
of molecules developed by Seragen, a wholly owned subsidiary of Ligand.
Potential indications for this technology include the treatment of cancers
including CTCL, autoimmune diseases such as rheumatoid arthritis, psoriasis, and
HIV infection/AIDS. ONTAK(TM), approved in 1999 for the treatment of patients
with persistent or recurrent cutaneous CTCL whose malignant cells express the
CD25 component of the IL-2 receptor, was developed using fusion protein
technology.
Currently, Ligand has five retinoid products in its cancer pipeline,
Panretin(R) gel, Panretin(R) capsules, Targretin(R) gel, Targretin(R) capsules
and LGD1550, all of which were developed using IR technology. (See
"Technology.") Retinoids may offer important clinical advantages over currently
available cancer therapies by triggering natural mechanisms to halt or reverse
the progress of various forms of cancer. Retinoids selectively target cells that
express retinoid receptors. Accordingly, they offer potentially less toxic side
effect profiles compared to some chemotherapeutic agents, which kill rapidly
growing cells, cancerous or not. IR technology was instrumental in the
development of Ligand's first approved product by the FDA in early 1999,
Panretin(R) gel.
Ligand also in-licenses technologies to pursue the development of its core
technologies. As such, when a drug is discovered at Ligand, the Company may be
obligated to pay milestone payments, royalties, and/or license fees under the
terms of certain agreements. Ligand has entered into licensing agreements with
Baylor College of Medicine ("Baylor"), The Salk Institute of Biological Studies
("Salk Institute"), and Rockefeller University ("Rockefeller") for certain
rights to IR and STAT technologies. (See "Academic Collaborations.")
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STRATEGIC TRANSACTIONS
In 1998, Ligand acquired rights to ONTAK() through the acquisition of
Seragen and the concurrent execution of related agreements with Lilly. Also in
1998, Ligand in-licensed Morphelan() from Elan, a late-stage development product
for the management of pain in cancer and HIV patients.
<TABLE>
<CAPTION>
COMPANY NAME PRODUCT DISEASE/INDICATION STATUS MARKETING RIGHTS
------------ ---------- ------------------ ---------------- --------------------
<S> <C> <C> <C> <C>
Elan Morphelan(TM) Pain management in Phase III U.S., Canada; Europe
HIV/Cancer (co-promotion
option)
Seragen ONTAK(TM) CTCL Marketed in U.S. Worldwide
</TABLE>
Elan Strategic Alliance. In September 1998, the Company and Elan signed a
binding letter of agreement and in November 1998 signed definitive documents for
a strategic alliance, which provides Ligand with financing through December 31,
1999 of up to $130.0 million. As of December 31, 1998, Elan had provided
approximately $60.0 million of the potential $130.0 million in financing.
$50.0 million of the $60.0 million in financing was provided by Elan
through the purchase of approximately $20.0 million of the Company's common
stock (1,716,738 shares, valued at $11.65 per share) in two installments and
$30.0 million in issue price of zero coupon convertible senior notes due 2008
with an 8.0% per annum yield to maturity. Interest will accrue during the term
of the notes. The remaining available notes may be used to finance the final
payments for the Seragen merger due in August 1999, as well as other
acquisitions of complementary technologies, subject to the consent of Elan.
In conjunction with the strategic alliance, Elan licensed to Ligand
exclusive rights to market Elan's proprietary product Morphelan(TM) in the U.S.
and Canada for pain management in cancer and HIV patients. Ligand also has an
option to co-promote Morphelan(TM) in continental Europe for the same
indications. Morphelan(TM), a once-daily, oral capsule form of morphine, may
provide sustained pain management for HIV and cancer patients as compared to
current therapies requiring frequent dosage treatment. Morphelan(TM) is
currently in Phase III clinical trials in the U.S. Ligand can market and sell
Morphelan(TM), if approved, through its existing specialty cancer and HIV-center
sales force.
Under the license agreement, Ligand paid Elan $15.0 million, in the form of
$5.0 million of common stock (429,185 shares, valued at $11.65 per share) and
$10.0 million in notes (a portion of the $60.0 million of financing provided to
date). The $15.0 million consideration was written off in 1998 as in-process
technology as a one-time charge to results of operations. Milestone payments
will be made based upon the occurrence of certain events up to and including the
approval of the NDA in the U.S. Payment may be in cash or, subject to certain
conditions, in common stock or notes.
Seragen. In May 1998, Ligand announced an agreement to acquire Seragen;
Seragen became a wholly owned subsidiary of Ligand in August 1998. In August
1998, Seragen signed an agreement with Ligand and Lilly in which Lilly assigned
its rights and obligations with Seragen to Ligand, including its sales and
marketing rights to ONTAK(TM). (See "Marketed Products.") Under the terms of the
merger agreement, Ligand paid merger consideration at closing of $30.0 million,
$4.0 million in cash and $26.0 million in the form of the Company's common stock
(1,858,515 shares, valued at $13.99 per share). The merger agreement required an
additional $37.0 million to be paid, at the Company's option in cash and/or
common stock, six months after the date of receipt of final FDA clearance to
market ONTAK(TM). In February 1999, the FDA approved ONTAK(TM) with certain
post-marketing requirements. Under the Company's agreement with Lilly, Ligand
paid $5.0 million (434,546 shares, valued at $11.51 per share) in March 1999 in
the form of common stock as a milestone payment to Lilly as a result of the
FDA's marketing approval for ONTAK(TM). Upon certain other events, Lilly could
receive an additional $5.0 million in milestone payments.
In connection with the Seragen merger, the Company entered into a
definitive asset purchase agreement to acquire substantially all the assets of
Marathon Biopharmaceuticals, LLC, which provided manufacturing and other
services to Seragen under a service agreement. In January 1999, the Company
purchased the assets. Ligand paid, at closing, $5.0 million in the form of the
common stock (402,820 shares, valued at $12.41 per
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share) with an additional $3.0 million to be paid in August 1999, six months
after FDA approval of ONTAK(TM).
Ligand's strategic intent in the acquisition of Seragen was to acquire the
technology of Seragen, including ONTAK(TM), a late-stage product that
represented a good fit with Ligand's developing cancer product portfolio. The
technology acquired from Seragen includes fusion protein expertise and the
patent estate related to this technology. (See "Technology -- Fusion Protein
Technology.") The patent estate provides Ligand with a potential royalty stream
beginning in 2001 for Simulect(R), a Novartis Pharmaceuticals Corporation
product. The FDA approved Simulect(R) in May 1998 for acute rejection episodes
in renal transplant recipients. (See "Out-licensed Products.")
MARKETED PRODUCTS
Ligand currently markets four products that are approved for the treatment
of various cancers -- ONTAK(TM), Panretin(R) gel, PHOTOFRIN(R) and Proleukin(R).
ONTAK(TM) and Panretin(R) gel are marketed in the U.S. by Ligand's specialty
cancer sales force. PHOTOFRIN(R) and Proleukin(R) are in-licensed products
marketed solely in Canada by Ligand's Canadian sales force, which was
established in 1995.
<TABLE>
<CAPTION>
PRODUCT APPROVED INDICATION(1) MARKETING RIGHTS
- ---------- ----------------------------- ----------------
<S> <C> <C>
ONTAK(TM) CTCL Worldwide
Panretin(R) Kaposi's sarcoma Worldwide
gel
PHOTOFRIN(R) Esophageal cancer, Canada Only
Superficial bladder cancer
Proleukin(R) Metastatic renal cell Canada Only
carcinoma,
Metastatic malignant melanoma
</TABLE>
- ---------------
(1) For a discussion of clinical trials being conducted with ONTAK(TM) and
Panretin(R) gel, see "Ligand Products in Clinical Development."
ONTAK(TM). ONTAK(TM), approved by the FDA for the treatment of patients
with persistent or recurrent cutaneous CTCL whose malignant cells express the
CD25 component of the IL-2 receptor, was developed using Seragen's fusion
protein technology. ONTAK(TM) is the first product commercialized by Ligand for
the treatment of CTCL, and the first treatment to be approved for CTCL in nearly
10 years.
CTCL is a type of non-Hodgkin's lymphoma ("NHL") that appears initially in
the skin, but over time may involve other organs. The disease can be extremely
disfiguring and debilitating, and median survival for late-stage patients is
less than three years. The prognosis for CTCL is based in part on the stage of
the disease when diagnosed. CTCL is most commonly a slowly progressing cancer,
and many patients live with the complications of CTCL for 10 or more years after
diagnosis. However, some patients have a much more aggressive form of this
disease. CTCL affects an estimated 16,000 people in the U.S.
ONTAK(TM) was granted priority review designation by the FDA in February
1998, and in February 1999, the FDA granted marketing approval for ONTAK(TM)
under the accelerated approval regulations for the treatment of patients with
persistent or recurrent cutaneous CTCL whose malignant cells express the CD25
component of the IL-2 receptor. ONTAK(TM) is manufactured and marketed by
Ligand.
Human clinical studies indicated that ONTAK(TM) was safe and effective for
the treatment of patients with previously treated CTCL. The Phase III
intent-to-treat analysis of 71 patients showed that 30% of patients treated with
ONTAK(TM) had a reduction in tumor burden of 50% or greater and approximately
10% of the patients showed complete resolution of all evidence of the disease
for a median duration of nine months. As expected in patients receiving an
intravenous infusion of foreign protein, significant adverse events were
reported in all patients in the clinical trials including flu-like symptoms
(91%); acute hypersensitivity-type reactions (69%); nausea and vomiting (64%);
infections (48%) and vascular leak syndrome (27%).
The FDA acted under the accelerated approval regulations in its approval of
ONTAK(TM) and requested that the Company conduct certain post-approval clinical
and research studies to further document the safety, efficacy and
pharmacokinetic profile of this drug.
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Panretin(R) gel. Panretin(R) gel, a topical retinoid developed utilizing IR
technology, was approved for marketing by the FDA in February 1999 for the
topical treatment of cutaneous lesions of patients with AIDS-related KS. The
active substance in Panretin(R) gel is a small molecule, non-peptide hormone
isolated and characterized in 1991 as 9-cis retinoic acid by scientists at
Ligand in collaboration with scientists at The Salk Institute and Baylor. 9-cis
retinoic acid is the first non-peptide hormone discovered in over 25 years and
appears to be a natural hormone for both the RAR and RXR subfamilies of retinoid
receptors. (See "Technology -- Intracellular Receptor Technology.") Panretin(R)
gel is one of five proprietary retinoid products in advanced stages of clinical
development.
Clinical trials for Panretin(R) gel were launched in June 1994, with Phase
III trials commencing in the U.S. in the second quarter of 1996 and
internationally in the third quarter of 1996. In June 1998, the Company reported
the final analysis of data from the North American and international pivotal
Phase III studies at the 12th International AIDS Conference in Geneva,
Switzerland. Data from the Phase III pivotal studies demonstrated that
Panretin(R) gel is clinically effective in treating the dermal lesions of
AIDS-related KS in up to 50% of patients studied, confirming the positive
results from the interim analyses reported in December 1997. In February 1999,
the FDA approved Panretin(R) gel for the treatment of cutaneous lesions of
patients with AIDS-related KS. Panretin(R) gel has received orphan drug
designation in this indication.
Ligand is also pursuing approval of Panretin(R) gel for the treatment of
cutaneous lesions of patients with AIDS-related KS in Canada and Europe. Ligand
filed a New Drug Submission ("NDS") with the Canadian Health Protection Branch
("CHPB") in September 1998 and submitted a Marketing Authorization Application
("MAA") with the European Agency for the Evaluation of Medicinal Products in
February 1999. The NDS for Panretin(R) gel has been accepted for priority review
in Canada. The NDS filing in Canada and the MAA submission in Europe are based
on the pivotal Phase III clinical trials included in the NDA submitted to the
FDA for Panretin(R) gel in May 1998. In January 1999, Ligand announced the
formation of Ligand Pharmaceuticals International, Inc. and the appointment of
its president of European Operations in anticipation of the submission of the
MAA for Panretin(R) gel in Europe.
PHOTOFRIN(R). In March 1995, Ligand acquired from QLT PhotoTherapeutics,
Inc. ("QLT") exclusive Canadian marketing rights to PHOTOFRIN(R), a
laser-activated drug for use in photodynamic therapy for esophageal cancer and
superficial bladder cancer, and began distribution of the product in July 1995.
Each year over 3,500 new cases of superficial bladder cancer and 1,200 new cases
of esophageal cancer are diagnosed in Canada. In addition, Ligand has the rights
to sell the product for any other approved indications in Canada. In August
1997, QLT filed a supplemental NDS with the CHPB for PHOTOFRIN(R) in
advanced-stage lung cancer.
Proleukin(R). In September 1994, Ligand acquired from Cetus Oncology
Corporation, a subsidiary of Chiron Corporation, exclusive Canadian marketing
rights to Proleukin(R), a recombinant human Interleukin-2 for the treatment of
metastatic renal cell carcinoma, and began distribution of the product in April
1995. Nearly 3,900 new cases of kidney cancer are reported in Canada each year.
Proleukin(R) is also being tested with interferon alpha to determine if
additional indications are feasible. In January 1999, the CHPB issued a Notice
of Compliance for Proleukin(R) for the treatment of patients with metastatic
malignant melanoma.
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<PAGE> 8
LIGAND PRODUCTS IN CLINICAL DEVELOPMENT
Ligand is developing several proprietary products for which it has
worldwide rights for a variety of cancers and skin diseases. These product
development programs are based on retinoids discovered through Ligand's IR
technology and ONTAK(TM) which was developed using Seragen's fusion protein
technology. (See "Technology.") The table below provides a summary of clinical
development programs currently being conducted by Ligand.
<TABLE>
<CAPTION>
PROGRAM DISEASE/INDICATION DEVELOPMENT PHASE
- ----------------- ------------------------------------- -------------------
<S> <C> <C>
ONTAK(TM) Non-Hodgkin's lymphoma (NHL) Phase II
Psoriasis Phase II
Panretin(R) gel Skin cancers Phase II
(Under development)
Panretin(R) Kaposi's sarcoma (KS) Phase II
capsules Pediatric cancers, Breast cancer Phase II
Myelodysplastic syndrome (MDS) Phase II
Severe plaque psoriasis Phase II
Bronchial metaplasia Phase II
Targretin(R) CTCL, Lung cancer (minimal disease) Phase II/III
capsules Breast cancer Phase II
Moderate-to-severe psoriasis Phase II
Lung cancer (combination therapy) Phase II
Head and neck cancer Phase II
Type II diabetes mellitus (Diabetes) Phase II
Targretin(R) gel CTCL Phase III
Actinic keratoses Phase II
Skin cancers Phase II
(Under development)
LGD1550 capsules Advanced cancer Phase I/II
Head and neck cancer, Cervical cancer Phase II
(Under development)
</TABLE>
Development phase refers to the current stage of development of the most
advanced indication. Clinical trials are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into humans, the emphasis is on testing for adverse effects,
dosage tolerance, absorption, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a representative patient population
to determine the efficacy of the pharmaceutical for specific targeted
indications, to determine dosage tolerance and optimal dosage and to identify
related adverse side effects and safety risks. Once a compound is found to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to evaluate clinical efficacy further and to
further test for safety. Sometimes Phase I and II trials or Phase II and III
trials are combined. In the U.S., the FDA reviews both the clinical plans and
the results of the trials and may discontinue the trials at any time if there
are significant safety issues.
In connection with the exercise of the buyback of ALRT and the exclusive
licensing arrangement with Allergan, Inc. ("Allergan") (see "Corporate
Collaborations -- Allergan Inc."), Ligand acquired the exclusive right to
develop and commercialize Panretin(R) capsules, Panretin(R) gel, LGD1550,
LGD1268 and LGD1324.
In connection with the corporate collaboration with Lilly described in
"Corporate Collaborations -- Eli Lilly and Company," Lilly received worldwide,
exclusive rights to Targretin(R), other Ligand compounds and
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<PAGE> 9
technology associated with the RXR receptor, HNF4, PPAR modulators and the ob
gene pathway in all fields other than cancer and dermatology. In early 1999,
Lilly opted not to proceed with the development of certain first generation
compounds, including Targretin(R), in the RXR program for diabetes. As a result
of this decision, all rights to the oral form of Targretin(R) reverted to Ligand
and LGD1268 and LGD1324 returned to the pool of eligible RXR modulators for
possible use in oncology in combination with a selective estrogen receptor
modulator ("SERM") under the separate collaboration agreement between Ligand and
Lilly.
ONTAK(TM). ONTAK(TM) is the first of a new class of targeted cytotoxic
biologic agents called fusion proteins. In addition to the use of ONTAK(TM) in
CTCL, a Phase II trial for the treatment of patients with NHL is under
development by the Eastern Cooperative Oncology Group. Nearly 300,000 people in
the U.S. are affected by NHL. Two Phase III trials are currently in progress to
evaluate the use of ONTAK(TM) in patients with CTCL who have received two to
four previous therapies. A Phase II trial with ONTAK(TM) for the treatment of
severe psoriasis, a condition which affects an estimated 1.4 to 1.9 million
people in the U.S., is ongoing.
Retinoids. Five of the products in Ligand's proprietary product development
programs are retinoids, discovered and developed using Ligand's proprietary IR
technology. Retinoids have the ability to trigger natural mechanisms to halt or
reverse various forms of cancer. (See "Technology -- Retinoid Responsive IRs.")
Retinoids selectively target cells that express retinoid receptors and offer
potentially less toxic side effect profiles compared to some chemotherapeutic
agents, which may kill rapidly growing cells indiscriminately, cancerous or not.
The five retinoid products currently under clinical development by Ligand are
Panretin(R) gel, Panretin(R) capsules, Targretin(R) capsules, Targretin(R) gel
and LGD1550 capsules.
Panretin(R) gel. Panretin(R) gel incorporates 9-cis retinoic acid, a
retinoid isolated and characterized by Ligand in 1991 in collaboration with
scientists at The Salk Institute and Baylor. 9-cis retinoic acid is the first
non-peptide hormone discovered in over 25 years and appears to be a natural
ligand for the RAR and RXR subfamilies of retinoid receptors. (See
"Technology -- IR Technology.") A Phase II trial is under development for use of
Panretin(R) gel in patients with basal cell carcinoma, a disease with an
estimated 600,000 new cases diagnosed in the U.S. each year.
Panretin(R) capsules. Panretin(R) capsules also contain 9-cis retinoic acid
and have demonstrated clinical promise for the systemic treatment of cutaneous
AIDS-related KS, other cancers and skin disorders. In completed Phase I/II human
clinical trials, Panretin(R) capsules were tolerated at doses up to 140
mg/m(2)/day (milligrams per square meter of body surface per day). At the
maximum tolerated dose, side effects, including headaches, elevated triglyceride
levels, hypercalcemia and mucocutaneous irritation, were dose limiting
toxicities.
In February and June 1998, favorable results were reported in two Phase II
trials with Panretin(R) capsules in patients with KS. The two Phase II studies
were similar in design, with one conducted by the AIDS Malignancy Consortium
("AMC") sponsored by the National Cancer Institute ("NCI") and the other
conducted by Ligand. In the studies, Panretin(R) capsules were administered once
daily at doses increasing from 60 mg/m(2) to 140 mg/m(2). Study participants had
to have biopsy-proven KS associated with AIDS and at least five skin lesions
that were assessed every two weeks for response. Response was determined by
applying standard AIDS Clinical Trial Group criteria for complete and partial
response based on the indicator lesions. The overall response rate at final
analysis following the 16-week treatment period for patients meeting the
criteria for evaluation was 37% (19 of 50) in the AMC study and included one
complete responder. Drug-associated side effects were generally manageable, with
some patients requiring dose reductions due to side effects of headache, dry
skin, rash, alopecia, peeling/flaking skin and hyperlipidemia as the most common
events. The study conducted by Ligand enrolled 57 patients at five study
centers. The overall response rate for all patients was 39% (22 of 57), and for
patients who met the protocol-defined criteria for evaluation, the overall
response rate was 62% (21 of 34). One patient demonstrated a complete response.
Almost all patients were on highly active antiretroviral therapy, including at
least one protease inhibitor, prior to the start of Panretin(R) capsules
therapy. The side effect profile was similar to that in the AMC study. For the
22 responders, two patients relapsed and 20 continued to respond at the time of
the study's analysis. The studies' conclusions suggest that patient responses to
Panretin(R) capsules occurred independent of their pretreatment
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<PAGE> 10
CD4(+)counts, concurrent antiretroviral therapy and prior treatment for
AIDS-related KS with systemic chemotherapy.
Ligand is conducting discussions with the FDA regarding the adequacy of the
data from these two Phase II clinical trials to support the filing of an NDA for
Panretin(R) capsules in AIDS-related KS. Panretin(R) capsules have not shown the
more significant side effects observed with commonly prescribed chemotherapies
used to treat KS. In addition, chemotherapeutic agents must be administered to
KS patients by injection or through intravenous infusion. Panretin(R) capsules
may provide patients with an effective way to control the disease in an easily
administered oral form.
Phase II trials with Panretin(R) capsules are ongoing in breast and
pediatric cancers, and in bronchial metaplasia. Ligand has completed Phase II
trials in myelodysplastic syndrome and in severe plaque psoriasis, and the
NCI-Canada has evaluated the results of a Phase I/II trial using Panretin(R)
capsules in combination with interferon alpha for renal cell carcinoma.
Targretin(R) capsules and Targretin(R) gel. Bexarotene, the active
substance in Targretin(R), is a synthetic retinoid developed by Ligand that
shows selective retinoid receptor subtype activity that is different from that
of 9-cis retinoic acid, the active substance in Panretin(R). (See
"Technology -- Retinoid Responsive IRs.") Targretin(R) selectively activates a
subclass of retinoid receptors called retinoid X receptors ("RXRs"). RXRs play
an important role in the control of a variety of cellular functions. Ligand's
preclinical research indicates that bexarotene has utility in the treatment of
psoriasis, solid tumors and tamoxifen-resistant breast tumors, as well as in
treatment and prevention models of breast cancer. In addition, preclinical
studies indicate bexarotene's utility in metabolic disorders, such as type II
diabetes mellitus, as these studies demonstrate the ability of bexarotene to
decrease blood glucose and insulin levels.
Ligand is developing Targretin(R) capsules for the treatment of patients
with refractory or persistent early-stage or refractory advanced-stage CTCL and
Targretin(R) gel for the treatment of patients with refractory or persistent
early-stage CTCL. If approved, Targretin(R) capsules and Targretin(R) gel, along
with the already approved ONTAK(TM), would result in the availability of Ligand
products for treating every stage of CTCL. Ligand has completed three trials for
the treatment of patients with CTCL with Targretin(R), two Phase II/III trials
with Targretin(R) capsules and one Phase III trial with Targretin(R) gel.
Interim findings based on analysis of Phase II/III clinical data for
Targretin(R) capsules from the first 84 patients with advanced stage CTCL who
were resistant to previous therapies and who received the dose believed
appropriate for marketing (300 mg/m(2)/day) showed a 49% (41 of 84 patients)
response rate using the Physician's Global Assessment score. Some early-stage
patients received a low dose (6.5 mg/m(2)/day) of Targretin(R) capsules; only
one of the 15 patients (7%) who received the low dose achieved a response,
suggesting that higher doses are required. Formal analyses in preparation for
the submission of an NDA are ongoing.
An interim assessment of a Phase I/II study for Targretin(R) gel in
patients with CTCL demonstrated that 59% (36 of 61 patients) showed a 50% or
greater improvement in the disease using the Physician's Global Assessment
score. A Phase III study of patients with refractory or persistent early-stage
CTCL accrued 51 patients. An interim assessment of the first 16 patients who
completed the protocol-specified evaluation period for this trial had a response
rate of 56% using the Physician's Global Assessment score. Patient enrollment in
these trials is complete and formal analyses in preparation for the submission
of an NDA are ongoing.
Ligand has completed Phase IIA trials with Targretin(R) gel for the
treatment of patients with actinic keratoses, a condition that is estimated to
affect up to 5 million people in the U.S. A Phase II trial with Targretin(R) gel
for the treatment of patients with non-melanoma skin cancer is under
development.
Ligand is also conducting a Phase II trial with Targretin(R)capsules for
the treatment of patients with moderate to severe psoriasis, a condition that is
estimated to affect between 1.4 and 1.9 million people in the U.S., as well as a
Phase II trial in patients with KS. A Phase II study in patients with head and
neck cancers has been completed. A Phase II/III trial is also ongoing in lung
cancer.
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<PAGE> 11
In November 1998, Ligand initiated a Phase II trial with Targretin(R)
capsules for the treatment of patients with advanced breast cancer. The purpose
of this open-label study is to assess the efficacy, safety and tolerability of
Targretin(R) capsules at two dose levels in up to 180 patients at approximately
30 sites at leading cancer centers throughout the U.S. This year, experts
predict that more than 180,000 cases of breast cancer will be diagnosed, making
it the most common non-skin malignancy in the U.S. among women. The prevalence
of breast cancer in the U.S. is estimated to have reached more than 2 million.
Tamoxifen is currently the most widely prescribed breast cancer therapy.
A Phase II multicenter trial with Targretin(R) capsules in type II diabetes
in Europe is near completion. This trial demonstrated the insulin sensitizing
effects of the RXR-selective drug in humans. In November 1997, Ligand initiated
a collaboration with Lilly for the development of certain compounds in metabolic
disease, including type II diabetes. In the first quarter of 1999, Lilly decided
to focus the collaboration's research effort on second generation RXR modulators
which show an improved side effect profile in diabetes and opted not to proceed
with the development of Targretin(R) capsules and two other first generation
compounds in the RXR program in diabetes. As a result of this decision, all
rights to Targretin(R) capsules under the agreement relating to its development
reverted to Ligand. (See "Corporate Collaborations -- Eli Lilly and Company.")
LGD1550 capsules. LGD1550 is a potent retinoic acid receptor ("RAR")
agonist that strongly inhibits growth of several human cancer cell lines. (See
"Technology -- Intracellular Receptor Technology.") Phase I/IIA clinical trials
in advanced cancer have shown that LGD1550 capsules were well tolerated.
Investigators observed dose-limiting skin toxicities, diarrhea and abdominal
cramps. Dose-limiting toxicities, such as headache and lipid abnormalities,
frequently observed with other retinoids have not been observed with LGD1550.
Unlike all-trans retinoic acid, a retinoid approved for the treatment of acute
promyelocytic leukemia, LGD1550 does not appear to induce its own metabolism
over the dose range tested since blood levels are maintained with continued
therapy. Phase II studies with LGD1550 in combination with chemotherapy for the
treatment of patients with cervical and head and neck cancers are being
designed. The prevalence of cervical cancer cases in the U.S. is estimated at
205,000 cases, while the prevalence of head and neck cancer in the U.S. is
estimated at more than 210,000 cases.
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<PAGE> 12
LIGAND RESEARCH AND DEVELOPMENT PROGRAMS
Ligand is pursuing several major internally funded and collaborative drug
discovery programs based on specific IRs (sex hormone, PPAR and glucocorticoid
receptor programs for cancer, skin and eye disease, metabolic disease, men's and
women's health and inflammatory disease) and STATs (interferon, hematopoietic
growth factor and cytokine programs for cancer and immunological diseases). (See
"Technology.")
<TABLE>
<CAPTION>
PROGRAM DISEASE/INDICATION DEVELOPMENT PHASE MARKETING RIGHTS
------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
SEX HORMONE MODULATORS
Droloxifene Osteoporosis Phase II Pfizer
CP336,156 Osteoporosis Phase II Pfizer
TSE-424 Post-menopausal Phase II AHP
osteoporosis
ERA-923 Breast cancer Phase I AHP
Progesterone Antagonists Contraception, Reproductive Lead compounds selected AHP/Ligand
disorders
Progesterone Agonists Hormone replacement therapy Lead compounds selected AHP/Ligand
(HRT)
Androgen Antagonists Acne, Hirsutism, Alopecia, Development candidate Ligand worldwide
(LGD1331) Prostate cancer, Benign
prostatic hyperplasia (BPH)
Androgen Agonists Male HRT, Cachexia, AIDS- Lead compounds selected Ligand worldwide
wasting, Osteoporosis
CARDIOVASCULAR/METABOLIC DISEASE
LDL-lowering Compound Atherosclerosis Lead compounds selected Glaxo
PPAR Modulators Cardiovascular disease Lead compounds selected Glaxo
PPAR Modulators Diabetes, Metabolic disease Lead compounds identified Lilly
RXR Modulators Diabetes, Metabolic disease Lead compounds identified Lilly
HNF-4 Modulators Diabetes, Metabolic disease Research Lilly
ob-gene Pathway Metabolic disease Research Lilly
ob-Leptin Metabolic disease Research SmithKline Beecham
AGN4204 and AGN4326 Type II diabetes mellitus Lead compounds selected Allergan
(Diabetes)
INFLAMMATORY DISEASE
Glucocorticoid Agonists Inflammation Preclinical Abbott/Ligand
AGN4310 Psoriasis, Mucotaneous Development candidate Allergan
toxicity
STATS
Hematopoietic Growth Oncology, Anemia Lead compounds selected SmithKline
Factors Beecham/Ligand
Interferon Agonists Cancer, Infectious disease, Lead compounds identified Ligand worldwide
Multiple sclerosis
Cytokine Cancer, Immunology, Growth Research Ligand worldwide
Agonists/Antagonists disorders
</TABLE>
Development phase refers to the current stage of development of the most
advanced indication. Research activities include research related to specific IR
and STATs targets and the identification of lead compounds. Lead compounds are
chemicals that have been identified that meet pre-selected criteria in cell
culture models for activity and potency against IR or STATs targets. More
extensive evaluation is then undertaken to determine if the compound should be
selected to enter into preclinical development. Once a lead compound is
selected, chemical modification of the compound is then undertaken to create the
best drug candidate.
The preclinical phase includes pharmacology and toxicology testing in
preclinical models (in vitro and in vivo), formulation work and manufacturing
scale-up to gather necessary data to comply with applicable regulations prior to
commencement of human clinical trials. Development candidates are lead compounds
that have successfully undergone in vitro and in vivo evaluation to demonstrate
that they have an acceptable profile, which justifies taking them through
preclinical development with the intention of filing an IND and initiating human
clinical testing. Clinical trials are typically conducted in three sequential
phases that may overlap. (See "Ligand Products in Clinical Development.")
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<PAGE> 13
Droloxifene is a Pfizer compound for which Ligand performed work at
Pfizer's request. CP336,156 is a compound discovered through the Company's
collaborative relationship with Pfizer to which Pfizer has retained marketing
rights. (See "Corporate Collaborations -- Pfizer Inc.")
In connection with the corporate collaboration with Lilly described in
"Corporate Collaborations -- Eli Lilly and Company," Lilly received worldwide,
exclusive rights to Targretin(R), other Ligand compounds and technology
associated with the RXR receptor, HNF-4, PPAR modulators and the obgene pathway
in all fields other than cancer and dermatology.
In connection with the exercise of the buyback of ALRT and the exclusive
licensing arrangement with Allergan, Allergan acquired rights to AGN4204,
AGN4326 and AGN4310. Ligand has retained certain compound rights in its
collaborations with AHP, SmithKline Beecham and Abbott. (See "Corporate
Collaborations.")
SEX HORMONE MODULATORS DEVELOPMENT PROGRAMS
The primary objective of Ligand's sex hormone modulators programs is to
develop drugs for hormonally responsive cancers of men and women, hormone
replacement therapies and the treatment and prevention of diseases affecting
women's health, as well as hormonal disorders prevalent in men. Ligand's
programs in the sex hormone modulators area target development of
tissue-selective modulators of the progesterone receptor ("PR") and estrogen
receptor ("ER") for uses including hormone replacement therapy and various
chronic disease indications and the development of androgen receptor ("AR")
agonists and antagonists for use in cancer and a number of benign indications.
Lead compounds or development candidates have been identified in each of these
project areas.
Selective Estrogen Receptor Modulators. Through the Company's
collaborations with Pfizer and AHP, four SERMs are in advanced stages of
development. (See "Corporate Collaborations.") Droloxifene and CP336,156 have
resulted from the Pfizer collaboration and may be used to prevent or treat
osteoporosis and reduce the risk of cardiovascular disease in post-menopausal
women. These SERMs have also been shown to reduce bone loss and decrease
low-density lipoprotein levels ("LDL", or "bad" cholesterol). Droloxifene is an
estrogen antagonist-partial agonist compound while CP336,156 is an estrogen
partial agonist compound. Both compounds are in Pfizer-sponsored Phase II trials
for osteoporosis, with at least one compound targeted to enter Phase III
clinical trials according to Pfizer. Two SERMs have also resulted from Ligand's
collaboration with AHP -- TSE-424 and ERA-923. TSE-424 is being developed for
the treatment of post-menopausal osteoporosis, with Phase I trials completed and
Phase II trial protocols under development. ERA-923 is being developed for the
treatment of breast and reproductive cancers. AHP filed an IND for ERA-923 for
the treatment of women with breast cancer in December 1998 and Phase I trial
protocols are under development.
Osteoporosis, the targeted indication for droloxifene, CP336,156 and
TSE-424, is a disease characterized by significant loss of bone mass.
Osteoporosis, which predominantly affects post-menopausal women, leads to a
greater susceptibility to traumatic bone fractures and can lead to curved spine
("dowager's hump") or hip fractures in elderly women. In the U.S., it is
estimated that 10 million people have osteoporosis and 18 million more have low
bone mass, placing them at increased risk for osteoporosis. Osteoporosis is
ordinarily treated by giving women therapeutic doses of estrogen or other
steroidal analogues of estrogen. Estrogen therapy is associated with significant
side effects, including an increased risk of developing uterine cancer and a
concern about a potential increase in breast cancer risk. Estrogen therapy is
not well-tolerated by all women and approximately 60% of women abandon the
therapy within the first year due to side effects, such as nausea, vomiting,
vaginal bleeding and fluid retention, and concern about an increased risk of
cancer. Due to their improved side effect profile, the SERMs being developed by
Ligand and its collaborators, if commercialized, may provide an improved
alternative to estrogen therapy for the treatment of osteoporosis.
PR Modulators. Ligand is developing novel non-steroidal PR antagonists,
partial agonists and agonists internally and in collaboration with AHP, for use
in hormone replacement therapy, contraception, reproductive disorders and other
applications in women's health. (See "Corporate Collaborations -- American Home
Products.") Exploratory clinical research indicates that PR antagonists may have
utility in contraception and in a variety of chronic diseases, including
endometriosis and cancer. Although PR antagonists currently are
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<PAGE> 14
used clinically for acute contraceptive indications, their use in chronic
diseases is likely to be limited by their cross-reaction with the glucocorticoid
receptor, which is anticipated to produce adverse side effects with long-term
administration. Ligand believes that more selective PR antagonists may be useful
in the treatment of many hormone responsive diseases, including gynecological
and malignant disorders, such as breast and uterine cancer, uterine fibroids
(benign smooth muscle tumors) and endometriosis. Because of the very close
structural similarity of the IRs for progesterone and glucocorticoids, it has
proven difficult to find compounds that do not interact with both.
Ligand has discovered, based on its proprietary tools and approaches,
specific PR antagonists that do not cross-react with the IR for glucocorticoids.
Ligand has also discovered several additional nonsteroidal lead compounds that
are PR modulators. In addition, Ligand has discovered closely related compounds
that are full agonists of the PR, which may be useful in contraception,
reproductive disorders, and hormone replacement therapy.
Selective Androgen Receptor Modulators ("SARMs.") The primary objective of
Ligand's SARMs program is to develop novel tissue-selective AR agonists or
antagonists for male hormone replacement therapy and the treatment of skin
disorders, osteoporosis, prostate cancer, benign prostatic hyperplasia ("BPH")
and other diseases. The growth of most prostate cancers appears to be stimulated
by or dependent upon androgens. The use of androgen antagonists has shown
efficacy in the treatment of prostate cancer, with three androgen antagonists
currently approved by the FDA for use in the treatment of prostate cancer.
Ligand believes that there is a substantial medical need for improved androgen
modulators for use in the treatment of prostate cancer, as currently available
agents appear to have significant side effects.
AR antagonists with an improved side effect profile may provide utility in
the treatment of BPH, prostate cancer, acne, hirsutism and male-pattern
baldness. AR agonists with distinct tissue selectivity are being developed by
Ligand. These novel molecules may have utility for hormone replacement therapy
in men and women, male osteoporosis and in the treatment of cachexia associated
with chronic disease (e.g., cancer, autoimmune disorders and AIDS). Ligand has
identified non-steroidal lead compounds from its internal screening programs. An
internally directed medicinal chemistry effort has produced potent, selective,
patentable AR agonists that show pharmacological activity in vivo in rodents and
AR antagonists that show pharmacological activity in vivo in rodents and dogs.
Compounds from these series are being optimized and will be further evaluated as
potential preclinical candidates. Ligand intends to pursue the specialty
applications emerging from these projects internally, but may seek a
collaboration with a pharmaceutical company to exploit broader clinical
applications.
Ligand researchers have identified an orally available, non-steroidal AR
antagonist, LGD1331, which preclinical studies indicate may have utility for
treating acne and hirsutism disorders that affect a significant number of women.
This compound may be a promising agent for antiandrogen therapy for prostate
cancer, balding in men and BPH. In vivo studies of LGD1331 have revealed
favorable characteristics, including indirect evidence of diminished effects on
the central nervous system, compared with currently marketed drugs of this type
for the treatment of these conditions.
CARDIOVASCULAR/METABOLIC DISEASE DEVELOPMENT PROGRAMS
Ligand scientists are exploring the role of certain orphan IRs in disorders
affecting the cardiovascular system. Data suggest that these receptors regulate
the expression of apolipoprotein A1 ("ApoA1.") ApoA1 is the major protein
constituent of high-density lipoprotein ("HDL"), and recent data link increased
levels of ApoA1 to prevention of atherosclerosis.
PPARs, another subfamily of orphan IRs, have been implicated in processes
that regulate plasma levels of very low density lipoproteins ("LDL") and
triglycerides. (See "Technology -- Intracellular Receptor Technology.") Data
implicate PPARs in the mechanism of action of lipid lowering drugs such as
Lopid(R). There are three subtypes of the PPAR subfamily with defined novel
aspects of their action -- alpha, beta and gamma. The subtype PPAR alpha appears
to regulate the metabolism of certain lipids and is useful in treating
hyperlipidemia. PPAR gamma plays a role in fat cell differentiation and cellular
responses to insulin. Modulators of PPAR gamma activity (e.g., the glitazone
class of insulin sensitizers) have utility in the
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<PAGE> 15
management of type II diabetes. PPARs are believed to function in cells in
partnership with RXRs. In addition to compounds that act directly on PPARs and
that may have utility in various cardiovascular and metabolic disorders, certain
retinoids are able to activate this RXR:PPAR complex (e.g., Targretin(R)
capsules and LGD1268) and they may also have utility in these disorders. Studies
have demonstrated that Targretin(R) capsules have beneficial effects in
preclinical models of diabetes.
In September 1992, Ligand entered into a collaboration with Glaxo to
discover and develop drugs for the prevention or treatment of atherosclerosis
and other disorders affecting the cardiovascular system. In collaboration with
Glaxo, Ligand worked to discover drugs which produce beneficial alterations in
lipid and lipoprotein metabolism in projects focused on: (1) regulation of
cholesterol biosynthesis and expression of a receptor which removes cholesterol
from the blood stream, (2) the IRs influencing circulating HDL levels, and (3)
PPARs, the subfamily of IRs activated by the clofibrate class of lipid lowering
drugs, Lopid(R) and Atromid-S. The collaboration with Glaxo has identified a
novel lead structure that activates selected PPAR subfamily members. A different
lead compound showing activity in preclinical models has been selected for
lowering LDL cholesterol by up-regulating LDL receptor gene expression in liver
cells. Glaxo is responsible for the subsequent research necessary to optimize
the leads to produce clinical candidates. (See "Corporate
Collaborations -- Glaxo-Wellcome plc.")
In November 1997, the Company and Lilly entered into a strategic alliance
for the discovery and development of products based upon Ligand's IR technology.
The collaboration focuses on products with broad applications across metabolic
diseases, including diabetes, obesity, dislipidemia, insulin resistance and
cardiovascular diseases associated with insulin resistance and obesity. (See
"Corporate Collaborations -- Eli Lilly and Company.")
In March 1998, Ligand and SmithKline Beecham initiated a new collaboration
to develop small molecule drugs that modulate the signaling pathway controlled
by leptin as a means of discovering orally available drugs for the treatment of
obesity. (See "Corporate Collaborations -- SmithKline Beecham.")
INFLAMMATORY DISEASE DEVELOPMENT PROGRAM
In collaboration with Abbott, Ligand is seeking novel small molecule
anti-inflammatory drugs. The collaborative program includes molecular approaches
to discovering modulators of glucocorticoid receptor activity that have
significantly improved therapeutic profiles relative to currently known
anti-inflammatory steroids such as prednisone and dexamethasone. The
collaboration is focused on the development of novel non-steroidal
glucocorticoids with full anti-inflammatory activity and reduced or eliminated
side effect profiles. A number of lead compounds have been identified and are
currently being optimized for further drug development. (See "Corporate
Collaborations -- Abbott Laboratories.")
STAT DEVELOPMENT PROGRAMS
Ligand's proprietary STAT technology is distinct from Ligand's IR
technology platform. STATs are activated through a receptor located on the
surface of the cell rather than through an intracellular receptor. STAT
technology provides Ligand with a second broadly enabling drug discovery
platform that has potential applications in cancer, inflammation, asthma,
allergy, infectious disease, anemia, obesity, diabetes and growth disorders.
(See "Technology -- STAT Technology.") Ligand is pursuing product development
opportunities based on its STAT technology through a collaboration with
SmithKline Beecham and internally funded programs focusing on interferon
agonists and other cytokine agonists and antagonists.
The SmithKline Beecham collaborative research program, initiated in 1995
and expanded in 1998, uses Ligand's STAT technology to discover and characterize
small molecule, orally bioavailable drugs to control hematopoiesis, the
formation and development of blood cells, for the treatment of a variety of
blood cell deficiencies. In the July 10, 1998 issue of the journal Science,
Ligand and SmithKline Beecham scientists announced the discovery of the first
non-peptide small molecule that mimics the activity of Granulocyte-Colony
Stimulating Factor ("G-CSF"), a natural hormone that stimulates production of
infection-fighting neutrophils (a type of white blood cell). This molecule could
lead to the development of an orally active drug that could replace recombinant
G-CSF (sold by Amgen as Neupogen(TM)), a drug that must be administered
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<PAGE> 16
by injection. While the lead compound has only been shown to be active in mice,
its discovery is a major scientific milestone and suggests that orally active,
small molecule mimics can be developed not only for G-CSF, but for other
cytokines as well. Ligand and SmithKline Beecham continue to pursue development
of this compound series. (See "Corporate Collaborations -- SmithKline Beecham.")
Ligand's program to discover and develop small molecule, orally available
drugs to act as interferon agonists for potential application in various cancers
and viral diseases is ongoing. Ligand scientists are currently studying small
molecule mimics for both interferon alpha, which has approved indications in the
treatment of chronic viral diseases, such as Hepatitis B and C and cancer, and
interferon beta, which is approved for the treatment of relapsing-remitting
multiple sclerosis. A number of lead compounds with strong efficacy in
preclinical in vitro antiviral studies have been identified and are undergoing
further characterization.
Ligand continues its internal preclinical program aimed at discovering
novel immunomodulatory drugs. Clinically, it is well established that a variety
of immune disorders are characterized by unbalanced helper T-cell responses.
(Helper T-cells are white blood cells critical to immune response.) Several
cytokines play a key role in regulating the proper balance of helper T-cell
responses, including interleukin-4 ("IL-4") and interleukin-12 ("IL-12.")
Regulating helper T-cell responses through modulation of IL-4 or IL-12 signaling
pathways may have application in allergy and asthma in the case of IL-4, and
transplant rejection and autoimmune diseases in the case of IL-12. Compelling in
vivo evidence suggests that pharmacological intervention in the JAK/STAT
signaling pathways activated by IL-4 or IL-12 could result in drugs with novel
mechanisms of action that may not only complement, but also greatly improve on
current therapies.
OUT-LICENSED PRODUCTS
Ligand has licensed certain patent rights to Cytel related to Cylexin(R)
and to Novartis related to Simulect(R).
<TABLE>
<CAPTION>
COMPANY NAME PRODUCT DISEASE/INDICATION DEVELOPMENT PHASE
- ------------ ------- ------------------ -----------------
<S> <C> <C> <C>
Cytel Cylexin(R) Reperfusion injury Phase II/III
Novartis Simulect(R) Kidney transplant rejection Marketed
</TABLE>
Cylexin(R). In February 1998, Glycomed, a wholly owned subsidiary of
Ligand, entered into a non-exclusive licensing agreement with Cytel Corporation.
As a result, Cytel received the right to a series of Glycomed-owned patents
relating to certain carbohydrate compounds for the treatment of acute
inflammation. This agreement covers Cytel's most advanced product, Cylexin(R),
which is being studied in an ongoing Phase II/III trial to evaluate the safety
and efficacy of Cylexin(R) in preventing reperfusion injury in infants
undergoing cardiopulmonary by-pass surgery to facilitate surgical repair of
life-threatening congenital heart defects. Glycomed is eligible for milestone
payments upon certain regulatory filings and approvals.
Simulect(R). Seragen has a license agreement with Novartis that provides
for the payment of royalties to Seragen beginning in 2001 for sales of
Simulect(R) in the U.S. and Canadian transplantation markets. In May 1998, the
FDA approved Simulect(R) for acute rejection episodes in renal transplant
recipients. Simulect(R) is a two-dose high-affinity monoclonal antibody. Results
of clinical trials in the U.S., Canada and Europe demonstrate that Simulect(R)
reduces the rate of acute rejection episodes by one-third.
ACADEMIC COLLABORATIONS
To date, Ligand has licensed technology from The Salk Institute, Baylor and
Rockefeller University and developed relationships with key scientists to
further the Company's development of its core IR and STAT technologies.
The Salk Institute of Biological Studies. In October 1988, Ligand
established an exclusive relationship with The Salk Institute, which is one of
the research centers in the area of IR technology. Dr. Ronald Evans, who cloned
and characterized the first IR in 1985 and who invented the co-transfection
assay used by Ligand, is a professor in the Gene Expression Laboratory of The
Salk Institute and an Investigator of the Howard
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Hughes Medical Institute. Under the agreement, Ligand has an exclusive,
worldwide license to the IR technology developed by Dr. Evans' laboratory at The
Salk Institute. Subject to compliance with the terms of the agreement, the term
of the license extends for the life of the patents covering such developments.
Under the agreement, Ligand made an initial payment to The Salk Institute and
issued common stock as partial consideration for the license. Ligand is also
obligated to make certain royalty payments based on sales of certain products
developed using the licensed technology, as well as certain minimum annual
royalty payments.
In May 1998, Ligand submitted a NDA to the FDA for Panretin(R) gel for the
treatment of AIDS-related KS. In connection with the submission, Ligand
exercised an option to acquire a fully paid up license for the patent rights to
Panretin(R) and paid approximately $4.1 million as a one-time license fee to The
Salk Institute.
Ligand also entered into exclusive consulting agreements with Dr. Evans
that continue through July 2001. Under these agreements, Dr. Evans purchased
common stock and has been granted options to purchase common stock. As a
consultant, Dr. Evans meets on a regular basis with Company personnel to review
ongoing research and to assist Ligand in defining the technical objectives of
future research. Dr. Evans is also involved in identifying new developments made
in other leading academic laboratories that relate to Ligand's research
interests. Dr. Evans serves as Chairman of Ligand's Scientific Advisory Board.
Baylor College of Medicine. In January 1990, Ligand established an
exclusive relationship with Baylor, which is a center of IR technology. Dr. Bert
W. O'Malley is a professor and the Chairman of the Department of Cell Biology at
the Baylor College of Medicine and the Director of the Center for Reproductive
Biology who leads IR research at that institution. Important features of
Ligand's co-transfection assay were developed in Dr. O'Malley's laboratory and
are exclusively licensed by Ligand. Ligand has entered into a series of
agreements with Baylor under which it has an exclusive, worldwide license to IR
technology developed at Baylor and to future improvements made in Dr. O'Malley's
laboratory through September 1999. Subject to compliance with the terms of the
agreements, the term of the license may extend for the life of the patents
covering such developments.
Ligand works closely with Dr. O'Malley and Baylor in scientific IR
research, particularly in the area of sex steroids and orphan IRs. Under the
agreement, Ligand is obligated to make payments to Baylor College of Medicine in
support of research done in Dr. O'Malley's laboratory for the period from April
1992 through September 1999. Ligand is also obligated to make certain royalty
payments based on the sales of products developed using the licensed technology.
Ligand has entered into an exclusive consulting agreement with Dr. O'Malley
through September 2002. Dr. O'Malley is a member of Ligand's Scientific Advisory
Board. Dr. O'Malley has purchased common stock and has been granted options to
purchase common stock.
Rockefeller University. In September 1992, Ligand entered into a worldwide,
exclusive license agreement with Rockefeller University and exclusive consulting
agreements with Dr. James Darnell of Rockefeller University and Dr. David Levy
of NYU to develop and commercialize certain technology involving STATs to
control gene expression. Dr. Darnell is one of the leading investigators of the
control of gene expression by STATs. Rockefeller University received payments
upon the transfer of the technology to Ligand and upon the first four
anniversary dates of the agreement and, subject to a vesting schedule, shares of
common stock and warrants to purchase shares of common stock. In addition,
Rockefeller University will receive a royalty on any commercialized products. In
consideration of related technology assigned by NYU to Rockefeller University
and covered by the license agreement with Ligand, NYU received, subject to a
vesting schedule, shares of common stock and warrants to purchase shares of
common stock. Subject to a vesting schedule tied to their consulting agreements,
Dr. Darnell and Dr. Levy received shares of common stock. In addition, in
October 1994 Ligand granted Dr. Darnell options to purchase shares of common
stock.
In addition to the collaborations discussed above, the Company also has a
number of other consulting, licensing, development and academic agreements by
which it strives to advance its technology.
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TECHNOLOGY
Ligand and its exclusive academic collaborators have advanced the
understanding of the activities of hormones and hormone-related drugs and have
made scientific discoveries relating to IR and STAT technologies. Ligand
believes that its expertise in these technologies will enable the Company to
develop novel, small-molecule drugs acting through IRs or STATs with more
target-specific properties than currently available drugs, resulting in either
improved therapeutic and side effect profiles and new indications for IRs or
novel mechanisms of action and oral activity for STATs.
In addition to the Company's proprietary IR and STAT technologies, Ligand
has acquired fusion protein technology, which was utilized by Seragen in the
development of ONTAK(TM).
INTRACELLULAR RECEPTOR ("IR") TECHNOLOGY
Hormones occur naturally within the body and control processes such as
reproduction, cell growth and differentiation. Hormones generally fall into two
general classes, the peptide hormones and non-peptide hormones. The non-peptide
hormones include the retinoids, sex steroids (estrogens, progestins and
androgens), adrenal steroids (glucocorticoids and mineralocorticoids), vitamin D
and thyroid hormone. These non-peptide hormones act by binding to their
corresponding IRs to regulate the expression of genes in order to maintain and
restore balanced cellular function within the body. Hormonal imbalances can lead
to a variety of diseases. The hormones themselves and drugs which mimic or block
hormone action may be useful in the treatment of these diseases. Furthermore,
hormone mimics (agonists) or blockers (antagonists) can be used in the treatment
of diseases in which the underlying cause is not hormonal imbalance.
The effectiveness of the IRs as drug targets has been demonstrated by
currently available drugs acting through IRs for many of these diseases.
However, the use of most of these drugs has been limited by their often
significant side effects. Examples of currently marketed hormone-related drugs
acting on IRs are glucocorticoids (steroids used to treat inflammation), natural
and synthetic estrogens and progesterones (used for hormone replacement therapy
and contraception), tamoxifen (an estrogen antagonist used in the treatment of
breast cancer), and various retinoids such as Accutane(R) and Retin-A(R) (used
to treat acne and others to treat psoriasis).
The understanding of non-peptide hormones and their actions has increased
substantially in the last 15 years. Driving this rapid expansion of knowledge
has been the discovery of the family of IRs through which all the known
small-molecule, non-peptide hormones act. Dr. Ronald Evans at The Salk
Institute, Ligand's scientific co-founder and exclusive consultant, was the
first to clone and characterize a functional human IR in 1985. Since that time,
approximately 75 IRs have been defined and characterized, some by Ligand's
scientists or its exclusive collaborators.
Ligand and its collaborators and consultants have made major discoveries
pertaining to IRs and small molecule hormones and compounds, which interact with
these IRs. These discoveries include: (1) the identification of the IR
superfamily, (2) the recognition of IR subtypes, (3) the discovery of orphan IRs
and (4) the heterodimer biology of RXR selective compounds. Ligand believes that
each of these broad areas of knowledge provides important opportunities for drug
discovery.
The receptors for all the non-peptide hormones are closely related members
of a superfamily of proteins known as IRs. The IRs are similar in both structure
and mechanisms of action. Human IRs for all of the known non-peptide hormones
have now been cloned, in many cases by Ligand's scientists or its collaborators,
building an understanding of the similar underlying mechanisms of action shared
by the non-peptide hormones. Because they have a common mechanism of action,
drug discovery insights about one IR can often be directly applied to other
members of the IR superfamily, bringing synergy to Ligand's IR-focused drug
discovery efforts. First generation drugs were developed and commercialized for
their therapeutic benefits prior to the discovery of IRs and often cross-react
with the IRs for hormones other than the intended target, resulting in often
significant side effects. The understanding that IRs are structurally similar
has enabled Ligand to determine the basis for the side effects of some first
generation drugs and to discover improved drug candidates.
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For some of the non-peptide hormones, several closely related but
non-identical IRs, known as IR subtypes, have been discovered. These include six
subtypes of the IRs for retinoids, two subtypes of the IRs for thyroid hormone,
two subtypes for the ER, and three subtypes for the PPARs. Patent applications
covering many of these IR subtypes have been exclusively licensed by Ligand.
Ligand believes that drugs that activate a subset of IR subtypes will allow more
specific pharmacological intervention better matched to therapeutic need.
Ligand's clinical candidate Targretin(R), an RXR selective molecule, was
discovered as a result of Ligand's understanding of retinoid receptor subtypes.
Over 50 additional members of the IR superfamily, which do not interact
with the known non-peptide hormones, have been discovered. These members of the
IR superfamily have been designated orphan receptors. Ligand believes that among
the orphan IRs may be receptors for uncharacterized small molecule hormones and
that the physiological roles of the various orphan IRs are likely to be diverse.
Ligand has devised strategies to isolate small molecules that interact with
orphan IRs.
RXRs can form a dimer with numerous IRs, such as the retinoic acid receptor
("RAR"), thyroid hormone receptor and vitamin D receptor. While RXRs are widely
expressed, their IR partners are more discrete, being expressed in selective
tissues, such as liver, fat or muscle. As a result, compounds that bind RXRs
offer the unique potential to be broadly active compounds that can treat a
variety of diseases, including cancer and metabolic diseases. In preclinical
models of type II diabetes, RXR agonists appear to stimulate the physiological
pathways responsive to RXR-PPAR receptor partners expressed in key target
tissues that are involved in glucose metabolism. As a result, a discrete set of
genes is activated in these tissues resulting in a decrease in serum glucose
levels and insulin.
Ligand has built a strong proprietary position and accumulated substantial
expertise in IRs applicable to drug discovery and development. Building on its
recent scientific findings about the molecular basis of hormone action, Ligand
has created proprietary new tools to explore and manipulate non-peptide hormone
action for potential therapeutic benefit. The Company has exclusive
relationships in the field of IRs with Dr. Ronald Evans, a professor in the Gene
Expression Laboratory of The Salk Institute, and Dr. Bert O'Malley, a professor
and Chairman of the Department of Cell Biology and Director of the Center for
Reproductive Biology at Baylor, where many of the core discoveries in IR
research have been made. The Company has exclusively licensed most of these
discoveries.
Retinoid Responsive IRs ("RRs.") Retinoic acid, a derivative of Vitamin A,
is one of the body's natural regulatory hormones that has a broad range of
biological actions, influencing cell growth, differentiation, programmed cell
death and embryonic development. Many chemical analogues of retinoic acid,
called retinoids, also have biological activity.
Specific retinoids have been approved by the FDA for the treatment of
psoriasis and certain severe forms of acne. Evidence also suggests that
retinoids can be used to arrest and, to an extent, reverse the effects of skin
damage arising from prolonged exposure to the sun. Other evidence suggests that
retinoids are useful in the treatment of a variety of cancers, including kidney
cancer and certain forms of leukemia. For example, all-trans-Retinoic-acid has
been approved by the FDA for the treatment of acute promyelocytic leukemia.
Retinoids have also shown an ability to reverse precancerous (premalignant)
changes in tissues, reducing the risk of development of cancer, and may have
potential as preventive agents for a variety of epithelial malignancies,
including skin, head and neck, bladder and prostate cancer. Currently marketed
retinoids cause significant side effects, such as severe birth defects if fetal
exposure occurs, severe irritation of the skin and mucosal surfaces, elevation
of plasma lipids, headache and skeletal abnormalities. Currently marketed
retinoids were developed and commercialized prior to the discovery of
retinoid-responsive IRs.
The six RRs that have been identified to date can be grouped in two
subfamilies -- Retinoic Acid Receptors ("RARs") and RXRs. Patent applications
covering members of both families of RRs have been licensed exclusively to
Ligand primarily from The Salk Institute. The RR subtypes appear to have
different functions, based on their distribution in the various tissues within
the body and data arising from in vitro and in vivo studies including studies of
transgenic mice. Several of the retinoids currently in commercial use are either
non-selective in their pattern of RR subtype activation or are not ideal drugs
for other reasons. Ligand is
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developing chemically synthesized retinoids that, by selectively activating RR
subtypes, may preserve desired therapeutic effects while reducing side effects.
Ligand has one retinoid product approved by the FDA (Panretin(R) gel), five
retinoid products in clinical trials (Panretin(R) gel, Panretin(R) capsules,
Targretin(R) capsules, Targretin(R) gel and LGD1550 capsules), and five retinoid
compounds in advanced preclinical evaluation through its corporate partners.
SIGNAL TRANSDUCERS AND ACTIVATORS OF TRANSCRIPTION ("STAT") TECHNOLOGY.
STATs are a recently discovered family of proteins that are a key part of
the signal transduction pathway for a variety of biologically important
polypeptide hormones (e.g., interferons, interleukins, leptin and hematopoietic
growth factors). STATs play a role in the biology of cytokines and growth
factors functionally analogous to that played by IRs in the biology of the
non-peptide hormones. Both STATs and IRs are families of transcription factors
that change cell function by selectively turning on or off particular genes in
response to circulating signals that impinge on cells. When various cytokines or
growth factors bind to their receptors on the cell surface, this triggers the
activation of specific members of the Janus Kinase family of tyrosine protein
kinases ("JAKs"), which in turn activate specific STATs. The activated STATs
enter the cell nucleus and bind to the control regions of specific target genes
and increase their expression, thereby modulating physiologic or
pathophysiologic processes.
Many diseases, such as certain inflammatory conditions, may be the result
of excessive activity of certain cytokines. In these conditions it may prove
beneficial to block the actions of specific cytokines. In other pathological
states there is insufficient activity of specific cytokines. For example, in
patients with chronic renal failure, diminished erythropoietin ("EPO") release
by the damaged kidneys results in the inadequate production of red blood cells,
causing anemia. Recombinant human EPO protein (Epogen(R)) can be administered to
correct this anemia effectively, but must be injected. Many other cytokines are
useful as injected protein medicines, including interferons (Intron-A(R),
Roferon(R), Betaseron(R)), interleukins (e.g., Proleukin(R), which Ligand
markets in Canada), and hematopoietic growth factors (Epogen(R), Neupogen(R)).
Each of these and many other cytokines appear to exert their actions through
JAK/STAT signal transduction pathways.
Ligand is utilizing JAK/STAT technologies to seek low molecular weight
compounds able to mimic or block the actions of medically relevant cytokines for
uses in various pathological conditions, including cancer, inflammation and
disorders of blood cell formation. Because these compounds are small molecules,
whereas the cytokines themselves are proteins, they offer potentially
significant advantages over current cytokine-based compounds, including oral
bioavailability, greater ease of manufacture and improved stability.
The discovery of STATs, the elucidation of their roles in interferon signal
transduction, and the first cloning of genes encoding STATs were all
accomplished by Ligand's exclusive collaborator, Dr. James Darnell at
Rockefeller University, and were described initially in August 1992. A total of
seven members of the STAT family have been identified and a large number of
peptide hormones have been shown to utilize STAT signaling pathways. These
peptide hormones include the interferons (alpha, beta and gamma), the
hematopoietic colony stimulating factors (interleukin-3, EPO, G-CSF, GM-CSF and
thrombopoietin), many of the interleukins and the related Oncostatin M and
Leukemia Inhibitory Factor, the cytokine leptin, growth hormone and prolactin.
Ligand believes that its JAK/STAT drug discovery technology can produce
drug candidates to control gene expression to address a broad range of uses,
including treating cancer, providing hematopoietic support for cancer patients
undergoing chemotherapy or bone marrow transplantation, combating inflammation,
treating viral or other infections, treating anemia in chronically ill patients
(e.g., those with renal failure), treating dwarfism and related disorders of
stature, and enhancing immune function.
Ligand is using its high throughput screening assays to discover small
molecule drugs to act as interferon agonists for potential application in
various cancers and viral diseases and that act as cytokine agonists and
antagonists in cancer and immunology. Ligand has also established a
collaboration with SmithKline Beecham to discover and characterize small
molecule drugs to modulate specific JAK/STAT pathways to control the
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formation of red and white blood cells for treating patients with cancer or
anemia. Ligand has additional assays under development to allow high throughput
screening for and subsequent optimization of small molecule drugs that act
through JAK/STAT signaling pathways to block or mimic other medically
significant cytokine and growth factors.
FUSION PROTEIN TECHNOLOGY
Ligand's fusion protein technology was developed by Seragen. Seragen's
fusion proteins consist of fragments of diphtheria toxin genetically fused to a
ligand that targets specific receptors on the surface of target cells. The
fusion proteins are designed to bind to specific receptors on the surface of
target cells and penetrate and destroy the target cells' ability to manufacture
proteins, thereby killing the target cells. Using this platform, Seragen has
genetically engineered six fusion proteins, each of which consists of fragments
of diphtheria toxin fused to a different targeting ligand, such as a polypeptide
hormone or growth factor. ONTAK(TM), which is approved in the U.S. for the
treatment of patients with persistent or recurrent CTCL, is a fusion protein
consisting of fragments of diphtheria toxin genetically fused to the
interleukin-2 ("IL-2") receptor. In addition to CTCL, fusion proteins may have
utility in oncology, dermatology, infectious diseases and autoimmune diseases.
Seragen has entered into exclusive license agreements with Harvard
University and other parties for patents related to fusion protein technology.
In addition, Seragen has been prosecuting a patent application family directed
to its core fusion protein technology, which technology represents an
improvement in the technology licensed from Harvard University. Four U.S.
patents have issued directed to these improvements.
LIGAND'S PROPRIETARY CELL-CULTURE BASED ASSAY SYSTEM
Ligand has developed a hybrid approach to lead compound identification that
retains the best features and avoids the pitfalls of traditional methods to
discover leads. Traditional drug discovery generally uses animal models or
biochemical screening systems for lead compound identification. Animal models
are relatively slow, complicated and expensive; and results in animals do not
always correlate to those obtained in humans. Biochemical assays are fast and
inexpensive, but give limited information and frequently identify poor lead
compounds.
Ligand's hybrid approach is a proprietary cell-culture based assay system
for small molecules that can modulate IRs, referred to as the co-transfection
assay. The co-transfection assay system simulates the actual cellular processes
controlled by IRs and is able to detect whether a compound interacts with a
particular human IR and whether this interaction mimics or blocks the effects of
the natural regulatory molecules on target gene expression. The system is: (1)
fast, compared to animal models; (2) capable of cost-effective, high throughput
screening of thousands of compounds per week; (3) generally predictive of in
vivo pharmacology of both agonists and antagonists; (4) able to separate complex
targets, such as receptor subtypes; and (5) conducted using the actual human
receptors which are the ultimate drug targets. Ligand's co-transfection assay is
a key component of Ligand's IR drug discovery and development programs, and
facilitates both the identification of lead compounds and their optimization as
clinical candidates. Ligand has developed similar automated high throughput
assays to identify lead compounds acting as agonists or antagonists of selected
JAK/STAT signaling pathways for interferons, certain interleukins and selected
hematopoietic growth factors.
Once Ligand verifies a lead compound for a particular target, the next
critical process is optimization of the compound to achieve specificity and
appropriate properties as a drug. Specificity is achieved when the compound
interacts only with the intended target molecule and not with related but
unintended molecules. Ligand's unique and comprehensive ability to assess
compounds preclinically for interactions with all the known human IRs and in
various STAT pathways is a significant advantage in obtaining specificity in a
lead compound. Optimization of a lead compound is an iterative process in which
analogues of the lead compound, designed and synthesized by medicinal chemists,
are assayed for activity. The results obtained with each set of analogues guide
the medicinal chemists in the design of compounds with greater specificity. The
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co-transfection assay produces results that enhance the accuracy and efficiency
of this iterative optimization process.
Ligand believes that its combination of modern molecular and traditional
approaches to drug discovery will accelerate its progress to develop new drug
candidates. To that end, Ligand has built a strong multidisciplinary team,
consisting of endocrinologists, molecular biologists, medicinal chemists,
pharmacologists and specialists in drug metabolism and distribution, and other
pharmaceutical scientists.
CORPORATE COLLABORATIONS
Ligand has initiated eight significant collaborations with corporate
partners since the inception of the Company to further the research and
development of compounds based on the Company's IR and STAT technologies.
Eli Lilly and Company. In November 1997, the Company and Lilly entered into
a strategic alliance for the discovery and development of products based upon
Ligand's IR technology. The collaboration focuses on products with broad
applications across metabolic diseases, including diabetes, obesity,
dislipidemia, insulin resistance and cardiovascular diseases associated with
insulin resistance and obesity. At the inception of the agreement, Lilly
invested $37.5 million by purchasing the Company's common stock and made an
upfront nonrefundable milestone payment to Ligand of $12.5 million. Ligand is
entitled to additional milestones upon the successful development of certain
products. If certain products are approved, Ligand may receive double-digit
royalties on net sales of the most advanced products and single-digit royalties
on net sales of earlier compounds. Ligand may also qualify to 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.
Under the alliance Lilly received worldwide, exclusive rights to
Targretin(R) and other Ligand compounds and technology associated with the RXR
receptor in the field. Lilly received additional rights to use Ligand technology
to develop an RXR compound in combination with a SERM in cancer. Ligand retains
exclusive rights to independently research, develop and commercialize
Targretin(R) and other RXR compounds in the fields of cancer and dermatology.
Lilly also received worldwide, exclusive rights in certain areas to Ligand's
PPAR technology, along with rights to use PPAR research technology with the RXR
technology. Lilly and Ligand also intend to begin research programs aimed at
discovering novel compounds that therapeutically activate PPAR subtypes for
treatment of cardiovascular disease. Finally, Lilly received exclusive rights to
Ligand's HNF4 receptor and the obesity gene promoter technology. Ligand has the
option to obtain selected rights to one of Lilly's specialty pharmaceutical
products. The product would fit into a current area of strategic focus for
Ligand. Should Ligand elect to obtain selected rights to the product, Lilly
could receive milestones of up to $20 million in common stock. In connection
with the acquisition of Seragen, Ligand obtained from Lilly its rights to
ONTAK(TM) in satisfaction of Ligand's option to obtain selected rights to one of
Lilly's specialty pharmaceutical products.
Lilly has the right to terminate the development of compounds under the
agreements, with Ligand receiving rights to certain of such compounds in return
for a royalty to Lilly, the rate of which is dependent on the stage at which the
development is terminated. In addition, either party may terminate the
agreements if a material breach by the other remains uncured for 90 days.
In early 1999, Lilly chose not to proceed with the development efforts for
three first generation compounds in the RXR program in diabetes. Instead, Lilly
and Ligand have agreed to focus their efforts on the RXR modulator second
generation program, which has compounds with improved therapeutic indices
relative to the three first generation compounds, and on co-agonists of the PPAR
receptor program. As a result of this decision, all rights to the oral form of
Targretin(R) relating to its development reverts to Ligand. Compounds LGD1268
and LGD1324 return to the pool of eligible RXR modulators for possible use in
oncology in combination with a selective estrogen receptor modulator under the
separate collaboration agreement between Lilly and Ligand. The decision not to
proceed with full development of the first generation compounds was based upon a
thorough review of the pre-clinical and Phase II clinical date on Ligand's RXR
modulators, Targretin(R), LGD1268 and LGD1324. As of December 31, 1998, Lilly
had funded approximately $11.0 million of the total of $49.0 million in
potential research funding under the agreement.
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SmithKline Beecham. In February 1995, Ligand entered into a collaborative
agreement with SmithKline Beecham providing for a three-year research program
(with an option to extend the program for two years at SmithKline Beecham's
election). Under the agreement, SmithKline Beecham will utilize Ligand's
proprietary STATs technology to discover and characterize small molecule, oral
drugs to control hematopoiesis (the formation and development of blood cells).
Under the terms of the agreement, SmithKline Beecham was granted exclusive
worldwide rights for products resulting from the collaboration in certain
targeted areas. In exchange, SmithKline Beecham agreed to provide Ligand up to
$9.0 million in research funding and up to $12.5 million in equity investments.
SmithKline Beecham will make additional milestone payments to Ligand as the
compounds progress in clinical development and will also make royalty payments
on product sales.
Ligand has the right to select up to three compounds related to
hematopoietic targets for development as anti-cancer products other than those
compounds selected for development by SmithKline Beecham. SmithKline Beecham has
the option to co-promote these products with Ligand in North America and to
develop and market them outside North America. SmithKline Beecham can terminate
the research program upon 60 days notice in the event of any breach by Ligand or
upon six months notice at any time after August 1996.
In April 1998, Ligand and SmithKline Beecham formed a new collaboration to
develop small molecule drugs that modulate the signaling pathway controlled by
leptin as a means of discovering orally available drugs for treatment or
prevention of obesity. As part of the leptin-obesity collaboration, SmithKline
Beecham purchased $5.0 million of common stock and also purchased a $1.0 million
warrant exercisable into common stock. The warrant expires in five years, and
Ligand may require SmithKline Beecham to exercise the warrant under certain
conditions after three years. Under the new agreement, SmithKline Beecham
obtained exclusive worldwide rights to products resulting from the obesity
collaboration and has agreed to make milestone payments to Ligand as compounds
progress through preclinical and clinical development, and royalty payments on
sales, if products result from the research. As of December 31, 1998, SmithKline
Beecham had funded approximately $11.4 million of the total of $11.5 million in
potential research funding under the agreement.
American Home Products. In September 1994, Ligand entered into a
collaborative research agreement with Wyeth-Ayerst Laboratories, the
pharmaceutical division of AHP, providing for a three-year research program
(with an option to extend the program for two years at AHP's election). The
purpose of the agreement was to discover and develop drugs that interact with
estrogen or progesterone receptors for use in hormone replacement therapy,
anti-cancer therapy, gynecological diseases, central nervous system disorders
associated with menopause and fertility control. AHP has been granted exclusive
worldwide rights to all products discovered in the collaboration that are
agonists or antagonists to the PRs and ERs for application in the fields of
women's health and cancer therapy. Under the agreement, AHP agreed to provide
$21.5 million in research funding and up to $25.0 million in equity and
convertible notes, in addition to milestone and royalty payments to Ligand for
such products.
An important additional aspect of this collaboration is Ligand's right to
assay AHP's extensive chemical library for activity against a selected set of
targets of Ligand's internal programs. Ligand may select up to 24 lead compounds
for internal development to which Ligand has worldwide rights. In January 1996,
AHP exercised its option to include compounds discovered by Ligand that modulate
PRs and to expand the collaboration to encompass the treatment or prevention of
osteoporosis through the ER. In connection with the exercise of the option, the
Company received $2.5 million in additional research revenue and funding
commitments. Ligand's proprietary PR modulators added to the collaboration
includes three series: LG121046 (Series A), LG120527 (Series B) and LG120716
(Series C). In 1997, Ligand regained rights to the series B and series C
compounds in the AHP collaboration. Series A compounds formed the basis for
additional drug discovery in the AHP alliance, leading to both PR agonists and
antagonists. In May 1996, AHP expanded the collaboration to include four
advanced chemical compound series from its internal ER-osteoporosis program. The
research phase of the collaboration ended in August 1998. AHP has ongoing
studies with two other compounds, TSE-424, a potential treatment for
osteoporosis and ERA-923, a potential treatment for breast cancer. The IND
filing of both compounds in 1998 and early 1999 triggered two separate
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milestone payments to Ligand. (See "Technology.") As of December 31, 1998, AHP
had funded approximately $17.9 million of the total of $21.5 million in
potential research funding under the agreement.
Abbott Laboratories. In July 1994, Ligand entered into a collaborative
research agreement with Abbott providing for a five-year research program to
discover and develop small molecule compounds for the prevention or treatment of
inflammatory diseases. The collaborative program includes several approaches to
discovering modulators of glucocorticoid receptor activity to treat
inflammation. (See "Inflammatory Disease.")
Abbott has also committed significant internal resources to the
collaboration. Abbott was granted exclusive worldwide rights for all products
discovered in the collaboration for use in inflammation. Ligand was granted
exclusive worldwide rights for all anti-cancer products discovered in the
collaboration. Abbott will make milestone and royalty payments on products
targeted at inflammation resulting from the collaboration, while Ligand will
make milestone and royalty payments on products targeted at anti-cancer
resulting from the collaboration. Each party will be responsible for the
development, registration and commercialization of the products in its
respective field. Abbott can terminate the research program at any time upon 90
days notice in the event of any breach by Ligand or upon four months notice at
any time. As of December 31, 1998, Abbott had funded approximately $9.2 million
of the total of $16.0 million in potential research funding under the agreement.
Sankyo Company, Ltd. As part of the Merger with Glycomed, the Company
acquired a collaborative research agreement with Sankyo that Glycomed had
entered into in June 1994 providing for a three-year research program. Under the
agreement, Sankyo reimburses a portion of the Company's research expenses
related to the collaboration up to an aggregate of $8.9 million. The agreement
also provides that upon being presented with a target compound arising from the
research collaboration with the Company, Sankyo will notify the Company whether
it wishes to pursue development of the compound. In October 1997, the research
program was terminated. As of December 31, 1998, Sankyo had funded all of the
total of $8.9 million in potential research funding under the agreement.
Glaxo-Wellcome plc. In September 1992, Ligand entered into a five-year
collaborative research agreement with Glaxo to develop drugs for the prevention
or treatment of cardiovascular disease. Glaxo committed significant internal
resources to the collaboration and funded one-half of Ligand's research expenses
to support 18 Ligand scientists assigned to the collaboration. Ligand and Glaxo
screened compounds to identify potential lead compounds. Once leads have been
identified, Glaxo has primary responsibility for pharmacology, medicinal
chemistry to optimize the drug candidates and preclinical testing. Glaxo also
has responsibility for conducting clinical trials of the drug candidates for
marketing approval by the FDA and certain other regulatory agencies. Ligand will
receive milestone payments as the compounds progress through the development
cycle and a royalty on any commercialized products. Ligand has retained the
right to develop and commercialize products arising from the collaboration in
markets not exploited by Glaxo or where Glaxo is not developing a product for
the same indication. The collaborative research program was completed in
September 1997. Glaxo is responsible for the subsequent research necessary to
optimize the leads to produce clinical candidates. As of December 31, 1998,
Glaxo had funded approximately $9.2 million of the total of $10.0 million in
potential research funding under the agreement.
Allergan Inc. In June 1992, Ligand and Allergan formed Allergan-Ligand
Joint Venture ("the Joint Venture"), owned 50% by each party, to discover,
develop and commercialize retinoid drugs. In December 1994, the Company and
Allergan formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue
the research and development activities previously conducted by the Joint
Venture. In June 1995, the joint venture was dissolved and the Company and ALRT
completed a public offering of 3,250,000 units (the "Units") totaling $32.5
million. Each Unit consisted of one share of ALRT's Callable Common Stock and
two warrants entitling the holder to purchase one share of Common stock. The
$32.5 million aggregate proceeds ("the ALRT Offering") and cash contributions by
Allergan and Ligand of $50.0 million and $17.5 million, respectively, provided
net proceeds of $94.3 million for retinoid product research and development. As
part of the ALRT Offering, all rights held by the Joint Venture were licensed to
ALRT. The Company, Allergan and ALRT entered into certain other various
agreements in connection with the funding
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of ALRT, including a Technology License Agreement, a Research and Development
Agreement, a Commercialization Agreement, and a Services and Administrative
Agreements.
Ligand's $17.5 million in cash, as well as warrants were in exchange for:
(1) a right to acquire all of the Callable Common Stock at specified future
dates and amounts (the "Stock Purchase Option") and (2) a right to acquire all
rights to the Panretin(R) (ALRT 1057) product, jointly with Allergan (the "1057
Option.") Allergan's $50.0 million cash contribution to ALRT was in exchange
for: (1) the right to acquire one-half of technologies and other assets in the
event Ligand exercised its right to acquire all of the Callable Common Stock
(the "Asset Purchase Option"), (2) a similar right to acquire all of the
Callable Common Stock if Ligand did not exercise its right and (3) a right to
acquire all rights to Panretin(R) (ALRT 1057) product, jointly with Ligand.
In September 1997, Ligand exercised the option to purchase all of the
Callable Common Stock of ALRT. At the same time, Allergan exercised the option
to purchase certain assets of ALRT. In November 1997, Ligand issued 3,166,567
shares of the Company's common stock along with cash payments totaling $25.0
million, to holders of the Callable common stock. In November 1997, Allergan
made a cash payment of $8.9 million to ALRT, which was used by Ligand to pay a
portion of the Stock Purchase Option. The excess of the purchase price over the
fair value of net assets acquired was allocated to in-process technology and
written off resulting in a one time non-cash charge to operations of $65.0
million in 1997.
In November 1997, ALRT became a wholly owned subsidiary of the Company.
Also during 1997, Ligand and Allergan agreed to restructure the terms and
conditions relating to research, development, and commercialization and
sublicense rights for the ALRT compounds. Under the restructured arrangement,
Ligand received exclusive, worldwide development, commercialization and
sublicense rights to Panretin(R) capsules and Panretin(R) gel, LGD1550, LGD268
and LGD324. Allergan received exclusive, worldwide development,
commercialization and sublicense rights to LGD4310, an RAR antagonist being
developed for topical application against mucocutaneous toxicity associated with
currently marketed retinoids as well as for psoriasis. Allergan also received
LGD326 and LGD4204 (two advanced preclinical RXR selective compounds). In
addition, Ligand and Allergan participated in a lottery for each of the
approximately 2,000 retinoid compounds existing in the ALRT compound library as
of the closing date, with each party acquiring exclusive, worldwide development,
commercialization and sublicense rights to the compounds which they select.
Ligand and Allergan will each pay the other a royalty based on net sales of
products developed from the compounds selected by each in the lottery and the
other ALRT compounds to which each acquires exclusive rights. Ligand will also
pay to Allergan royalties based on Ligand's net sales of Targretin(R) for uses
other than oncology and dermatology indications. In the event that Ligand
licenses commercialization rights to Targretin(R) to a third party, Ligand will
pay to Allergan a percentage of royalties payable to Ligand with respect to
sales of Targretin(R) other than in oncology and dermatology indications. Under
the restructured arrangement, on the closing of the exercise of the Stock
Purchase Option and the Asset Purchase Option, Ligand paid Allergan a
non-refundable cash payment in the amount of $4.5 million. ALRT had provided
approximately $52.0 million in research funding to Ligand under the Research and
Development Agreement. Since 1992, Allergan Ireland, a wholly owned subsidiary
of Allergan, has made $30.0 million in equity investments in Ligand.
Pfizer Inc. In May 1991, Ligand entered into a five-year collaborative
research and development and license agreement with Pfizer to develop better
alternative therapies for osteoporosis. Pfizer agreed to provide up to $3.0
million per year in research funding to Ligand in addition to committing
significant internal resources. In November 1993, Ligand and Pfizer announced
the successful completion of the research phase of their alliance with the
identification of a development candidate and backups for the prevention and
treatment of osteoporosis. In preclinical studies, the candidates from the
program mimic the beneficial effects of estrogen on bone and have an impact on
blood serum lipids often associated with cardiac benefits without increasing
uterine or breast tissue proliferation. Under the terms of the collaboration,
Pfizer has primary responsibility for pharmacology, medicinal chemistry to
optimize the drug candidates, pre-clinical testing and clinical trials of drug
candidates for marketing approval by the FDA and certain other regulatory
agencies.
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Ligand has granted Pfizer exclusive worldwide rights to manufacture and market
any compounds jointly developed for osteoporosis. Ligand is to receive up to
$7.5 million in milestone payments as development objectives are achieved, in
addition to royalties on sales of successful drugs that emerge from the
alliance.
In December 1994, Ligand filed suit against Pfizer in the Superior Court of
California in San Diego County. The suit was filed for breach of contract and
for a declaration of future rights as they relate to droloxifene, a compound
upon which Ligand performed work at Pfizer's request during the collaboration
between Pfizer and Ligand to develop drugs in the field of osteoporosis. Ligand
and Pfizer entered into a settlement agreement with respect to the lawsuit in
April 1996. Under the terms of the settlement agreement, Ligand is entitled to
receive milestone and royalty payments if Pfizer continues development and
eventually commercializes droloxifene. To date, Ligand has received
approximately $1.3 million in milestone payments from Pfizer as a result of the
continued development of droloxifene. These milestones were paid in the form of
the Company's common stock by Pfizer and were subsequently retired from treasury
stock in September 1996. According to announcements by Pfizer, droloxifene has
entered Phase II clinical trials for osteoporosis. As of December 31, 1998,
Pfizer had made a total of $7.5 million of equity investments in Ligand and had
funded approximately $9.4 million in research funding.
MANUFACTURING
Ligand currently has no manufacturing facilities outside of Marathon's
facility for the manufacturing of ONTAK(TM), and accordingly relies on third
parties, including its collaborative partners, for clinical or commercial
production of any products or compounds under consideration as products. For a
discussion of the risks associated with manufacturing see "Risks and
Uncertainties."
RAW MATERIALS
Certain raw materials necessary for the Company's commercial manufacturing
of its products are custom and must be obtained from a specific sole source. The
Company currently attempts to manage the risk associated with such sole source
raw materials by active inventory management and supply agreements. Ligand
attempts to remain appraised of the financial condition of its suppliers and
their ability to supply the company's needs. Unavailability of certain materials
from current sources could cause an interruption in production pending
establishment of new sources, or in some cases, implementation of alternative
processes.
QUALITY ASSURANCE
The Company's success depends in great measure upon customer confidence in
the quality of the Company's products and in the integrity of the data that
support their safety and effectiveness. The quality of the Company's products
arises from the total commitment to quality in all parts of the Company,
including research and development, purchasing, manufacturing, and distribution.
Quality-assurance procedures have been developed relating to the quality and
integrity of the Company's scientific information and production processes.
Control of production processes involves rigid specifications for
ingredients, equipment, and facilities, manufacturing methods, packaging
materials, and labeling. Control tests are made at various stages of production
processes and on the final product to assure that the product meets all
regulatory requirements and the Company's standards. These tests may involve
chemical and physical microbiological testing, preclinical testing, human
clinical trials, or a combination of these trials.
SALES AND MARKETING
The Company recently developed a 26-person specialty cancer sales force in
the United States in 1998 and early 1999. For markets outside Ligand's current
marketing strategy, the Company will rely initially on other companies to
distribute and market Panretin(R) gel and ONTAK(TM). A Canadian sales force,
which has been in place since 1995, currently markets two in-licensed cancer
products in Canada. In early 1999, Ligand established a subsidiary, Ligand
Pharmaceuticals International, Inc., with a branch in London, England to
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manage its European marketing and operations. For a discussion of the risks
associated with sales and marketing see "Risks and Uncertainties."
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $70.3 million, $72.4 million and
$59.6 million in fiscal 1998, 1997 and 1996, respectively, of which
approximately 75%, 29%, and 38%, was sponsored by the Company and the remainder
of which was funded pursuant to product development collaboration arrangements.
(See "Notes to Financial Statements.")
COMPETITION
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.
A number of pharmaceutical and biotechnology companies are pursuing IR-related
or STAT-related approaches to drug discovery and development. Furthermore,
academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection with respect to
potentially competing products or technologies and may establish collaborative
arrangements with competitors of Ligand.
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 for
the often substantial period between technological conception and commercial
sales. For a discussion of the risks associated with competition see "Risks and
Uncertainties."
GOVERNMENT REGULATION
The manufacturing and marketing of Ligand's products and its ongoing
research and development activities are subject to regulation for safety and
efficacy by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceuticals are subject to rigorous
regulation by federal and various state authorities, including FDA. The Federal
Food, Drug, and Cosmetic Act and the Public Health Service Act govern the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of Ligand's products. There are often
comparable regulations, which apply at the state level. Product development and
approval within this regulatory framework takes a number of years and involves
the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (1) preclinical laboratory tests, (2) the submission to
the FDA of an IND, which must become effective before human clinical trials may
commence, (3) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug, (4) the submission of a NDA to the FDA and
(5) the FDA approval of the NDA prior to any commercial sale or shipment of the
drug. A company must pay a one-time user fee for NDA submissions, and annually
pay user fees for each approved product and manufacturing establishment. In
addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with the FDA and in
California, with the Food and Drug Branch of California. Domestic manufacturing
establishments are subject to pre-approved inspections by the FDA prior to
marketing approval and then to biennial inspections and must comply with current
Good Manufacturing Practices ("cGMP"). To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in existing
regulations could have a material adverse effect on Ligand.
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For marketing outside the United States before FDA approval to market, the
Company must submit an export permit application to the FDA. The Company also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for drugs. The requirements relating to the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country and there can be no assurance that the Company or
any of its partners will meet and sustain any such requirements. For a
discussion of the risks associated with government regulations see "Risks and
Uncertainties."
PATENTS AND PROPRIETARY RIGHTS
Ligand believes that patents and other proprietary rights are important to
its business. Ligand's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. Ligand also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
To date, Ligand has filed or participated as licensee in the filing of
approximately 105 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. In addition, Ligand owns or is the
exclusive licensee to rights covered by approximately 250 patents issued,
granted or allowed worldwide to Ligand, The Salk Institute, Baylor and other
licensors. Subject to compliance with the terms of the respective agreements,
Ligand's rights under its license with The Salk Institute and other exclusive
licensors extend for the life of the patents covering such developments. For a
discussion of the risks associated with patent and proprietary rights see "Risks
and Uncertainties."
PRODUCT LIABILITY AND INSURANCE
Ligand's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of human drugs. Ligand
has recently increased its product liability insurance in connection with the
launching of two marketed drugs. The Company's product liability insurance also
provides coverage for products in development and in clinical trials. 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. To the extent that Ligand's current 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. For a discussion of the risks
associated with product liability see "Risks and Uncertainties."
HUMAN RESOURCES
As of December 31, 1998, Ligand had 418 full-time employees, of whom 295
were involved directly in scientific research and development activities. Of
these employees, approximately 87 hold Ph.D. or M.D. degrees.
RISKS AND UNCERTAINTIES
The following is a summary description of some of the many risks we face in
our business. You should carefully review these risks in evaluating our business
and the businesses of our subsidiaries. You should also consider the other
information described in this report.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION INVOLVES A NUMBER OF UNCERTAINTIES
AND WE MAY NEVER GENERATE REVENUES FROM THE SALE OF PRODUCTS SUFFICIENT TO
BECOME PROFITABLE.
We were founded in 1987 and have not generated any revenues from the sale
of products that we or our collaborative partners have developed. To become
profitable, we must successfully develop, clinically test, market and sell our
products. In February 1999, we were granted FDA marketing approval for our first
two products, Panretin(R) gel for the topical treatment of cutaneous
AIDS-related KS, and ONTAK(TM) for the
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treatment of patients with persistent or recurrent cutaneous CTCL whose
malignant cells express the CD25 component of the IL-2 receptor.
Most of our other products will require extensive additional development,
including preclinical testing and human studies, as well as regulatory
approvals, before we can market them. We do not expect that any additional
products resulting from our product development efforts or the efforts of our
collaborative partners will be available for sale until the end of the 1999
calendar year at the earliest, if at all. There are many reasons that we may
fail in our efforts to develop our other potential products, including the
possibility that:
- we may discover during preclinical testing or human studies that they are
ineffective or cause harmful side effects,
- the products may fail to receive necessary regulatory approvals from the
FDA or other foreign authorities in a timely manner or at all,
- we may fail to produce the products, if approved, in commercial
quantities or at reasonable costs, or
- the proprietary rights of other parties may prevent us from marketing the
products.
We also will rely, at least initially, on another company to distribute our
approved products and have only recently developed a sales force. Therefore,
even though two of our products have been approved for marketing, we still may
not be able to successfully market these products or potential products in the
territories chosen for marketing.
SOME OF OUR KEY TECHNOLOGIES HAVE NOT BEEN USED TO PRODUCE MARKETED PRODUCTS AND
MAY NOT BE CAPABLE OF PRODUCING SUCH PRODUCTS.
To date, we have dedicated most of our resources to the research and
development of potential drugs based upon our expertise in what we refer to as
our IR and STATs technologies. Even though certain marketed drugs act through
IRs, some aspects of our IR technologies have not been used to produce marketed
products. In addition, we are 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. If we are unable
to apply our IR and STAT technologies to the development of our potential
products, our business could be adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY
CONTINUE.
We have incurred significant losses since our inception in 1987. At
December 31, 1998, our accumulated deficit was approximately $396.0 million. To
date, we have received almost all of our revenues from our collaborative
arrangements. We expect to incur additional losses as we continue our research
and development, testing and regulatory activities and as we establish
manufacturing and sales and marketing capabilities.
OUR DRUG DEVELOPMENT PROGRAMS WILL REQUIRE SUBSTANTIAL ADDITIONAL FUTURE CAPITAL
AND WE MAY NEED MORE CAPITAL.
Our drug development programs require substantial capital expenses,
including expenses to:
- conduct research, preclinical testing and human studies,
- establish pilot scale and commercial scale manufacturing processes and
facilities, and
- establish and develop quality control, regulatory, marketing, sales
and administrative capabilities.
Our future capital needs will depend on many factors, including:
- the pace of scientific progress in our research and development
programs and the magnitude of these programs,
- the scope and results of preclinical testing and human studies,
- the time and costs involved in obtaining regulatory approvals,
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- the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims,
- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in our existing collaborations,
- the cost of manufacturing scale-up, and
- the effectiveness of our commercialization activities.
WE MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.
To date, we have not generated any revenue from the sales of products we or
our collaborative partners have developed. We may not be able to successfully
develop, manufacture or market any products or ever achieve profitability.
Moreover, even if we achieve profitability, we cannot predict the level of that
profitability or whether we will be able to sustain profitability. We expect
that our operating results will fluctuate from period to period as a result of
differences in when we incur expenses and receive revenues from collaborative
arrangements and other sources. Some of these fluctuations may be significant.
We believe our available cash, cash equivalents, marketable securities and
existing sources of funding will be adequate to satisfy out anticipated capital
requirements through 1999. Our future capital requirements will depend on many
factors, including: (1) the pace of scientific progress in our research and
development programs, (2) the magnitude of these programs, (3) the scope and
results of preclinical testing and clinical trials, (4) the time and costs
involved in obtaining regulatory approvals, (5) the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, (6) competing
technological and market developments, (7) the ability to establish additional
collaborations or changes in existing collaborations, (8) the cost of
manufacturing scale-up and (9) the effectiveness of our commercialization
activities.
WE MAY NOT BE ABLE TO PAY AMOUNTS DUE ON OUR OUTSTANDING INDEBTEDNESS.
We may not have sufficient cash to make required payments due under our
existing debt. Our subsidiary, Glycomed, is obligated to make payments under
certain debentures in the total principal amount of $50.0 million. The
debentures bear interest at a rate of 7 1/2% per annum and are due in 2003.
Glycomed may not have the funds necessary to pay the interest on and the
principal of these debentures when due. If Glycomed does not have adequate
funds, it will be forced to refinance the debentures and may not be successful
in doing so. In addition, in November 1998, we issued notes with a total issue
price of $40.0 million to Elan. Glycomed's failure to make payments when due
under its debentures would cause us to default under the notes we have issued or
may issue to Elan.
WE MAY REQUIRE ADDITIONAL STOCK OR DEBT FINANCINGS TO FUND OUR OPERATIONS WHICH
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We have incurred losses since our inception and do not expect to generate
positive cash flow to fund our operations for the 1999 calendar year and perhaps
for one or more subsequent years. As a result, we may need to complete
additional equity or debt financings in the near future to fund our operations.
These financings may not be available on acceptable terms. In addition, these
financings, if completed, still may not meet our capital needs and could result
in substantial dilution to our stockholders. For instance, the notes we issued
to Elan are convertible into common stock at the option of Elan, subject to some
limitations. In addition, we may issue additional notes to Elan with up to a
total issue price of $70.0 million, which also would be convertible into common
stock. If adequate funds are not available, we may be required to delay, reduce
the scope of or eliminate one or more of our drug development programs.
Alternatively, we may be forced to attempt to continue development by entering
into arrangements with collaborative partners or others that require us to
relinquish some or all of our rights to certain technologies or drug candidates
that we would not otherwise
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relinquish. Our inability to obtain additional financing or to satisfy our
obligations or the obligations of our subsidiaries under outstanding
indebtedness could adversely affect our business.
WE NEED TO BUILD MARKETING AND SALES FORCES IN THE UNITED STATES AND EUROPE
WHICH WILL BE AN EXPENSIVE AND TIME-CONSUMING PROCESS.
Developing the sales force to market and sell products is a difficult,
expensive and time-consuming process. To market any of our products directly, we
will need to either develop a marketing and sales force with technical expertise
and distribution capability or contract with other companies with distribution
systems and direct sales forces. We recently developed a sales force and will,
at least initially, rely on another company to distribute our products. The
distributor will be responsible for providing many marketing support services,
including customer service, order entry, shipping and billing, and customer
reimbursement assistance. In addition, in Canada we are the sole marketer of two
cancer products other companies have developed. We may not be able to continue
to establish and maintain the necessary sales and marketing capabilities. To the
extent we enter into co-promotion or other licensing arrangements, any revenues
we receive will depend on the marketing efforts of others, which may or may not
be successful. Our failure to establish an effective sales force, either
directly or through others, could adversely affect our business.
OUR SUCCESS WILL DEPEND ON THIRD-PARTY REIMBURSEMENT AND MAY BE IMPACTED BY
HEALTH CARE REFORM.
The efforts of governments and third party payors to contain or reduce the
cost of health care will continue to affect the business and financial condition
of drug companies. A number of legislative and regulatory proposals to change
the health care system have been discussed in recent years. In addition, an
increasing emphasis on managed care in the United States has and will continue
to increase pressure on drug pricing. We cannot predict whether legislative or
regulatory proposals will be adopted or what effect those proposals or managed
care efforts may have on our business. The announcement and/or adoption of such
proposals or efforts could adversely affect our profit margins and business.
Sales of prescription drugs depend significantly on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. These third party payors frequently require drug
companies to provide predetermined discounts from list prices, and they are
increasingly challenging the prices charged for medical products and services.
If we succeed in bringing one or more products to the market, these products may
not be considered cost-effective and reimbursement to the consumer may not be
available or sufficient to allow us to sell our products on a competitive basis.
WE FACE SUBSTANTIAL COMPETITION WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
Some of the drugs that we are developing will compete with existing
treatments. In addition, several companies are developing new drugs that target
the same diseases that we are targeting and are taking IR-related and
STAT-related approaches to drug development. Many of our existing or potential
competitors, particularly large drug companies, have greater financial,
technical and human resources than us and may be better equipped to develop,
manufacture and market products. Many of these companies also have extensive
experience in preclinical testing and human clinical trials, obtaining FDA and
other regulatory approvals and manufacturing and marketing pharmaceutical
products. In addition, academic institutions, governmental agencies and other
public and private research organizations are developing products that may
compete with the products we are developing. These institutions are becoming
more aware of the commercial value of their findings and are seeking patent
protection and licensing arrangements to collect payments for the use of their
technologies. These institutions also may market competitive products on their
own or through joint ventures and will compete with us in recruiting highly
qualified scientific personnel. Any of these companies, academic institutions,
government agencies or research organizations may develop and introduce products
and processes that compete with or are better than ours. As a result, our
products may become noncompetitive or obsolete.
The products we are developing target a broad range of markets. Our ability
to compete will depend on the uses for which our products are developed and
ultimately approved by regulatory authorities. For some of our potential
products, an important factor in competition may be the timing of market
introduction.
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Important competitive factors include the speed at which we develop products,
complete the clinical trials and regulatory approval processes, and
commercialize the products. In addition, we expect that competition among
products approved for sale will be based on product safety, effectiveness,
reliability, availability, and price and patent position. Our competitive
position also will depend on whether we can attract and retain qualified
personnel, obtain patent protection or otherwise develop proprietary products or
processes, and secure sufficient capital resources.
OUR PRODUCTS MUST CLEAR SIGNIFICANT REGULATORY HURDLES PRIOR TO MARKETING.
Before we obtain the approvals necessary to sell any of our potential
products, we must show through preclinical studies and clinical trials that each
product is safe and effective. Our failure to show any product's safety and
effectiveness would delay or prevent regulatory approval of the product and
could adversely affect our business. The clinical trials process is complex and
uncertain. The results of preclinical studies and initial clinical trials may
not necessarily predict the results from later large-scale clinical trials. In
addition, clinical trials may not demonstrate a product's safety and
effectiveness to the satisfaction of the regulatory authorities. A number of
companies have suffered significant setbacks in advanced clinical trials or in
seeking regulatory approvals, despite promising results in earlier trials. The
FDA may also require additional clinical trials post approval, which could be
expensive and time-consuming, and failure to successfully conduct those trials
could jeopardize continued commercialization.
The rate at which we complete our clinical trials depends on many factors,
including our ability to obtain adequate clinical supplies and patient
enrollment. Patient enrollment 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 patient enrollment may result in
increased costs and longer development times. In addition, some of our
collaborative partners have rights to control product development and clinical
programs for products developed under the collaborations. As a result, these
collaborators may conduct these programs more slowly or in a different manner
than we had expected. Even if clinical trials are completed, we or our
collaborative partners still may not apply for FDA approval in a timely manner
or the FDA still may not grant approval.
WE RELY HEAVILY ON COLLABORATIVE RELATIONSHIPS AND TERMINATION OF ANY OF THESE
PROGRAMS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our strategy for developing and commercializing many of our potential
products includes entering into collaborations with corporate partners,
licensors, licensees and others. To date, we have entered into collaborations
with Lilly, SmithKline Beecham, American Home Products, Abbott, Sankyo, Glaxo-
Wellcome, Allergan and Pfizer. These collaborations provide us with funding and
research and development resources for potential products for the treatment or
control of metabolic diseases, hematopoiesis, women's health disorders,
inflammation, cardiovascular disease, cancer and skin disease, and osteoporosis.
These agreements also give our collaborative partners significant discretion
when deciding whether or not to pursue any development program. We cannot be
certain that our collaborations will continue or be successful.
In addition, our collaborators may develop drugs, either alone or with
others that compete with the types of drugs they currently are developing with
us. This would result in less support and increased competition for our
programs. If products are approved for marketing under our collaborative
programs, any revenues we receive will depend on the manufacturing, marketing
and sales efforts of our collaborators, who generally retain commercialization
rights under the collaborative agreements. Our current collaborators also
generally have the right to terminate their collaborations under certain
circumstances. If any of our collaborative partners breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully, our product development under these agreements will be delayed or
terminated. The delay or termination of any of the collaborations could
adversely affect our business.
We may have disputes in the future with our collaborators, including
disputes concerning who owns the rights to any technology developed. For
instance, we were involved in litigation with Pfizer, which we settled in April
1996, concerning our right to milestones and royalties based on the development
and commercialization
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<PAGE> 33
of droloxifene. These and other possible disagreements between us and our
collaborators could delay our ability and the ability of our collaborators to
achieve milestones or our receipt of other payments. In addition, any
disagreements could delay, interrupt or terminate the collaborative research,
development and commercialization of certain potential products, or could result
in litigation or arbitration. The occurrence of any of these problems could be
time-consuming and expensive and could adversely affect our business.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN AND MAINTAIN OUR PATENTS AND OTHER
PROPRIETARY RIGHTS.
Our success will depend on our ability and the ability of our licensors to
obtain and maintain patents and proprietary rights for our potential products
and to avoid infringing the proprietary rights of others, both in the United
States and in foreign countries. Patents may not be issued from any of these
applications currently on file or, if issued, may not provide sufficient
protection. In addition, if we breach our licenses, we may lose rights to
important technology and potential products.
Our patent position like that of many pharmaceutical companies, is
uncertain and involves complex legal and technical questions for which important
legal principles are unresolved. We may not develop or obtain rights to products
or processes that are patentable. Even if we do obtain patents, they may not
adequately protect the technology we own or have licensed. In addition, others
may challenge, seek to invalidate, infringe or circumvent any patents we own or
license, and rights we receive under those patents may not provide competitive
advantages to us. Further, the manufacture, use or sale of our products may
infringe the patent rights of others.
Several drug companies and research and academic institutions have
developed technologies, filed patent applications or received patents for
technologies that may be related to our business. Others have filed patent
applications and received patents that conflict with patents or patent
applications we have licensed for our use, either by claiming the same methods
or compounds or by claiming methods or compounds that could dominate those
licensed to us. In addition, we may not be aware of all patents or patent
applications that may impact our ability to make, use or sell any of our
potential products. For example, United States patent applications are
confidential while pending in the Patent and Trademark Office, and patent
applications filed in foreign countries are often first published six months or
more after filing. Any conflicts resulting from the patent rights of others
could significantly reduce the coverage of our patents and limit our ability to
obtain meaningful patent protection. If other companies obtain patents with
conflicting claims, we may be required to obtain licenses to those patents or to
develop or obtain alternative technology. We may not be able to obtain any such
license on acceptable terms or at all. Any failure to obtain such licenses could
delay or prevent us from pursuing the development or commercialization of our
potential products, which would adversely affect our business.
We have had and will continue to have discussions with our current and
potential collaborators regarding the scope and validity of our patent and other
proprietary rights. If a collaborator or other party successfully establishes
that our patent rights are invalid, we may not be able to continue our existing
collaborations beyond their expiration. Any determination that our patent rights
are invalid also could encourage our collaborators to terminate their agreements
where contractually permitted. Such a determination could also adversely affect
our ability to enter into new collaborations.
We may also need to initiate litigation, which could be time-consuming and
expensive, to enforce our proprietary rights or to determine the scope and
validity of others' rights. If litigation results, a court may find our patents
or those of our licensors invalid or may find that we have infringed on a
competitor's rights. If any of our competitors have filed patent applications in
the United States which claim technology we also have invented, the Patent and
Trademark Office may require us to participate in expensive interference
proceedings to determine who has the right to a patent for the technology.
We have learned that Hoffman LaRoche, Inc. has received a United States
patent and has made patent filings in foreign countries that relate to our
Panretin(R) capsules and gel products. We filed a patent application with an
earlier filing date than Hoffman LaRoche's patent, which we believe is broader
than, but overlaps in part with, Hoffman LaRoche's patent. We currently are
investigating the scope and validity of Hoffman LaRoche's patent to determine
its impact upon our products. The Patent and Trademark Office has informed
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<PAGE> 34
us that the overlapping claims are patentable to us and has initiated a
proceeding to determine whether we or Hoffman LaRoche are entitled to a patent.
We may not receive a favorable outcome in the proceeding. In addition, the
proceeding may delay the Patent and Trademark Office's decision regarding our
earlier application. While we believe that the Hoffman LaRoche patent does not
cover the use of Panretin(R) capsules and gel for most of our planned uses, if
we do not prevail, the Hoffman LaRoche patent might block our use of Panretin(R)
capsules and gel in certain cancers.
We also rely on unpatented trade secrets and know-how to protect and
maintain our competitive position. We require our employees, consultants,
collaborators and others to sign confidentiality agreements when they begin
their relationship with us. These agreements may be breached and we may not have
adequate remedies for any breach. In addition, our competitors may independently
discover our trade secrets. Any of these actions might adversely affect our
business.
WE CURRENTLY HAVE LIMITED MANUFACTURING CAPABILITY AND WILL RELY ON THIRD-PARTY
MANUFACTURERS.
We currently have no manufacturing facilities outside of Marathon's
facility and rely on Marathon and others for clinical or commercial production
of our potential products. To be successful, we will need to manufacture our
products, either directly or through others, in commercial quantities, in
compliance with regulatory requirements and at acceptable cost. If we are unable
to develop our own facilities or contract with others for manufacturing
services, our ability to conduct preclinical testing and human clinical trials
will be adversely affected. This in turn could delay our submission of products
for regulatory approval and our initiation of new development programs. In
addition, although other companies have manufactured drugs acting through IRs
and STATs on a commercial scale, we may not be able to do so at costs or in
quantities to make marketable products. Any of these events would adversely
affect our business.
Our manufacturing process also may be susceptible to contamination, which
could cause the affected manufacturing facility to close until the contamination
is identified and fixed. In addition, problems with equipment failure or
operator error also could cause delays. Any extended and unplanned manufacturing
shutdowns could be expensive and could result in inventory and product
shortages.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY RISKS AND WE MAY NOT HAVE
SUFFICIENT INSURANCE TO COVER ANY CLAIMS.
Our business exposes us to potential product liability risks. A successful
product liability claim or series of claims brought against us could adversely
affect our business. Some of the compounds we are investigating may be harmful
to humans. For example, retinoids as a class are known to contain compounds,
which can cause birth defects. We have arranged to increase our product
liability insurance coverage in connection with the planned launch of two of our
potential products; however, we may not be able to maintain our insurance on
acceptable terms, or our insurance may not provide adequate protection in the
case of a product liability claim. We expect to purchase additional insurance
when more of our products progress to a later stage of development and if we
license any rights to use later-stage products in the future. To the extent that
product liability insurance, if available, does not cover potential claims, we
will be required to self-insure the risks associated with such claims.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES, THE LOSS OF WHOSE SERVICES COULD
ADVERSELY AFFECT US.
We depend on our key scientific and management staff, the loss of whose
services could adversely affect our business. Furthermore, we are currently
experiencing a period of rapid growth, which requires us to hire many new
scientific, management and operational personnel. Accordingly, recruiting and
retaining qualified management, operations and scientific personnel to perform
research and development work also is critical to our success. Although we
believe we will successfully attract and retain the necessary personnel, we may
not be able to attract and retain such personnel on acceptable terms given the
competition among numerous drug companies, universities and other research
institutions for such personnel.
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<PAGE> 35
WE USE HAZARDOUS MATERIALS WHICH REQUIRES US TO INCUR SUBSTANTIAL COSTS TO
COMPLY WITH ENVIRONMENTAL REGULATIONS.
In connection with our research and development activities, we handle
hazardous materials, chemicals and various radioactive compounds. For example,
as we previously mentioned, retinoids as a class are known to contain compounds,
which can cause birth defects. We cannot completely eliminate the risk of
accidental contamination or injury from the handling and disposing of hazardous
materials. In the event of any accident, we could be held liable for any damages
that result, which could be significant. In addition, we may incur substantial
costs to comply with environmental regulations. Any of these events could
adversely affect our business.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY VOLATILITY IN THE MARKETS.
The market prices and trading volumes for our securities, and the
securities of emerging companies like us, have historically been highly volatile
and have experienced significant fluctuations unrelated to operating
performance. Future announcements concerning us or our competitors may impact
the market price of our common stock. These announcements might include the
results of research, development testing, technological innovations, new
commercial products, government regulation, receipt of regulatory approvals by
competitors, our failure to receive regulatory approvals, developments
concerning proprietary rights, litigation or public concern about the safety of
the products.
YOU MAY NOT RECEIVE A RETURN ON YOUR SHARES OTHER THAN THROUGH THE SALE OF YOUR
SHARES OF COMMON STOCK.
We have not paid any cash dividends on our common stock to date, and we do
not anticipate paying cash dividends in the foreseeable future. Accordingly,
other than through a sale of your shares, you may not receive a return.
OUR CHARTER DOCUMENTS AND SHAREHOLDER RIGHTS PLAN MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO YOU.
Our shareholder rights plan and certain provisions contained in our
certificate of incorporation and bylaws may discourage transactions involving an
actual or potential change in our ownership, including transactions in which you
might otherwise receive a premium for your shares over then-current market
prices. These provisions also may limit your ability to approve transactions
that you deem to be in your best interests. In addition, our board of directors
may issue shares of preferred stock without any further action by you. Such
issuances may have the effect of delaying or preventing a change in our
ownership.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED AND WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
For a discussion of the risks associated with our year 2000 readiness,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
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<PAGE> 36
ITEM 2. PROPERTIES
Ligand currently leases and occupies three facilities in San Diego,
California, and one facility in Hopkinton, Massachusetts.
In July 1994, the Company entered into a 20-year lease related to the
construction of a new build-to-suit laboratory facility. This 52,800 square foot
facility was completed and occupied in August 1995. In March 1997, the Company
entered into a 17-year lease for laboratory and administrative office space for
a second build-to-suit facility. This 82,000 square foot facility was completed
and occupied in December 1997. The third facility in San Diego is occupied under
a lease of approximately 7,500 square feet of laboratory space, which continues
through February 2001.
In January 1999, Ligand purchased all the assets of Marathon
Biopharmaceuticals in Hopkinton, Massachusetts. Marathon has 13 years remaining
on a lease for a 64,000 square foot facility which is used for manufacturing and
administrative office space.
The Company believes these facilities will be adequate to meet the
Company's near-term space requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to litigation arising in the
normal course of business. As of the date of the filing, the Company is not a
party to any litigation which would have a material effect on its financial
position or business operations taken as a whole.
On August 4, 1998, a lawsuit was filed in the Court of Chancery of the
State of Delaware which sought to enjoin the acquisition of Seragen by Ligand.
The injunction was denied and the acquisition occurred on August 12, 1998. An
amended complaint was filed on or about December 18, 1998 against Seragen,
Seragen Technology, Inc., certain former directors and officers and Seragen
investors, Boston University and certain of its trustees, Marathon
Biopharmaceuticals L.L.C., Ligand and Knight Acquisition Corp., a wholly owned
subsidiary of Ligand at the time of the merger with Seragen ("Knight"). Ligand
and Knight were not named as defendants in the original complaint. The amended
complaint alleges claims of self-dealing and breach of fiduciary duties of
disclosure, loyalty and care by the individual defendants and Seragen investors,
and seeks damages on behalf of a class of shareholders who purchased Seragen
common stock during the period April 1992 through August 12, 1998. The lawsuit
also challenges the fairness of Ligand's acquisition of Seragen, and the
allocation of the merger proceeds among the individual defendants, Seragen's
investors and minority shareholders. We believe that the lawsuit is without
merit and intend to defend against it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKETS FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
(A) MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "LGND." The following table sets forth the
high and low sales prices for the Company's common stock on the Nasdaq National
Market for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
------------
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1997:
1st Quarter................................................. $17 $10 1/4
2nd Quarter................................................. 14 1/2 9 1/8
3rd Quarter................................................. 17 3/4 11 5/8
4th Quarter................................................. 18 3/8 11 1/4
YEAR ENDING DECEMBER 31, 1998:
1st Quarter................................................. $16 5/8 $10 7/8
2nd Quarter................................................. 16 3/8 12 1/8
3rd Quarter................................................. 13 1/4 5 1/2
4th Quarter................................................. 12 3/8 6 15/16
</TABLE>
(B) HOLDERS
As of February 28, 1999, there were approximately 1,944 holders of record
of the common stock.
(C) DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not intend to pay any cash dividends in the foreseeable future.
The Company currently intends to retain its earnings, if any, to finance future
growth. The Company has no contractual restrictions on paying dividends.
(D) RECENT SALES OF UNREGISTERED SECURITIES
None.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated financial statements has been derived from the audited financial
statements. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Collaborative research and
development
Related parties................. $ -- $ 18,997 $ 18,641 $ 11,972 $ 8,342
Unrelated parties............... 17,267 32,284 17,994 12,424 4,893
Other.............................. 406 418 207 120 74
---------- ---------- ---------- ---------- ----------
Total revenues................ 17,673 51,699 36,842 24,516 13,309
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Research and development........... 70,739 72,426 59,494 41,636 27,205
Selling, general and
administrative.................. 16,568 10,108 10,205 8,181 6,957
Write-off of acquired in-process
technology...................... 45,000 64,970 -- 19,564 --
ALRT contribution.................. -- -- -- 17,500 --
---------- ---------- ---------- ---------- ----------
Total operating expenses...... 132,307 147,504 69,699 86,881 34,162
---------- ---------- ---------- ---------- ----------
Loss from operations................. (114,634) (95,805) (32,857) (62,365) (20,853)
Interest income...................... 3,070 3,743 3,704 3,603 1,298
Interest expense..................... (8,322) (8,088) (8,160) (5,410) (679)
Realized gain on sale of
investments........................ 2,000 -- -- -- --
Equity in operations of joint
venture............................ -- -- -- -- (6,845)
---------- ---------- ---------- ---------- ----------
Net loss............................. $ (117,886) $ (100,150) $ (37,313) $ (64,172) $ (27,079)
========== ========== ========== ========== ==========
Basic and diluted net loss per
Share.............................. $ (2.92) $ (3.02) $ (1.30) $ (2.70) $ (1.57)
---------- ---------- ---------- ---------- ----------
Shares used in computing net loss per
share.............................. 40,392,421 33,128,372 28,780,914 23,791,542 17,240,535
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short term
investments and restricted cash.... $ 72,521 $ 86,287 $ 84,179 $ 76,903 $ 38,403
Working capital...................... 51,098 62,399 71,680 57,349 33,567
Total assets......................... 156,020 107,423 102,140 93,594 46,696
Long-term debt....................... 51,185 14,751 19,961 18,585 12,285
Convertible subordinated
debentures......................... 39,302 36,628 33,953 31,279 --
Accumulated deficit.................. (395,630) (277,744) (177,594) (140,281) (76,108)
Total stockholders' equity
(deficit).......................... (11,362) 34,349 34,461 28,071 26,335
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
This annual report on Form 10-K may contain predictions, estimates and
other forward-looking statements that involve a number of risks and
uncertainties, including those discussed in Item 1 above at "Risks and
Uncertainties." This outlook represents our current judgment on the future
direction of our business. Any risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. We
undertake no obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events or circumstances arising
after the date of this annual report.
OVERVIEW
Since January 1989, we have devoted substantially all of our resources to
our intracellular receptor and signal transducers and activators of
transcription drug discovery and development programs. We have been unprofitable
since our inception. We expect to incur substantial additional operating losses
until the approval and commercialization of our products, begun in 1999,
generate sufficient revenues to cover our expenses. These losses will be due to
continued capital requirements for: (1) research and development, (2)
preclinical testing, (3) clinical trials, (4) regulatory activities (5)
establishment of manufacturing processes and (6) sales and marketing
capabilities. We expect that our operating results will fluctuate from period to
period as a result of differences in the timing of expenses incurred and
revenues earned from collaborative arrangements and future product sales. Some
of these fluctuations may be significant. As of December 31, 1998, our
accumulated deficit was $395.6 million.
In February 1999, the FDA granted us marketing approval for our first two
products, Panretin(R) gel for the treatment of patients with cutaneous
AIDS-related Kaposi's sarcoma and ONTAK(TM) for the treatment of patients with
persistent or recurrent cutaneous CTCL whose malignant cells express the CD25
component of the IL-2 receptor.
In August 1998, we completed a merger with Seragen, Inc. We currently
operate Seragen as one of our subsidiaries. Also, in August 1998, Seragen signed
an agreement with Eli Lilly and Company and us under which Lilly assigned to us
Lilly's rights and obligations under its agreements with Seragen, including its
sales and marketing rights to ONTAK(TM).
We paid Seragen shareholders $30.0 million, $4.0 million of which was in
cash and $26.0 million of which was in the form of approximately 1,858,515
shares of common stock. We must pay an additional $37.0 million to Seragen
shareholders in cash and/or common stock, at our option. The additional payment
must be made in August 1999.
Additionally, our agreement with Lilly calls for up to $5.0 million,
payable in cash or common stock, at our option, in milestone payments to Lilly,
upon ONTAK(TM) approval by the FDA. Upon certain other events, Lilly could
receive an additional $5.0 million in milestone payments.
In January 1999, we purchased substantially all of the assets of Marathon
Biopharmaceuticals for $5.0 million through the issuance of 402,820 shares of
our common stock, at $12.41 per share with an additional $3.0 million to be paid
in August 1999.
The transactions with Seragen shareholders, Marathon, and Lilly represent
our cost to acquire all of the rights to manufacture, market and sell ONTAK(TM),
and we accounted for using the purchase method of accounting. The purchase
price, totaling $84.1 million, which includes liabilities assumed of $2.3
million was allocated to the fair value of the assets acquired. This included an
allocation to in-process technology which was written off, resulting in a
one-time non-cash charge to results of operations of approximately $30.0
million.
In September 1998, we signed a binding letter of agreement with Elan
Corporation, plc. In September 1998, Elan purchased 1,278,970 shares of common
stock for $14.9 million ($11.65 per share). In November 1998, Elan purchased an
additional 437,768 shares for $5.1 million ($11.65 per share).
In addition, in November 1998, Elan purchased from us $40.0 million in
issue price of zero coupon convertible senior notes, due 2008 with an 8.0% per
annum yield to maturity. Of these notes, $30.0 million are convertible into
common stock at $14.00 per share. The balance issued of $10.0 million along with
up to an
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<PAGE> 40
additional $70.0 million of notes which Elan may also purchase in the future is
convertible into common stock. The conversion price is determined by the average
of the closing prices of common stock for the 20 trading days immediately prior
to the issuance of a note plus a premium. However, the conversion price will
never be less than $14.00 per share or more than $20.00 per share. Interest will
accrue during the term of the notes. The notes may be used to finance the final
payments for the Seragen merger and Marathon acquisition which are due in August
1999, as well as other acquisitions of complementary technologies, subject to
the consent of Elan.
Elan also exclusively licensed to us in the United States and Canada its
proprietary product Morphelan(TM). At the closing, we paid Elan $5.0 million
through the issuance of 429,185 shares of common stock ($11.65 per share) and
$10.0 million through the issuance of notes for these rights to Morphelan(TM).
The total $15.0 in million payments was written off as in-process technology in
a one-time charge to operations. We will also pay Elan milestone payments upon
the occurrence of certain events up to and including the approval of the new
drug application in the United States. These payments may be in cash or, subject
to certain conditions, in common stock or notes.
In December 1994, we formed Allergan Ligand Retinoid Therapeutics, Inc.
with Allergan, Inc. to continue the research and development activities
previously conducted by a joint venture with Allergan. In June 1995, Allergan
Ligand and we completed a public offering of 3,250,000 units with aggregate
proceeds of $32.5 million and cash contributions by Allergan of $50.0 million
and by us of $17.5 million. Allergan Ligand received net proceeds of $94.3
million for retinoid product research and development. Each unit consisted of
one share of Allergan Ligand callable common stock and two warrants, each
warrant entitling the holder to purchase one share of our common stock. In
September 1997, we exercised our option to purchase all of the callable common
stock. At the same time, Allergan exercised its option to purchase certain
assets of Allergan Ligand. Our exercise of the stock purchase option required
the issuance of 3,166,567 shares of our common stock, along with cash payments
totaling $25.0 million, to holders of the callable common stock in November
1997. Allergan made a cash payment of $8.9 million to Allergan Ligand in
November 1997, which was used by us to pay a portion of the stock purchase
option. Prior to September 1997, cash received from Allergan Ligand was recorded
as contract revenue. As a result of our exercise of the stock purchase option,
research expenditures incurred related to Allergan Ligand activities are no
longer reimbursed, eliminating the Allergan Ligand contract revenue recognition.
The buyback of Allergan Ligand was accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of net assets
acquired was allocated to in-process technology and written off resulting in a
one time non-cash charge to operations of $65.0 million in 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 ("1998"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1997 ("1997")
We had revenues of $17.7 million for 1998 compared to revenues of $51.7
million for 1997. The decrease in revenues is primarily due to: (1) the buyback
of Allergan Ligand which resulted in reduced revenue of $19.0 million in 1998
compared to 1997, (2) completion of the Glaxo-Wellcome, plc and Sankyo Company
Ltd. collaborations in 1997 resulting in reduced revenues in 1998 of $1.3
million for Glaxo and $2.3 million for Sankyo compared to 1997, (3) completion
of the American Home Products Corporation collaboration in 1998 resulting in
reduced revenue of $2.7 million compared to 1997 and (4) a reduction in revenue
from Lilly of $9.3 million. The Lilly reduction was due to a $12.5 million
up-front non refundable milestone payment received in 1997 and $6.25 million
which was recognized in 1997 revenue upon the execution of the Lilly
collaboration agreement, offset by a full year of collaboration revenue from
Lilly recognized in 1998. Revenues in 1998 were derived from the Company's
research and development agreements with: (1) Lilly of $10.4 million, (2)
SmithKline Beecham Corporation of $3.7 million, (3) American Home Products of
$1.3 million (4) Abbott Laboratories of $1.2 million, as well as from product
sales of in-licensed products by our Canadian subsidiary of $406,000 and a
one-time license fee payment of $686,000. Revenues for 1997 were derived from
our research and development agreements with: (1) Lilly of $19.7 million (2)
Allergan Ligand of $19.0 million, (3) American Home Products of $4.0 million,
(4) SmithKline Beecham of $3.2 million,
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<PAGE> 41
(5) Sankyo of $2.3 million, (6) Abbott of $1.7 million, (7) Glaxo-Wellcome of
$1.3 million, as well as from product sales of in-licensed products by our
Canadian subsidiary of $418,000.
For 1998, research and development expenses decreased to $70.7 million from
$72.4 million in 1997. The decrease in expenses was primarily due to initial
drug product validation costs incurred in 1997 and the closure of Glycomed's
Alameda facility and completion of the research portion of the Sankyo
collaboration in October 1997. The decrease in these expenses was offset by an
increase in expenses related to completion of Phase III trials and NDA
preparation and submission for our lead product candidates. Selling, general and
administrative expenses increased to $16.6 million in 1998 from $10.1 million in
1997. This increase was primarily attributable to personnel additions and
increased expenses in preparation for commercialization activities. Interest
income decreased to $3.1 million in 1998 from $3.7 million in 1997 due to the
use of cash to fund development and clinical programs and to support the growth
in commercialization activities, offset by cash received from the Elan notes and
the $20.0 million equity investment by Elan in second half of 1998. Interest
expense increased to $8.3 million in 1998 from $8.1 million in 1997. The
increase is due to interest payable in connection with the receipt of the Elan
notes. A $2.0 million gain was realized from the sale of investment securities
in 1998.
A one-time charge of $30.0 million for in process technology was incurred
in 1998 from the merger with Seragen, and an additional one-time charge of $15.0
million related to the licensing of Morphelan(TM) from Elan.
We have significant net operating loss carryforwards for federal and state
income taxes which are available subject to Internal Revenue Code Sections 382
and 383 carryforward limitations. We do not believe the limitations will have a
material impact upon the future utilization of these carryforwards. See note 13
to our consolidated financial statements included elsewhere in this annual
report.
YEAR ENDED DECEMBER 31, 1997 ("1997"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
We had revenues of $51.7 million for 1997 compared to revenues of $36.8
million for 1996. The increase in revenues is primarily due to the Lilly
collaboration revenues of $19.7 million in 1997, offset by decreased revenues
from the research and development collaboration with American Home Products, 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 Inc. in 1996. Revenues in 1997 were derived from our
research and development agreements as discussed above. Revenues for 1996 were
derived from our research and development agreements with: (1) Allergan Ligand
of $18.6 million, (2) American Home Products of $6.9 million, (3) Sankyo of $2.7
million, (4) Abbott of $2.5 million, (5) SmithKline Beecham of $2.4 million, (6)
Glaxo-Wellcome of $2.1 million as well as from a milestone payment received from
Pfizer of $1.3 million, product sales of in-licensed products by our Canadian
subsidiary of $207,000 and revenues from a National Institutes of Health grant
of $99,000.
For 1997, research and development expenses increased to $72.4 million from
$59.5 million in 1996. These expenses increased primarily due to expansion of
our clinical and development activities, as well as related additions of
clinical and development personnel. Selling, general and administrative expenses
decreased to $10.1 million in 1997 from $10.2 million in 1996. The decrease was
primarily attributable to higher legal expenses incurred in 1996 related to the
settlement of future product rights litigation offset by additions to personnel
in 1997 to support expanded clinical and development activities. Interest income
was $3.7 million for 1997 and 1996. Interest expense decreased slightly to $8.1
million for 1997, from $8.2 million in 1996, due to conversion of $7.5 million
convertible notes from American Home Products to equity in 1997, offset by the
addition of $2.5 million of convertible notes from SmithKline Beecham in 1997
and increases in capital lease obligations used to finance equipment.
A one-time charge of $65.0 million was incurred in 1997 for the write off
of in-process technology related to the exercise of the Allergan Ligand stock
purchase option.
40
<PAGE> 42
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through private and public offerings of our
equity securities, collaborative research revenues, capital and operating lease
transactions, issuance of convertible notes, investment income and product
sales. From inception through December 31, 1998, we have raised cash proceeds of
$234.4 million from sales of equity securities: $78.2 million from public
offerings and a total of $156.2 million from private placements and the exercise
of options and warrants.
As of December 31, 1998, we had acquired a total of $36.5 million in
property, laboratory and office equipment (including Marathon) and $5.0 million
in tenant leasehold improvements. Of these totals, $7.9 million was recorded in
the merger with Seragen and will be paid in cash or common stock, at the
Company's option, while substantially all of the balance has been funded through
capital lease and equipment note obligations. In addition, we lease our office
and laboratory facilities. In July 1994, we entered into a long-term lease
related to the construction of a new laboratory facility, which was completed
and occupied in August 1995. In March 1997, we entered into a long-term lease,
related to a second build-to-suit facility and loaned the construction
partnership $3.7 million at an annual interest rate of 8.5% which will be paid
back monthly over a 10-year period. The second build-to-suit facility was
completed and occupied in December 1997. In February 1997, the Company signed a
master lease agreement to finance future capital equipment up to $1.5 million.
This master lease agreement was expanded and extended in July 1997 and again in
December 1998 and is currently available until March 31, 2000. Each individual
schedule under the master lease agreement will be paid back monthly with
interest over a five-year period. As of December 31, 1998, we had $4.5 million
available to finance future capital equipment.
Working capital decreased to $51.1 million as of December 31, 1998, from
$62.4 million at the end of 1997. The decrease in working capital resulted from
a decrease in cash and increases in accounts payable and accruals at year end
1998, due to increases in clinical trials, product development expenses and
increased selling expenses in preparation for commercialization activities. This
decrease in working capital was offset by the $20.0 million equity investment by
Elan in the second half of 1998 and $30 million in the notes received from Elan
in November 1998. For the same reasons, cash and cash equivalents, short-term
investments and restricted cash decreased to $72.5 million at December 31, 1998
from $86.3 million at December 31, 1997. We primarily invest our cash in United
States government and investment grade corporate debt securities.
In April 1998, we initiated a new collaboration with SmithKline Beecham to
develop small molecule drugs for the treatment or prevention of obesity. As part
of the collaboration, SmithKline Beecham purchased 274,423 shares of common
stock for $5.0 million ($18.22 per share), a 20% premium over a 15-day average
of the daily closing price of common stock prior to execution of the agreement.
The premium has been deferred and will be recognized as revenue over the
two-year period in which services will be provided under the collaborative
agreement. SmithKline Beecham also purchased for $1.0 million a warrant to
purchase 150,000 shares of common stock at $20.00 per share. The warrant expires
in five years, and we may require SmithKline Beecham to exercise the warrant
under certain circumstances after three years. SmithKline Beecham will also
purchase additional common stock at a 20% premium if a certain research
milestone is achieved and will make cash payments to us if subsequent milestones
are met.
In June 1998, we converted $3.8 million of the convertible notes
outstanding to American Home Products into 374,625 shares of common stock at a
$10.01 conversion price.
In August 1998, we paid Seragen shareholders $30.0 million, $4.0 million of
which was cash and $26.0 million of which was in the form of approximately
1,858,515 shares of common stock. We must pay an additional $37.0 million to
Seragen shareholders in cash and/or common stock, at our option. The additional
payment must be made in August 1999.
In January 1999, we purchased substantially all of the assets of Marathon
Biopharmaceuticals for $5.0 million through the issuance of 402,820 shares of
our common stock, at $12.41 per share with an additional $3.0 million to be paid
in August 1999.
In September 1998, Elan purchased 1,278,970 shares of common stock for
$14.9 million ($11.65 per share). An additional 437,768 shares for $5.1 million
($11.65 per share) was purchased by Elan in November
41
<PAGE> 43
1998. Elan also purchased from us in November 1998 $40.0 million in issue price
of notes. At our option, Elan may also purchase up to an additional $70.0
million of notes which will be convertible into common stock at $14.00 to $20.00
per share.
Elan also exclusively licensed to us in the United States and Canada its
proprietary product Morphelan(TM). At the closing, we paid Elan $5.0 million
through the issuance of 429,185 shares of common stock ($11.65 per share) and
$10.0 million through the issuance of notes for these rights to Morphelan(TM).
The total $15.0 million payment was written off as in-process technology in a
one-time charge to operations. We will also pay Elan milestone payments upon the
occurrence of certain events up to and including the approval of the new drug
application in the United States. These payments may be in cash or, subject to
certain conditions, in common stock or notes
We believe our available cash, cash equivalents, marketable securities and
existing sources of funding will be adequate to satisfy our anticipated capital
requirements through 1999. Our future capital requirements will depend on many
factors, including: (1) the pace of scientific progress in our research and
development programs, (2) the magnitude of these programs, (3) the scope and
results of preclinical testing and clinical trials, (4) the time and costs
involved in obtaining regulatory approvals, (5) the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims, (6) competing
technological and market developments, (7) the ability to establish additional
collaborations or changes in existing collaborations, (8) the cost of
manufacturing scale-up and (9) the effectiveness of our commercialization
activities.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded computer chip technology, including, building controls,
security systems or laboratory equipment. It may also impact the ability to
obtain products or services if the provider encounters and fails to resolve year
2000 related problems.
We have established an active program to identify and resolve year 2000
related issues. This program includes the review and assessment of our
information technology and non-information technology systems, as well as third
parties with whom we have a material relationship. This program consists of four
phases: inventory, risk assessment, problem validation and problem resolution.
The inventory phase identified potential risks we face. They include among
others computer software, computer hardware, telecommunications systems,
laboratory equipment, facilities systems (security, environment control, alarm),
service providers (contract research organizations, consultants, product
distribution), and other third parties. The risk assessment phase categorizes
and prioritizes each risk by its potential impact. The problem validation phase
tests each potential risk, according to priority, to determine if an action risk
exists. In the case of critical third parties, this step will include a review
of their year 2000 plans and activities. The problem resolution phase will, for
each validated risk, determine the method/strategy for alleviating the risk. It
may include anything from replacement of hardware or software to process
modification to selection of alternative vendors. This step also includes the
development of contingency plans.
We initiated this program in 1998. The inventory and risk assessment phases
were completed in 1998 while the problem validation phase was completed in 1998
for all areas, except for evaluating specific pieces of research equipment and
the assessment of some critical third parties. We expect that we will complete
the last portion of the problem validation phase by the end of the second
calendar quarter of 1999. Contingency plans are being developed. We expect to
have those plans completed by the end of the second quarter of 1999. We expect
the problem resolution phase to be completed by the end of the third quarter in
1999.
To date, we have determined that some of our internal information
technology and non-information technology systems are not year 2000 compliant.
However, we have not completed our full assessment of the critical third-party
service providers we utilize. This assessment is taking place as part of the
current problem validation phase.
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<PAGE> 44
We are actively correcting problems as we identify them. These corrections
include the replacement of hardware and software systems, the identification of
alternative service providers and the creation of contingency plans. We
currently estimate that the cost of identified problems will be approximately
$100,000 for hardware and software upgrades or modifications. In addition, we
estimate that we will incur approximately $400,000 of internal personnel costs
to complete the remaining phases of the project. We do not believe that the cost
of these actions will have a material adverse affect on our business. We expect
that we will be able to resolve any problems we identify in the remaining phases
of the project as part of normal operating expenses.
Any failure of our internal computer systems or of third-party equipment or
software we use, or of systems maintained by our suppliers, to be year 2000
compliant may adversely effect our business. In addition, adverse changes in the
purchasing patterns of our potential customers as a result of year 2000 issues
affecting them may adversely effect our business. These expenditures by
potential customers may result in reduced funds available to purchase our
products, which could adversely effect our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998 our investment portfolio includes fixed-income
securities of $40.3 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. However, due to the short
duration of our investment portfolio, an immediate 10% change in interest rates
would have no material impact on our financial condition or results of
operations.
We generally conduct business including sales to foreign customers, in U.S.
dollars and as a result we have very limited foreign currency exchange rate
risk. The effect of an immediate 10% change in foreign exchange rates would not
have a material impact on our financial condition or results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections labeled "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
1999 Annual Meeting of Stockholders are incorporated herein by reference (the
"Proxy Statement.")
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation and Other Information"
appearing in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Principal Stockholders" and "Security Ownership of
Directors and Management" appearing in the Proxy Statement are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Executive Compensation and Other Information" and
"Certain Relationships and Related Transactions" appearing in the Proxy
Statement are incorporated herein by reference.
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<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this report.
CONSOLIDATED FINANCIAL STATEMENTS OF LIGAND PHARMACEUTICALS INCORPORATED
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998............... F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
# 2.1 Agreement of Merger, dated February 7, 1995 by and among
Ligand Pharmaceuticals Incorporated, LG Acquisition Corp.
and Glycomed Incorporated (other Exhibits omitted, but will
be filed by the Company with the Commission upon request).
# 2.2 Form of Plan of Merger.
### 2.3 Agreement and Plan of Reorganization dated May 11, 1998, by
and among the Company, Knight Acquisition Corp. and Seragen,
Inc. (Exhibit 2.1).
### 2.4 Form of Certificate of Seragen Merger. (Exhibit 2.2).
### 3.1 Amended and Restated Certificate of Incorporation of the
Company. (Exhibit 3.2)
### 3.2 Bylaws of the Company, as amended. (Exhibit 3.3)
### 3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of the
Company. (Exhibit 3.4).
# 10.1 The Company's 1992 Stock Option/Stock Issuance Plan, as
amended.
* 10.2 Form of Stock Option Agreement.
* 10.3 Form of Stock Issuance Agreement.
* 10.7 The Company's 1988 Stock Option Plan, as amended.
* 10.8 Form of Incentive Stock Option Agreement (Installment
Vesting).
* 10.9 Form of Non-Qualified Stock Option Agreement (Installment
Vesting).
* 10.10 Form of Consultant Non-Qualified Stock Option Agreement
(Immediate Vesting).
* 10.12 1992 Employee Stock Purchase Plan.
* 10.13 Form of Stock Purchase Agreement.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
* 10.29 Consulting Agreement, dated October 20, 1988, between the
Company and Dr. Ronald M. Evans, as amended by Amendment to
Consulting Agreement, dated August 1, 1991, and Second
Amendment to Consulting Agreement, dated March 6, 1992.
* 10.30 Form of Proprietary Information and Inventions Agreement.
Research and License.
* 10.31 Agreement, dated March 9, 1992, between the Company and
Baylor College of Medicine (with certain confidential
portions omitted).
* 10.33 License Agreement, dated November 14, 1991, between the
Company and Rockefeller University (with certain
confidential portions omitted).
* 10.34 License Agreement and Bailment, dated July 22, 1991, between
the Company and the Regents of the University of California
(with certain confidential portions omitted).
* 10.35 Agreement, dated May 1, 1991, between the Company and Pfizer
Inc (with certain confidential portions omitted).
* 10.36 License Agreement, dated July 3, 1990, between the Company
and the Brigham and Woman's Hospital, Inc. (with certain
confidential portions omitted).
* 10.37 Compound Evaluation Agreement, dated May 17, 1990, between
the Company and SRI International (with certain confidential
portions omitted).
* 10.38 License Agreement, dated January 5, 1990, between the
Company and the University of North Carolina at Chapel Hill
(with certain confidential portions omitted).
* 10.40 License Agreement, dated January 4, 1990, between the
Company and Baylor College of Medicine (with certain
confidential portions omitted).
* 10.41 License Agreement, dated October 1, 1989, between the
Company and Institute Pasteur (with certain confidential
portions omitted).
* 10.42 Sublicense Agreement, dated September 13, 1989, between the
Company and AndroBio Corporation (with certain confidential
portions omitted).
* 10.43 License Agreement, dated June 23, 1989, between the Company
and La Jolla Cancer Research Foundation (with certain
confidential portions omitted).
* 10.44 License Agreement, dated October 20, 1988, between the
Company and the Institute for Biological Studies, as amended
by Amendment to License Agreement dated September 15, 1989,
Second Amendment to License Agreement, dated December 1,
1989 and Third Amendment to License Agreement dated October
20, 1990 (with certain confidential portions omitted).
* 10.45 Agreement dated June 12, 1989, between the Company and the
Regents of the University of California.
* 10.46 Form of Indemnification Agreement between the Company and
each of its directors.
* 10.47 Form of Indemnification Agreement between the Company and
each of its officers.
* 10.50 Consulting Agreement, dated October 1, 1991, between the
Company and Dr. Bert W. O'Malley.
* 10.53 Stock And Warrant Purchase Agreement, Dated June 30, 1992
Between The Company And Allergan, Inc. And Allergan
Pharmaceuticals (Ireland) Ltd., Inc.
* 10.58 Stock Purchase Agreement, dated September 9, 1992, between
the Company and Glaxo, Inc.
* 10.59 Research and Development Agreement, dated September 9, 1992,
between the Company and Glaxo, Inc. (with certain
confidential portions omitted).
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
* 10.60 Stock Transfer Agreement, dated September 30, 1992, between
the Company and the Rockefeller University.
* 10.61 Stock Transfer Agreement, dated September 30, 1992, between
the Company and New York University.
* 10.62 License Agreement, dated September 30, 1992, between the
Company and the Rockefeller University (with certain
confidential portions omitted).
* 10.63 Professional Services Agreement, dated September 30, 1992,
between the Company and Dr. James E. Darnell.
* 10.64 Letter Agreement, dated August 24, 1992, between the Company
and Dr. Howard T. Holden.
* 10.65 Letter Agreement, dated August 20, 1992, between the Company
and Dr. George Gill.
* 10.67 Letter Agreement, dated September 11, 1992, between the
Company and Mr. Paul Maier.
!! 10.69 Form of Automatic Grant Option Agreement.
** 10.73 Supplementary Agreement, dated October 1, 1993, between the
Company and Pfizer, Inc. to Agreement, dated May 1, 1991.
! 10.76 Amended Registration Rights Agreement, dated June 24, 1994,
between the Company and the individuals listed on attached
Schedule A, as amended (Exhibit 4.1).
! 10.77 First Addendum to Amended Registration Rights Agreement,
dated July 6, 1994, between Company and Abbott Laboratories.
(Exhibit 4.2).
*** 10.78 Research, Development and License Agreement, dated July 6,
1994, between the Company and Abbott Laboratories (with
certain confidential portions omitted). (Exhibit 10.75).
*** 10.79 Stock and Note Purchase Agreement, dated September 2, 1994,
between the Company and American Home Products Corporation
(with certain confidential portions omitted).
*** 10.80 Unsecured Convertible Promissory Note dated September 2,
1994, in the face amount of $10,000,000 executed by the
Company in favor of American Home Products Corporation (with
certain confidential portions omitted). (Exhibit 10.78).
*** 10.81 Second Addendum to Amended Registration Rights Agreement,
dated September 2, 1994, between the Company and American
Home Products Corporation.
*** 10.82 Research, Development and License Agreement, dated September
2, 1994, between the Company and American Home Products
Corporation, as represented by its Wyeth-Ayerst Research
Division (with certain confidential portions omitted).
(Exhibit 10.77).
*** 10.83 Option Agreement, dated September 2, 1994, between the
Company and American Home Products Corporation, as
represented by its Wyeth-Ayerst Research Division (with
certain confidential portions omitted). (Exhibit 10.80).
*** 10.84 Distribution and Marketing Agreement, dated September 16,
1994, between the Company and Cetus Oncology Corporation, a
wholly owned subsidiary of the Chiron Corporation (with
certain confidential portions omitted). (Exhibit 10.82).
& 10.93 Indemnity Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
& 10.94 Tax Allocation Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
& 10.95 Stock Purchase Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Pharmaceuticals
(Ireland), Ltd.
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
& 10.97 Research, Development and License Agreement, dated December
29, 1994, between SmithKline Beecham Corporation and the
Company (with certain confidential portions omitted).
& 10.98 Stock and Note Purchase Agreement, dated February 2, 1995,
between SmithKline Beecham Corporation, S.R. One Limited and
the Company (with certain confidential portions omitted).
& 10.99 Third Addendum to Amended Registration Rights Agreement,
dated February 3, 1995, between S. R. One, Limited and the
Company.
# 10.100 PHOTOFRIN(R) Distribution Agreement, dated March 8, 1995,
between the Company and Quadra Logic Technologies Inc. (with
certain confidential portions omitted).
10.119(1) Option and Development Agreement, dated August 15, 1990,
between Glycomed and Dr. Richard E. Galardy and Dr. Damian
Grobelny with exhibit thereto (with certain portions
omitted). (Exhibit 10.20).
10.120(1) Option and Development Agreement, dated November 27, 1989,
between Glycomed and the President and Fellows of Harvard
College with appendices thereto (with certain confidential
portions omitted). (Exhibit 10.21)
10.121(1) Option and Development Agreement, dated January 1, 1991,
between Glycomed and UAB Research Foundation with exhibits
thereto (with certain confidential portions omitted).
(Exhibit 10.22).
10.122(1) Joint Venture Agreement, dated December 18, 1990, among
Glycomed, Glyko, Inc., Millipore Corporation, Astroscan,
Ltd., Astromed, Ltd., Gwynn R. Williams and John Klock,
M.D., with exhibits thereto (with certain confidential
portions omitted). (Exhibit 10.23).
10.127(2) Research and License Agreement, dated April 29, 1992,
between Glycomed and the Alberta Research Council with
Appendix thereto (with certain confidential portions
omitted). (Exhibit 10.28).
10.130(3) Amendment to Research and License Agreement, dated July 12,
1993, (confidential portions omitted). (Exhibit 10.32).
10.131(4) Amendments to Research and License Agreement, dated October
22, 1993, December 16, 19 and May 9, 1994 between Glycomed
and the Alberta Research Council (with certain confidential
portions omitted). (Exhibit 10.33).
10.132(4) License Agreement, dated February 14, 1994 between Glycomed
and Sankyo Company, Ltd., for the Far East marketing rights
of ophthalmic indications of Galardin(TM) MPI and analogs
(with certain confidential portions omitted). (Exhibit
10.34).
10.133(4) Collaborative Technology Research and Development Agreement
between Glycomed and Sankyo Company, Ltd., dated June 27,
1994 (with certain confidential portions omitted). (Exhibit
10.35).
10.136(5) Amendment to Research and License Agreement, dated September
22, 1994 between Glycomed and Alberta Research Council (with
certain confidential portions omitted). (Exhibit 10.38).
# 10.137 First Supplemental Indenture among the Company, Glycomed and
Chemical Trust Company of California, Trustee. (Exhibit
10.133).
%% 10.140 Promissory Notes, General Security Agreements and a Credit
Terms and Conditions letter dated March 31, 1995, between
the Company and Imperial Bank (Exhibit 10.101).
-- 10.142 Stock Purchase Agreement, dated June 27, 1995, between the
Company and Sankyo Company, Ltd.
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
-- 10.143 Fifth Addendum to Amended Registration Rights Agreement,
dated September 11, 1995 between the Company and Sankyo
Company Limited.
-- 10.144 Stock Purchase Agreement, dated August 28, 1995, between the
Company and Abbott Laboratories.
-- 10.145 Sixth Addendum to Amended Registration Rights Agreement,
dated August 31, 1995, between the Company and Abbott
Laboratories.
-- 10.146 Amendment to Research and Development Agreement, dated
January 16, 1996, between the Company and American Home
Products Corporation, as amended.
-- 10.147 Amendment to Stock Purchase Agreement, dated January 16,
1996, between the Company and American Home Products
Corporation.
-- 10.148 Lease, dated July 6, 1994, between the Company and
Chevron/Nexus partnership, First Amendment to lease dated
July 6, 1994.
x 10.149 Successor Employment Agreement, signed May 1, 1996, between
the Company and David E. Robinson.
10.150(6) Master Lease Agreement, signed May 30, 1996, between the
Company and USL Capital Corporation.
x 10.151 Settlement Agreement and Mutual Release of all Claims,
signed April 20, 1996, between the Company and Pfizer, Inc.
(with certain confidential portions omitted).
x 10.152 Letter Amendment to Abbott Agreement, dated March 14, 1996,
between the Company and Abbott Laboratories (with certain
confidential portions omitted).
Xx 10.153 Letter Agreement, dated August 8, 1996, between the Company
and Dr. Andres Negro-Vilar.
## 10.154 Preferred Shares Rights Agreement, dated as of September 13,
1996, by and between Ligand Pharmaceuticals Incorporated and
Wells Fargo Bank, N.A. (Exhibit 10.1).
10.155(6) Letter Agreement, dated November 4, 1996, between the
Company and William Pettit.
10.156(6) Letter Agreement, dated February 6, 1997, between the
Company and Russell L. Allen.
10.157(6) Master Lease Agreement, signed February 13, 1997, between
the Company and Lease Management Services.
10.158(6) Lease, dated March 7, 1997, between the Company and Nexus
Equity VI LLC.
10.159(6) Eighth Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
February 10, 1997.
10.160(6) Seventh Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
November 10, 1995.
10.161(7) Settlement Agreement, License and Mutual General Release
between Ligand Pharmaceuticals and SRI/LJCRF, dated August
23, 1995 (with certain confidential portions omitted).
10.162(8) Limited Extension of Collaborative Technology Research,
Option and Development Agreement between Ligand
Pharmaceuticals and Sankyo Company Limited, dated June 24,
1997.
10.163(8) Extension of Master Lease Agreement between Lease Management
Services and Ligand Pharmaceuticals dated July 29, 1997.
10.164(9) Third Amendment to Agreement, dated September 2, 1997,
between the Company and American Home Products Corporation.
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.165(10) Amended and Restated Technology Cross License Agreement,
dated September 24, 1997, among the Company, Allergan, Inc.
and Allergan Ligand Retinoid Therapeutics, Inc.
10.166(10) Transition Agreement, dated September 24, 1997, among the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
10.167(10) Development and License Agreement, dated November 25, 1997,
between the Company and Eli Lilly and Company (with certain
confidential portions omitted).
10.168(10) Collaboration Agreement, dated November 25, 1997, among the
Company, Eli Lilly and Company, and Allergan Ligand Retinoid
Therapeutics, Inc. (with certain confidential portions
omitted).
10.169(10) Option and Wholesale Purchase Agreement, dated November 25,
1997, between the Company and Eli Lilly and Company (with
certain confidential portions omitted).
10.170(10) Stock Purchase Agreement, dated November 25, 1997, between
the Company and Eli Lilly and Company.
10.171(10) First Amendment to Option and Wholesale Purchase Agreement
dated February 23, 1998, between the Company and Eli Lilly
and Company (with certain confidential portions omitted).
10.172(10) Second Amendment to Option and Wholesale Purchase Agreement,
dated March 16, 1998, between the Company and Eli Lilly and
Company (with certain confidential portions omitted).
10.173(11) Ninth Addendum to Amended Registration Rights Agreement,
dated June 24, 1994, between the Company and SmithKline
Beecham plc., and is effective as of April 24, 1998.
10.174(11) Leptin Research, Development and License Agreement, dated
March 17, 1998, between the Company and SmithKline Beecham,
plc (with certain confidential portions omitted).
10.175(11) Stock and Warrant Purchase Agreement, dated March 17, 1998,
among the Company, SmithKline Beecham, plc. and SmithKline
Beecham Corporation (with certain confidential portions
omitted).
10.176(12) Secured Promissory Note, dated March 7, 1997, in the face
amount of $3,650,000, payable to the Company by Nexus Equity
VI LLC. (Filed as Exhibit 10.1).
10.177(12) Amended memorandum of Lease effective March 7, 1997, between
the Company and Nexus Equity VI LLC. (filed as exhibit 10.2)
10.178(12) First Amendment to Lease, dated March 7, 1997, between the
Company and Nexus Equity VI LLC. (filed as exhibit 10.3)
10.179(12) First Amendment to secured Promissory Note, date March 7,
1997, payable to the Nexus Equity VI LLC. (filed as exhibit
10.4)
10.180(13) Form of Seragen Stockholder Voting Agreement. (Exhibit
10.1).
10.181(13) Form of Irrevocable Proxy to Vote Seragen, Inc. stock.
(Exhibit 10.2).
### 10.182(14) Option and Asset Purchase Agreement, dated May 11, 1998, by
and among the Company, Marathon Biopharmaceuticals, LLC, 520
Commonwealth Avenue Real Estate Corp. and 660 Corporation.
(Exhibit 10.3).
10.183(15) Extension Option Agreement, dated May 11, 1998, by and among
the Company, Seragen, Inc., Marathon Biopharmaceuticals,
LLC, 520 Commonwealth Avenue Real Estate Corp. and 660
Corporation. (Exhibit 99.5)
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.184(15) Letter agreement, dated May 11, 1998, by and among the
Company, Eli Lilly & Company and Seragen, Inc. (Exhibit
99.6).
### 10.185 Amendment No. 3 to Option and Wholesale Purchase Agreement,
dated May 11, 1998, by and between Eli Lilly and Company and
the Company. (Exhibit 10.6).
### 10.186 Agreement, dated May 11, 1998, by and among Eli Lilly and
Company, the Company and Seragen, Inc. (Exhibit 10.7).
### 10.187 Form of Escrow Agreement to be entered into by and among
Lehman Brothers Inc., Shoreline Pacific Institutional
Finance, Seragen LLC, Reed R. Prior, Jean C. Nichols,
Elizabeth C. Chen, Robert W. Crane, Leon C. Hirsch, Turi
Josefsen, Gerald S.J. Cassidy and Loretta P. Cassidy, the
Company, Knight Acquisition Corporation, Seragen, Inc. and
State Street Bank and Trust Company. (Exhibit 10.8).
10.188(15) Settlement Agreement, dated May 1, 1998, by and among
Seragen, Inc., Seragen Biopharmaceuticals Ltd./Seragen
Biopharmaceutique Ltee, Sofinov Societe Financiere
D'Innovation Inc., Societe Innovatech Du Grand Montreal, MDS
Health Ventures Inc., Canadian Medical Discoveries Fund
Inc., Royal Bank Capital Corporation and Health Care and
Biotechnology Venture Fund (Exhibit 99.2).
10.189(15) Accord and Satisfaction Agreement, dated May 11, 1998, by
and among Seragen, Inc., Seragen Technology, Inc., Trustees
of Boston University, Seragen LLC, Marathon
Biopharmaceuticals, LLC, United States Surgical Corporation,
Leon C. Hirsch, Turi Josefsen, Gerald S.J. and Loretta P.
Cassidy, Reed R. Prior, Jean C. Nichols, Elizabeth C. Chen,
Robert W. Crane, Shoreline Pacific Institutional Finance,
Lehman Brothers Inc., 520 Commonwealth Avenue Real Estate
Corp. and 660 Corporation (Exhibit 99.4).
### 10.190 Amendment No. 1 to Service Agreement, dated as of May 11,
1998, by and between Seragen, Inc. and Marathon
Biopharmaceuticals, LLC. (Exhibit 10.11)
10.191(12) Letter of Agreement dated September 28, 1998 among the
Company, Elan Corporation, plc and Elan International
Services, Ltd. (with certain confidential portions omitted),
(filed as exhibit 10.5)
10.192(12) Stock Purchase Agreement dated September 30, 1998 between
the Company and Elan International Services, Ltd. (with
certain confidential portions omitted), (filed as exhibit
10.6)
10.193(12) Tenth Addendum to Registration Rights Agreement dated
September 30, 1998 between the Company and Elan
International Services Ltd. (filed as exhibit 10.7)
10.194 Eleventh Addendum to Registration Rights Agreement dated
November 9, 1998 between the Company and Elan International
Services Ltd.
10.195 Zero Coupon Convertible Senior Note Due 2008 dated November
9, 1998 between the Company and Elan International Services
Ltd., No. R-1.
10.196 Zero Coupon Convertible Senior Note Due 2008 dated November
9, 1998 between the Company and Elan International Services
Ltd., No. R-2.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 53).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
<TABLE>
<S> <C>
* These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Company's Registration Statement on
Form S-1 (No. 33-47257) filed on April 16, 1992 as amended.
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C>
% These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1992.
** These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
*** These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit (except as otherwise noted) filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 1994.
! These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the exhibit filed with
the Company's Form 8-K, filed on July 14, 1994.
!! This exhibit was previously filed as part of, and is hereby
incorporated by reference to Exhibit 99.1 filed with the
Company's Form S-8 (No. 33-85366), filed on October 17,
1994.
& These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered
exhibit filed with the Registration Statement on Form
S-1/S-3 (No. 33-87598 and 33-87600) filed on December 20,
1994, as amended.
# These exhibits were previously filed as part of, and are
hereby incorporated by reference to the numbered exhibit
filed with the Registration Statement on Form S-4 (No.
33-90160) filed on March 9, 1995, as amended.
%% This exhibit was previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly report on Form 10-Q for the
period ended September 30, 1995.
- -- These exhibits were filed previously, and are hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
x These exhibits were previously filed as part of, and are
hereby incorporated by reference to the same numbered
exhibit filed with the Company's Quarterly report on Form
10-Q for the period ended June 30, 1996.
Xx This exhibit was previously filed as part of, and are hereby
incorporated by reference at the same numbered exhibit filed
with the Company's Quarterly report on Form 10-Q for the
period ended September 30, 1996.
## These exhibits were previously filed as part of, and are
hereby incorporated by reference, the same numbered exhibit
filed with the Company's Registration Statement on Form S-3
(No. 333-12603) filed on September 25, 1996, as amended.
### These exhibits were previously filed as part of, and are
hereby incorporated by reference to the same numbered
exhibit filed with the Company's Registration Statement on
Form S-4 (No. 333-58823) filed on July 9, 1998.
(1) Filed as an exhibit to Glycomed's Registration Statement on
Form S-1 (No. 33-39961) filed on or amendments thereto and
incorporated herein by reference.
(2) Filed as an exhibit to Glycomed's Annual Report on Form 10-K
(File No. 0-19161) filed on September 25, 1992 and
incorporated herein by reference.
(3) Filed as an exhibit to Glycomed's Annual Report on Form 10-K
(File No. 0-19161) filed on September 13, 1993 and
incorporated herein by reference.
(4) Filed as an amendment to Glycomed's Annual Report on Form
10-K (File No. 0-19161) filed on September 27, 1994 and
incorporated herein by reference.
(5) Filed as an exhibit to Glycomed's Quarterly Report on Form
10-Q (File No. 0-19161) filed on February 10, 1995 and
incorporated herein by reference.
</TABLE>
51
<PAGE> 53
<TABLE>
<S> <C>
(6) This exhibit was previously filed as part of, and is hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the period
ended December 31, 1996.
(7) This exhibit was previously filed as part of, and is hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997.
(8) This exhibit was previously filed as part of, and is hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997.
(9) This exhibit was previously filed as part of, and is hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997.
(10) This exhibit was previously filed as part of and is hereby
incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the period
ended December 31, 1997.
(11) These exhibits were previously filed as part of, and is
hereby incorporated by reference to the same numbered
exhibit filed with the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998.
(12) These exhibits were previously filed as part of and is
hereby incorporated by reference to the numbered exhibit
filed with the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(13) Previously filed as, and hereby incorporated by reference
to, Exhibit A filed with the Schedule 13D of the Company
filed with the Commission on May 21, 1998 for Seragen, Inc.
(14) The schedules referenced in this agreement have not been
included because they are either disclosed in such agreement
or do not contain information which is material to an
investment decision. The Company agrees to furnish a copy of
such schedules to the Commission upon request.
(15) Previously filed as, and hereby incorporated by reference
to, the same-numbered exhibit filed with the Current Report
on Form 8-K of Seragen, Inc. filed with the Commission on
May 15, 1998 (except as otherwise noted).
</TABLE>
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ DAVID E. ROBINSON
------------------------------------
David E. Robinson,
President and Chief Executive
Officer
Date: March 31, 1999
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints David E. Robinson or Paul V. Maier, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID E. ROBINSON Chairman of the Board, President, March 26, 1999
- --------------------------------------------- Chief Executive Officer and
David E. Robinson Director
(Principal Executive Officer)
/s/ PAUL V. MAIER Senior Vice President, March 24, 1999
- --------------------------------------------- Chief Financial Officer
Paul V. Maier (Principal Financial and
Accounting Officer)
/s/ HENRY F. BLISSENBACH Director March 24, 1999
- ---------------------------------------------
Henry F. Blissenbach
/s/ ALEXANDER D. CROSS Director March 23, 1999
- ---------------------------------------------
Alexander D. Cross
/s/ JOHN GROOM Director March 24, 1999
- ---------------------------------------------
John Groom
/s/ IRVING S. JOHNSON Director March 23, 1999
- ---------------------------------------------
Irving S. Johnson
/s/ CARL C. PECK Director March 23, 1999
- ---------------------------------------------
Carl C. Peck
/s/ VICTORIA R. FASH Director March 30, 1999
- ---------------------------------------------
Victoria R. Fash
</TABLE>
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ligand Pharmaceuticals Incorporated
We have audited the accompanying consolidated balance sheets of Ligand
Pharmaceuticals Incorporated as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ligand
Pharmaceuticals Incorporated at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
February 5, 1999
F-2
<PAGE> 57
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 32,801 $ 62,252
Short-term investments.................................... 37,166 20,978
Inventories............................................... 6,166 --
Other current assets...................................... 1,860 864
-------- --------
Total current assets.............................. 77,993 84,094
Restricted short-term investments......................... 2,554 3,057
Property and equipment, net............................... 23,722 14,853
Acquired technology....................................... 40,312 --
Notes receivable from officers and employees.............. 544 559
Other assets.............................................. 10,895 4,860
-------- --------
$156,020 $107,423
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 12,363 $ 10,717
Accrued liabilities....................................... 7,216 5,609
Deferred revenue.......................................... 4,115 2,616
Current portion of obligations under capital leases....... 3,201 2,753
-------- --------
Total current liabilities......................... 26,895 21,695
Long-term obligations under capital leases.................. 8,165 8,501
Convertible subordinated debentures......................... 39,302 36,628
Accrued acquisition obligation.............................. 50,000 --
Convertible note............................................ 2,500 6,250
Zero coupon convertible senior notes........................ 40,520 --
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value, 5,000,000
shares authorized; none issued......................... -- --
Common stock, $0.001 par value; 80,000,000 shares
authorized, 45,690,067 shares and 38,504,459 shares
issued at December 31, 1998 and 1997, respectively..... 46 39
Paid-in capital........................................... 384,715 311,681
Adjustment for unrealized gains (losses) on
available-for-sale securities.......................... (482) 384
Accumulated deficit....................................... (395,630) (277,744)
-------- --------
(11,351) 34,360
Less treasury stock, at cost (1,114 shares in 1998 and
1997).................................................. (11) (11)
-------- --------
Total stockholders' equity (deficit).............. (11,362) 34,349
-------- --------
$156,020 $107,423
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 58
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Collaborative research and development:
Related parties.................................... $ -- $ 18,997 $ 18,641
Unrelated parties.................................. 17,267 32,284 17,994
Other................................................. 406 418 207
----------- ----------- -----------
17,673 51,699 36,842
Costs and expenses:
Research and development.............................. 70,739 72,426 59,494
Selling, general and administrative................... 16,568 10,108 10,205
Write-off of acquired in-process technology........... 45,000 64,970 --
----------- ----------- -----------
Total operating expenses...................... 132,307 147,504 69,699
----------- ----------- -----------
Loss from operations.................................... (114,634) (95,805) (32,857)
Interest income......................................... 3,070 3,743 3,704
Interest expense........................................ (8,322) (8,088) (8,160)
Realized gain on sale of investments.................... 2,000 -- --
----------- ----------- -----------
Net loss................................................ $ (117,886) $ (100,150) $ (37,313)
=========== =========== ===========
Basic and diluted net loss per share.................... $ (2.92) $ (3.02) $ (1.30)
=========== =========== ===========
Shares used in computing net loss per share............. 40,392,421 33,128,372 28,780,914
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENT
FOR UNREALIZED
GAINS (LOSSES) DEFERRED
COMMON STOCK WARRANT ON AVAILABLE- COMPENSATION
------------------- PAID-IN SUBSCRIPTION FOR-SALE ACCUMULATED AND
SHARES AMOUNT CAPITAL RECEIVABLE SECURITIES DEFICIT CONSULTING
---------- ------ -------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995... 27,800,597 $28 $173,452 $(4,524) $ 217 $(140,281) $(819)
Issuance of Common Stock..... 3,999,020 4 41,082 -- -- -- --
Amortization of deferred
compensation and consulting
fees....................... -- -- -- -- -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities................. -- -- -- -- (295) -- --
Receipt of Common Stock for
milestone revenue.......... -- -- -- -- -- -- --
Retirement of shares......... -- -- -- -- -- -- --
Purchase of treasury
shares..................... -- -- -- -- -- -- --
Issuance of Common Stock held
in Treasury................ -- -- -- -- -- -- --
Option term extension........ -- -- 353 -- -- -- --
Amortization of warrant
subscription receivable.... -- -- -- 2,071 -- -- --
Net loss..................... -- -- -- -- -- (37,313) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1996... 31,799,617 32 214,887 (2,453) (78) (177,594) (322)
Issuance of Common Stock..... 6,704,842 7 96,794 -- -- -- --
Amortization of deferred
compensation and consulting
fees....................... -- -- -- -- -- -- 322
Amortization of warrant
subscription receivable.... -- -- -- 1,535 -- -- --
Write-off of warrant
subscription receivable.... -- -- -- 918 -- -- --
Adjustment of unrealized
gains (losses) on
available-for-sale
securities................. -- -- -- -- 462 -- --
Net loss..................... -- -- -- -- -- (100,150) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1997... 38,504,459 39 311,681 -- 384 (277,744) --
Issuance of Common Stock..... 7,185,608 7 73,034 -- -- -- --
Adjustment of unrealized
gains (losses) on available
for-sale securities........ -- -- -- -- (866) -- --
Net loss..................... -- -- -- -- -- (117,886) --
---------- --- -------- ------- ----- --------- -----
Balance at December 31, 1998... 45,690,067 $46 $384,715 $ -- $(482) $(395,630) $ --
========== === ======== ======= ===== ========= =====
<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
-------------------- EQUITY COMPREHENSIVE
SHARES AMOUNT (DEFICIT) INCOME
-------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... (4,986) $ (2) 28,071 $ --
Issuance of Common Stock..... -- -- 41,086
Amortization of deferred
compensation and consulting
fees....................... -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities................. -- -- (295) (295)
Receipt of Common Stock for
milestone revenue.......... (101,011) (1,320) (1,320)
Retirement of shares......... 101,011 1,320 1,320
Purchase of treasury
shares..................... (3,164) (23) (23)
Issuance of Common Stock held
in Treasury................ 7,036 14 14
Option term extension........ -- -- 353
Amortization of warrant
subscription receivable.... -- -- 2,071
Net loss..................... -- -- (37,313) (37,313)
-------- --------- --------- ---------
Balance at December 31, 1996... (1,114) (11) 34,461 $ (37,608)
=========
Issuance of Common Stock..... -- -- 96,801
Amortization of deferred
compensation and consulting
fees....................... -- -- 322
Amortization of warrant
subscription receivable.... -- -- 1,535
Write-off of warrant
subscription receivable.... -- -- 918
Adjustment of unrealized
gains (losses) on
available-for-sale
securities................. -- -- 462 462
Net loss..................... -- -- (100,150) (100,150)
-------- --------- --------- ---------
Balance at December 31, 1997... (1,114) (11) 34,349 $ (99,688)
=========
Issuance of Common Stock..... -- -- 73,041
Adjustment of unrealized
gains (losses) on available
for-sale securities........ -- -- (866) (866)
Net loss..................... -- -- (117,886) (117,886)
-------- --------- --------- ---------
Balance at December 31, 1998... (1,114) $ (11) $ (11,362) $(118,752)
======== ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(117,886) $(100,150) $(37,313)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 4,326 4,133 3,879
Amortization of notes receivable from officers and
employees............................................. 188 230 235
Amortization of warrant subscription receivable......... -- 2,453 2,071
Write-off of acquired in-process technology............. 45,000 64,970 --
Amortization of deferred compensation and consulting.... -- 322 497
Accretion of debt discount and interest on zero coupon
convertible senior note............................... 3,194 2,675 2,674
Company stock received for milestone revenue............ -- -- (1,320)
Gain (loss) on sale of property and equipment........... 69 (6) --
Change in operating assets and liabilities, net
Other current assets.................................... (1,031) 856 (1,129)
Receivable from a related party....................... -- 3,087 (801)
Inventory............................................. (2,899) -- --
Accounts payable and accrued liabilities.............. 891 7,605 (1,638)
Deferred revenue...................................... 1,499 465 (457)
--------- --------- --------
Net cash used in operating activities....................... (66,649) (13,360) (33,302)
INVESTING ACTIVITIES
Purchases of short-term investments......................... (52,245) (35,033) (53,123)
Proceeds from short-term investments........................ 35,191 60,339 61,188
Purchase of property and equipment.......................... (2,362) (4,278) (399)
Proceeds from sale of property and equipment................ 92 109 --
Increase in note receivable from officers and employees..... (180) (270) (350)
Payment of notes receivable from officers and employees..... 8 16 66
Increases in other assets................................... (4,282) (4,036) (2)
Decreases in other assets................................... 917 130 118
Net cash paid for exercise of ALRT stock purchase option.... -- (12,661) --
Net cash paid for Seragen acquisition....................... (5,756) -- --
--------- --------- --------
Net cash (used in) provided by investing activities......... (28,617) 4,316 7,498
FINANCING ACTIVITIES
Principal payments on obligations under capital leases...... (2,983) (3,210) (2,561)
Net change in restricted short-term investment.............. 503 470 3,232
Net proceeds from the issuance of convertible note.......... -- 2,500 5,000
Net proceeds from issuance of zero coupon convertible senior
note...................................................... 30,000 -- --
Net proceeds from sale of common stock...................... 38,295 36,706 39,000
--------- --------- --------
Net cash provided by financing activities................... 65,815 36,466 44,671
--------- --------- --------
Net (decrease) increase in cash and cash equivalents........ (29,451) 27,422 18,867
Cash and cash equivalents at beginning of period............ 62,252 34,830 15,963
--------- --------- --------
Cash and cash equivalents at end of period.................. $ 32,801 $ 62,252 $ 34,830
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 5,736 $ 5,444 $ 5,559
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Additions to obligations under capital leases............... $ 3,095 $ 3,146 $ 2,888
Issuance of common stock to purchase Seragen................ 25,996 -- --
Conversion of convertible note to common stock.............. 3,750 7,500 3,750
Issuance of common stock for technology license............. 5,000 -- --
Issuance of zero coupon convertible senior note for
technology license........................................ 10,000 -- --
Retirement of treasury stock................................ $ -- $ -- $ 1,320
</TABLE>
See accompanying notes.
F-6
<PAGE> 61
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"
or "Ligand"), is a biopharmaceutical company primarily committed to the
discovery and development of new drugs that regulate hormone activated
intracellular receptors and Signal Transducers and Activators of Transcription.
The Company includes its wholly owned subsidiaries, Glycomed Incorporated
("Glycomed"), Ligand Pharmaceuticals (Canada) Incorporated, Allergan Ligand
Retinoid Therapeutics, Inc. ("ALRT") and Seragen, Inc. ("Seragen").
In February 1999, the Company was granted U.S. Food and Drug Administration
("FDA") marketing approval for its first two products, Panretin(R) gel
("Panretin") for the treatment of Kaposi's sarcoma in AIDS Patients and
ONTAK(TM) ("ONTAK") for treatment of patients with persistent or recurrent
cutaneous T-cell lymphoma ("CTCL").
The Company's other potential products are in various stages of
development. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons. Substantially all
of the Company's revenues to date have been derived from its research and
development agreements with major pharmaceutical collaborators. Prior to
generating product revenues from these products, the Company must complete the
development of its products in the human health care market. No assurance can be
given that: (1) product development efforts will be successful (2) required
regulatory approvals for any indication will be obtained (3) any products, if
introduced will be capable of being produced in commercial quantities at
reasonable costs or that (4) patient and physician acceptance of these products
will be achieved. There can be no assurance that Ligand will ever achieve or
sustain profitability.
The Company faces risks common to companies whose products are in various
stages of development. These risks include, among others, the Company's need for
additional financing to complete its research and development programs and
commercialize its technologies. The Company expects to incur substantial
additional research and development expenses, including continued increases in
personnel and costs related to preclinical testing, clinical trials, and sales
and marketing expenses related to product sales. The Company intends to seek
additional funding sources of capital and liquidity through collaborative
arrangements, collaborative research or through public or private financing.
There is no assurance such financing would be available under favorable terms,
if at all.
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The patent positions of
pharmaceutical and biotechnology firms, including the Company, are uncertain and
involve complex legal and technical questions for which important legal
principles are largely unresolved.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
F-7
<PAGE> 62
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist primarily of cash, certificates of
deposit, treasury securities and repurchase agreements with original maturities
at the date of acquisition of less than three months.
The Company invests its excess cash principally in United States government
debt securities, investment grade corporate debt securities and certificates of
deposit. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. In January 1996, the Company adopted the disclosure requirements of
SFAS 123, Accounting for Stock-Based Compensation (Note 9).
New Accounting Standards
As of January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement has no impact on the Company's net income or shareholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and the foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.
As of January 1, 1998, the Company adopted SFAS 131, Segment Information.
SFAS 131 amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. The Company
currently operates in one business and operating segment and the adoption of
this standard did not have a material impact on the Company's financial
statements as reported.
Research and Development Revenues and Expenses
Collaborative research and development revenues are recorded as earned
based on the performance criteria of each contract. Payments received which have
not met the appropriate criteria are recorded as deferred revenue. Research and
development costs are expensed as incurred.
For the years ended December 31, 1998, 1997 and 1996, costs and expenses
related to collaborative research and development agreements were $17.3 million,
$51.3 million, $36.6 million, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in-first-out method.
<TABLE>
<S> <C>
Raw materials............................... $2,382
Work-in-process............................. 3,634
Finished goods.............................. 150
------
$6,166
======
</TABLE>
F-8
<PAGE> 63
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The products Panretin(R) and ONTAK(TM) received approval for marketing by
the FDA in early February 1999. The Company outsources all manufacturing related
to the production of commercial inventory. Inventory also includes Targretin(R)
("Targretin") for which a New Drug Application ("NDA") will be filed in 1999. In
preparation for the approval by the FDA, if received, Ligand has manufactured
commercial quantities of Targretin of approximately $1.3 million of
work-in-process inventory as of December 31, 1998. If the FDA does not approve
the NDA, and Targretin is not approved for commercial sale, any capitalized
costs related to Targretin will be expensed.
Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Property............................................... $ 2,649 $ 2,649
Equipment and leasehold improvements................... 38,854 26,662
Less accumulated depreciation and amortization......... (17,781) (14,458)
-------- --------
Net property and equipment............................. $ 23,722 $ 14,853
======== ========
</TABLE>
Depreciation of equipment and leasehold improvements is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to fifteen years. Assets acquired pursuant to capital lease
arrangements and leasehold improvements are amortized over their estimated
useful lives or their related lease term, whichever is shorter.
3. INVESTMENTS
Investments are recorded at estimated fair market value at December 31,
1998 and 1997, and consist principally of United States government debt
securities, investment grade corporate debt securities and certificates of
deposit with maturities at the date of acquisition of three months or longer.
The Company has
F-9
<PAGE> 64
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
classified all of its investments as available-for-sale securities. The
following table summarizes the various investment categories at (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED FAIR
COST GAINS (LOSSES) VALUE
------- ---------------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Available-for-Sale:
U.S. Government Securities............... $13,240 $ 5 $13,245
Corporate Obligations.................... 19,262 63 19,325
Certificates of Deposit.................. 4,596 -- 4,596
------- ----- -------
37,098 68 37,166
Certificates of Deposit-restricted....... 2,554 -- 2,554
Equity securities........................ 693 (550) 143
------- ----- -------
$40,345 $(482) $39,863
======= ===== =======
DECEMBER 31, 1997
Available-for-Sale:
U.S. Government Securities............... $11,790 $ 9 $11,799
Corporate Obligations.................... 7,085 2 7,087
Certificates of Deposit.................. 2,093 (1) 2,092
------- ----- -------
20,968 10 20,978
Certificates of Deposit-restricted....... 3,057 -- 3,057
Equity securities........................ 440 374 814
------- ----- -------
$24,465 $ 384 $24,849
======= ===== =======
</TABLE>
Equity securities are included in long-term other assets.
The realized gains on sales of available-for-sale securities for the year
ended December 31, 1998 is $2.0 million. There were no material realized gains
or losses for the year ended December 31, 1997.
The amortized cost and estimated fair value of debt and marketable
securities at December 31, 1998 and 1997, by contractual maturity, are shown
below (in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Due in one year or less................... $24,270 $24,291 $17,148 $17,151
Due after one year through three years.... 15,382 15,429 6,782 6,792
Due after three years..................... -- -- 94 92
------- ------- ------- -------
39,652 39,720 24,025 24,035
Equity securities......................... 693 143 440 814
------- ------- ------- -------
$40,345 $39,863 $24,465 $24,849
======= ======= ======= =======
</TABLE>
4. MERGER WITH SERAGEN
In August 1998, the Company completed a merger with Seragen (the "Merger").
In addition, the Company had previously announced that it had signed a
definitive asset purchase agreement to acquire substantially all the assets of
Marathon Biopharmaceuticals, LLC, ("Marathon") which currently provides
F-10
<PAGE> 65
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
manufacturing services to Seragen under a service agreement. Finally, in August
1998 Seragen signed an agreement with the Company and Eli Lilly and Company
("Lilly") under which Lilly assigned to the Company Lilly's rights and
obligations under its agreements with Seragen, including its sales and marketing
rights to ONTAK(TM).
Under the terms of the merger agreement, Ligand paid merger consideration
at closing in the amount of $30.0 million, $4.0 million of which was in cash and
$26.0 million of which was in the form of approximately 1,858,515 shares of the
Company's Common Stock valued at $13.99 per share. The valuation of the
Company's Common Stock for this portion of the transaction is based on the
average closing share price for the five trading days prior to signing of the
definitive agreement in May 1998.
The merger agreement also calls for an additional $37.0 million payment in
cash and/or the Company's Common Stock, at the Company's option, to be paid six
months after the date of receipt of final FDA clearance to market ONTAK. The
final FDA clearance occurred in February 1999.
Additionally, the Company's agreement with Lilly calls for up to $5.0
million, payable in cash or the Company's Common Stock, at the Company's option,
in potential milestone payments to Lilly, upon ONTAK approval by the FDA. Upon
certain other events, Lilly could receive an additional $5.0 million in
milestone payments.
On January 30, 1999, the Company purchased substantially all of the assets
of Marathon for $5.0 million, through the issuance of 402,820 shares of the
Company's Common Stock, at $12.41 per share, with an additional $3.0 million to
be paid in August 1999, six months after the FDA approval of ONTAK.
The Merger was accounted for using the purchase method of accounting. The
purchase price, totaling $84.1 million, which includes liabilities assumed of
$2.3 million was allocated to the fair value of the assets acquired.
The purchase price is composed of and allocated to the fair value of assets
acquired as follows (in thousands):
<TABLE>
<S> <C>
Issuance of common stock (including transaction costs)...... $25,996
Amounts due to Seragen shareholders, Marathon and Lilly,
payable in common stock or cash........................... 50,000
Liabilities assumed......................................... 2,360
Net cash paid............................................... 5,756
-------
$84,112
=======
Inventory................................................... $ 3,230
Property and equipment...................................... 7,905
Identifiable intangible assets:
In-process technology..................................... 30,000
Acquired technology....................................... 40,312
Other intangibles......................................... 2,665
-------
$84,112
=======
</TABLE>
The following pro forma condensed statement of operations information has
been prepared to give effect to the merger as if such transaction had occurred
at the beginning of the periods presented. The historical results of operations
have been adjusted to reflect (1) adjustment for depreciation resulting from
adjusting the basis of certain property and equipment to fair value and
amortization over 10 years, (2) amortization of acquired technology over 15
years, (3) elimination of Seragen stock issuance costs (1997) and compensation
expense amortization (1998), (4) elimination of interest income for Seragen and
reduction of Ligand interest
F-11
<PAGE> 66
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
income resulting from use of $6.0 million for the Merger at an annual interest
rate of 5.5%, and (5) elimination of interest expense related to certain Seragen
liabilities. The information presented is not necessarily indicative of the
results of future operations of the merged companies.
Included in the 1998 net loss is a one-time charge of $30.0 million related
to in-process research and development included in the intangibles acquired.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues............................................. $ 20,477 $ 56,413
Net loss............................................. (124,867) $(118,675)
Weighted average shares outstanding.................. 40,392 34,987
Loss per share....................................... (3.09) (3.39)
</TABLE>
5. OTHER ASSETS AND ACCRUED LIABILITIES
Other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Deferred rent............................................. $ 3,429 $3,676
Prepaid royalty buyout.................................... 4,080 --
Intangible assets acquired................................ 2,665 --
Investment in equity securities........................... 143 814
Other..................................................... 578 370
------- ------
$10,895 $4,860
======= ======
</TABLE>
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Accrued legal.............................................. $1,140 $ 451
Accrued interest........................................... 1,972 2,088
Accrued compensation....................................... 1,784 1,446
Other...................................................... 2,320 1,624
------ ------
$7,216 $5,609
====== ======
</TABLE>
6. CONVERTIBLE SUBORDINATED DEBENTURES
In May 1995, Glycomed Incorporated ("Glycomed") was merged into a
wholly-owned subsidiary of the Company (the "Glycomed Merger"). In conjunction
with the Glycomed Merger, the Company adjusted the carrying value of the
Glycomed 7 1/2% Convertible Subordinated Debentures due 2003 (the "Debentures")
issued by Glycomed in 1992 in the original amount of $50 million to $29.6
million, which was their fair market value at the date of the Glycomed Merger.
The current carrying value approximates fair market value. The Company has
entered into a supplemental indenture which provides for conversion of the
Debentures into the Company's Common Stock at $26.52 per share. Debentures pay
interest semi-annually at 7.5% per annum and are due in 2003. The difference
between the face value and the fair market value at the acquisition date
F-12
<PAGE> 67
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
will be accreted up to the face value over the remaining term of the Debentures
and the accretion is charged to interest expense.
7. STRATEGIC ALLIANCE AND FINANCING
On September 1998, the Company and Elan Corporation, plc ("Elan") signed a
binding letter of agreement. Elan purchased approximately $20.0 million of the
Company's Common Stock in two installments. In September 1998, Elan purchased
1,278,970 shares of the Company's Common Stock for $14.9 million ($11.65 per
share). The second installment to purchase 437,768 shares for $5.1 million
($11.65 per share) occurred at the closing of the transaction on November 9,
1998.
Elan purchased from the Company at the closing, $40.0 million in issue
price of Zero Coupon Convertible Senior Notes, due 2008 with an 8.0% per annum
yield to maturity (the "Notes"). Of these Notes, $30.0 million are convertible
into the Company's Common Stock at $14.00 per share. The balance issued of $10.0
million along with up to an additional $70.0 million of Notes which Elan may
also purchase will be convertible into the Company's Common Stock at a price
which is the average of the closing prices of the Company's Common Stock for the
20 trading days immediately prior to the issuance of a Note plus a premium;
however, in no event will the conversion price be less than $14.00 per share or
more than $20.00 per share. Interest will accrue during the term of the Notes,
and the Notes may be used to finance the final payments for the Seragen merger
expected in 1999 as well as other acquisitions of complementary technologies,
subject to the consent of Elan.
Elan also agreed to exclusively license to the Company in the United States
and Canada its proprietary product Morphelan(TM). For the rights to
Morphelan(TM) the Company will pay Elan certain license fees at the closing of
the transaction, and milestone payments upon the occurrence of certain events up
to and including the approval of the NDA in the United States. Payment may be in
cash or subject to certain conditions in the Company's Common Stock or Notes. At
closing, the Company paid Elan $5.0 million through the issuance of 429,185
shares of the Company's Common Stock ($11.65 per share) and $10.0 million from
the issuance of Notes. The total $15.0 million consideration was written off as
in-process technology in a one-time charge to operations.
8. COMMITMENTS
Leases and Equipment Notes Payable
The Company has entered into capital lease and equipment note payable
agreements which require monthly payments through January 2004. The carrying
value of equipment under these agreements at December 31, 1998 and 1997 was
$17.3 million and $16.9 million, respectively. At December 31, 1998 and 1997,
accumulated amortization was $7.3 million and $6.0 million, respectively.
The Company has also entered into operating lease agreements for office and
research facilities with varying terms through August 2015. The agreements also
provide for increases in annual rentals based on changes in the Consumer Price
Index or fixed percentage increases varying from 3% to 6%. One of these leases
requires an irrevocable standby letter of credit of $1.3 million to secure the
performance of the Company's lease obligations.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $3.2
million, $3.4 million and $3.1 million, respectively.
F-13
<PAGE> 68
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, annual minimum rental payments due under the
Company's leases and equipment notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL LEASES AND
EQUIPMENT NOTES
PAYABLE OPERATING LEASES
------------------ ----------------
<S> <C> <C>
1999.......................................... $4,104 $ 3,114
2000.......................................... 4,071 3,174
2001.......................................... 2,845 2,802
2002.......................................... 1,607 2,812
2003.......................................... 682 2,867
Thereafter.................................... -- 34,920
------ -------
Total minimum lease payments........ 13,309 $49,689
=======
Less amounts representing interest............ (1,943)
------
Present value of minimum lease payments....... 11,366
------
Less current portion.......................... 3,201
------
$8,165
======
</TABLE>
In 1997, one of the Company's main operating lease agreements for office
and research facilities expired, and the Company moved into a second
build-to-suit facility. In early 1997, the Company entered into a 17-year lease
and the Company loaned the construction partnership $3.7 million which will be
repaid with interest over a 10-year period.
Royalty Agreements
The Company has entered into royalty agreements requiring payments ranging
from 1% to 20% of net sales and 10% to 30% of license and other income for
certain products developed by the Company. Currently, the Company is making
minimum royalty payments under three agreements, of $45,000 per year. Royalty
expense under the agreements for the years ended December 31, 1998, 1997 and
1996 was $75,000, $276,000 and $261,000, respectively.
In May 1998, the Company elected to make a final one-time $4.1 million
royalty payment to the Salk Institute as an alternative to paying future royalty
payments based on total net sales of defined potential products. The one-time
payment will be amortized over the remaining life of the related patents.
No royalty payments have been received by the Company.
9. STOCKHOLDERS' EQUITY
Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
4,486,404 shares of the Company's Common Stock, of which 4,228,154 warrants
relate to the ALRT transaction ("ALRT warrants") (see Note 11). The ALRT
warrants have an exercise price of $7.12 per share, the additional warrants have
exercise prices ranging from $1.80 to $20.0 per share and expire at various
dates through April 24, 2003.
In December 1998, the Company received net proceeds of approximately $12.5
million from investors who elected to exercise their ALRT warrants to purchase
2,267,836 shares. The Company agreed to pay a cost of money incentive to the
investors for the early exercise of those warrants.
F-14
<PAGE> 69
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Stock Plans
The Company's 1992 Stock Option Stock Issuance Plan incorporates all
outstanding stock options and unvested share issuances under a prior plan. In
May of years 1993 through 1998 inclusive, the plan was amended to increase the
aggregate shares available for grant or issuance to 8,088,457 shares of Common
Stock. The large majority of the options granted have 10 year terms and vest and
become fully exercisable at the end of four years of continued employment. As
part of this plan, on the date of the Glycomed Merger, all outstanding
in-the-money stock options from Glycomed's stock option plan were converted into
options to purchase 470,008 shares of the Company's Common Stock based on the
exchange ratio in effect. The Company's employee stock purchase plan also
provides for the sale of up to 260,000 shares of the Company's Common Stock.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the dates of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Risk free interest rates............ 4.1% - 5.5% 6.1% - 6.9% 5.3% - 6.6%
Dividend yields..................... -- -- --
Volatility.......................... 62.0% 42.7% 44.4%
Weighted average expected life...... 5 or 7 years 5 or 7 years 5 or 7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net loss as reported..................... $(117,886) $(100,150) $(37,313)
Net loss pro forma....................... (121,916) (102,929) (39,210)
Net loss per share as reported........... (2.92) (3.02) (1.30)
Net loss per share pro forma............. (3.01) (3.11) (1.36)
</TABLE>
The pro forma effect on net loss for 1998, 1997 and 1996 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
F-15
<PAGE> 70
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Following is a summary of the Company's stock option plans activity and
related information:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1995....................... 3,604,106 $ .29 - 11.59 $ 7.33
Granted.......................................... 974,015 10.31 - 16.38 12.85
Exercised........................................ (498,456) .22 - 12.75 5.61
Cancelled........................................ (282,783) 3.89 - 13.31 7.91
--------- -------------- ------
Balance at December 31, 1996....................... 3,796,882 .22 - 16.38 9.55
Granted.......................................... 875,339 9.50 - 16.06 12.75
Exercised........................................ (384,340) .68 - 14.50 8.59
Cancelled........................................ (219,375) 5.50 - 16.06 10.65
--------- -------------- ------
Balance at December 31, 1997....................... 4,068,506 .68 - 16.06 10.26
Granted.......................................... 1,584,604 9.31 - 15.00 11.10
Exercised........................................ (211,524) .68 - 16.13 7.52
Cancelled........................................ (396,567) .68 - 16.38 11.30
--------- -------------- ------
Balance at December 31, 1998....................... 5,045,019 $ .68 - 16.38 $10.56
========= ============== ======
Options exercisable at December 31, 1998......... 2,814,876 $ .68 - 16.38
========= ==============
</TABLE>
Of the total options granted from 1995 through 1998, 4,923,491 were granted
at a price equal to the fair value of the options at the time of grant, and
58,012 were granted at a price below the fair value of the options at the time
of grant.
Following is a further breakdown of the options outstanding as of December
31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS REMAINING LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE
------------------------ ----------- -------------- ----------------
<S> <C> <C> <C>
$ .68 - $ .79............... 2,740 1.43 $ .72
4.68 - 9.21............... 1,389,481 5.56 7.74
9.31 - 11.25............... 1,767,495 7.98 10.09
11.26 - 13.31............... 1,484,516 8.11 12.45
$14.50 - $16.38............... 400,787 8.76 15.37
--------- ------
5,045,019 $10.56
========= ======
</TABLE>
At December 31, 1998, 240,807 shares were available under the plans for
future grants of stock options or sale of stock.
For certain shares issued under these plans and certain other issuances of
stock, the Company has recognized as compensation and consulting expense the
excess of the deemed value for accounting purposes over the aggregate issue
price for such shares. The compensation expense is amortized ratably over the
vesting period of each share.
Amortization of deferred compensation and consulting for the years ended
December 31, 1998, 1997 and 1996 was none, $322,000 and $497,000, respectively.
F-16
<PAGE> 71
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Shareholder Rights Plan
In September 1996, the Company's Board of Directors adopted a preferred
shareholder rights plan (the "Shareholder Rights Plan"), as amended, 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 an acquisition of 20% or more of the 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 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 common stock and September 13, 2006.
10. COLLABORATIVE RESEARCH AGREEMENTS
Eli Lilly and Company
In November 1997, the Company entered into a strategic alliance with Eli
Lilly and Company ("Lilly") for the discovery and development of products based
on Ligand's Intracellular Receptor technology. Lilly made an investment of $37.5
million by purchasing 2,176,279 shares of the Company's Common Stock at $17.23
per share at the inception of the agreement. The price per share included a 20%
premium to the market value as defined in the agreement. The 20% premium was in
recognition of Ligand's past research and development efforts and accordingly,
$6.25 million (the premium) was included in 1997 revenues. Ligand also received
a $12.5 million up-front non-refundable milestone payment following inception of
the agreement. Under the agreement, Lilly also agreed to support up to $49
million in research funding. Revenues for research funding are recognized
ratably over the term of the agreement. Revenues recognized under the agreement
for the years ended December 31, 1998 and 1997 were $10.0 and $19.7 million,
respectively. The Company also has the option to obtain selected rights to one
Lilly specialty pharmaceutical product. Should the Company elect to obtain
selected rights to the product, Lilly could receive milestone payments of up to
$20 million payable in the Company's Common Stock. In the event that Ligand does
not exercise this product option during the first 120 days after the effective
date of the agreements, the Company will sell an additional $20 million in
equity to Lilly at a 20% premium to the then current 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 Targetin(R) (LGD1069), LGD1268 or LGD1324.
SmithKline Beecham Corporation
In February 1995, the Company entered into a research collaboration with
SmithKline Beecham Corporation ("SmithKline Beecham") to discover and
characterize small molecule drugs to control hematopoiesis. Revenues under the
agreement are recognized ratably over the term of the agreement. Revenues
recognized under the agreement for the years ended December 31, 1998, 1997 and
1996 were $3.7 million, $3.2 million and $2.4 million, respectively. SmithKline
Beecham has agreed to provide the Company up to $21.5 million in research
funding and equity investments. SmithKline Beecham made an investment of $5.0
million by purchasing 674,127 shares of the Company's Common Stock at $7.41 per
share at the inception of the agreement. In November 1995, a second equity
investment of $2.5 million by purchasing 260,200 shares of the Company's Common
Stock at $9.60 per share, was provided to the Company upon the achievement of
certain milestones. In January 1997, a third installment of equity investment of
$2.5 million by purchasing 164,474 shares of the Company's Common Stock at
$15.20 per share was provided to the Company as a result of SmithKline Beecham's
election to expand the scope of research as defined. The final installment of
$2.5 million was provided in October 1997 as a convertible note as a result of
SmithKline
F-17
<PAGE> 72
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
In April 1998, SmithKline Beecham plc. and the Company initiated a new
collaboration to develop small molecule drugs for the treatment or prevention of
obesity. As part of the collaboration, SmithKline Beecham plc. purchased 274,423
shares of Ligand Common Stock for $5.0 million ($18.22 per share), a 20 percent
premium over a 15-day average of the daily closing price of the Company's Common
Stock prior to execution of the agreement, which premium has been deferred and
will be recognized as revenue over two years and also purchased for $1 million a
warrant to purchase 150,000 shares of Ligand Common Stock at $20 per share. The
warrant expires in five years, and Ligand may require SmithKline Beecham plc. to
exercise the warrant under certain circumstances after three years. SmithKline
Beecham plc. will also purchase additional Ligand Common Stock at a 20 percent
premium if a certain research milestone is achieved and will make cash payments
to Ligand if subsequent milestones are met.
American Home Products Corporation
In September 1994, the Company entered into a collaborative research
agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of
American Home Products ("AHP"), to discover and develop drugs which interact
with the estrogen or progesterone receptors. AHP agreed to provide up to $19.0
million of the Company's research activities, to invest $5.0 million by
purchasing 574,513 shares of the Company's Common Stock at $8.70 per share, and
to provide, in three installments, up to $20.0 million in convertible notes over
the life of the agreement.
In January 1996, the Company and AHP expanded and amended the research and
development collaboration. The Company received $1.5 million in additional
research revenue from AHP, AHP expanded the research funding by $1.0 million in
years two and three of the agreement, the contract-specified milestone payments
increased, AHP granted rights to the Company to cause the conversion of the
convertible note into Common Stock, and the parties agreed to extend the period
for Ligand to draw down the second convertible note installment until December
1996.
Revenues under the agreement, which was completed in September 1998, were
recognized ratably over the term of the agreement. Revenues recognized under the
agreement for the years ended December 31, 1998, 1997 and 1996 were $1.3
million, $4.0 million and $6.9 million, respectively. The $5.0 million equity
investment plus the initial $10.0 million convertible note was provided to the
Company upon inception of the agreement. In the second quarter of 1995, the
Company achieved certain milestones which qualified the Company to receive the
second installment of a $5.0 million convertible note, which the Company elected
to receive in December 1996. The final convertible note installment of $5.0
million will be provided if the collaboration agreement is extended from three
to five years. The first two notes are convertible into the Company's Common
Stock at $10.01 per share and the final note is convertible at $10.88 per share.
The conversion prices are subject to adjustment if certain dilutive events occur
to the Company's outstanding Common Stock. In August 1996, March 1997, July
1997, December 1997 and again in June 1998, the Company converted $3.8 million,
$3.8 million, $2.5 million, $1.3 million and $3.8 million of the convertible
notes outstanding into 374,626, 374,626, 249,749, 124,875 and 374,626 shares of
Common Stock, at the $10.01 conversion price. These were no convertible notes
outstanding at December 31, 1998.
Abbott Laboratories
In July 1994 the Company entered into a long-term collaborative research
agreement with Abbott Laboratories ("Abbott") to discover and develop drugs for
the prevention or treatment of inflammatory
F-18
<PAGE> 73
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
diseases. Abbott agreed to support up to $16.0 million of the Company's research
activities over a five-year period in connection with the agreement.
Revenues under the agreement are recognized ratably over the term of the
agreement and for the years ended December 31, 1998, 1997 and 1996 revenues were
$1.2 million, $1.7 million and $2.5 million, respectively. Abbott made an equity
investment of $5.0 million by purchasing 571,305 shares of the Company's Common
Stock at $8.75 per share at the inception of the agreement, and in August 1995
Abbott made another equity investment of $5.0 million by purchasing 516,129
shares of the Company's Common Stock at $9.68 per share, as provided in the
contract.
Sankyo Company, Limited
As part of the Glycomed Merger in May 1995, the Company acquired a
collaborative research agreement with Sankyo Company, Limited ("Sankyo") which
Glycomed had entered into in June 1994. Under the agreement, Sankyo reimbursed a
portion of the Company's research expenses related to the collaboration up to an
aggregate of $8.9 million. Revenues under the agreement were recognized ratably
over the term of the agreement. Revenues recognized under the agreement and for
the years ended December 31, 1997 and 1996 were $2.3 million and $2.7,
respectively.
In connection with the collaborative research agreement, in September 1995,
Sankyo purchased 189,274 shares of the Company's Common Stock at $7.92 per share
for net proceeds of $1.5 million. In June 1997, the collaborative research
agreement was extended through October 1997.
Glaxo-Wellcome plc
In September 1992 the Company entered into a five-year collaborative
research agreement with Glaxo-Wellcome plc ("Glaxo") to develop drugs for the
treatment of cardiovascular disease. Under the agreement, Glaxo reimbursed a
portion of the Company's research expenses related to the collaboration to a
maximum of approximately $2.0 million annually. Revenues under the agreement are
recognized ratably over the term of the agreement. Revenues recognized under the
agreement for the years ended December 31, 1997 and 1996 were $1.3 million and
$2.1 million, respectively. In connection with the agreement, Glaxo purchased
662,755 shares of the Company's Common Stock at $11.31 per share for net
proceeds of $7.5 million. Glaxo also purchased 315,465 shares of the Company's
Common Stock at $7.92 per share as part of the Company's initial public offering
for net proceeds of $2.5 million.
Pfizer Inc.
In 1991, the Company entered into a collaborative research and development
and license agreement with Pfizer Inc. ("Pfizer") to perform services related to
the joint development of pharmaceuticals for the treatment of osteoporosis. Due
to the early success in meeting research-stage objectives for drug candidates,
the two companies phased out the ongoing research collaboration by July 1, 1994.
In connection with the collaborative research agreement, Pfizer purchased
1,353,125 shares of the Company's Common Stock for $5.54 per share for net
proceeds of $7.5 million.
In December 1994, the Company filed suit against Pfizer in the Superior
Court of California in San Diego County for breach of contract and for a
declaration of future rights as they relate to droloxifene, a compound upon
which the Company performed work at Pfizer's request during a collaboration
between Pfizer and the Company to develop drugs in the field of osteoporosis.
Droloxifene is an estrogen antagonist/partial against with potential indications
in the treatment of osteoporosis and breast cancer as well as other
applications. The Company and Pfizer entered into a settlement agreement with
respect to the lawsuit in April 1996. Under the terms of the settlement
agreement, the Company is entitled to receive milestone payments if
F-19
<PAGE> 74
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Pfizer continues development and royalties if Pfizer commercializes droloxifene.
At the option of either party, milestone and royalty payments owed the Company
can be satisfied by Pfizer transferring to the Company shares of Common Stock at
an exchange ratio of $12.375 per share. At the time of the settlement, the
Company received approximately $1.3 million in milestone payments from Pfizer as
a result of the continued development of droloxifene. These milestones were paid
in the form of an aggregate of 101,011 shares of Common Stock, which were
subsequently retired from treasury stock in September 1996. According to prior
announcements by Pfizer, droloxifene is in Phase II clinical trials for
osteoporosis.
11. ALLERGAN LIGAND RETINOID THERAPEUTICS, INC. -- RELATED PARTY
In December 1994, the Company and Allergan, Inc. ("Allergan") formed
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research
and development activities previously conducted by 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 Ligand of
$50.0 million and $17.5 million, respectively, providing for net proceeds of
$94.3 million for retinoid product research and development. Ligand's $17.5
million in cash contribution, as well as warrants were in exchange for (1) a
right to acquire all of the Callable Common Stock at specified future dates and
amounts and (2) a right to acquire all rights to the Panretin(R) (ALRT 1057)
product, jointly with Allergan. Allergan's $50.0 million cash contribution to
ALRT was in exchange for (1) the right to acquire one-half of technologies and
other assets in the event Ligand exercises its right to acquire all of the
Callable Common Stock, (2) a similar right to acquire all of the Callable Common
Stock if Ligand does not exercise its right and (3) a right to acquire all
rights to the Panretin (ALRT1057) product, jointly with Ligand. 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. From June 3, 1995
through September 23, 1997, 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 1997 and 1996, $1.5
million and $2.1 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.
In September 1997, the Company and Allergan exercised their respective
options to purchase the Callable Common Stock (the "Stock Purchase Option") and
certain assets (the "Asset Purchase Option") of ALRT. The Company's exercise of
the Stock Purchase Option required the issuance of 3,166,567 shares of the
Company's Common Stock along with cash payments totaling $25.0 million to
holders of the Callable Common Stock in November 1997.
Allergan's exercise of the Asset Purchase Option required a cash payment of
$8.9 million which was used by the Company to pay a portion of the Stock
Purchase Option.
In November 1997, ALRT became a wholly owned subsidiary of the Company. The
transaction was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
allocated to in-process technology and was written off, resulting in a one-time
non-cash charge to results of operations of $65.0 million.
F-20
<PAGE> 75
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Details of the acquisition are as follows (in thousands):
<TABLE>
<S> <C>
Total consideration:
Common stock.............................................. $52,595
Liabilities assumed....................................... 1,010
Warrant subscription receivable write-off................. 918
Net cash paid for ALRT net of cash received............... 12,661
-------
$67,184
=======
Less:
Deferred liabilities write-off............................ $ 2,214
Write-off of in-process technology........................ 64,970
-------
$67,184
=======
</TABLE>
12. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has advanced funds to certain officers and employees in
connection with various employment agreements. The agreements provide for
forgiveness of the advances over four-year and five-year periods. If an
individual terminates the relationship with the Company, the unforgiven portion
of the advances and any accrued interest are due and payable upon termination.
The notes are secured by shares of the Company's Common Stock owned by the
individual or second trust deeds on the personal residences of the respective
employees.
13. INCOME TAXES
At December 31, 1998, the Company had consolidated federal and combined
California income tax net operating loss carryforwards of approximately $354.6
million and $21.9 million, respectively. The difference between the federal and
California tax loss carryforwards is primarily attributable to the
capitalization of research and development expenses for California income tax
purposes and the 50% limitation on California loss carryforwards. The Company
also had foreign net operating loss carryforwards of approximately $3.1, which
will begin to expire in 2001 unless previously utilized.
The federal tax loss carryforward will begin to expire in 2002, unless
previously utilized. The California tax loss carryforwards began expiring in
1998 (approximately $4.0 expired in 1998). The Company also had consolidated
federal and combined California research tax credit carryforwards of
approximately $14.3 million and $4.5 million, respectively, which will begin to
expire in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of a portion of
net operating loss and credit carryforwards will be limited because of
cumulative changes in ownership of more than 50% which occurred within three
year periods during 1989, 1992 and 1996. However, the Company does not believe
the limitations will have a material impact upon the future utilization of these
carryforwards. In addition, use of Glycomed's and Seragen's preacquisition tax
net operating and credit carryforwards will also be limited because the
acquisitions by the Company represent changes in ownership of more than 50%.
Such tax net operating losses and credit carryforwards have been reduced,
including the related deferred tax assets.
F-21
<PAGE> 76
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are shown below. A valuation allowance has been recognized to
fully offset the deferred tax assets as of December 31, 1998 and 1997 as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Acquired subordinated debt........................... $ 4,387 $ 5,483
Purchased intangible assets.......................... 17,621 --
Fixed assets......................................... 2,684 --
--------- ---------
Total deferred tax liabilities............. 24,692 5,483
Deferred tax assets:
Net operating loss carryforwards..................... 126,771 82,552
Research and development credits..................... 17,218 9,979
Capitalized research and development................. 13,604 10,252
Capitalized license.................................. 6,150 --
Other................................................ 2,940 3,472
--------- ---------
Total deferred tax assets.................. 166,683 106,255
Valuation allowance for deferred tax assets.......... (141,991) (100,772)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
</TABLE>
Approximately $2.1 million of the valuation allowance for deferred tax
assets relates to benefits of stock option deductions which, when recognized,
will be allocated directly to paid-in capital.
F-22
<PAGE> 1
EXHIBIT 10.194
ELEVENTH ADDENDUM TO AMENDED REGISTRATION RIGHTS AGREEMENT
This Eleventh Addendum ("Addendum") to the Amended Registration Rights
Agreement dated June 24, 1994, as amended through the date hereof ("Registration
Rights Agreement") between Ligand Pharmaceuticals Incorporated (the "Company"),
Elan Corporation, plc ("Elan"), and Elan International Services, Ltd. ("EIS") is
effective as of November 9, 1998.
RECITALS
A. The Company has issued 437,768 shares of the Company's Common Stock
(the "Shares") and Zero Coupon Convertible Senior Notes due 2008 with an
aggregate issue price of $40,000,000, and may in the future issue additional
Zero Coupon Convertible Senior Notes due 2008 with up to an aggregate issue
price of $70,000,000 (collectively, the "Notes"), to EIS pursuant to Section 1
of that certain Securities Purchase Agreement dated the date hereof among the
Company. Elan and EIS (the "Securities Purchase Agreement").
B. The Company and Elan have entered into that certain Development,
License and Supply Agreement dated the date hereof (the "License Agreement")
pursuant to which the Company has issued 429,185 shares of Common Stock (the
"License Shares"), and may in the future issue additional shares of its Common
Stock to Elan in satisfaction of certain royalty payments provided for therein.
C. This Addendum serves to include the Shares and any shares of the
Company's Common Stock issuable upon the conversion of the Notes or pursuant to
the terms of the License Agreement within the definition of "Registrable
Securities" under the Registration Rights Agreement, to modify Schedule A to the
Registration Rights Agreement to include the Shares, and to provide that
Schedule A to the Registration Rights Agreement shall be further updated to
include any shares issued upon the conversion of the Notes or pursuant to the
terms of the License Agreement, all pursuant to Section 2.6(a) of the
Registration Rights Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth in the Registration Rights Agreement, the parties agree as follows:
1. Section 1. 1, paragraph (f) of the Registration Rights Agreement is
hereby restated in its entirety as follows:
"(f) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon exercise of those warrants issued to certain
Existing Investors and pursuant to which such Existing Investors were
previously granted registration rights by the Company, (ii) the shares
of Common Stock (or the shares of such other class of stock into which
the Common Stock is converted) issuable upon conversion of those certain
Unsecured Convertible Promissory Notes issued to American Home Products
Corporation pursuant to the Stock and Note Purchase Agreement dated
September 2, 1994, (iii) the 35,957 shares of Common Stock issuable or
issued upon exercise of the Warrant issued to
<PAGE> 2
Genentech, Inc. in connection with the merger of L.G. Acquisition Corp.,
a wholly-owned subsidiary of the Company, with and into Glycomed
Incorporated, which shares are reflected on Schedule A attached to the
Fourth Addendum to this Agreement, (iv) the 164,474 shares of Common
Stock (or that number of shares of such other class of stock into which
the Common Stock is converted) issued to S.R. One Limited pursuant to a
Stock and Note Purchase Agreement dated February 3, 1995 (the "Stock and
Note Purchase Agreement"), which shares are reflected on Schedule A
attached to the Eighth Addendum to this Agreement, and the shares of
Common Stock (or the shares of such other class of stock into which the
Common Stock is converted) issuable upon conversion of those certain
Unsecured Convertible Promissory Notes dated October 30, 1997 (the "S.R.
One Notes") issued pursuant to the Stock and Note Purchase Agreement
(and upon such conversion of the S.R. One Notes, Schedule A shall be
updated to include such shares), (v) the 274,423 shares of Common Stock
(or that number of shares of such other class of stock into which the
Common Stock is converted) issued to SmithKline Beecham plc pursuant to
a Stock Purchase Agreement dated April 24, 1998 (the "SmithKline Stock
Purchase Agreement"), which shares are reflected on Schedule A attached
to the Ninth Addendum to this Agreement, and the shares of Common Stock
(or the shares of such other class of stock into which the Common Stock
is converted) issuable upon conversion of that certain Warrant (the
"Warrant") issued pursuant to the SmithKline Stock Purchase Agreement
(and upon such conversion of the Warrant, Schedule A shall be updated to
include such shares), (vi) the 1,278,970 shares of Common Stock (or that
number of shares of such other class of stock into which the Common
Stock is converted) issued to Elan International Services, Ltd. pursuant
to the Stock Purchase Agreement dated September 30, 1998, which shares
are reflected on Schedule A attached to the Tenth Addendum to this
Agreement, (vii) the 437,768 shares of Common Stock (or that number of
shares of such other class of stock into which the Common Stock is
converted) issued to Elan International Services, Ltd. pursuant to the
Securities Purchase Agreement, dated November 6, 1998 (the "Securities
Purchase Agreement") (viii) the shares of Common Stock (or the shares of
such other class of stock into which the Common Stock is converted)
issuable upon conversion of the Notes issued pursuant to the Securities
Purchase Agreement (and upon such conversion of the Notes, Schedule A
shall be updated to include such shares), (viii) the 429,185 shares of
Common Stock (or the shares of such other class of stock into which the
Common Stock is converted) issued to Elan Corporation, plc pursuant to
the Development, License and Supply Agreement dated November 9, 1998
(the "License Agreement"), (ix) the shares of Common Stock that may be
issued to Elan Corporation, plc pursuant to the License Agreement (and
upon each such issuance, Schedule A shall be updated to include such
shares), and (x) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or
in exchange for or in replacement of the shares referenced in (i), (ii),
(iii), (iv), (v), (vi), (vii), (viii), and (ix) above, excluding in all
cases, however, any Registrable Securities
2
<PAGE> 3
sold by a person in a transaction in which rights under this Agreement
are not assigned."
2. Schedule A of the Registration Rights Agreement is hereby restated in
its entirety as attached to this Addendum.
3. This Addendum may be executed in one or more counterparts.
4. This Addendum shall be binding upon the Company, Elan and EIS and
each holder of Registrable Securities and each future holder of Registrable
Securities pursuant to Section 2.6(a) of the Registration Rights Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
first above written.
ELAN INTERNATIONAL SERVICES, LIGAND PHARMACEUTICALS
LTD. INCORPORATED
By: By: /s/ William L. Respess
------------------------------- --------------------------------------
Senior Vice President, General
Title Title: Counsel, Government Affairs
----------------------------- ----------------------------------
ELAN CORPORATION, PLC
By:
-------------------------------
Title:
----------------------------
[SIGNATURE PAGE TO ELEVENTH ADDENDUM TO
AMENDED REGISTRATION RIGHTS AGREEMENT]
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
first above written.
ELAN INTERNATIONAL SERVICES, LIGAND PHARMACEUTICALS
LTD. INCORPORATED
By: /s/ Kevin Insley By:
------------------------------- --------------------------------------
Title PRESIDENT & CFO Title:
----------------------------- ----------------------------------
ELAN CORPORATION, PLC
By:
-------------------------------
Title:
----------------------------
[SIGNATURE PAGE TO ELEVENTH ADDENDUM TO
AMENDED REGISTRATION RIGHTS AGREEMENT]
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
first above written.
ELAN INTERNATIONAL SERVICES, LIGAND PHARMACEUTICALS
LTD. INCORPORATED
By: By:
------------------------------- --------------------------------------
Title Title:
----------------------------- ----------------------------------
ELAN CORPORATION, PLC
By: /s/ William F. Daniel
---------------------------------
Title: GROUP VICE PRESIDENT, FINANCE
------------------------------
[SIGNATURE PAGE TO ELEVENTH ADDENDUM TO
AMENDED REGISTRATION RIGHTS AGREEMENT]
<PAGE> 1
EXHIBIT 10.195
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
OR PURSUANT TO A VALID EXEMPTION THEREFROM AND HAS BEEN SOLD IN RELIANCE ON THE
EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE ACT ("REGULATION
S"). THE SECURITY EVIDENCED HEREBY MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S (SECTION
230.901 THROUGH SECTION 230.905, AND PRELIMINARY NOTES).
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE CONDITIONS
SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF NOVEMBER 6, 1998, BY
AND AMONG THE COMPANY, ELAN INTERNATIONAL SERVICES, LTD. AND ELAN CORPORATION,
PLC, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITY
UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY
OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT
CHARGE.
LIGAND PHARMACEUTICALS INCORPORATED
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
No. R-1
Issue Date: November 9, 1998
Issue Price: $30,000,000
($456.39 for each $1,000 Principal Amount)
Original Issue Discount at Maturity: $35,733,694
($543.61 for each $1,000 Principal Amount)
Ligand Pharmaceuticals Incorporated, a Delaware corporation,
promises to pay to Elan International Services, Ltd. or registered assigns, on
November 9, 2008, the Principal Amount of SIXTY FIVE MILLION SEVEN HUNDRED AND
THIRTY THREE THOUSAND SIX HUNDRED AND NINETY FOUR DOLLARS ($65,733,694) or such
Principal Amount as may result from an Accrual Increase as specified on the
other side of this Security.
This Security shall not bear interest except as specified on the
other side of this Security. Original Issue Discount will accrue as specified on
the other side of this Se-
<PAGE> 2
-2-
curity. This Security is convertible into Common Stock as specified on the other
side of this Security.
Additional provisions of this Security are set forth on the other
side of this Security.
This Security is one of the Zero Coupon Convertible Senior Notes
due 2008 issued pursuant to the Securities Purchase Agreement, dated as of
November 6, 1998, by and among Ligand Pharmaceuticals Incorporated, Elan
International Services, Ltd. and Elan Corporation, plc (the "Purchase
Agreement").
<PAGE> 3
IN WITNESS WHEREOF, Ligand Pharmaceuticals Incorporated has caused
this instrument to be duly executed.
LIGAND PHARMACEUTICALS
INCORPORATED
By: /s/ WILLIAM L. RESPESS
-------------------------------------
Name: William L. Respess
Title: Senior Vice President, General
Counsel, Government Affairs
Attest
By: /s/ DAVID E. ROBINSON
--------------------------------------
Name: David E. Robinson
Title: President and Chief Executive
Officer
Dated:
------------------
<PAGE> 4
FORM OF REVERSE SIDE OF SECURITY
LIGAND PHARMACEUTICALS INCORPORATED
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
1. INTEREST
(a) This Security shall not bear interest, except as specified in this
paragraph or in paragraph 12 hereof. If the Principal Amount hereof or any
portion of such Principal Amount is not paid when due (whether upon acceleration
pursuant to paragraph 9 hereof, upon the date set for payment of the Redemption
Price pursuant to paragraph 3 hereof, upon the date set for payment of a
Purchase Price or a Company Change of Control Purchase Price pursuant to
paragraph 4 hereof, upon the date set for payment of the Elan Change of Control
Purchase Price pursuant to paragraph 5 hereof or upon the Stated Maturity of
this Security) or if shares of Common Stock (and cash in lieu of fractional
shares) in respect of a conversion of this Security in accordance with paragraph
6 hereof are not delivered when due, then, in each such case, the overdue amount
shall bear interest at the rate of 10.0% per annum, compounded semiannually (to
the extent that the payment of such interest shall be legally enforceable),
which interest shall accrue from the date such overdue amount was due to the
date payment of such amount, including interest thereon, has been made. All such
interest shall be payable on demand. The accrual of such interest on overdue
amounts shall be in lieu of, and not in addition to, the continued accrual of
Original Issue Discount.
(b) Original Issue Discount (the difference between the Issue Price and
the Principal Amount of a Security) in the period during which a Security
remains outstanding shall accrue at 8.0% per annum, on a semiannual bond
equivalent basis using a 360-day year consisting of twelve 30-day months,
commencing on the Issue Date of this Security, and shall cease to accrue on the
earlier of (i) the date on which the Principal Amount hereof or any portion of
such Principal Amount becomes due and payable and (ii) any Redemption Date,
Purchase Date, Company Change of Control Payment Date, Elan Change of Control
Payment Date or Conversion Date.
(c) In the event that the Company defaults in the performance or
observance of any agreement, covenant, term or condition contained in the
Registration Rights Agreement or the New Registration Rights Agreement, as the
case may be, and such
<PAGE> 5
-2-
default continues for a period of 30 days after receipt by the Company of notice
thereof (provided that, if such default is not cured on or prior to the last day
of such 30 day period and such breach is then capable of being cured and the
Company is then working in good faith to cure such default, such 30 day period
shall be extended by an additional 20 days from the last day of such 30 day
period) (a "Registration Rights Default"), the Company acknowledges that the
Holders of the Securities will suffer damages and that it would not be feasible
to ascertain the extent of such damages with precision. Accordingly, the Company
agrees that, as liquidated damages, the rate at which Original Issue Discount or
interest pursuant to paragraph 1(a) or 12 hereof, if any, accrues shall be
increased over and above the rate stated in paragraph 1(b), 1(a) and 12(a),
respectively (an "Accrual Increase"), by an additional 50 basis points for each
90-day period in which a Registration Rights Default continues; provided that
the aggregate of such Accrual Increase shall not exceed 200 basis points over
and above the rate set forth in paragraph 1(b), 1(a) and 12(a) hereof, as the
case may be; provided, further, that any Accrual Increase shall immediately
cease upon the cure of any such Registration Rights Default. Whenever, in this
Security, there is mentioned, in any context, Principal Amount, Original Issue
Discount or interest, or any other amount payable under or with respect to this
Security, including the Redemption Price, the Purchase Price, the Company Change
of Control Purchase Price and the Elan Change of Control Purchase Price, such
mention shall be deemed to include mention of an Accrual Increase to the extent
that, in such context, such Accrual Increase is, was or would be in effect.
2. METHOD OF PAYMENT
Holders must surrender Securities to the Company to collect payments in
respect of the Securities. The Company will pay cash amounts in money of the
United States that at the time of payment is legal tender for payment of public
and private debts (and all references in the Securities to "$" or "dollars"
shall refer to such currency) by wire transfer in immediately available funds,
to an account or accounts designated in writing by each Holder not less than 5
Business Days prior to the date of the applicable payment.
3. REDEMPTION AT THE OPTION OF THE COMPANY
(a) No sinking fund is provided for the Securities. The Securities are
redeemable as a whole at any time, or in part from time to time, at the option
of the Company, at the redemp-
<PAGE> 6
-3-
tion prices (each, a "Redemption Price") set forth in paragraph 3(b) hereof;
provided that the Securities are not redeemable prior to November 9, 2001.
(b) The table below shows the Redemption Prices of a Security per $1,000
Principal Amount on the dates shown below and at Stated maturity, which prices
reflect accrued Original Issue Discount calculated to each such date. The
Redemption Price of a Security redeemed between such dates would include an
additional amount reflecting the additional Original Issue Discount accrued
since the next preceding date in the table to the actual Redemption Date.
<TABLE>
<CAPTION>
(2)
Accrued
(1) Original (3)
Security Issue Redemption
Issue Discount Price
Redemption date Price At 8.0% (1) + (2)
--------------- -------- ------- ---------
<S> <C> <C> <C>
November 9, 2001................... $456.39 $121.09 $577.48
November 9, 2002.................... 456.39 168.21 624.60
November 9, 2003.................... 456.39 219.17 675.56
November 9, 2004.................... 456.39 274.30 730.69
November 9, 2005.................... 456.39 333.92 790.31
November 9, 2006.................... 456.39 398.41 854.80
November 9, 2007.................... 456.39 468.17 924.56
At maturity.......................... 456.39 543.61 1,000.00
</TABLE>
If converted to a semiannual coupon note following the occurrence of a
Tax Event, the Securities will be redeemable at the Restated Principal Amount
plus interest accrued and unpaid from, and including, the date of such
conversion to, but excluding, the Redemption Date.
(c) If less than all of the Securities are to be redeemed, the Company
shall select the Securities to be redeemed pro rata. If any Security selected
for redemption is thereafter surrendered for conversion in part, the converted
portion of such Security shall be deemed (so far as may be), solely for purposes
of determining the aggregate Principal Amount of Securities to be redeemed by
the Company, the portion selected for redemption. Nothing in this paragraph 3
shall affect the right of any Holder to convert any Security pursuant to
paragraph 6 hereof.
<PAGE> 7
-4-
(d) Provisions of this Security that apply to the redemption of all of a
Security also apply to the redemption of any portion of such Security.
(e) At least 30 days but not more than 60 days before a Redemption Date,
the Company shall cause notice of redemption to be mailed, by first-class mail,
postage prepaid, to each Holder of Securities at such Holder's address appearing
on the register maintained by the Company. Such notice shall identify the
Securities to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the Conversion Price in effect on the date of such notice;
(iv) that Securities called for redemption may be converted at
any time prior to the close of business on the Redemption Date;
(v) that Securities called for redemption must be surrendered to
the Company to collect the Redemption Price and the procedures to be
followed to so surrender such Securities;
(vi) if fewer than all the outstanding Securities are to be
redeemed, the identification and Principal Amounts of the particular
Securities to be redeemed;
(vii) that, unless the Company defaults in payment of the
Redemption Price, Original Issue Discount on the Securities called for
redemption and interest, if any, will cease to accrue on and after the
Redemption Date;
(viii) that Holders whose Securities are being redeemed only in
part will, without charge, be issued a new Security equal in Principal
Amount to the unredeemed portion of the Securities; and
(ix) that the Redemption Price for any Security called for
redemption will be paid one Business Day following the later of (x) the
Redemption Date and (y) the date such Security is surrendered to the
Company.
(f) Once notice of redemption is given, Securities called for redemption
shall become due and payable on the Redemption
<PAGE> 8
-5-
Date and at the Redemption Price stated in such notice, except for Securities
that are converted. The Redemption Price for the Securities called for
redemption shall be paid one Business Day following the later of (x) the
Redemption Date and (y) the date such Securities are surrendered to the Company.
(g) Receipt by the Company of the Securities called for redemption prior
to, on or after the Redemption Date shall be a condition to the receipt by the
Holder of the Redemption Price therefor.
(h) Upon surrender of a Security that is redeemed in part, the Company
shall, without charge, execute and deliver to the Holder a new Security equal in
Principal Amount to the unredeemed portion of such Security.
4. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER
(a) Purchase at the Option of the Holder. The Company shall be obligated
to purchase, at the option of the Holder, the Securities held by such Holder on
the following purchase dates (each, a "Purchase Date") and at the following
purchase prices per $1,000 Principal Amount (each, a "Purchase Price"), which
Purchase Prices reflect accrued Original Issue Discount to each such date. Such
Purchase Prices may be paid, at the option of the Company, in cash or by the
issuance and delivery of shares of Common Stock, subject to the conditions set
forth in paragraph 4(a)(iv) hereof.
<TABLE>
<CAPTION>
(2)
Accrued
(1) Original (3)
Security Issue Purchase
Issue Discount Price
Purchase Date Price At 8.0% (1) + (2)
------------- -------- -------- ---------
<S> <C> <C> <C>
November 9, 2002.......... 456.39 168.21 624.60
November 9, 2005.......... 456.39 333.92 790.31
</TABLE>
If, prior to the Purchase Date, the Securities have been converted to a
semiannual coupon note following the occurrence of a Tax Event, the Purchase
Price will be equal to the Restated Principal Amount plus interest accrued and
unpaid from, and including, the date of such conversion to, but excluding, the
Purchase Date.
(i) in order to have Securities purchased pursuant to this
paragraph 4(a), the Holder shall (x) deliver to the Company (for each
Security or portion thereof to be
<PAGE> 9
-6-
purchased) a written notice of purchase in the form attached to this
Security as Annex A (a "Purchase Notice") at any time on or prior to the
close of business on such Purchase Date and (y) surrender such
Securities to the Company prior to, on or after the Purchase Date, such
surrender being a condition to receipt by the Holder of the Purchase
Price therefor.
Provisions of this Security that apply to the purchase of all of
a Security also apply to the purchase of any portion of such Security.
Subject to the right of a Holder to convert Securities as to
which a Purchase Notice has been delivered into Common Stock at any time
prior to the close of business on the Purchase Date, such Holder may not
withdraw such Purchase Notice.
Any purchase of Securities contemplated pursuant to this
paragraph 4(a) shall be consummated by the delivery of the Purchase
Price to be received by the Holder (in cash or Common Stock, as the case
may be) one Business Day following the later of (x) the Purchase Date
and (y) the date such Securities are surrendered to the Company.
(ii) The Securities to be purchased pursuant to this paragraph
4(a) may be paid for, at the option of the Company, in cash or Common
Stock, subject to the conditions set forth in paragraph 4(a)(iv) hereof.
The Company shall designate, in the Company Notice (as defined below)
delivered pursuant to paragraph 4(a)(v) hereof, whether the Company will
purchase the Securities for cash or Common Stock; provided that the
Company will pay cash for fractional shares of Common Stock pursuant to
paragraph 4(a)(iv)(A) hereof. The Company may not change its election
with respect to the consideration to be paid once the Company has given
the Company Notice, except pursuant to paragraph 4(a)(iv)(B) hereof.
(iii) On each Purchase Date, if the Company Notice shall state
that the Company will purchase Securities for cash, the Securities in
respect of which a Purchase Notice has been given shall be purchased by
the Company with cash in an amount equal to the aggregate Purchase Price
of such Securities.
(iv) On each Purchase Date, if the Company Notice shall state
that the Company will purchase Securities for
<PAGE> 10
-7-
Common Stock, the Securities in respect of which a Purchase Notice has
been given shall be purchased by the Company by the issuance of a number
of whole shares of Common Stock equal to the quotient obtained by
dividing (x) the amount of cash to which the Holder would have been
entitled had the Company elected to pay the Purchase Price of such
Securities in cash by (y) the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and including
the second trading day immediately preceding the Purchase Date, subject
to paragraph 4(a)(iv)(A) hereof.
(A) The Company will not issue a fractional share of Common Stock
in payment of the Purchase Price. Instead, the Company will pay cash in
an amount equal to the current market value of the fractional share. The
current market value of a fraction of a share of Common Stock shall be
determined by multiplying the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and including
the second trading day immediately preceding the Purchase Date by such
fraction and rounding to the nearest whole cent, with one-half cent
being rounded upward. It is understood that if a Holder elects to have
more than one Security purchased, the number of whole shares of Common
Stock shall be based on the aggregate amount of Securities to be
purchased.
(B) The Company's right to elect to purchase the Securities of
any Holder through the issuance of shares of Common Stock shall be
conditioned upon the following: (x) assuming compliance with all
applicable state securities or "Blue Sky" laws, and assuming the
accuracy of the statements of such Holder set forth in the Purchase
Notice, the issuance of such shares of Common Stock shall be exempt from
the registration requirements of Section 5 of the Securities Act, (y) no
consent, approval, authorization or order of any court or governmental
agency or body or third party shall be required for the issuance by the
Company of such shares of Common Stock and (z) such Holder shall have
received an Opinion of Counsel (which shall be included with the Company
Notice) stating that the terms of the issuance of such Common Stock are
in conformity with this paragraph 4(a), that such Common Stock has been
duly authorized and, upon issuance, will be validly issued,
nonassessable
<PAGE> 11
-8-
and fully paid, will not be issued in violation of any preemptive or
similar rights and will be free of any liens, encumbrances or
restrictions on transfer imposed by the Company other than those imposed
by the Securities Act and applicable state securities or "Blue Sky" laws
(provided that such Opinion of Counsel may state that, insofar as it
relates to the absence of preemptive or similar rights, it is given upon
the best knowledge of such counsel) and that clause (x) of this
paragraph 4(a)(iv)(B) has been satisfied.
(C) if the conditions set forth in paragraph 4(a)(iv)(B) hereof
are not satisfied as of the Purchase Date, and the Company shall have
elected to purchase the Securities through the issuance of shares of
Common Stock, the Company shall, without further notice, pay the
Purchase Price in cash.
(v) The Company shall cause a notice of its election to pay the Purchase
Price with cash or Common Stock (the "Company Notice") to be sent by first-class
mail, postage prepaid, to the Holders at their addresses appearing in the
register maintained by the Company. The Company Notice shall be sent to Holders
on a date not less than 20 Business Days prior to the Purchase Date (such date
being herein referred to as the "Company Notice Date"); provided that, in the
event that the Company shall not have delivered the Company Notice on or prior
to the Company Notice Date, the Company shall be deemed to have irrevocably
elected to pay the Purchase Price in cash. The Company Notice shall state the
manner of payment elected and shall contain the following information:
In the event that the Company has elected to pay the Purchase Price with
Common Stock, the Company Notice shall state that each Holder will receive
Common Stock (except for any cash amount to be paid in lieu of fractional
shares) in accordance with this paragraph 4(a) and shall be accompanied by the
Opinion of Counsel described in paragraph 4(a)(iv)(B) hereof.
In any case, each Company Notice will include the Purchase Notice to be
completed by the Holder and shall state:
<PAGE> 12
-9-
(A) the Purchase Price on such Purchase Date and the
Conversion Price in effect on the date of the Company Notice;
(B) that Securities must be surrendered to the Company
to collect payment and any procedures to be followed in so
surrendering the Securities;
(C) that Securities as to which a Purchase Notice has
been given may be converted at any time prior to the close of
business on the applicable Purchase Date;
(D) that, unless the Company defaults in the payment of
the Purchase Price, Original Issue Discount on all Securities in
respect of which a Purchase Notice has been delivered or
interest, if any, will cease to accrue on and after the Purchase
Date;
(E) that Holders whose Securities are being purchased
only in part will, without charge, be issued a new Security
equal in Principal Amount to the unpurchased portion of the
Securities; and
(F) that the Purchase Price for any Security as to which
a Purchase Notice has been given will be paid one Business Day
following the later of (x) the Purchase Date and (y) the date
such Security is surrendered to the Company.
(vi) All shares of Common Stock delivered upon purchase of the
Securities shall be newly issued shares or treasury shares, shall be
duly and validly issued, fully paid and nonassessable, shall not be
issued in violation of any preemptive or similar rights and shall be
free of any liens, encumbrances or restrictions on transfer other than
those imposed by the Securities Act and applicable state securities or
"Blue Sky" laws.
(vii) Receipt of such Security by the Company prior to, on or
after the Purchase Date shall be a condition to the receipt by the
Holder of the Purchase Price therefor.
(viii) on the Business Date immediately following the later of
(x) the Purchase Date and (y) the date on which such Securities are
surrendered to the Company, the Company shall deliver to each Holder
entitled to receive Common Stock a certificate for the number of full
shares of
<PAGE> 13
-10-
Common Stock issuable in payment of the Purchase Price and cash in lieu
of any fractional shares.
(ix) If a Holder is paid in Common Stock, the Company shall pay
any documentary, stamp or similar issue or transfer tax due on such
issuance of Common Stock.
(x) Upon surrender of a Security that is to be purchased only in
part, the Company shall, without charge, execute and deliver to the
Holder a new Security equal in Principal Amount to the unpurchased
portion of such Security.
(b) Purchase at the Option of the Holder upon Company Change of Control.
Upon a Change of Control of the Company, the Company shall be obligated to make
an offer to purchase all outstanding Securities (the "Company Change of Control
Offer") at a purchase price per $1,000 Principal Amount (the "Company Change of
Control Purchase Price") equal to the sum of (x) the Issue Price plus (y)
accrued Original Issue Discount to the Company Change of Control Payment Date.
If, prior to the Company Change of Control Payment Date, the Securities have
been converted to a semiannual coupon note following the occurrence of a Tax
Event, the Company Change of Control Purchase Price will be equal to the
Restated Principal Amount plus interest accrued and unpaid from, and including,
the date of such conversion to, but excluding, the Company Change of Control
Payment Date.
(i) within 10 days after the occurrence of a Change of Control of
the Company, the Company shall cause a notice of the Company Change of
Control Offer (the "Company Change of Control Offer Notice") to be sent
by first-class mail, postage prepaid, to the Holders at their addresses
appearing in the register maintained by the Company, stating:
(A) the event or events causing such Change of Control
of the Company and the date such Change of Control occurred;
(B) that the Company Change of Control Offer is being
made pursuant to this paragraph 4(b);
(C) the Company Change of Control Purchase Price and the
purchase date (which shall be a Business Day no earlier than 10
days nor later than 30
<PAGE> 14
-11-
days from the date such notice is mailed (the "Company Change of
Control Payment Date"));
(D) that a Company Change of Control Purchase Notice (as
defined below) must be delivered to the Company on or prior to
the close of business on the Company Change of Control Payment
Date and that Securities must be surrendered to the Company
prior to, on or after the Company Change of Control Payment Date
to collect payment, including any procedures to be followed in
so surrendering the Securities;
(E) that any Security as to which a Company Change of
Control Purchase Notice has not been delivered will continue to
accrue Original Issue Discount or interest, if any;
(F) the Conversion Price in effect on the date of the
Company Change of Control Offer Notice and any adjustments
thereto resulting from such Change of Control;
(G) that the Securities as to which a Company Change of
Control Purchase Notice has been given may be converted into
Common Stock at any time prior to the close of business on the
Company Change of Control Payment Date;
(H) that, unless the Company defaults in the payment of
the Company Change of Control Payment, Original Issue Discount
on all Securities as to which a Company Change of Control
Purchase Notice has been delivered or interest, if any, will
cease to accrue on and after the Company Change of Control
Payment Date;
(I) that Holders whose Securities are being purchased
only in part will, without charge, be issued a new Security
equal in Principal Amount to the unpurchased portion of the
Securities; and
(J) that the Company Change of Control Purchase Price
for any Security as to which a Company Change of Control
Purchase Notice has been given will be paid one Business Day
following the later of (x) the Company Change of Control Payment
Date and (y) the date such Security is surrendered to the
Company.
<PAGE> 15
-12-
(ii) A Holder may elect to have its Securities purchased pursuant
to a Company Change of Control Offer upon delivery of a written notice
of purchase (the "Company Change of Control Purchase Notice") to the
Company at any time prior to the close of business on the Company Change
of Control Payment Date, stating:
(A) the certificate number of each Security which the
Holder will deliver to be purchased; and
(B) the portion of the Principal Amount of such Security
which the Holder has elected to have purchased.
(iii) Receipt of such Security by the Company prior to, on or
after the Company Change of Control Payment Date shall be a condition to
the receipt by the Holder of the Company Change of Control Purchase
Price therefor.
(iv) Provisions of this Security that apply to the purchase of
all of a Security also apply to the purchase of any portion of such
Security.
(v) Any purchase of Securities contemplated pursuant to this
paragraph 4(b) shall be consummated by the delivery of the Company
Change of Control Purchase Price to be received by the Holder one
Business Day following the later of (x) the Company Change of Control
Payment Date and (y) the date such Securities are surrendered to the
Company.
(vi) If any Security is to be purchased only in part, the Company
shall, without charge, issue to the Holder a new Security equal in
Principal Amount to the unpurchased portion of such Security.
(vii) The Company will comply with the requirements of Section
14(e) under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Securities pursuant
to a Company Change of Control Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of
this paragraph 4(b), the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached
its obligations under this paragraph 4(b) by virtue thereof.
<PAGE> 16
-13-
5. PURCHASE AT THE OPTION OF THE COMPANY UPON ELAN CHANGE OF CONTROL
(a) Upon a Change of Control of Elan occurring prior to November 9,
2001, the Company may, at its option, repurchase (the "Elan Change of Control
Purchase") the Securities held by Elan or any of its Affiliates on the date of
such Change of Control, in whole but not in part, at a cash purchase price per
$1,000 Principal Amount (the "Elan Change of Control Purchase Price") equal to
the greater of (i) the sum of (A) the Issue Price plus (B) accrued Original
Issue Discount to the Elan Change of Control Payment Date (provided that if,
prior to the Elan Change of Control Payment Date, the Securities have been
converted to a semiannual coupon note following the occurrence of a Tax Event,
the sum set forth in this clause (i) shall be the Restated Principal Amount plus
interest accrued and unpaid from, and including, the date of such conversion to,
but excluding, the Elan Change of Control Payment Date) and (ii) the product of
(a) the number of shares of Common Stock into which the Securities to be
redeemed may be converted pursuant to paragraph 6 hereof on the day immediately
preceding the Elan Change of Control Payment Date and (b) the average of the
Closing Prices of the Common Stock for the 20 consecutive trading days ending on
and including the second trading day immediately prior to the Elan Change of
Control Payment Date (as defined below); provided that, as a condition to any
such repurchase, the Company shall repurchase all, but not less than all, of the
Initial Shares, the Shares, the Conversion Shares and the License Shares, in
each case, held by Elan and its Affiliates on the date of such Change of
Control, pursuant to and in accordance with the terms of the Purchase Agreement.
(b) If an Elan Change of Control Purchase is to be made by the Company,
the Company shall, on or prior to the 10th day following receipt of an Elan
Change of Control Notice, cause an irrevocable notice of the Elan Change of
Control Purchase (the "Elan Change of Control Purchase Notice") to be sent by
first-class mail, postage prepaid, to Elan stating:
(i) that the Elan Change of Control Purchase is being made
pursuant to this paragraph 5;
(ii) the Elan Change of Control Purchase Price and the purchase
date (which shall be a Business Day no earlier than 10 days nor later
than 20 days from the date of the Elan Change of Control Purchase Notice
(the "Elan Change of Control Payment Date"));
<PAGE> 17
-14-
(iii) that the Elan Change of Control Purchase Price for any
Security as to which the Elan Change of Control Purchase Notice relates
will be paid on the Business Day following the later of (x) the Elan
Change of Control Payment Date and (y) the date such Security is
surrendered to the Company;
(iv) that Elan shall, and shall cause its Affiliates to,
surrender to the Company on or prior to the Elan Change of Control
Payment Date all Securities owned by any of them on the date of the
Change of Control of Elan and the procedures to be followed in so
surrendering such Securities; and
(v) that, unless the Company defaults in the payment of the Elan
Change of Control Purchase Price, original Issue Discount on all such
Securities or interest, if any, will cease to accrue on and after the
Elan Change of Control Payment Date and, effective upon the date of the
Change of Control of Elan, such Securities shall cease to be
convertible.
(c) In the event that the Company fails to deliver the Elan Change of
Control Purchase Notice on or prior to the 10th day following receipt of an Elan
Change of Control Notice pursuant to paragraph 5(b) hereof, such failure shall
be deemed to be a waiver by the Company of its right to repurchase the
Securities pursuant to this paragraph 5.
(d) Upon the giving of the Elan Change of Control Purchase Notice
pursuant to this paragraph 5, such notice may not be revoked by the Company and
all Securities as to which such Elan Change of Control Purchase Notice relates
shall become due and payable in accordance with this paragraph 5 at the Elan
Change of Control Purchase Price.
(e) Receipt of such Securities by the Company prior to, on or after the
Elan Change of Control Payment Date shall be a condition to the receipt by the
Holder of the Elan Change of Control Purchase Price therefor.
6. CONVERSION
(a) A Holder of a Security may, on or prior to November 9, 2008, convert
in whole at any time or in part from time to time such Security into Common
Stock; provided, however, that if a Security is called for redemption, the
Holder may convert it at any time before the Redemption Date. A Security
<PAGE> 18
-15-
in respect of which the Holder has delivered a Purchase Notice or a Company
Change of Control Purchase Notice exercising the option of such Holder to
require the Company to purchase such Security may, notwithstanding such notice,
convert the Security in accordance with this paragraph 6 until the close of
business on the Payment Date or the Company Change of Control Payment Date, as
the case may be. Upon the occurrence of a Change of Control of Elan, the
Securities then held by Elan and its Affiliates may not be converted on or prior
to the 10th day following the giving of an Elan Change of Control Notice;
provided that, if an Elan Change of Control Purchase Notice is given by the
Company pursuant to paragraph 5(b) hereof, the Securities may not be converted
unless the Company defaults in the payment of the Elan Change of Control
Purchase Price for all Securities as to which such Elan Change of Control
Purchase Notice relates. Notwithstanding the foregoing, neither Elan nor any of
its Affiliates may convert any Security held by it if, at the time of such
conversion, Elan is in violation of Section 14(c) of the Purchase Agreement.
(b) This Security shall be convertible into a number shares of Common
Stock equal to (x) the Issue Price plus all accrued Original Issue Discount to
the applicable Conversion Date (as defined below) (provided that if, prior to
the applicable Conversion Date, the Securities have been converted to a
semiannual coupon note following the occurrence of a Tax Event, this clause (x)
shall be the Restated Principal Amount plus interest accrued and unpaid from,
and including, the date of such conversion to, but excluding, such Conversion
Date) provided by (y) $14.00, as adjusted to the Conversion Date (the
"Conversion Price"). Provisions of this Security that apply to conversion of all
of a Security also apply to conversion of a portion of such Security.
(c) The shares of Common Stock issuable upon conversion of this Security
shall, to the extent required, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR PURSUANT TO A VALID EXEMPTION THEREFROM. THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE
<PAGE> 19
-16-
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S (SECTION 230.901 THROUGH SECTION 230.905, AND
PRELIMINARY NOTES). HEDGING TRANSACTIONS INVOLVING THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE ACT.
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE CONDITIONS SPECIFIED IN A SECURITIES PURCHASE
AGREEMENT, DATED AS OF NOVEMBER 6, 1998, BY AND AMONG THE
COMPANY, ELAN INTERNATIONAL SERVICES, LTD. AND ELAN CORPORATION,
PLC, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER
OF SUCH SHARES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH
RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE
FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE.
(d) To convert this Security a Holder must (i) complete and duly sign a
conversion notice in the form attached hereto as Annex B (the "Conversion
Notice") and deliver such notice to the Company and (ii) surrender this Security
to the Company. The date on which a Holder of Securities satisfies all the
foregoing requirements is the conversion date (the "Conversion Date"). Not more
than three Business Days after the Conversion Date, the Company shall deliver to
the Holder a certificate for the number of full shares of Common Stock issuable
upon such conversion and cash in lieu of any fractional share. The Person in
whose name the certificate is registered shall be treated as a stockholder of
record on and after the Conversion Date; provided, however, that no surrender of
a Security on any date when the stock transfer books of the Company shall be
closed shall be effective to constitute the Person or Persons entitled to
receive the shares of Common Stock upon such conversion as the record holder or
holders of such shares of Common Stock on such date, but such surrender shall be
effective to constitute the Person or Persons entitled to receive such shares of
Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; such conversion shall be at the Conversion Price in effect on the date
that such Security shall have been surrendered for conversion, as if the stock
transfer books of the Company had not been closed. Upon conversion of a
Security, such Person shall no
<PAGE> 20
-17-
longer be a Holder of such Security. Any Security for which a Conversion Notice
is delivered on any Business Day shall be deemed to be converted simultaneously
with all other Securities for which a Conversion Notice is delivered on such
Business Day, subject to the surrender of such Securities to the Company
pursuant to this paragraph 6.
(e) if a Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon such conversion shall be based on
the sum of (x) the aggregate Issue Price plus (y) the aggregate accrued Original
Issue Discount, in each case, of the Securities converted; provided that if,
prior to the applicable Conversion Date, the Securities have been converted to a
semiannual coupon note following the occurrence of a Tax Event, such conversion
shall be based on the sum of (x) the aggregate Restated Principal Amount plus
(y) the aggregate interest accrued and unpaid from, and including, the date of
such conversion to, but excluding, such Conversion Date. Upon surrender of a
Security that is converted in part, the Company shall execute and deliver to the
Holder a new Security in a denomination equal in Principal Amount to the
unconverted portion of the Security surrendered. If the last day on which a
Security may be converted is not a Business Day, such Security may be
surrendered to the Company on the next succeeding Business Day.
(f) The Company shall not issue a fractional share of Common Stock upon
conversion of a Security. Instead, the Company shall deliver cash in an amount
equal to the current market value of the fractional share. The current market
value of a fraction of a share shall be determined to the nearest 1/10,000th of
a share by multiplying the average of the Closing Prices of the Common Stock for
the 20 consecutive trading days immediately prior to the applicable Conversion
Date by such fraction and rounding to the nearest whole cent, with one-half cent
being rounded upward.
(g) If a Holder converts a Security, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon such conversion.
(h) The Company shall reserve out of its authorized but unissued Common
Stock a sufficient number of shares of Common Stock to permit the conversion of
the Securities. All shares of Common Stock delivered upon conversion of the
Securities shall be newly issued shares or treasury shares, shall be validly
issued, nonassessable and fully paid, shall not be issued in violation of any
preemptive or similar rights and shall be
<PAGE> 21
-18-
free of any liens, encumbrances or restrictions on transfer imposed by the
Company other than those imposed by the Securities Act and applicable state
securities or "Blue Sky" laws. The Company shall cause all such reserved shares
of Common Stock to be listed on the Nasdaq National Market or any other United
States securities exchange or market where the Common Stock is principally
traded.
(i) The Conversion Price shall be adjusted from time to time by the
Company as follows:
(i) In case the Company shall, at any time or from time to time
on or after the Issue Date, (A) pay a dividend or make a distribution on
its Common Stock in shares of Common Stock, (B) subdivide its
outstanding Common Stock into a greater number of shares, (B) combine
its outstanding Common Stock into a smaller number of shares or (D)
issue by reclassification of its Common Stock any other shares of its
Capital Stock, then, in each such case, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the Holder of
any Security thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock or other Capital Stock of
the Company which such Holder would have owned or have been entitled to
receive after the happening of any of the events described above had
such Security been converted immediately prior to the happening of such
event. If any dividend or distribution of the type described in clause
(A) above is not so paid or made, the Conversion Price shall again be
adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. An adjustment made
pursuant to this paragraph 6(i)(i) shall become effective immediately
after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case
of subdivision, combination or reclassification. If, after an adjustment
made pursuant to this paragraph 6(i)(i), the Holder of any Security
thereafter converted shall become entitled to receive shares of two or
more classes of Capital Stock of the Company, the board of directors of
the Company shall determine the allocation of the adjusted Conversion
Price between or among such classes of Capital Stock, which
determination shall be final and binding on all Holders. After such
allocation, the Conversion Price of each class of Capital Stock of the
Company shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this paragraph 6(i).
<PAGE> 22
-19-
(ii) If, at any time or from time to time on or after the Issue
Date, the Company issues or sells any Common Stock for consideration in
an amount per share less than the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and including
the second trading day immediately prior to such issuance or sale, the
Conversion Price shall be adjusted in accordance with the following
formula:
P
-
E' = E x O + M
-----
A
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common stock outstanding
immediately prior to the issuance or sale of such
additional shares of Common Stock.
P = the aggregate consideration received for the issuance
or sale of such additional shares of Common Stock.
M = the average Closing Prices of the Common Stock for the
20 consecutive trading days ending on and including the
second trading day immediately prior to the date of the
issuance or sale of such additional shares of Common
Stock.
A = the number of shares of Common Stock outstanding
immediately after the issuance or sale of such
additional shares of Common Stock.
The adjustments shall be made successively whenever any such
issuance or sale is made, and shall become effective immediately after
such issuance or sale.
This paragraph 6(i)(ii) does not apply to:
(A) the issuance of the License Shares pursuant to and
in accordance with the License Agreement and the Purchase
Agreement;
<PAGE> 23
-20-
(B) the conversion of the Securities or the conversion,
exercise or exchange of any other securities convertible into, or
exercisable or exchangeable for, Common Stock;
(C) the issuance of Common Stock pursuant to a valid and
binding written agreement with any Person, the terms of which
provide that such Common Stock is to be issued on a date after
the execution of such agreement and upon the occurrence of
specified events (other than solely the passage of time);
(D) the issuance Common Stock to the shareholders of any
Person which mergers into the Company or any Subsidiary of the
Company in proportion to such shareholders' ownership of the
securities of such Person, upon such merger; or
(E) Common Stock issued in a bona fide public offering
pursuant to a firm commitment or "best efforts" underwriting.
(iii) If, at any time or from time to time on or after the Issue
Date, the Company shall issue rights, options or warrants to all holders
of its Common Stock entitling them (for a period expiring within 60 days
after the record date mentioned below) to subscribe for or purchase
shares of Common Stock at a Price per share less than the greater of (x)
the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second trading day
immediately prior to the record date and (y) the then current Conversion
Price, the Conversion Price shall be adjusted in accordance with the
following formula:
N x P
-----
E' = E x O + M
-----
O + N
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common Stock outstanding on
the record date fixed for determination of
<PAGE> 24
-21-
stockholders entitled to participate in such issuance.
N = the number of additional shares of Common Stock
offered pursuant to such issuance.
P = the offering price per share of such additional shares
of Common Stock.
M = the greater of (x) the average of the Closing Prices
of the Common Stock for the 20 consecutive trading days
ending on and including the second trading day
immediately prior to the record date and (y) the then
current Conversion Price.
The adjustment shall be made successively whenever any such
issuance is made and shall become effective immediately after the record
date fixed for the determination of stockholders entitled to participate
in such issuance.
To the extent that shares of Common Stock are not delivered after
the expiration of such rights, options or warrants, the Conversion Price
shall be readjusted to the Conversion Price which would then be in
effect had the adjustments made upon the issuance of such rights,
options or warrants been made on the basis of delivery of only the
number of shares of Common Stock actually delivered. If such rights,
options or warrants are not so issued, the Conversion Price shall again
be adjusted to be the Conversion Price which would then be in effect if
the record date for the determination of stockholders entitled to
participate in such distribution had not been fixed. In determining
whether any rights, options or warrants entitle the Holders to subscribe
for or purchase shares of Common Stock at a price per share less than
the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second trading day
immediately preceding the record date, and in determining the aggregate
offering price of such shares of Common Stock, there shall be taken into
account any consideration received by the Company for such rights,
options or warrants, the value of such consideration, if other than
cash, to be determined in good faith by the board of directors of the
Company (irrespective of the accounting treatment thereof), which
determination shall be final and binding on all Holders. Such
determination shall be described in a board resolution. Notwithstanding
the foregoing provisions of this paragraph 6(i)(iii), an
<PAGE> 25
-22-
event which would otherwise give rise to an adjustment under this
paragraph 6(i)(iii) shall not give rise to such an adjustment if the
Company includes the Holders in such distribution on a pro rata basis as
if each such Holder held the number of shares of Common Stock into which
such Holder's Securities are convertible on the record date fixed for
determination of the stockholders entitled to participate in such
distribution and with the same notice as is provided to such
stockholders.
This paragraph 6(i)(iii) does not apply to transactions described
in paragraph 6(i)(iv).
(iv) If, at any time or from time to time on or after the Issue
Date, the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock any class of Capital Stock of the Company
(other than Common Stock) or evidences of its indebtedness or assets
(excluding cash dividends or other cash distributions from current or
retained earnings other than any Extraordinary Cash Dividend) or rights,
options or warrants to subscribe for or purchase any of the foregoing,
the Conversion Price shall be adjusted in accordance with the following
formula:
E' = E x M - F
-----
M
where
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
M = the greater of (x) the average of the Closing Prices
of the Common Stock for the 20 consecutive trading days
ending on and including the second trading day
immediately prior to the record date mentioned below and
(y) the then current Conversion Price.
F = the fair market value on the record date fixed for
determination of the stockholders entitled to
participate in such distribution of the assets,
securities, rights, options or warrants applicable to
one share of Common stock. The board of directors shall
determine such fair market value in good faith
(irrespective of the
<PAGE> 26
-23-
accounting treatment thereof), which determination shall
be final and binding on the Holders. Such determination
shall be described in a board resolution.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the
record date fixed for the determination of stockholders entitled to
receive such distribution. To the extent that shares of Common Stock are
not so delivered after the expiration of such rights, options, or
warrants, the Conversion Price shall be readjusted to the Conversion
Price which would then be in effect had the adjustment made upon the
issuance of such rights, options or warrants been made on the basis of
the delivery of only the number of shares of Common Stock actually
delivered. Notwithstanding the foregoing provisions of this paragraph
6(i)(iv), an event which would otherwise give rise to an adjustment
under this paragraph 6(i)(iv) shall not give rise to such an adjustment
if the Company includes the Holders in such distribution on a pro rata
basis as if each such Holder held the number of shares of Common Stock
into which such Holder's Securities are convertible on the record date
fixed for determination of the stockholders entitled to participate in
such distribution and with the same notice as is provided to such
stockholders.
This paragraph 6(i)(iv) does not apply to any transaction
described in paragraph 6(i)(iii) hereof.
(v) If, at any time or from time to time on or after the Issue
Date, the Company shall (x) enter into any valid and binding written
agreement with any Person to issue or sell Common Stock on a date after
the execution of such agreement and upon the occurrence of specified
events (other than solely the passage of time) or (y) issue or sell any
securities convertible into, or exercisable or exchangeable for, Common
Stock, in each case, for consideration per share of Common Stock less
than the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second trading day
immediately prior to, in the case of clause (x), the date of execution
of such agreement, and, in the case of clause (y), the date of such
issuance or sale, the Conversion Price shall be adjusted in accordance
with the following formula:
<PAGE> 27
-24-
P
-
E' = E x O + M
-----
O + D
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common Stock outstanding
immediately prior to, in the case of clause (x) above,
the date of execution of such agreement, and, in the
case of clause (y) above, the issuance or sale of such
securities.
P = (a) in the case of clause (x) above, the minimum
aggregate amount of consideration payable to the Company
upon the issuance or sale of such Common Stock
(including the minimum aggregate amount of cash payments
to be made by the Company to the other Person or Persons
party to such agreement in lieu of which such Common
Stock may be issued) and (b) in the case of clause (y)
above, the aggregate consideration received for the
issuance or sale of such securities plus the minimum
aggregate amount of additional consideration, other than
the surrender of such securities, payable to the Company
upon conversion, exercise or exchange of such
securities.
M = the Closing Prices of the Common stock for the 20
consecutive trading days ending on and including the
second trading day immediately prior to, in the case of
clause (x) above, the date of execution of such
agreement, and, in the case of clause (y) above, the
date of such issuance or sale.
D = the maximum stated number of shares deliverable
pursuant to such agreement or upon conversion, exercise
or exchange of such securities, as the case may be.
The adjustment shall be made successively whenever any such
agreement is executed or such issuance or sale is made, and shall become
effective immediately after the execution of such agreement or such
issuance or sale.
<PAGE> 28
-25-
If all of the Common Stock deliverable pursuant to any such
agreement or upon conversion, exercise or exchange of such securities
have not been issued upon the expiration or termination of such
agreement or when such securities are no longer outstanding, as the case
may be, then the Conversion Price shall be readjusted to the Conversion
Price which would then be in effect had the adjustment made upon the
execution of such agreement or the issuance or sale of such securities
been made on the basis of the actual number of shares of Common Stock
issued pursuant to such agreement or upon conversion, exercise or
exchange of such securities.
This paragraph 6(i)(v) does not apply to:
(A) any stock options issued to employees and
consultants (other than officers or directors) of the Company
pursuant to any employee stock option or purchase plan or
program approved by the board of directors of the Company;
(B) the issuance of the Securities; or
(C) any transaction described in paragraph 6 (i) (iii)
or (iv).
In the event of any change in the number of shares of Common
Stock deliverable, or in the consideration payable to the Company,
pursuant to any such agreement or upon the conversion, exercise or
exchange of such securities, including, but not limited to, a change
resulting from any anti-dilution provisions thereof, the Conversion
Price shall, on the date of such change, be recomputed to reflect such
change.
(vi) For purposes of any computation respecting consideration
received pursuant to paragraph 6(i)(ii) and (v) hereof, the following
shall apply:
(A) in the case of the issuance or sale of shares of
Common Stock for cash, the consideration shall be the amount of
such cash; provided that in no event shall any deduction be made
for any commissions, discounts or other expenses incurred by the
Company in connection therewith;
<PAGE> 29
-26-
(B) in the case of the issuance or sale of shares of
Common Stock for a consideration in whole or in part other than
cash, the consideration other than cash shall be deemed to be
the fair market value thereof as determined in good faith by the
board of directors of the Company (irrespective of the
accounting treatment thereof), which determination shall be
final and binding on the Holders. Such determination shall be
described in a board resolution; and
(C) in the case of any agreement referred to in clause
(x) of paragraph 6(i)(v) hereof or the issuance or sale of
securities referred to in clause (y) of paragraph 6(i)(v)
hereof, the consideration, if any, to be received by the Company
for the issuance or sale of Common Stock pursuant to such
agreement or upon the conversion, exercise or exchange of such
securities shall determined in the same manner as provided in
clauses (A) and (B) of this paragraph 6(i)(vi).
(vii) No adjustment in the Conversion Price need be made unless
the adjustment would require a decrease of at least 1% in the Conversion
Price then in effect; provided that any adjustment that would otherwise
be required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this paragraph 6(i)
shall be made to the nearest cent or to the nearest 1/10,000th of a
share, as the case may be.
(viii) No adjustment need be made for rights to purchase Common
Stock pursuant to a Company plan for reinvestment of dividends or
interest. No adjustment need be made for a change in the par value or no
par value of the Common Stock. To the extent that the Securities become
convertible into cash, no adjustment need be made thereafter as to the
amount of cash into which such Securities are convertible. Neither
Original Issue Discount nor interest will accrue on cash.
(ix) Whenever the Conversion Price is adjusted, the Company shall
promptly mail to each Holder, by first-class mail, postage prepaid, at
its address appearing on the register maintained by the Company, a
notice of the adjustment.
(x) In case:
<PAGE> 30
-27-
(A) the Company shall take any action that would require
an adjustment in the Conversion Price pursuant to paragraph
6(i)(i), (ii), (iii), (iv) or (v) hereof;
(B) of any event described in paragraph 6(i)(xi) hereof;
or
(C) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
the Company shall cause to be mailed to each Holder, by first-class
mail, postage prepaid, at its address appearing on the register
maintained by the Company, as promptly as possible but in any event at
least 15 days prior to the applicable date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the
purpose of any dividend or distribution or (y) the date on which any
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective or occur.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of such dividend, distribution, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding-up.
(xi) In the event of: (a) any reclassification or change of
outstanding shares of Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), (b) any consolidation or
amalgamation with, or merger with or into, another Person as a result of
which holders of Common Stock shall be entitled to receive cash,
securities or other property with respect to or in exchange for such
Common Stock or (c) any sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all of the assets of the
Company (in one transaction or series of related transactions) to any
other Person as a result of which holders of Common Stock shall be
entitled to receive cash, securities or other property with respect to
or in exchange for such Common Stock, then the Company or the Person (if
other than the Company) formed by such consolidation or amalgamation or
into which the Company is merged or to which the properties and assets
are sold, assigned, transferred, leased, conveyed or otherwise disposed
of, as the case may be, shall expressly agree in writing, in form and
substance satisfactory to a majority of Holders of Securities
<PAGE> 31
-28-
then outstanding (excluding Securities then held by the Company or any
of its Affiliates), that each Security shall be convertible into the
kind and amount of securities, cash or other assets which the Holder of
such Security would have owned immediately after such reclassification,
change, consolidation, amalgamation, merger, sale, transfer, assignment,
lease, conveyance or other disposition if such Holder had exercised such
Security immediately before the record date or effective date, as the
case may be, of the transaction. Such written agreement shall provide
for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph 6(i).
The Company shall cause notice of the execution of such written
agreement to be mailed to each Holder, by first-class mail, postage
prepaid, at its address appearing on the register maintained by the
Company, within 20 days after execution thereof. Failure to deliver such
notice shall not affect the legality or validity of such agreement.
The above provisions of this paragraph 7(i)(xi) shall similarly
apply to successive reclassifications, changes, consolidations,
amalgamations, mergers, sales, transfers, assignments, leases,
conveyances or other dispositions.
If this paragraph 6(i)(ix) applies to any event or occurrence,
paragraph 6(i)(i), (ii), (iii), (iv) and (v) hereof shall not apply.
(xii) Rights or warrants distributed by the Company to all
holders of Common Stock entitling the holders thereof to subscribe for
or purchase shares of the Company's Capital Stock (either initially or
under certain circumstances), which rights or warrants, until the
occurrence of a specified event or events (each, a "Trigger Event"): (i)
are deemed to be transferred with such shares of Common Stock, (ii) are
not exercisable and (iii) are also issued in respect of future issuances
of Common Stock, shall be deemed not to have been distributed for
purposes of this paragraph 6(i) (and no adjustment to the Conversion
Price under this paragraph 6(i) will be required) until the occurrence
of the earliest Trigger Event, whereupon such rights and warrants shall
be deemed to have been distributed and an appropriate adjustment (if any
is required) to the Conversion Price shall be made under this paragraph
6(i). If any such right or warrant, including
<PAGE> 32
-29-
any such existing rights or warrants distributed prior to the Issue
Date, are subject to events, upon the occurrence of which such rights or
warrants become exercisable to purchase different securities, evidences
of indebtedness or other assets, then the date of the occurrence of any
and each such event shall be deemed to be the date of distribution with
respect to new rights or warrants with such rights (and a termination or
expiration of the existing rights or warrants without exercise by any of
the holders thereof). In addition, in the event of any distribution (or
deemed distribution) of rights or warrants, or any Trigger Event or
other event (of the type described in the preceding sentence) with
respect thereto that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price
under this paragraph 6(i) was made, (A) in the case of any such rights
or warrants which shall have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall be
readjusted upon such final redemption or repurchase to give effect to
such distribution or Trigger Event, as the case may be, as though it
were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with
respect to such rights or warrants (assuming such holder had retained
such rights or warrants), made to all holders of Common Stock as of the
date of such redemption or repurchase and (B) in the case of such rights
or warrants which shall have expired or been terminated without exercise
by any holders thereof, the Conversion Price shall be readjusted as if
such rights and warrants had not been issued. Notwithstanding the
foregoing, no Holder shall be entitled to any adjustment in the
Conversion Price of the Notes held by such Holder pursuant to this
paragraph 6(i) if the applicable Trigger Event shall have been caused by
the acquisition of securities of the Company by such Holder or any of
its Affiliates.
(j) After an adjustment to the Conversion Price under paragraph 6(i),
(ii), (iii), (iv) or (v) hereof, any subsequent event requiring an adjustment
shall cause an adjustment to the Conversion Price as so adjusted.
(k) No adjustment shall be made pursuant to paragraph 6(i)(i), (ii),
(iii), (iv) or (v) hereof if, as a result thereof, the Conversion Price would be
increased.
<PAGE> 33
-30-
7. COVENANTS
(a) Payment of Securities. The Company shall promptly make all payments in
respect of the Securities on the dates and in the manner provided herein.
The Company shall, to the extent permitted by law, pay interest on overdue
amounts at the rate set forth in paragraph 1 of the Securities, which interest
on overdue amounts (to the extent that the payment of such interest shall be
legally enforceable) shall accrue from the date such amounts became overdue.
(b) SEC Reports. The Company shall deliver to each Holder, by first-class
mail, postage prepaid, at its address appearing on the register maintained by
the Company, at the time the Company distributes them to the holders of its
Common Stock, copies of its annual reports to shareholders and its proxy
statements. In addition, the Company shall deliver to Elan, by first-class mail,
postage prepaid, at its address appearing on the register maintained by the
Company, within 30 days after the Company files them with the SEC, copies of all
other information, documents and reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act (or any successor provision thereof). In the event that the Company
is at any time no longer subject to the reporting requirements of the Exchange
Act (or any such successor provision), it shall deliver to each Holder, by
first-class mail, postage prepaid, at its address appearing on the register
maintained by the Company, reports containing substantially the same information
as would have been required to be filed with the SEC had the Company continued
to have been subject to such reporting requirements, including, with respect to
annual information only, a report thereon by the Company's certified independent
public accountants as such would be required in such reports to the SEC and, in
each case, together with a management's discussion and analysis of financial
condition and results of operations as such would be so required. In such event,
such reports shall be so delivered at the time the Company would have been
required to provide such reports had it continued to have been subject to such
reporting requirements.
(c) Compliance Certificates; Notice of defaults.
(i) The Company shall deliver to each Holder, within 90 days after
the end of each fiscal year, an Officers'
<PAGE> 34
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Certificate stating that a review of the activities of the Company and its
Subsidiaries during such fiscal year has been made under the supervision
of the signing Officers with a view to determining whether the Company has
kept, observed, performed and fulfilled its obligations under the
Securities, and further stating, as to each such Officer signing such
certificate, that to the best of his or her knowledge, the Company has
kept, observed, performed and fulfilled each and every covenant contained
in the Securities and is not in default in the performance or observance
of any of the terms, provisions and conditions contained in the Securities
(or, if a Default or Event of Default shall have occurred, describing all
such Defaults or Events of Default of which he or she may have knowledge
and what action the Company is taking or proposes to take with respect
thereto).
(ii) The Company shall, so long as any of the Securities are
outstanding, deliver to each Holder, forthwith upon any officer becoming
aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
(d) Further Instruments and Acts. Upon request of the Holders of at least
a majority in the aggregate Principal Amount of the outstanding Securities
(excluding Securities at the time owed by the Company and its Affiliates), the
Company will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
provisions of the Securities.
(e) Taxes. The Company shall, and shall cause each of its Subsidiaries to,
pay prior to delinquency all material taxes, assessments and governmental
levies, except as contested in good faith and by appropriate proceedings.
(f) Legal Existence. Subject to paragraph 8 hereof, the Company shall do
or cause to be done all things necessary to preserve and keep in full force and
effect its legal existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with their respective organizational
documents (as the same may be amended from time to time) and the rights (charter
and statutory), licenses and franchises of the Company and its Subsidiaries;
provided that the Company shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any of
its Subsidiaries if the board of directors of the Com-
<PAGE> 35
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pany shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and its Subsidiaries, taken as a whole.
(g) Withholding Taxes. All transfers of Securities by the Holders thereof
and all payments made by the Company under or with respect to the Securities
(including the issuance of securities upon the conversion of the Securities)
shall be made free and clear of and without withholding or deduction for or on
account of any present or future Taxes, unless the Company is required to
withhold or deduct Taxes by law or by the interpretation or administration
thereof. If the Company is required by law or by the interpretation or
administration thereof to withhold or deduct any amount of Taxes in connection
with the Securities, such amount shall be withheld and deducted by the Company
without alteration of or increase in its obligations under the Securities;
provided, however, that, if the Holder thereof has delivered to the Company a
complete, manually-signed copy of Internal Revenue Service Form 1001 (or any
successor form) or Internal Revenue Service Form 4224 (or any successor form)
properly certifying to such Holder's entitlement to a complete exemption from
U.S. withholding Tax with respect to such payment under applicable United States
Treasury Regulations, such payment shall be made free and clear of and without
withholding or deduction for or on account of any Taxes. In connection with any
payment made by the Company under any Security which is made in whole or in part
through the delivery of shares of Common Stock of the Company (including upon
the conversion of the Securities), the amount required to be withheld or
deducted shall first be withheld or deducted from the amount of cash (up to the
total amount thereof) which would otherwise be paid at such time. Any additional
amount required to be withheld or deducted, unless otherwise agreed by the
Company and the Holder of a Security, shall be withheld and deducted by reducing
the number of shares of Common Stock to be delivered by that number of shares of
Common Stock equal to the remaining amount required to be withheld or deducted
divided by the Conversion Price in effect on the date of such payment.
(h) Line of Business. The Company and its Subsidiaries will not engage in
any businesses other than the business of researching, developing, marketing,
selling, manufacturing, distributing or licensing pharmaceutical, medical,
biologic, genetic or related products and services and financing activities
related solely thereto, including the businesses in which the Company and its
Subsidiaries are engaged on the Issue Date.
<PAGE> 36
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(i) Use of Proceeds. The Company will use the gross proceeds from the
issuance of any Additional Notes in accordance with Section 1(b) of the Purchase
Agreement and otherwise in accordance with the Purchase Request related thereto.
(j) Maintenance of Properties; Insurance; Books and Records; Compliance
with Law.
(i) The Company shall, and shall cause each of its Subsidiaries to,
at all times cause all material properties used or useful in the conduct
of its business to be maintained and kept in good condition, repair and
working order (reasonable wear and tear excepted) and supplied with all
necessary equipment, and shall cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereto; provided
that, subject to the other provisions of the Securities, nothing in this
paragraph 7(j)(i) shall prevent the Company or any of its Subsidiaries
from selling, abandoning or otherwise disposing of any property (including
any lease of property) if in the judgment of the Company the same is no
longer useful in the business of the Company or such Subsidiary, as the
case may be.
(ii) The Company shall maintain, and shall cause to be maintained
for each of its Subsidiaries, insurance covering such risks as are usually
and customarily insured against by corporations similarly situated, in
such amounts as shall be customary for corporations similarly situated and
with such deductibles and by such methods as shall be customary and
reasonably consistent with past practice.
(iii) The Company shall, and shall cause each of its Subsidiaries
to, keep proper books of record and account, in which full and correct
entries shall be made of all financial transactions and the assets and
business of the Company and each Subsidiary of the Company, in accordance
with U.S. generally accepted accounting principles consistently applied to
the Company and its Subsidiaries, taken as a whole.
(iv) The Company shall, and shall cause each of its Subsidiaries to,
comply with all statutes, laws, ordinances or government rules and
regulations to which they are subject, non-compliance with which would
materially adversely affect the business, prospects, earnings, prop-
<PAGE> 37
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erties, assets or financial condition of the Company and its Subsidiaries,
taken as a whole.
8. SUCCESSOR CORPORATION
(a) The Company shall not consolidate with, amalgamate with, merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets (as an entirety or substantially as an entirety
in one transaction or a series of related transactions), to any Person unless:
(i)(x) the Company shall be the continuing Person, or (y) the Person
(if other than the Company) formed by such consolidation or amalgamation
or into which the Company is merged or to which the properties and assets
of the Company are sold, assigned, transferred, leased, conveyed or
otherwise disposed of (in any case, the "Successor Company") shall be a
corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia and the Successor Company
shall expressly affirm, in writing, the due and punctual performance of
all of the terms, covenants, agreements and conditions of the Securities
to be performed or observed by the Company, and such obligations shall
remain in full force and effect; and
(i) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing.
(b) In connection with any consolidation, amalgamation, merger or sale,
assignment, transfer, lease, conveyance or other disposition of assets
contemplated by this paragraph 8, prior to the consummation of such transaction
or transactions the Company shall deliver, or cause to be delivered, to each
Holder, by first-class mail, postage prepaid, at its address appearing in the
register maintained by the Company, an Opinion of Counsel stating that (i) such
consolidation, amalgamation, merger or sale, assignment, transfer, lease,
conveyance or other disposition of assets complies with this paragraph 8, (ii)
all conditions precedent herein provided for relating to such transaction or
transactions have been complied with and (iii) the affirmation provided for in
this paragraph 8 has been duly authorized, executed and delivered by the
Successor Company and the Securities are valid and legally binding obligations
of the Successor Company enforceable against it in accordance with their terms
(subject to bankruptcy, insolvency, re-
<PAGE> 38
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organization and similar laws affecting the rights and remedies of creditors
generally and general equitable principles).
(c) For purposes of paragraph 8(a) and (b) hereof, the transfer (by sale,
assignment, lease, conveyance or other disposition, in a single transaction or
series of related transactions) of all or substantially all of the properties or
assets of one or more Subsidiaries of the Company, the Capital Stock of which
constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
(d) Upon any consolidation, amalgamation or merger, or any sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the assets of the Company in accordance with this paragraph
8, the Successor Company shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Securities with the
same effect as if such Successor Company had been named as the Company in the
Securities, and thereafter the predecessor corporation shall be relieved of all
obligations and covenants under the Securities.
9. DEFAULTS AND REMEDIES
(a) An "Event of Default" occurs if:
(i) after exercise of its option pursuant to paragraph 12 hereof
following a Tax Event, the Company defaults in the payment of interest
upon any Security or delivery of any Tax Event Option related thereto,
when such interest becomes due and payable, and such default continues for
a period of 30 days;
(ii) the Company defaults in the payment of the Principal Amount,
Issue Price, accrued Original Issue Discount, Redemption Price, Purchase
Price, Company Change of Control Purchase Price or Elan Change of Control
Purchase Price on any Security when the same becomes due and payable at
its Stated Maturity, upon redemption, upon declaration, when due for
purchase by the Company or otherwise;
(iii) the Company defaults in the observance or performance of any
agreement, covenant, term or condition contained in any Security (other
than those referred to in clause (i) and (ii) above) and such failure
continues for 30 days after receipt by the Company of notice thereof
<PAGE> 39
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(except in the case of a failure or default with respect to paragraph 8
hereof, which shall constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(iv) the Company defaults in any payment of principal of or
interest on any other obligation for money borrowed or the Company fails
to perform or observe any other agreement, covenant, term or condition
contained in any agreement under which any such obligation is created and
the effect of such default or failure is to cause, or the holder or
holders of such obligation (or a trustee on behalf of such holder or
holders), as a consequence of such default or failure shall take action to
cause, such obligation to become due prior to any stated maturity thereof;
provided that the aggregate amount of all obligations as to which such
acceleration shall occur is equal to or greater than $4.0 million;
(v) any final judgment or judgments which can no longer be
appealed for the payment of money in excess of $4.0 million (in excess of
amounts covered by insurance and as to which the insurer has acknowledged
coverage) shall be rendered against the Company or any Subsidiary thereof,
and shall not be discharged for any period of 60 consecutive days during
which a stay of enforcement shall not be in effect;
(vi) the Company or any Subsidiary thereof pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in
an involuntary case,
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or
(E) generally is not paying its debts as they become due;
(vii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
<PAGE> 40
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(A) is for relief against either of the Company or any
Subsidiary thereof in an involuntary case,
(B) appoints a Custodian of either of the Company or any
Subsidiary thereof or for all or substantially all of the property
of either of the Company or any Subsidiary thereof, or
(C) orders the liquidation of either of the Company or any
Subsidiary thereof,
and the order or decree remains unstayed and in effect for 60 days; or
(viii) the Company fails to deliver shares of Common Stock (or cash
in lieu of fractional shares) when such Common Stock (or cash in lieu of
fractional shares) is required to be delivered, upon conversion of a
Security and such failure is not remedied for a period of 10 days.
(b) If an Event of Default (other than an Event of Default specified in
paragraph 9(a)(vi) or (vii) hereof occurs and is continuing, the Holders of at
least 25% in aggregate Principal Amount of the Securities at the time
outstanding (excluding Securities at the time owned by the Company and its
Affiliates) by notice to the Company, may declare the Issue Price and accrued
Original Issue Discount (or, if the Securities have been converted to a
semiannual coupon note following a Tax Event, the Restated Principal Amount and
accrued and unpaid interest) through the date of declaration on all the
Securities to be immediately due and payable. Upon such a declaration, such
Issue Price and accrued Original Issue Discount (or, if the Securities have been
converted to a semiannual coupon note following a Tax Event, the Restated
Principal Amount and accrued and unpaid interest) shall become and be due and
payable immediately. If an Event of Default specified in paragraph 9(a)(vi) or
(vii) hereof occurs and is continuing, the Issue Price and accrued Original
Issue Discount (or, if the Securities have been converted to a semiannual coupon
note following a Tax Event, the Restated Principal Amount and accrued and unpaid
interest) on all the Securities shall become and be immediately due and payable
without any declaration or other act on the part of any Holders. The Holders of
a majority in aggregate Principal Amount of the Securities at the time
outstanding (excluding Securities at the time owned by the Company (and its
Affiliates), by notice to the Company (and without notice to any other Holder),
may rescind an acceleration and its consequences if the rescission would not
conflict with any
<PAGE> 41
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judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of the Issue Price and accrued Original Issue Discount
(or accrued and unpaid interest) that have become due solely as a result of
acceleration. No such rescission shall affect any subsequent or other Default or
Event of Default or impair any consequent right.
(c) If an Event of Default occurs and is continuing, any Holder may pursue
any available remedy to collect the payment of the Issue Price and accrued
Original Issue Discount (or, if the Securities have been converted to a
semiannual coupon note following a Tax Event, the Restated Principal Amount and
accrued and unpaid interest) on the Securities or to enforce the performance of
any provision of the Securities.
A delay or omission by any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of, or acquiescence in, the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
(d) The Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding (excluding Securities at the time owned by
the Company and its Affiliates), by notice to the Company (and without notice to
any other Holder), may waive an existing Default or Event of Default and its
consequences except (i) an Event of Default described in paragraph 9(a)(i), (ii)
or (viii) hereof or (ii) a Default in respect of a provision that under
paragraph 11 hereof cannot be amended without the consent of each Holder
affected. When a Default or Event of Default is waived, it is deemed cured, but
no such waiver shall extend to any subsequent or other Default or Event of
Default or impair any consequent right.
(e) Notwithstanding any other provision of the Securities, the right of
any Holder to receive payment of the Principal Amount, Issue Price, accrued
Original Issue Discount, Redemption Price, Purchase Price, Company Change of
Control Purchase Price, Elan Change of Control Purchase Price or interest, if
any, in respect of the Securities held by such Holder, on or after the
respective due dates expressed in the Securities and to convert the Securities
in accordance with paragraph 6 hereof, or to bring suit for the enforcement of
any such payment on or after such respective dates or the right to convert the
Securities, shall not be impaired or affected adversely without the consent of
each such Holder.
<PAGE> 42
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(f) The Company covenants (to the extent it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Company from paying all or any portion of the Principal
Amount, Issue Price plus accrued Original Issue Discount, Redemption Price,
Purchase Price, Company Change of Control Purchase Price or Elan Change of
Control Purchase Price, in each case, in respect of Securities, or any interest
on such amounts, as contemplated herein, or which may affect the covenants or
the performance of the Securities; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Holders, but will suffer and permit the execution of
every power as though no such law had been enacted.
10. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE
(a) The Company shall cause to be kept at its offices a register in which
the Company shall provide for the registration of Securities and of transfers of
Securities. Upon surrender for registration of transfer of any Security, the
Company shall execute, in the name of the designated transferee or transferees,
one or more Securities of a like aggregate Principal Amount and bearing such
restrictive legends as may be required by the terms of the Securities.
At the option of the Holder, and subject to the other provisions of the
Securities, Securities may be exchanged for other Securities of a like aggregate
Principal Amount, upon surrender of the Securities to be exchanged to the
Company. Whenever any Securities are so surrendered for exchange, and subject to
the other provisions of the Securities, the Company shall execute and deliver
the Securities which the Holder making the exchange is entitled to receive.
Every Security presented for registration of transfer or exchange shall be
accompanied by the written instrument of transfer in the form attached hereto as
Annex C, duly executed by the Holder thereof.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and subject to the same provisions as the Securities surrendered upon such
registration of transfer or exchange.
<PAGE> 43
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Subject to paragraph 7(g) hereof and notwithstanding any other provision of
this Section 10(a), no transfer of any Security shall be permitted, and no
registration of transfer shall be effected unless, prior to the time of such
transfer or registration of transfer, the Holder has made arrangements
reasonably satisfactory to the Company for payment or reimbursement of any and
all Taxes which would, in the absence of payment by the transferor, be required
to be paid by the Company as a result of such transfer. No service charge shall
be made for any registration of transfer or exchange. The Company acknowledges
that Treasury Regulation Section 1.441-2(b)(3) (effective January 1, 1999) is
not applicable to any Security issued prior to January 1, 1999.
In the event of a redemption of the Securities, the Company will not be
required (i) to register the transfer of or exchange Securities for a period of
5 days immediately preceding the date notice of any redemption is given pursuant
to paragraph 3(e) hereof or (ii) to register the transfer of or exchange any
Security, or portion thereof, called for redemption.
(b) Except as permitted by this paragraph (b), each Security (and all
Securities issued in exchange therefor or substitution thereof) shall, so long
as appropriate, bear a legend (the "Legend") to substantially the following
effect (each, a "Transferred Restricted Security"):
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO A VALID EXEMPTION
THEREFROM.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE
CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF
NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN INTERNATIONAL
SERVICES, LTD. AND ELAN CORPORATION, PLC, AND THE COMPANY RESERVES THE
RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITY UNTIL SUCH CONDITIONS
HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH
CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF
WITHOUT CHARGE.
<PAGE> 44
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At such time as any Transfer Restricted Security may be freely transferred
without registration under the Securities Act and without being subject to
transfer restrictions pursuant to the Securities Act, the Company shall permit
the Holder of such Transfer Restricted Security to exchange such Transfer
Restricted Security for a new Security which does not bear the applicable
portion of the Legend upon receipt of certification from such Holder
substantially in the form attached hereto as Annex D and, at the request of the
Company, upon receipt of an opinion of counsel addressed to the Company that the
transfer restrictions contained in the Legend are no longer applicable. In
addition, at such time as such Security is no longer subject to the transfer
conditions set forth in the Purchase Agreement, the Company shall permit the
Holder of such Security to exchange such Security for a new Security which does
not bear the portion of the Legend referring to such transfer conditions.
In addition to the Legend, until the expiration of the "one-year
distribution compliance period" within the meaning of Rule 903 of Regulation S
under the Securities Act, each Security (and all Securities issued in exchange
therefor or substitution thereof) shall bear a legend (the "Reg. S Legend") to
substantially the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE
PROVISIONS OF REGULATION S (SECTION 230.901 THROUGH SECTION 230.905,
AND PRELIMINARY NOTES). HEDGING TRANSACTIONS INVOLVING THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE ACT.
At the expiration of such "one-year distribution compliance period," the
Company shall permit the Holder of such Security to exchange such Security for a
new Security which does not bear the Reg. S Legend.
(c) If any mutilated Security is surrendered to the Company, the Company
shall execute and deliver a new Security of like aggregate Principal Amount.
If there is delivered to the Company:
(i) evidence to its reasonable satisfaction of the destruction, loss
or theft of any Security; and
<PAGE> 45
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(ii) such security or indemnity as may be reasonably satisfactory to
the Company to save it harmless,
then, in the absence of actual notice to the Company that such Security has
been acquired by a bona fide purchaser, the Company shall execute and deliver,
in lieu of any such destroyed, lost or stolen Security, a new Security of like
aggregate Principal Amount.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company, in its discretion, but
subject to conversion rights, may, instead of issuing a new Security, pay such
Security, upon satisfaction of the conditions set forth in the preceding
paragraph.
11. AMENDMENTS AND WAIVERS
(a) Any term, covenant, agreement or condition of the Securities may, with
the consent of the Company, be amended, or compliance therewith may be waived
(either generally or in a particular instance and either retroactively or
prospectively), by one or more substantially concurrent written instruments
signed by the Holders of at least a majority in aggregate Principal Amount of
the Securities at the time outstanding (excluding Securities at the time owned
by the Company and its Affiliates); provided that, without the consent of each
Holder affected, no such amendment or waiver, including a waiver pursuant to
paragraph 9(d) hereof, shall:
(i) make any change in the Principal Amount of Securities whose
Holders must consent to an amendment or waiver;
(ii) make any change to the manner or rate of accrual in connection
with original Issue Discount, reduce the interest rate referred to in
paragraph 1 of the Securities, reduce the rate of interest referred to in
paragraph 12 of the Securities upon the occurrence of a Tax Event or extend
the time for payment of accrued original Issue Discount or interest, if
any, on any Security;
(iii) reduce the Principal Amount or the Issue Price of or extend the
Stated Maturity of any Security;
(iv) reduce the Redemption Price, Purchase Price, Company Change of
Control Purchase Price or Elan Change of Control Purchase Price or extend
the date on which the Re-
<PAGE> 46
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demption Price, Purchase Price, Company Change of Control Purchase Price or
Elan Change of Control Purchase Price of any Security is payable;
(v) make any Security payable in money or securities other than
that stated in the Securities;
(vi) make any change in paragraph 9(d) hereof or this paragraph
11(a), except to increase any percentage referred to, or make any change in
paragraph 9(e) hereof;
(vii) make any change that adversely affects the right to convert any
Security (including the right to receive cash in lieu of fractional
shares);
(viii) make any change that adversely affects the right to require the
Company to purchase Securities in accordance with their terms; or
(ix) impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the Securities.
(b) No waiver shall extend to or affect any obligation not expressly waived
or impair any right consequent thereto.
(c) The Company will not solicit, request or negotiate for or with respect
to any proposed amendment or waiver of any provisions of any Security unless
each Holder of Securities (irrespective of the amount of Securities then owned
by it) shall be informed thereof by the Company and shall be afforded the
opportunity of considering the same and shall be supplied by the Company with
sufficient information to enable it to make an informed decision with respect
thereto; provided, however, that preliminary discussions with one or more
Holders regarding any such proposed amendment shall not constitute any such
solicitation, request or negotiation. Executed or true copies of any amendment
or waiver effected pursuant to this paragraph 11 shall be delivered by the
Company to each Holder of Securities, by first class mail, postage prepaid, at
its address appearing on the register maintained by the Company, forthwith
following the date on which the same shall have been executed and delivered by
the Holder or Holders of the requisite amount of outstanding Securities. The
Company will not, directly or indirectly, pay or cause to be paid, remuneration,
whether by way of fees or otherwise, to any Holder of Securities as
consideration for or as an inducement to the entering into by such Holder of any
amendment or waiver unless such remuneration is
<PAGE> 47
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concurrently paid, on the same terms, ratably to the Holders of all Securities
then outstanding.
(d) Any amendment or waiver pursuant to this paragraph 11 shall (except as
provided in paragraph 11(a)(i) through (ix) above) apply equally to all Holders
and shall be binding upon them, upon each future Holder and upon the Company.
(e) In determining whether the Holders of the requisite amount of
outstanding Securities have given any authorization, consent or waiver under
this paragraph 11, Securities owned by the Company or any of its Affiliates
shall be disregarded and deemed not to be outstanding.
12. TAX EVENT CONVERSION
(a) From and after the date (the "Tax Event Date") of the occurrence of a
Tax Event, at the option of the Company, interest in lieu of future Original
Issue Discount shall accrue at 8.0% per annum on a principal amount per Security
(the "Restated Principal Amount") equal to the Issue Price plus accrued Original
Issue Discount to the date immediately prior to the Tax Event Date or the date
on which the Company exercises the option described in this paragraph 12(a),
whichever is later (such date, the "Option Exercise Date"). Such interest shall
accrue from the Option Exercise Date and shall be payable on November 9 and May
9 of each year (the "Interest Payment Date") to the Holders of record at the
close of business on October 25 and April 24 (each, a "Regular Record Date")
immediately preceding such Interest Payment Date. Interest will be computed on
the basis of a 360-day year consisting of twelve 30-day months and will accrue
from the most recent date on which interest has been paid or, if no interest has
been paid, from the Option Exercise Date. Within 15 days of the occurrence of a
Tax Event, the Company shall mail a written notice of such Tax Event to each
Holder, by first-class mail, postage prepaid, at its address appearing on the
register maintained by the Company.
(b) On each Interest Payment Date, concurrently with the payment of the
interest due and payable on such date, the Company shall issue and deliver to
each Holder of a Security to whom such interest is paid, an option (which option
shall be in the form of a written instrument duly executed by the Company (a
"Tax Event Option") to purchase a number of shares of Common Stock equal to the
quotient obtained by dividing (x) the aggregate amount of such interest due and
payable to such Holder on
<PAGE> 48
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such Interest Payment Date in respect of such Security by (y) the Conversion
Price of such Security in effect on the Business Day immediately prior to such
Interest Payment Date. Such Tax Event Option shall be exercisable, in whole at
any time or in part from time to time, on or prior to November 9, 2008. Each Tax
Event Option shall include provisions substantially similar to those set forth
in paragraph 6(c), (d), (e), (f), (g), (h) and (i) hereof. Each Tax Event Option
shall be transferable by the holder thereof only together with the Security in
respect of which such Tax Event option was issued, subject to compliance with
all applicable transfer restrictions of federal and state securities laws.
(c) Interest on any Security that is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the person in
whose name that Security is registered at the close of business on the Regular
Record Date for such interest. Each installment of interest on any Security
shall be paid by wire transfer in immediately - available funds to an account
designated in writing by the payee at least 2 Business Days prior to the
Interest Payment Date applicable thereto.
(d) Subject to the foregoing provisions of this paragraph 12, each Security
upon registration of transfer, or in exchange for or in lieu of any other
Security, shall carry the rights to interest accrued and unpaid, and to accrue,
which were carried by such other Security.
13. MISCELLANEOUS
(a) Any notices or other communications required or permitted hereunder
shall be sufficiently given if delivered personally, sent by nationally
recognized overnight delivery service or facsimile (receipt confirmed) or mailed
by first-class mail, postage prepaid, addressed as follows:
(i) if to the Company, to:
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attn: General Counsel
Fax No.: (619) 550-1825
with a copy to:
Brobeck, Phleger & Harrison LLP
<PAGE> 49
-46-
550 West C Street, Suite 1300
San Diego, California 92101-3532
Attn: Faye H. Russell, Esq.
Fax No.: (619) 234-3848
(ii) if to any Holder, at its address appearing in the register
maintained by the Company pursuant to paragraph 10(a) hereof
(iii) (x) on the date delivered, if delivered by facsimile or
personally, (y) on the day after the notice is delivered into the
possession and control of a nationally recognized overnight delivery
service, duly marked for delivery to the receiving party or (z) three
Business Days after being mailed by first-class mail, postage prepaid. The
Company, by written notice to each of the Holders, may designate a
different address for subsequent notices or communications.
(b) All agreements of the Company in this Security shall bind its
successor.
(c) Each provision of this Security shall be considered separable and if
for any reason any provision which is not essential to the effectuation of the
basic purpose of this Security shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(d) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF
LAW TO THE EXTENT THAT THE APPLICATION OF LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
(e) Upon conversion of this Security in accordance with the terms hereof,
the Holder will be entitled to the benefits of the Registration Rights Agreement
or the New Registration Rights Agreement, as the case may be, with respect to
the shares of Common Stock issuable to such Holder upon such conversion.
14. DEFINITIONS
"Accrual Increase" has the meaning specified in paragraph 1(c) hereof.
<PAGE> 50
-47-
"Additional Amounts" has the meaning specified in paragraph 7(g) hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of Voting Stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"Business Day" means each day of the year on which banking institutions are
not required or authorized to close in The City of New York.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership interests or any other
participation, right or other interest in the nature of an equity interest in
such Person including, without limitation, common stock and preferred stock of
such Person, or any option, warrant or other security convertible into any of
the foregoing.
A "Change of Control" of any Person shall be deemed to have occurred at
such time as (i) any other Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act ("Group") becomes the beneficial owner (as
defined under Rule l3d-3 under the Exchange Act), directly or indirectly, of
50.0% or more of the total Voting Stock of such specified Person, (ii) there
shall be consummated any consolidation or merger of such specified Person in
which such specified Person is not the continuing or surviving corporation or
pursuant to which the Voting Stock of such specified Person would be converted
into cash, securities or other property, other than a merger or consolidation of
such specified Person in which the holders of the Voting Stock of such specified
Person outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of all Voting Stock of the
continuing or surviving corporation immediately after such consolidation or
merger or (iii) during any period of two consecutive years, individuals who at
the beginning of such pe-
<PAGE> 51
-48-
riod constituted the board of directors of such specified Person (together with
any new directors whose election by such board of directors or whose nomination
for election by the shareholders of such specified Person has been approved by a
majority of the directors then still in office who either were directors at the
beginning of such period or whose election or recommendation for election was
previously so approved) cease to constitute a majority of the board of directors
of such specified Person.
"close of business" means, with respect to any date, 5:00 PM, San Diego
time, on such date, or such other city in which the Company's principal place of
business may then be located.
"Closing Price" means, with respect to the Common Stock on any trading day,
the last reported per share sales price of the Common Stock on such trading day,
as reported by the Nasdaq National Market or, if the Common Stock is listed on a
United States securities exchange, the closing per share sales price, regular
way, on such trading day on the principal United States securities exchange on
which the Common Stock is traded or, if no such sale takes place on such trading
day, the average of the closing bid and asked prices on such day.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company, as such class exists on the date of this Security as originally
executed or any other shares of Capital Stock into which such common stock shall
be reclassified or changed.
"Company" means Ligand Pharmaceuticals Incorporated, a Delaware
corporation.
"Company Change of Control Offer" has the meaning specified in paragraph
4(b) hereof.
"Company Change of Control Offer Notice" has the meaning specified in
paragraph 4(b)(i) hereof.
"Company Change of Control Payment Date" has the meaning specified in
paragraph 4(b)(i)(C) hereof.
"Company Change of Control Purchase Price" has the meaning specified in
paragraph 4(b) hereof.
"Company Notice" has the meaning specified in paragraph 4(a)(v) hereof.
<PAGE> 52
-49-
"Company Notice Date" has the meaning referred to in paragraph 4(a)(v)
hereof.
"Conversion Date" has the meaning specified in paragraph 6(d) hereof.
"Conversion Notice" has the meaning specified in paragraph 6(d) hereof.
"Conversion Price" has the meaning specified in paragraph 6(b) hereof.
"Conversion Shares" has the meaning specified in the Purchase Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Distributed Securities" has the meaning specified in paragraph 6(i)(iv)
hereof.
"Elan" means Elan Corporation, plc, a public limited company organized and
existing under the laws of Ireland.
"Elan Change of Control Notice" has the meaning specified in the Purchase
Agreement.
"Elan Change of Control Payment Date" has the meaning specified in
paragraph 5(b)(ii) hereof.
"Elan Change of Control Purchase" has the meaning specified in paragraph
5(a) hereof.
"Elan Change of Control Purchase Notice" has the meaning specified in
paragraph 5(b) hereof.
"Elan Change of Control Purchase Price" has the meaning specified in
paragraph 5(a) hereof.
"Event of Default" has the meaning specified in paragraph 10(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
<PAGE> 53
-50-
"Extraordinary Cash Dividend" means cash dividends with respect to the
Common Stock the aggregate amount of which in any fiscal year exceeds the
greater of (i) 10% of the consolidated net income of the Company for the fiscal
year immediately preceding the payment of such dividend and (ii) $200,000.
"Holder" means a Person in whose name this Security is registered on the
books of the Company.
"Initial Shares" has the meaning specified in the Purchase Agreement.
"Interest Payment Date" has the meaning specified in paragraph 12(a)
hereof.
"Issue Date" of this Security means the date on which this Security was
originally issued or deemed issued as set forth on the face of this Security.
"Issue Price" of this Security means, in connection with the original
issuance of this Security, the initial issue price at which this Security is
issued as set forth on the face of this Security.
"Legend" has the meaning specified in paragraph 10(b) hereof.
"License Agreement" has the meaning specified in the Purchase Agreement.
"License Shares" has the meaning specified in the Purchase Agreement.
"Nasdaq National Market" means the electronic interdealer quotation system
operated by Nasdaq Stock Market, Inc., a subsidiary of the National Association
of Securities Dealers, Inc.
"New Registration Rights Agreement" has the meaning specified in the
Purchase Agreement.
"Officer" means the Chief Executive Officer, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a written certificate, signed in the name of
the Company by (i) its Chief Executive
<PAGE> 54
-51 -
Officer, its President or any Vice President and (ii) its Treasurer or its
Secretary.
"Opinion of Counsel" means a written opinion from legal counsel. The
counsel may be an employee of, or counsel to, the Company or any Successor
Company.
"Option Exercise Date" has the meaning specified in paragraph 12(a) hereof.
"Original Issue Discount" of this Security means the difference between the
Issue Price and the Principal Amount of this Security as set forth on the face
of this Security. For purposes of this Security, accrual of Original Issue
Discount shall be calculated on a semi-annual bond equivalent basis using a 360
day year consisting of twelve 30-day months.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government, or any agency or political subdivision thereof.
"Principal" or "Principal Amount" of this Security means the Principal
Amount as set forth on the face of this Security.
"Purchase Agreement" has the meaning specified on the face of this
Security.
"Purchase Date" has the meaning specified in paragraph 4(a) hereof.
"Purchase Notice" has the meaning specified in paragraph 4(a)(i) hereof.
"Purchase Price" has the meaning specified in paragraph 4(a) hereof.
"Purchase Request" has the meaning specified in the Purchase Agreement.
"Redemption Date" means a date specified for redemption of this Security in
accordance with the terms hereof.
"Redemption Price" has the meaning specified in paragraph 3(a) hereof.
"Registration Rights Agreement" has the meaning specified in the Purchase
Agreement.
<PAGE> 55
-52-
"Registration Rights Default" has the meaning specified in paragraph 1(c)
hereof.
"Regular Record Date" has the meaning specified in paragraph 12(a) hereof.
"Restated Principal Amount" has the meaning specified in paragraph 12(a)
hereof.
"SEC" means the Securities and Exchange Commission.
"Securities" means any of the Company's Zero Coupon Convertible Senior
Notes due 2008, as amended and supplemented from time to time in accordance with
the terms hereof, issued pursuant to the Purchase Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Shares" has the meaning specified in the Purchase Agreement.
"Stated Maturity" means November 9, 2008.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired, (i) in the case of a
corporation, of which more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, officers or trustees thereof is held by such
specified Person or any of its Subsidiaries or (ii) in the case of a
partnership, joint venture, limited liability company, association or other
business entity, with respect to which such specified Person or any of its
Subsidiaries has the power to direct or cause the direction of the management
and policies of such entity by contract or otherwise.
"Successor Company" has the meaning specified in paragraph 8(a)(1) hereof.
"Tax Event" means that the Company shall have received an opinion from
independent tax counsel experienced in such matters to the effect that, on or
after the date of this Security, as a result of (a) any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
<PAGE> 56
-53-
thereunder) of the United Sates or any political subdivision or taxing authority
thereof or therein or (b) any amendment to, or change in, an interpretation or
application of such laws or regulations by any legislative body, court,
governmental agency or regulatory authority, in each case, which amendment or
change is enacted, promulgated, issued or announced or which interpretation is
issued or announced or which action is taken, on or after the date of this
Security, there is more than an insubstantial risk that interest (including
Original Issue Discount) payable on the Securities either (i) would not be
deductible on a current accrual basis or (ii) would not be deductible under any
other method, in either case, in whole or in part, by the Company, by reason of
deferral, disallowance or otherwise) for United States federal income tax
purposes.
"Tax Event Date" has the meaning specified in paragraph 12(a) hereof.
"Tax Event Option" has the meaning specified in paragraph 12(b) hereof.
"Taxes" means any present or future tax, duty, levy, impost, assessment or
other government charge (including penalties, interest and any other liabilities
related thereto) imposed or levied by or on behalf of a any government or any
political subdivision or territory or possession of any government or any
authority or agency therein or thereof having power to tax.
"Transfer Restricted Security" has the meaning specified in paragraph 10(b)
hereof.
"Voting Stock" means stock of any class or classes, however designated,
having general voting power under ordinary circumstances to elect a majority of
the board of directors, managers or trustees of a Person, other than stock
having such power only by reason of the occurrence of a contingency.
<PAGE> 57
ANNEX A
FORM OF PURCHASE NOTICE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Pursuant to the terms of the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ]
(the "Security"), the undersigned hereby elects to cause Ligand Pharmaceuticals
incorporated (the "Company") to purchase $[ ] Principal Amount of the
Security at the Purchase Price set forth in the Security on [November 9, 2002]
[November 9, 2005], subject to the right of the undersigned to convert the
Security at any time prior to the close of business on the Purchase Date.
Capitalized terms used herein and not otherwise defined have the meanings
specified in the Security.
2. In the event that the Security is purchased in part, please execute and
deliver to the undersigned a new Security in a denomination equal in Principal
Amount to the unpurchased portion of the Security.
3. In the event that the Company has elected to pay the Purchase Price with
Common Stock (the "Shares") Pursuant to paragraph 4(a)(iv) of the Security, the
undersigned confirms that:
(a) We understand that the Shares have not been registered under the
Securities Act and may not be offered or sold except as permitted in the
following sentence. We agree that if we should sell or otherwise transfer
the Shares, we will do so only (i) to the Company or its Subsidiaries,
(ii) inside the United States to an institutional "accredited investor" (as
defined below), (iii) outside the United States in accordance with
Regulation S under the Securities Act, (iv) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available)
or (v) pursuant to an effective registration statement under the Securities
Act.
A-1
<PAGE> 58
(b) We understand that the certificates representing the Shares will,
so long as appropriate, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO A VALID EXEMPTION THEREFROM.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE
WITH THE PROVISIONS OF REGULATION S (SECTION 230.901 THROUGH
SECTION 230.905, AND PRELIMINARY NOTES). HEDGING
TRANSACTIONS INVOLVING THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH
THE ACT.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO
THE CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT,
DATED AS OF NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN
INTERNATIONAL SERVICES, LTD. AND ELAN CORPORATION, PLC, AND
THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF
SUCH SECURITY UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH
RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE
FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT
CHARGE.
(c) We are acquiring the Shares for our own account and are either (i)
an institutional "accredited investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act) or (ii) a foreign
purchaser that is outside the United States (as such terms are used under
Regulations S under the Securities Act). We have such knowledge and
experience in financial and business matters to be capable of evaluating
the merits and risks of our investment in the Shares and we are able to
bear the economic risk of our investment for an indefinite period of time.
A-2
<PAGE> 59
This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
----------------
A-3
<PAGE> 60
ANNEX B
CONVERSION NOTICE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Pursuant to the terms of the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ] attached
hereto (the "Security"), the undersigned hereby elects to cause Ligand
Pharmaceuticals Incorporated (the "Company") to convert $[ ] Principal
Amount of the Security pursuant to paragraph 6 of the Security at the Conversion
Price. Capitalized terms used herein and not otherwise defined have the meanings
specified in the Security.
2. In the event that the undersigned has elected to convert the Security in
part, please execute and deliver to the undersigned a new Security in a
denomination equal in Principal Amount to the unconverted portion of the
Security.
3. In connection with the conversion of the Security, the undersigned
confirms that:
(a) We understand that the securities to be issued upon such
conversion have not been registered under the Securities Act and may not be
offered or sold except as permitted in the following sentence. We agree
that if we should sell or otherwise transfer such securities, we will do so
only (i) to the Company or its Subsidiaries, (ii) inside the United States
to an institutional "accredited investor" (as defined below), (iii) outside
the United States in accordance with Regulation S under the Securities Act,
(iv) pursuant to the exemption from registration provided by Rule 144 under
the Securities Act (if available) or (v) pursuant to an effective
registration statement under the Securities Act.
(b) We understand that the certificates representing such securities
will, so long as appropriate, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES
B-1
<PAGE> 61
ACT OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT
TO A VALID EXEMPTION THEREFROM. THE SHARES REPRESENTED BY
THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S (SECTION 230.901 THROUGH SECTION 230.905, AND
PRELIMINARY NOTES). HEDGING TRANSACTIONS INVOLVING THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED
UNLESS IN COMPLIANCE WITH THE ACT.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO
THE CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT,
DATED AS OF NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN
INTERNATIONAL SERVICES, LTD. AND ELAN CORPORATION, PLC, AND
THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF
SUCH SECURITY UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH
RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE
FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT
CHARGE.
(c) We are acquiring the securities to be issued upon conversion of
the Security for our own account and are either (i) an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act) or (ii) a foreign purchaser that is
outside the United States. We have such knowledge and experience in
financial and business matters to be capable of evaluating the merits and
risks of our investment in the securities and we are able to bear the
economic risk of our investment for an indefinite period of time.
This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
----------------
B-2
<PAGE> 62
ANNEX C
FORM OF CERTIFICATE FOR
REGISTRATION OF TRANSFER
OR EXCHANGE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Reference is hereby made to the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ] attached
hereto (the "Security"). Capitalized terms used herein and not otherwise defined
have the meanings specified in the Security.
2. In connection with the registration of transfer or exchange of such
Security, the undersigned hereby certifies that:
CHECK ONE
_____ The Security is being acquired for the undersigned's own
account, without transfer; or
_____ The Security is being transferred to the Company; or
_____ The Security is being transferred in a transaction permitted by
Rule 144 under the Securities Act; or
_____ The Security is being transferred pursuant to an effective
registration statement; or
_____ The Security is being transferred in a transaction permitted by
Rule 904 under the Securities Act; or
_____ The Security is being transferred pursuant to an exemption from
the registration requirements of the Securities Act other than Rule 144 or
Rule 904, and the undersigned hereby further certifies that the Security is
being transferred in compliance with the exemption claimed, which
certification is supported by an opinion of
C-1
<PAGE> 63
counsel, if required by the Company, provided by the undersigned or the
transferee (a copy of which the undersigned has attached to this
certification) in form reasonably satisfactory to the Company, to the
effect that such transfer is in compliance with the Securities Act;
and the Security is being transferred in compliance with any applicable state
securities or "Blue Sky" laws of any state of the United States.
(3) This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
----------------
C-2
<PAGE> 64
ANNEX D
FORM OF UNRESTRICTED SECURITIES CERTIFICATE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Reference is hereby made to the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ]
attached hereto (the "Security"). Capitalized terms used herein and not
otherwise defined have the meanings specified in the Security.
2. The undersigned, the registered owner of the Security, has requested
that the Security be exchanged for a new Security bearing no portion of the
Legend (excluding that portion of the Legend relating to transfer conditions set
forth in the Purchase Agreement). In connection with such exchange, the
undersigned hereby certifies that the exchange is occurring after a period of at
least two years has elapsed since the date the Security was acquired from the
Company or any affiliate (as such term is defined under Rule 144 under the
Securities Act) of the Company, whichever is later, and the undersigned is not,
and during the preceding three months has not been, an affiliate of the Company.
The undersigned also acknowledges that future transfers of the Security must
comply with all applicable state securities or "Blue Sky" laws.
3. This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
----------------
D-1
<PAGE> 1
EXHIBIT 10.196
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
OR PURSUANT TO A VALID EXEMPTION THEREFROM AND HAS BEEN SOLD IN RELIANCE ON THE
EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE ACT ("REGULATION
S"). THE SECURITY EVIDENCED HEREBY MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S
(SECTION 230.901 THROUGH SECTION 230.905, AND PRELIMINARY NOTES).
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE CONDITIONS
SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF NOVEMBER 6, 1998, BY
AND AMONG THE COMPANY, ELAN INTERNATIONAL SERVICES, LTD. AND ELAN CORPORATION,
PLC, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITY
UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY
OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT
CHARGE.
LIGAND PHARMACEUTICALS INCORPORATED
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
No. R-2
Issue Date: November 9, 1998
Issue Price: $10,000,000
($456.39 for each $1,000 Principal Amount)
Original Issue Discount at Maturity: $11,911,231
($543.61 for each $1,000 Principal Amount)
Ligand Pharmaceuticals Incorporated, a Delaware corporation, promises
to pay to Elan International Services, Ltd. or registered assigns, on November
9, 2008, the Principal Amount of TWENTY ONE MILLION NINE HUNDRED AND ELEVEN
THOUSAND TWO HUNDRED AND THIRTY ONE DOLLARS ($21,911,231) or such Principal
Amount as may result from an Accrual Increase as specified on the other side of
this Security.
This Security shall not bear interest except as specified on the other
side of this Security. Original Issue Discount will accrue as specified on the
other side of this Se-
<PAGE> 2
-2-
curity. This Security is convertible into Common Stock as specified on the other
side of this Security.
Additional provisions of this Security are set forth on the other side
of this Security.
This Security is one of the Zero Coupon Convertible Senior Notes due
2008 issued pursuant to the Securities Purchase Agreement, dated as of November
6, 1998, by and among Ligand Pharmaceuticals Incorporated, Elan International
Services, Ltd. and Elan Corporation, plc (the "Purchase Agreement").
<PAGE> 3
IN WITNESS WHEREOF, Ligand Pharmaceuticals Incorporated has caused
this instrument to be duly executed.
LIGAND PHARMACEUTICALS INCORPORATED
By: /s/ WILLIAM L. RESPESS
-------------------------------------
Name: William L. Respess
Title: Senior Vice President, General
Counsel, Government Affairs
Attest
By: /s/ DAVID E. ROBINSON
-------------------------------------
Name: David E. Robinson
Title: President and Chief Executive
Officer
Dated:
---------------
<PAGE> 4
FORM OF REVERSE SIDE OF SECURITY
LIGAND PHARMACEUTICALS INCORPORATED
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
1. INTEREST
(a) This Security shall not bear interest, except as specified in this
paragraph or in paragraph 12 hereof. If the Principal Amount hereof or any
portion of such Principal Amount is not paid when due (whether upon acceleration
pursuant to paragraph 9 hereof, upon the date set for payment of the Redemption
Price pursuant to paragraph 3 hereof, upon the date set for payment of a
Purchase Price or a Company Change of Control Purchase Price pursuant to
paragraph 4 hereof, upon the date set for payment of the Elan Change of Control
Purchase Price pursuant to paragraph 5 hereof or upon the Stated Maturity of
this Security) or if shares of Common Stock (and cash in lieu of fractional
shares) in respect of a conversion of this Security in accordance with paragraph
6 hereof are not delivered when due, then, in each such case, the overdue amount
shall bear interest at the rate of 10.0% per annum, compounded semiannually (to
the extent that the payment of such interest shall be legally enforceable),
which interest shall accrue from the date such overdue amount was due to the
date payment of such amount, including interest thereon, has been made. All such
interest shall be payable on demand. The accrual of such interest on overdue
amounts shall be in lieu of, and not in addition to, the continued accrual of
Original Issue Discount.
(b) Original Issue Discount (the difference between the Issue Price and the
Principal Amount of a Security) in the period during which a Security remains
outstanding shall accrue at 8.0% per annum, on a semiannual bond equivalent
basis using a 360-day year consisting of twelve 30-day months, commencing on the
Issue Date of this Security, and shall cease to accrue on the earlier of (i) the
date on which the Principal Amount hereof or any portion of such Principal
Amount becomes due and payable and (ii) any Redemption Date, Purchase Date,
Company Change of Control Payment Date, Elan Change of Control Payment Date or
Conversion Date.
(c) In the event that the Company defaults in the performance or observance
of any agreement, covenant, term or condition contained in the Registration
Rights Agreement or the New Registration Rights Agreement, as the case may be,
and such
<PAGE> 5
-2-
default continues for a period of 30 days after receipt by the Company of notice
thereof (provided that, if such default is not cured on or prior to the last day
of such 30 day period and such breach is then capable of being cured and the
Company is then working in good faith to cure such default, such 30 day period
shall be extended by an additional 20 days from the last day of such 30 day
period) (a "Registration Rights Default"), the Company acknowledges that the
Holders of the Securities will suffer damages and that it would not be feasible
to ascertain the extent of such damages with precision. Accordingly, the Company
agrees that, as liquidated damages, the rate at which Original Issue Discount or
interest pursuant to paragraph 1(a) or 12 hereof, if any, accrues shall be
increased over and above the rate stated in paragraph 1(b), 1(a) and 12(a),
respectively (an "Accrual Increase"), by an additional 50 basis points for each
90-day period in which a Registration Rights Default continues; provided that
the aggregate of such Accrual Increase shall not exceed 200 basis points over
and above the rate set forth in paragraph l(b), 1(a) and 12(a) hereof, as the
case may be; provided, further, that any Accrual Increase shall immediately
cease upon the cure of any such Registration Rights Default. Whenever, in this
Security, there is mentioned, in any context, Principal Amount, Original Issue
Discount or interest, or any other amount payable under or with respect to this
Security, including the Redemption Price, the Purchase Price, the Company Change
of Control Purchase Price and the Elan Change of Control Purchase Price, such
mention shall be deemed to include mention of an Accrual Increase to the extent
that, in such context, such Accrual Increase is, was or would be in effect.
2. METHOD OF PAYMENT
Holders must surrender Securities to the Company to collect payments in
respect of the Securities. The Company will pay cash amounts in money of the
United States that at the time of payment is legal tender for payment of public
and private debts (and all references in the Securities to "$" or "dollars"
shall refer to such currency) by wire transfer in immediately available funds,
to an account or accounts designated in writing by each Holder not less than 5
Business Days prior to the date of the applicable payment.
3. REDEMPTION AT THE OPTION OF THE COMPANY
(a) No sinking fund is provided for the Securities. The Securities are
redeemable as a whole at any time, or in part from time to time, at the option
of the Company, at the redemp-
<PAGE> 6
-3-
tion prices (each, a "Redemption Price") set forth in paragraph 3(b) hereof;
provided that the Securities are not redeemable prior to November 9, 2001.
(b) The table below shows the Redemption Prices of a Security per $1,000
Principal Amount on the dates shown below and at Stated Maturity, which prices
reflect accrued Original Issue Discount calculated to each such date. The
Redemption Price of a Security redeemed between such dates would include an
additional amount reflecting the additional Original Issue Discount accrued
since the next preceding date in the table to the actual Redemption Date.
<TABLE>
<CAPTION>
(2)
Accrued
(1) Original (3)
Security Issue Redemption
Issue Discount Price
Redemption Date Price At 8.0 (1) + (2)
- --------------- -------- -------- -----------
<S> <C> <C> <C>
November 9, 2001.................... $456.39 $121.09 $ 577.48
November 9, 2002.................... 456.39 168.21 624.60
November 9, 2003.................... 456.39 219.17 675.56
November 9, 2004.................... 456.39 274.30 730.69
November 9, 2005.................... 456.39 333.92 790.31
November 9, 2006.................... 456.39 398.41 854.80
November 9, 2007.................... 456.39 468.17 924.56
At maturity......................... 456.39 543.61 1,000.00
</TABLE>
If converted to a semiannual coupon note following the occurrence of a Tax
Event, the Securities will be redeemable at the Restated Principal Amount plus
interest accrued and unpaid from, and including, the date of such conversion to,
but excluding, the Redemption Date.
(c) If less than all of the Securities are to be redeemed, the Company
shall select the Securities to be redeemed pro rata. If any Security selected
for redemption is thereafter surrendered for conversion in part, the converted
portion of such Security shall be deemed (so far as may be), solely for purposes
of determining the aggregate Principal Amount of Securities to be redeemed by
the Company, the portion selected for redemption. Nothing in this paragraph 3
shall affect the right of any Holder to convert any Security pursuant to
paragraph 6 hereof.
<PAGE> 7
-4-
(d) Provisions of this Security that apply to the redemption of all of a
Security also apply to the redemption of any portion of such Security.
(e) At least 30 days but not more than 60 days before a Redemption Date,
the Company shall cause notice of redemption to be mailed, by first-class mail,
postage prepaid, to each Holder of Securities at such Holder's address appearing
on the register maintained by the Company. Such notice shall identify the
Securities to he redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the Conversion Price in effect on the date of such notice;
(iv) that Securities called for redemption may be converted at any
time prior to the close of business on the Redemption Date;
(v) that Securities called for redemption must be surrendered to the
Company to collect the Redemption Price and the procedures to be followed
to so surrender such Securities;
(vi) if fewer than all the outstanding Securities are to be redeemed,
the identification and Principal Amounts of the particular Securities to be
redeemed;
(vii) that, unless the Company defaults in payment of the Redemption
Price, Original Issue Discount on the Securities called for redemption and
interest, if any, will cease to accrue on and after the Redemption Date;
(viii) that Holders whose Securities are being redeemed only in part
will, without charge, be issued a new Security equal in Principal Amount to
the unredeemed portion of the Securities; and
(ix) that the Redemption Price for any Security called for redemption
will be paid one Business Day following the later of (x) the Redemption
Date and (y) the date such Security is surrendered to the Company.
(f) Once notice of redemption is given, Securities called for redemption
shall become due and payable on the Redemption
<PAGE> 8
-5-
Date and at the Redemption Price stated in such notice, except for Securities
that are converted. The Redemption Price for the Securities called for
redemption shall be paid one Business Day following the later of (x) the
Redemption Date and (y) the date such Securities are surrendered to the Company.
(g) Receipt by the Company of the Securities called for redemption prior
to, on or after the Redemption Date shall be a condition to the receipt by the
Holder of the Redemption Price therefor.
(h) Upon surrender of a Security that is redeemed in part, the Company
shall, without charge, execute and deliver to the Holder a new Security equal in
Principal Amount to the unredeemed portion of such Security.
4. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER
(a) Purchase at the option of the Holder. The Company shall be obligated to
purchase, at the option of the Holder, the Securities held by such Holder on the
following purchase dates (each, a "Purchase Date") and at the following purchase
prices per $1,000 Principal Amount (each, a "Purchase Price"), which Purchase
Prices reflect accrued original Issue Discount to each such date. Such Purchase
Prices may be paid, at the option of the Company, in cash or by the issuance and
delivery of shares of Common Stock, subject to the conditions set forth in
paragraph 4(a)(iv) hereof.
<TABLE>
<CAPTION>
(2)
Accrued
(1) Original (3)
Security Issue Purchase
Issue Discount Price
Purchase Date Price at 8.0% (1) + (2)
- ------------- -------- -------- ---------
<S> <C> <C> <C>
November 9, 2002.................... 456.39 $ 168.21 $624.60
November 9, 2005.................... 456.39 333.92 790.31
</TABLE>
If, prior to the Purchase Date, the Securities have been converted to a
semiannual coupon note following the occurrence of a Tax Event, the Purchase
Price will be equal to the Restated Principal Amount plus interest accrued and
unpaid from, and including, the date of such conversion to, but excluding, the
Purchase Date.
(i) In order to have Securities purchased pursuant to this paragraph
4(a), the Holder shall (x) deliver to the Company (for each Security or
portion thereof to be
<PAGE> 9
-6-
purchased) a written notice of purchase in the form attached to this
Security as Annex A (a "Purchase Notice") at any time on or prior to the
close of business on such Purchase Date and (y) surrender such Securities
to the Company prior to, on or after the Purchase Date, such surrender
being a condition to receipt by the Holder of the Purchase Price therefor.
Provisions of this Security that apply to the purchase of all of a
Security also apply to the purchase of any portion of such Security.
Subject to the right of a Holder to convert Securities as to which a
Purchase Notice has been delivered into Common Stock at any time prior to
the close of business on the Purchase Date, such Holder may not withdraw
such Purchase Notice.
Any purchase of Securities contemplated pursuant to this paragraph
4(a) shall be consummated by the delivery of the Purchase Price to be
received by the Holder (in cash or Common Stock, as the case may be) one
Business Day following the later of (x) the Purchase Date and (y) the date
such Securities are surrendered to the Company.
(ii) The Securities to be purchased pursuant to this paragraph 4(a)
may be paid for, at the option of the Company, in cash or Common Stock,
subject to the conditions set forth in paragraph 4(a)(iv) hereof. The
Company shall designate, in the Company Notice (as defined below) delivered
pursuant to paragraph 4(a)(v) hereof, whether the Company will purchase the
Securities for cash or Common Stock; provided that the Company will pay
cash for fractional shares of Common Stock pursuant to paragraph
4(a)(iv)(A) hereof. The Company may not change its election with respect to
the consideration to be paid once the Company has given the Company Notice,
except pursuant to paragraph 4(a)(iv)(B) hereof.
(iii) on each Purchase Date, if the Company Notice shall state that
the Company will purchase Securities for cash, the Securities in respect of
which a Purchase Notice has been given shall be purchased by the Company
with cash in an amount equal to the aggregate Purchase Price of such
Securities.
(iv) on each Purchase Date, if the Company Notice shall state that the
Company will purchase Securities for
<PAGE> 10
-7-
Common Stock, the Securities in respect of which a Purchase Notice has been
given shall be purchased by the Company by the issuance of a number of
whole shares of Common Stock equal to the quotient obtained by dividing (x)
the amount of cash to which the Holder would have been entitled had the
Company elected to pay the Purchase Price of such Securities in cash by (y)
the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second trading day
immediately preceding the Purchase Date, subject to paragraph 4(a)(iv)(A)
hereof.
(A) The Company will not issue a fractional share of Common Stock
in payment of the Purchase Price. Instead, the Company will pay cash
in an amount equal to the current market value of the fractional
share. The current market value of a fraction of a share of Common
Stock shall be determined by multiplying the average of the Closing
Prices of the Common Stock for the 20 consecutive trading days ending
on and including the second trading day immediately preceding the
Purchase Date by such fraction and rounding to the nearest whole cent,
with one-half cent being rounded upward. It is understood that if a
Holder elects to have more than one Security purchased, the number of
whole shares of Common Stock shall be based on the aggregate amount of
Securities to be purchased.
(B) The Company's right to elect to purchase the Securities of
any Holder through the issuance of shares of Common Stock shall be
conditioned upon the following: (x) assuming compliance with all
applicable state securities or "Blue Sky" laws, and assuming the
accuracy of the statements of such Holder set forth in the Purchase
Notice, the issuance of such shares of Common Stock shall be exempt
from the registration requirements of Section 5 of the Securities Act,
(y) no consent, approval, authorization or order of any court or
governmental agency or body or third party shall be required for the
issuance by the Company of such shares of Common Stock and (z) such
Holder shall have received an Opinion of Counsel (which shall be
included with the Company Notice) stating that the terms of the
issuance of such Common stock are in conformity with this paragraph
4(a), that such Common Stock has been duly authorized and, upon
issuance, will be validly issued, nonassessable
<PAGE> 11
-8-
and fully paid, will not be issued in violation of any preemptive or
similar rights and will be free of any liens, encumbrances or
restrictions on transfer imposed by the Company other than those
imposed by the Securities Act and applicable state securities or "Blue
Sky" laws (provided that such Opinion of Counsel may state that,
insofar as it relates to the absence of preemptive or similar rights,
it is given upon the best knowledge of such counsel) and that clause
(x) of this paragraph 4(a)(iv)(B) has been satisfied.
(C) If the conditions set forth in paragraph 4(a)(iv)(B) hereof
are not satisfied as of the Purchase Date, and the Company shall have
elected to purchase the Securities through the issuance of shares of
Common Stock, the Company shall, without further notice, pay the
Purchase Price in cash.
(v) The Company shall cause a notice of its election to pay the
Purchase Price with cash or Common Stock (the "Company Notice") to be sent
by first-class mail, postage prepaid, to the Holders at their addresses
appearing in the register maintained by the Company. The Company Notice
shall be sent to Holders on a date not less than 20 Business Days prior to
the Purchase Date (such date being herein referred to as the "Company
Notice Date"); provided that, in the event that the Company shall not have
delivered the Company Notice on or prior to the Company Notice Date, the
Company shall be deemed to have irrevocably elected to pay the Purchase
Price in cash. The Company Notice shall state the manner of payment elected
and shall contain the following information:
In the event that the Company has elected to pay the Purchase Price
with Common Stock, the Company Notice shall state that each Holder will
receive Common Stock (except for any cash amount to be paid in lieu of
fractional shares) in accordance with this paragraph 4(a) and shall be
accompanied by the Opinion of Counsel described in paragraph 4(a)(iv)(B)
hereof.
In any case, each Company Notice will include the Purchase Notice to
be completed by the Holder and shall state:
<PAGE> 12
-9-
(A) the Purchase Price on such Purchase Date and the Conversion
Price in effect on the date of the Company Notice;
(B) that Securities must be surrendered to the Company to collect
payment and any procedures to be followed in so surrendering the
Securities,
(C) that Securities as to which a Purchase Notice has been given
may be converted at any time prior to the close of business on the
applicable Purchase Date;
(D) that, unless the Company defaults in the payment of the
Purchase Price, Original Issue Discount on all Securities in respect
of which a Purchase Notice has been delivered or interest, if any,
will cease to accrue on and after the Purchase Date;
(E) that Holders whose Securities are being purchased only in
part will, without charge, be issued a new Security equal in Principal
Amount to the unpurchased portion of the Securities; and
(F) that the Purchase Price for any Security as to which a
Purchase Notice has been given will be paid one Business Day following
the later of (x) the Purchase Date and (y) the date such Security is
surrendered to the Company.
(vi) All shares of Common Stock delivered upon purchase of the
Securities shall be newly issued shares or treasury shares, shall be duly
and validly issued, fully paid and nonassessable, shall not be issued in
violation of any preemptive or similar rights and shall be free of any
liens, encumbrances or restrictions on transfer other than those imposed by
the Securities Act and applicable state securities or "Blue Sky" laws.
(vii) Receipt of such Security by the Company prior to, on or after
the Purchase Date shall be a condition to the receipt by the Holder of the
Purchase Price therefor.
(viii) on the Business Date immediately following the later of (x) the
Purchase Date and (y) the date on which such Securities are surrendered to
the Company, the Company shall deliver to each Holder entitled to receive
Common Stock a certificate for the number of full shares of
<PAGE> 13
-10-
Common Stock issuable in payment of the Purchase Price and cash in lieu of
any fractional shares.
(ix) If a Holder is paid in Common Stock, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on such issuance of
Common Stock.
(x) Upon surrender of a Security that is to be purchased only in part,
the Company shall, without charge, execute and deliver to the Holder a new
Security equal in Principal Amount to the unpurchased portion of such
Security.
(b) Purchase at the Option of the Holder upon Company Change of Control.
Upon a Change of Control of the Company, the Company shall be obligated to make
an offer to purchase all outstanding Securities (the "Company Change of Control
Offer") at a purchase price per $1,000 Principal Amount (the "Company Change of
Control Purchase Price") equal to the sum of (x) the Issue Price plus (y)
accrued Original Issue Discount to the Company Change of Control Payment Date.
If, prior to the Company Change of Control Payment Date, the Securities have
been converted to a semiannual coupon note following the occurrence of a Tax
Event, the Company Change of Control Purchase Price will be equal to the
Restated Principal Amount plus interest accrued and unpaid from, and including,
the date of such conversion to, but excluding, the Company Change of Control
Payment Date.
(i) within 10 days after the occurrence of a Change of Control of the
Company, the Company shall cause a notice of the Company Change of Control
Offer (the "Company Change of Control Offer Notice") to be sent by
first-class mail, postage prepaid, to the Holders at their addresses
appearing in the register maintained by the Company, stating:
(A) the event or events causing such Change of Control of the
Company and the date such Change of Control occurred;
(B) that the Company Change of Control Offer is being made
pursuant to this paragraph 4(b);
(C) the Company Change of Control Purchase Price and the purchase
date (which shall be a Business Day no earlier than 10 days nor later
than 30
<PAGE> 14
-11-
days from the date such notice is mailed (the "Company Change of
Control Payment Date"));
(D) that a Company Change of Control Purchase Notice (as defined
below) must be delivered to the Company on or prior to the close of
business on the Company Change of Control Payment Date and that
Securities must be surrendered to the Company prior to, on or after
the Company Change of Control Payment Date to collect payment,
including any procedures to be followed in so surrendering the
Securities;
(E) that any Security as to which a Company Change of Control
Purchase Notice has not been delivered will continue to accrue
Original Issue Discount or interest, if any;
(F) the Conversion Price in effect on the date of the Company
Change of Control Offer Notice and any adjustments thereto resulting
from such Change of Control;
(G) that the Securities as to which a Company Change of Control
Purchase Notice has been given may be converted into Common Stock at
any time prior to the close of business on the Company Change of
Control Payment Date;
(H) that, unless the Company defaults in the payment of the
Company Change of Control Payment, Original Issue Discount on all
Securities as to which a Company Change of Control Purchase Notice has
been delivered or interest, if any, will cease to accrue on and after
the Company Change of Control Payment Date;
(I) that Holders whose Securities are being purchased only in
part will, without charge, be issued a new Security equal in Principal
Amount to the unpurchased portion of the Securities; and
(J) that the Company Change of Control Purchase Price for any
Security as to which a Company Change of Control Purchase Notice has
been given will be paid one Business Day following the later of (x)
the Company Change of Control Payment Date and (y) the date such
Security is surrendered to the Company.
<PAGE> 15
-12-
(ii) A Holder may elect to have its Securities purchased pursuant to a
Company Change of Control Offer upon delivery of a written notice of
purchase (the "Company Change of Control Purchase Notice") to the Company
at any time prior to the close of business on the Company Change of Control
Payment Date, stating:
(A) the certificate number of each Security which the Holder will
deliver to be purchased; and
(B) the portion of the Principal Amount of such Security which
the Holder has elected to have purchased.
(iii) Receipt of such Security by the Company prior to, on or after
the Company Change of Control Payment Date shall be a condition to the
receipt by the Holder of the Company Change of Control Purchase Price
therefor.
(iv) Provisions of this Security that apply to the purchase of all of
a Security also apply to the purchase of any portion of such Security.
(v) Any purchase of Securities contemplated pursuant to this paragraph
4(b) shall be consummated by the delivery of the Company Change of Control
Purchase Price to be received by the Holder one Business Day following the
later of (x) the Company Change of Control Payment Date and (y) the date
such Securities are surrendered to the Company.
(vi) If any Security is to be purchased only in part, the Company
shall, without charge, issue to the Holder a new Security equal in
Principal Amount to the unpurchased portion of such Security.
(vii) The Company will comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Securities pursuant to a Company
Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this
paragraph 4(b), the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its
obligations under this paragraph 4(b) by virtue thereof.
<PAGE> 16
-13-
5. PURCHASE AT THE OPTION OF THE COMPANY UPON ELAN CHANGE OF CONTROL
(a) Upon a Change of Control of Elan occurring prior to November 9, 2001,
the Company may, at its option, repurchase (the "Elan Change of Control
Purchase") the Securities held by Elan or any of its Affiliates on the date of
such Change of Control, in whole but not in part, at a cash purchase price per
$1,000 Principal Amount (the "Elan Change of Control Purchase Price") equal to
the greater of (i) the sum of (A) the Issue Price plus (B) accrued Original
Issue Discount to the Elan Change of Control Payment Date (provided that if,
prior to the Elan Change of Control Payment Date, the Securities have been
converted to a semiannual coupon note following the occurrence of a Tax Event,
the sum set forth in this clause (i) shall be the Restated Principal Amount plus
interest accrued and unpaid from, and including, the date of such conversion to,
but excluding, the Elan Change of Control Payment Date) and (ii) the product of
(a) the number of shares of Common Stock into which the Securities to be
redeemed may be converted pursuant to paragraph 6 hereof on the day immediately
preceding the Elan Change of Control Payment Date and (b) the average of the
Closing Prices of the Common Stock for the 20 consecutive trading days ending on
and including the second trading day immediately prior to the Elan Change of
Control Payment Date (as defined below); provided that, as a condition to any
such repurchase, the Company shall repurchase all, but not less than all, of the
Initial Shares, the Shares, the Conversion Shares and the License Shares, in
each case, held by Elan and its Affiliates on the date of such Change of
Control, pursuant to and in accordance with the terms of the Purchase Agreement.
(b) If an Elan Change of Control Purchase is to be made by the Company, the
Company shall, on or prior to the 10th day following receipt of an Elan Change
of Control Notice, cause an irrevocable notice of the Elan Change of Control
Purchase (the "Elan Change of Control Purchase Notice") to be sent by
first-class mail, postage prepaid, to Elan stating:
(i) that the Elan Change of Control Purchase is being made pursuant to
this paragraph 5;
(ii) the Elan Change of Control Purchase Price and the purchase date
(which shall be a Business Day no earlier than 10 days nor later than 20
days from the date of the Elan Change of Control Purchase Notice (the "Elan
Change of Control Payment Date"));
<PAGE> 17
-14-
(iii) that the Elan Change of Control Purchase Price for any Security
as to which the Elan Change of Control Purchase Notice relates will be paid
on the Business Day following the later of (x) the Elan Change of Control
Payment Date and (y) the date such Security is surrendered to the Company;
(iv) that Elan shall, and shall cause its Affiliates to, surrender to
the Company on or prior to the Elan Change of Control Payment Date all
Securities owned by any of them on the date of the Change of Control of
Elan and the procedures to be followed in so surrendering such Securities;
and
(v) that, unless the Company defaults in the payment of the Elan
Change of Control Purchase Price, Original Issue Discount on all such
Securities or interest, if any, will cease to accrue on and after the Elan
Change of Control Payment Date and, effective upon the date of the Change
of Control of Elan, such Securities shall cease to be convertible.
(c) In the event that the Company fails to deliver the Elan Change of
Control Purchase Notice on or prior to the 10th day following receipt of an Elan
Change of Control Notice pursuant to paragraph 5(b) hereof, such failure shall
be deemed to be a waiver by the Company of its right to repurchase the
Securities pursuant to this paragraph 5.
(d) Upon the giving of the Elan Change of Control Purchase Notice pursuant
to this paragraph 5, such notice may not be revoked by the Company and all
Securities as to which such Elan Change of Control Purchase Notice relates shall
become due and payable in accordance with this paragraph 5 at the Elan Change of
Control Purchase Price.
(e) Receipt of such Securities by the Company prior to, on or after the Elan
Change of Control Payment Date shall be a condition to the receipt by the Holder
of the Elan Change of Control Purchase Price therefor.
6. CONVERSION
(a) A Holder of a Security may, on or prior to November 9, 2008, convert in
whole at any time or in part from time to time such Security into Common Stock;
provided, however, that if a Security is called for redemption, the Holder may
convert it at any time before the Redemption Date. A Security
<PAGE> 18
-15-
in respect of which the Holder has delivered a Purchase Notice or a Company
Change of Control Purchase Notice exercising the option of such Holder to
require the Company to purchase such Security may, notwithstanding such notice,
convert the Security in accordance with this paragraph 6 until the close of
business on the Payment Date or the Company Change of Control Payment Date, as
the case may be. Upon the occurrence of a Change of Control of Elan, the
Securities then held by Elan and its Affiliates may not be converted on or prior
to the 10th day following the giving of an Elan Change of Control Notice;
provided that, if an Elan Change of Control Purchase Notice is given by the
Company pursuant to paragraph 5(b) hereof, the Securities may not be converted
unless the Company defaults in the payment of the Elan Change of Control
Purchase Price for all Securities as to which such Elan Change of Control
Purchase Notice relates. Notwithstanding the foregoing, neither Elan nor any of
its Affiliates may convert any Security held by it if, at the time of such
conversion, Elan is in violation of Section 14(c) of the Purchase Agreement.
(b) This Security shall be convertible into a number shares of Common Stock
equal to (x) the Issue Price plus all accrued Original Issue Discount to the
applicable Conversion Date (as defined below) (provided that if, prior to the
applicable Conversion Date, the Securities have been converted to a semiannual
coupon note following the occurrence of a Tax Event, this clause (x) shall be
the Restated Principal Amount plus interest accrued and unpaid from, and
including, the date of such conversion to, but excluding, such Conversion Date)
divided by (y) $14.00, as adjusted to the Conversion Date (the "Conversion
Price"). Provisions of this Security that apply to conversion of all of a
Security also apply to conversion of a portion of such Security.
(c) The shares of Common Stock issuable upon conversion of this Security
shall, to the extent required, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO A VALID EXEMPTION
THEREFROM. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE
<PAGE> 19
-16-
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S
(SECTION 230.901 THROUGH SECTION 230.905, AND PRELIMINARY NOTES). HEDGING
TRANSACTIONS INVOLVING THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE CONDUCTED UNLESS IN COMPLIANCE WITH THE ACT.
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
THE CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF
NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN INTERNATIONAL SERVICES,
LTD. AND ELAN CORPORATION, PLC, AND THE COMPANY RESERVES THE RIGHT TO
REFUSE THE TRANSFER OF SUCH SHARES UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE
FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE.
(d) To convert this Security a Holder must (i) complete and duly sign a
conversion notice in the form attached hereto as Annex B (the "Conversion
Notice") and deliver such notice to the Company and (ii) surrender this Security
to the Company. The date on which a Holder of Securities satisfies all the
foregoing requirements is the conversion date (the "Conversion Date"). Not more
than three Business Days after the Conversion Date, the Company shall deliver to
the Holder a certificate for the number of full shares of Common Stock issuable
upon such conversion and cash in lieu of any fractional share. The Person in
whose name the certificate is registered shall be treated as a stockholder of
record on and after the Conversion Date; provided, however, that no surrender of
a Security on any date when the stock transfer books of the Company shall be
closed shall be effective to constitute the Person or Persons entitled to
receive the shares of Common Stock upon such conversion as the record holder or
holders of such shares of Common Stock on such date, but such surrender shall be
effective to constitute the Person or Persons entitled to receive such shares of
Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; such conversion shall be at the Conversion Price in effect on the date
that such Security shall have been surrendered for conversion, as if the stock
transfer books of the Company had not been closed. Upon conversion of a
Security, such Person shall no
<PAGE> 20
-17-
longer be a Holder of such Security. Any Security for which a Conversion Notice
is delivered on any Business Day shall be deemed to be converted simultaneously
with all other Securities for which a Conversion Notice is delivered on such
Business Day, subject to the surrender of such Securities to the Company
pursuant to this paragraph 6.
(e) If a Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon such conversion shall be based on
the sum of (x) the aggregate Issue Price plus (y) the aggregate accrued
Original Issue Discount, in each case, of the Securities converted; provided
that if, prior to the applicable Conversion Date, the Securities have been
converted to a semiannual coupon note following the occurrence of a Tax Event,
such conversion shall be based on the sum of (x) the aggregate Restated
Principal Amount plus (y) the aggregate interest accrued and unpaid from, and
including, the date of such conversion to, but excluding, such Conversion Date.
Upon surrender of a Security that is converted in part, the Company shall
execute and deliver to the Holder a new Security in a denomination equal in
Principal Amount to the unconverted portion of the Security surrendered. If the
last day on which a Security may be converted is not a Business Day, such
Security may be surrendered to the Company on the next succeeding Business Day.
(f) The Company shall not issue a fractional share of Common Stock upon
conversion of a Security. Instead, the Company shall deliver cash in an amount
equal to the current market value of the fractional share. The current market
value of a fraction of a share shall be determined to the nearest 1/10,000th of
a share by multiplying the average of the Closing Prices of the Common Stock for
the 20 consecutive trading days immediately prior to the applicable Conversion
Date by such fraction and rounding to the nearest whole cent, with one-half cent
being rounded upward.
(g) If a Holder converts a Security, the Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon such conversion.
(h) The Company shall reserve out of its authorized but unissued Common
Stock a sufficient number of shares of Common Stock to permit the conversion of
the Securities. All shares of Common Stock delivered upon conversion of the
Securities shall be newly issued shares or treasury shares, shall be validly
issued, nonassessable and fully paid, shall not be issued in violation of any
preemptive or similar rights and shall be
<PAGE> 21
-18-
free of any liens, encumbrances or restrictions on transfer imposed by the
Company other than those imposed by the Securities Act and applicable state
securities or "Blue Sky" laws. The Company shall cause all such reserved shares
of Common Stock to be listed on the Nasdaq National Market or any other United
States securities exchange or market where the Common Stock is principally
traded.
(i) The Conversion Price shall be adjusted from time to time by the Company
as follows:
(i) In case the Company shall, at any time or from time to time on or
after the Issue Date, (A) pay a dividend or make a distribution on its
Common Stock in shares of Common Stock, (B) subdivide its outstanding
Common Stock into a greater number of shares, (B) combine its outstanding
Common Stock into a smaller number of shares or (D) issue by
reclassification of its Common Stock any other shares of its Capital Stock,
then, in each such case, the Conversion Price in effect immediately prior
to such action shall be adjusted so that the Holder of any Security
thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other Capital Stock of the Company
which such Holder would have owned or have been entitled to receive after
the happening of any of the events described above had such Security been
converted immediately prior to the happening of such event. If any dividend
or distribution of the type described in clause (A) above is not so paid or
made, the Conversion Price shall again be adjusted to the Conversion Price
which would then be in effect if such dividend or distribution had not been
declared. An adjustment made pursuant to this paragraph 6(i)(i) shall
become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of subdivision, combination or reclassification.
If, after an adjustment made pursuant to this paragraph 6(i)(i), the Holder
of any Security thereafter converted shall become entitled to receive
shares of two or more classes of Capital Stock of the Company, the board of
directors of the Company shall determine the allocation of the adjusted
Conversion Price between or among such classes of Capital Stock, which
determination shall be final and binding on all Holders. After such
allocation, the Conversion Price of each class of Capital Stock of the
Company shall thereafter be subject to adjustment on terms comparable to
those applicable to Common Stock in this paragraph 6(i).
<PAGE> 22
-19-
(ii) if, at any time or from time to time on or after the Issue Date, the
Company issues or sells any Common Stock for consideration in an amount per
share less than the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second trading day
immediately prior to such issuance or sale, the Conversion Price shall be
adjusted in accordance with the following formula:
P
-
E' = E x 0 + M
-----
A
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common stock outstanding immediately
prior to the issuance or sale of such additional shares of
Common Stock.
P = the aggregate consideration received for the issuance or
sale of such additional shares of Common Stock.
M = the average Closing Prices of the Common Stock for the 20
consecutive trading days ending on and including the second
trading day immediately prior to the date of the issuance or
sale of such additional shares of Common Stock.
A = the number of shares of Common Stock outstanding immediately
after the issuance or sale of such additional shares of Common
Stock.
The adjustments shall be made successively whenever any such issuance
or sale is made, and shall become effective immediately after such issuance
or sale.
This paragraph 6(i)(ii) does not apply to:
(A) the issuance of the License Shares pursuant to and in
accordance with the License Agreement and the Purchase Agreement;
<PAGE> 23
-20-
(B) the conversion of the Securities or the conversion, exercise
or exchange of any other securities convertible into, or exercisable
or exchangeable for, Common Stock;
(C) the issuance of Common Stock pursuant to a valid and binding
written agreement with any Person, the terms of which provide that
such Common Stock is to be issued on a date after the execution of
such agreement and upon the occurrence of specified events (other than
solely the passage of time);
(D) the issuance Common Stock to the shareholders of any Person
which mergers into the Company or any Subsidiary of the Company in
proportion to such shareholders' ownership of the securities of such
Person, upon such merger; or
(E) Common Stock issued in a bona fide public offering pursuant
to a firm commitment or "best efforts" underwriting.
(iii) if, at any time or from time to time on or after the Issue Date,
the Company shall issue rights, options or warrants to all holders of its
Common Stock entitling them (for a period expiring within 60 days after the
record date mentioned below) to subscribe for or purchase shares of Common
Stock at a price per share less than the greater of (x) the average of the
Closing Prices of the Common Stock for the 20 consecutive trading days
ending on and including the second trading day immediately prior to the
record date and (y) the then current Conversion Price, the Conversion Price
shall be adjusted in accordance with the following formula:
N x P
-----
E' = E x 0 + M
-----
0 + N
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common Stock outstanding on the record
date fixed for determination of
<PAGE> 24
-21-
stockholders entitled to participate in such issuance.
N = the number of additional shares of Common Stock offered
pursuant to such issuance.
P = the offering price per share of such additional shares of
Common Stock.
M = the greater of (x) the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and
including the second trading day immediately prior to the record
date and (y) the then current Conversion Price.
The adjustment shall be made successively whenever any such issuance is
made and shall become effective immediately after the record date fixed for the
determination of stockholders entitled to participate in such issuance.
To the extent that shares of Common Stock are not delivered after the
expiration of such rights, options or warrants, the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights, options or warrants been made
on the basis of delivery of only the number of shares of Common Stock actually
delivered. If such rights, options or warrants are not so issued, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if the record date for the determination of stockholders entitled to
participate in such distribution had not been fixed. In determining whether any
rights, options or warrants entitle the Holders to subscribe for or purchase
shares of Common Stock at a price per share less than the average of the Closing
Prices of the Common Stock for the 20 consecutive trading days ending on and
including the second trading day immediately preceding the record date, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received by the Company for such
rights, options or warrants, the value of such consideration, if other than
cash, to be determined in good faith by the board of directors of the Company
(irrespective of the accounting treatment thereof), which determination shall be
final and binding on all Holders. Such determination shall be described in a
board resolution. Notwithstanding the foregoing provisions of this paragraph
6(i)(iii), an
<PAGE> 25
-22-
event which would otherwise give rise to an adjustment under this paragraph
6(i)(iii) shall not give rise to such an adjustment if the Company includes the
Holders in such distribution on a pro rata basis as if each such Holder held the
number of shares of Common Stock into which such Holder's Securities are
convertible on the record date fixed for determination of the stockholders
entitled to participate in such distribution and with the same notice as is
provided to such stockholders.
This paragraph 6(i)(iii) does not apply to transactions described in
paragraph 6(i)(iv).
(iv) If, at any time or from time to time on or after the Issue Date, the
Company shall, by dividend or otherwise, distribute to all holders of its Common
Stock any class of Capital Stock of the Company (other than Common Stock) or
evidences of its indebtedness or assets (excluding cash dividends or other cash
distributions from current or retained earnings other than any Extraordinary
Cash Dividend) or rights, options or warrants to subscribe for or purchase any
of the foregoing, the Conversion Price shall be adjusted in accordance with the
following formula:
E' = E x M - F
-----
M
where
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
M = the greater of (x) the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and
including the second trading day immediately prior to the record
date mentioned below and (y) the then current Conversion Price.
F = the fair market value on the record date fixed for determination
of the stockholders entitled to participate in such distribution
of the assets, securities, rights, options or warrants
applicable to one share of Common stock. The board of directors
shall determine such fair market value in good faith
(irrespective of the
<PAGE> 26
-23-
accounting treatment thereof), which determination shall be
final and binding on the Holders. Such determination shall be
described in a board resolution.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date fixed for the
determination of stockholders entitled to receive such distribution. To the
extent that shares of Common Stock are not so delivered after the expiration of
such rights, options, or warrants, the Conversion Price shall be readjusted to
the Conversion Price which would then be in effect had the adjustment made upon
the issuance of such rights, options or warrants been made on the basis of the
delivery of only the number of shares of Common Stock actually delivered.
Notwithstanding the foregoing provisions of this paragraph 6(i)(iv), an event
which would otherwise give rise to an adjustment under this paragraph 6(i)(iv)
shall not give rise to such an adjustment if the Company includes the Holders in
such distribution on a pro rata basis as if each such Holder held the number of
shares of Common Stock into which such Holder's Securities are convertible on
the record date fixed for determination of the stockholders entitled to
participate in such distribution and with the same notice as is provided to such
stockholders.
This paragraph 6(i)(iv) does not apply to any transaction described in
paragraph 6(i)(iii) hereof.
(v) If, at any time or from time to time on or after the Issue Date, the
Company shall (x) enter into any valid and binding written agreement with any
Person to issue or sell Common Stock on a date after the execution of such
agreement and upon the occurrence of specified events (other than solely the
passage of time) or (y) issue or sell any securities convertible into, or
exercisable or exchangeable for, Common Stock, in each case, for consideration
per share of Common Stock less than the average of the Closing Prices of the
Common Stock for the 20 consecutive trading days ending on and including the
second trading day immediately prior to, in the case of clause (x), the date of
execution of such agreement, and, in the case of clause (y), the date of such
issuance or sale, the Conversion Price shall be adjusted in accordance with the
following formula:
<PAGE> 27
-24-
P
-
E' = E x O + M
-----
O + D
where:
E' = the adjusted Conversion Price.
E = the then current Conversion Price.
O = the number of shares of Common Stock outstanding immediately
prior to, in the case of clause (x) above, the date of execution
of such agreement, and, in the case of clause (y) above, the
issuance or sale of such securities.
P = (a) in the case of clause (x) above, the minimum aggregate
amount of consideration payable to the Company upon the issuance
or sale of such Common Stock (including the minimum aggregate
amount of cash payments to be made by the Company to the other
Person or Persons party to such agreement in lieu of which such
Common Stock may be issued) and (b) in the case of clause (y)
above, the aggregate consideration received for the issuance or
sale of such securities plus the minimum aggregate amount of
additional consideration, other than the surrender of such
securities, payable to the Company upon conversion, exercise or
exchange of such securities.
M = the Closing Prices of the Common stock for the 20 consecutive
trading days ending on and including the second trading day
immediately prior to, in the case of clause (x) above, the date
of execution of such agreement, and, in the case of clause (y)
above, the date of such issuance or sale.
D = the maximum stated number of shares deliverable pursuant to such
agreement or upon conversion, exercise or exchange of such
securities, as the case may be.
The adjustment shall be made successively whenever any such agreement is
executed or such issuance or sale is made, and shall become effective
immediately after the execution of such agreement or such issuance or sale.
<PAGE> 28
-25-
If all of the Common Stock deliverable pursuant to any such agreement or
upon conversion, exercise or exchange of such securities have not been issued
upon the expiration or termination of such agreement or when such securities are
no longer outstanding, as the case may be, then the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustment made upon the execution of such agreement or the issuance or sale of
such securities been made on the basis of the actual number of shares of Common
Stock issued pursuant to such agreement or upon conversion, exercise or exchange
of such securities.
This paragraph 6(i)(v) does not apply to:
(A) any stock options issued to employees and consultants (other than
officers or directors) of the Company pursuant to any employee stock option
or purchase plan or program approved by the board of directors of the
Company;
(B) the issuance of the Securities; or
(C) any transaction described in paragraph 6(i)(iii) or (iv).
In the event of any change in the number of shares of Common Stock
deliverable, or in the consideration payable to the Company, pursuant to any
such agreement or upon the conversion, exercise or exchange of such securities,
including, but not limited to, a change resulting from any anti-dilution
provisions thereof, the Conversion Price shall, on the date of such change, be
recomputed to reflect such change.
(vi) For purposes of any computation respecting consideration received
pursuant to paragraph 6(i)(ii) and (v) hereof, the following shall apply:
(A) in the case of the issuance or sale of shares of Common Stock for
cash, the consideration shall be the amount of such cash; provided that in
no event shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company in connection therewith;
<PAGE> 29
-26-
(B) in the case of the issuance or sale of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the board of directors of the Company
(irrespective of the accounting treatment thereof), which determination
shall be final and binding on the Holders. Such determination shall be
described in a board resolution; and
(C) in the case of any agreement referred to in clause (x) of
paragraph 6(i)(v) hereof or the issuance or sale of securities referred to
in clause (y) of paragraph 6(i)(v) hereof, the consideration, if any, to be
received by the Company for the issuance or sale of Common Stock pursuant
to such agreement or upon the conversion, exercise or exchange of such
securities shall be determined in the same manner as provided in clauses
(A) and (B) of this paragraph 6(i)(vi).
(vii) No adjustment in the Conversion Price need be made unless the
adjustment would require a decrease of at least 1% in the Conversion Price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this paragraph 6(i) shall be made to the
nearest cent or to the nearest 1/10,000th of a share, as the case may be.
(viii) No adjustment need be made for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest. No
adjustment need be made for a change in the par value or no par value of the
Common Stock. To the extent that the Securities become convertible into cash, no
adjustment need be made thereafter as to the amount of cash into which such
Securities are convertible. Neither Original Issue Discount nor interest will
accrue on cash.
(ix) Whenever the Conversion Price is adjusted, the Company shall promptly
mail to each Holder, by first-class mail, postage prepaid, at its address
appearing on the register maintained by the Company, a notice of the adjustment.
(x) In case:
<PAGE> 30
-27-
(A) the Company shall take any action that would require an adjustment
in the Conversion Price pursuant to paragraph 6(i)(i), (ii), (iii), (iv) or
(v) hereof;
(B) of any event described in paragraph 6(i)(xi) hereof; or
(C) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
the Company shall cause to be mailed to each Holder, by first-class mail,
postage prepaid, at its address appearing on the register maintained by the
Company, as promptly as possible but in any event at least 15 days prior to the
applicable date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of any dividend or distribution or (y) the
date on which any reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective or occur.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of such dividend, distribution, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up.
(xi) In the event of: (a) any reclassification or change of outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), (b) any consolidation or amalgamation with, or merger with or
into, another Person as a result of which holders of Common Stock shall be
entitled to receive cash, securities or other property with respect to or in
exchange for such Common Stock or (c) any sale, transfer, assignment, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company (in one transaction or series of related transactions) to any other
Person as a result of which holders of Common Stock shall be entitled to receive
cash, securities or other property with respect to or in exchange for such
Common Stock, then the Company or the Person (if other than the Company) formed
by such consolidation or amalgamation or into which the Company is merged or to
which the properties and assets are sold, assigned, transferred, leased,
conveyed or otherwise disposed of, as the case may be, shall expressly agree in
writing, in form and substance satisfactory to a majority of Holders of
Securities
<PAGE> 31
-28-
then outstanding (excluding Securities then held by the Company or any of its
Affiliates), that each Security shall be convertible into the kind and amount of
securities, cash or other assets which the Holder of such Security would have
owned immediately after such reclassification, change, consolidation,
amalgamation, merger, sale, transfer, assignment, lease, conveyance or other
disposition if such Holder had exercised such Security immediately before the
record date or effective date, as the case may be, of the transaction. Such
written agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph 6(i).
The Company shall cause notice of the execution of such written agreement
to be mailed to each Holder, by first-class mail, postage prepaid, at its
address appearing on the register maintained by the Company, within 20 days
after execution thereof. Failure to deliver such notice shall not affect the
legality or validity of such agreement.
The above provisions of this paragraph 7(i)(xi) shall similarly apply to
successive reclassifications, changes, consolidations, amalgamations, mergers,
sales, transfers, assignments leases, conveyances or other dispositions.
If this paragraph 6(i)(ix) applies to any event or occurrence, paragraph
6(i)(i), (ii), (iii), (iv) and (v) hereof shall not apply.
(xii) Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase shares
of the Company's Capital Stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events (each, a "Trigger Event"): (i) are deemed to be transferred with
such shares of Common Stock, (ii) are not exercisable and (iii) are also issued
in respect of future issuances of Common Stock, shall be deemed not to have been
distributed for purposes of this paragraph 6(i) (and no adjustment to the
Conversion Price under this paragraph 6(i) will be required) until the
occurrence of the earliest Trigger Event, whereupon such rights and warrants
shall be deemed to have been distributed and an appropriate adjustment (if any
is required) to the Conversion Price shall be made under this paragraph 6(i). If
any such right or warrant, including
<PAGE> 32
-29-
any such existing rights or warrants distributed prior to the Issue Date,
are subject to events, upon the occurrence of which such rights or warrants
become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the date of the occurrence of any and
each such event shall be deemed to be the date of distribution with respect
to new rights or warrants with such rights (and a termination or expiration
of the existing rights or warrants without exercise by any of the holders
thereof). In addition, in the event of any distribution (or deemed
distribution) of rights or warrants, or any Trigger Event or other event
(of the type described in the preceding sentence) with respect thereto that
was counted for purposes of calculating a distribution amount for which an
adjustment to the Conversion Price under this paragraph 6(i) was made, (A)
in the case of any such rights or warrants which shall have been redeemed
or repurchased without exercise by any holders thereof, the Conversion
Price shall be readjusted upon such final redemption or repurchase to give
effect to such distribution or Trigger Event, as the case may be, as though
it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with
respect to such rights or warrants (assuming such holder had retained such
rights or warrants), made to all holders of Common Stock as of the date of
such redemption or repurchase and (B) in the case of such rights or
warrants which shall have expired or been terminated without exercise by
any holders thereof, the Conversion Price shall be readjusted as if such
rights and warrants had not been issued. Notwithstanding the foregoing, no
Holder shall be entitled to any adjustment in the Conversion Price of the
Notes held by such Holder pursuant to this paragraph 6(i) if the applicable
Trigger Event shall have been caused by the acquisition of securities of
the Company by such Holder or any of its Affiliates.
(j) After an adjustment to the Conversion Price under paragraph 6(i), (ii),
(iii), (iv) or (v) hereof, any subsequent event requiring an adjustment shall
cause an adjustment to the Conversion Price as so adjusted.
(k) No adjustment shall be made pursuant to paragraph 6(i)(i), (ii), (iii),
(iv) or (v) hereof if, as a result thereof, the Conversion Price would be
increased.
<PAGE> 33
-30-
7. COVENANTS
(a) Payment of Securities. The Company shall promptly make all payments in
respect of the Securities on the dates and in the manner provided herein.
The Company shall, to the extent permitted by law, pay interest on overdue
amounts at the rate set forth in paragraph 1 of the Securities, which interest
on overdue amounts (to the extent that the payment of such interest shall be
legally enforceable) shall accrue from the date such amounts became overdue.
(b) SEC Reports. The Company shall deliver to each Holder, by first-class
mail, postage prepaid, at its address appearing on the register maintained by
the Company, at the time the Company distributes them to the holders of its
Common Stock, copies of its annual reports to shareholders and its proxy
statements. In addition, the Company shall deliver to Elan, by first-class mail,
postage prepaid, at its address appearing on the register maintained by the
Company, within 30 days after the Company files them with the SEC, copies of all
other information, documents and reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act (or any successor provision thereof). In the event that the Company
is at any time no longer subject to the reporting requirements of the Exchange
Act (or any such successor provision), it shall deliver to each Holder, by
first-class mail, postage prepaid, at its address appearing on the register
maintained by the Company, reports containing substantially the same information
as would have been required to be filed with the SEC had the Company continued
to have been subject to such reporting requirements, including, with respect to
annual information only, a report thereon by the Company's certified independent
public accountants as such would be required in such reports to the SEC and, in
each case, together with a management's discussion and analysis of financial
condition and results of operations as such would be so required. In such event,
such reports shall be so delivered at the time the Company would have been
required to provide such reports had it continued to have been subject to such
reporting requirements.
(c) Compliance Certificates; Notice of Defaults.
(i) The Company shall deliver to each Holder, within 90 days after the
end of each fiscal year, an Officers'
<PAGE> 34
-31-
Certificate stating that a review of the activities of the Company and its
Subsidiaries during such fiscal year has been made under the supervision of
the signing Officers with a view to determining whether the Company has
kept, observed, performed and fulfilled its obligations under the
Securities, and further stating, as to each such Officer signing such
certificate, that to the best of his or her knowledge, the Company has
kept, observed, performed and fulfilled each and every covenant contained
in the Securities and is not in default in the performance or observance of
any of the terms, provisions and conditions contained in the Securities
(or, if a Default or Event of Default shall have occurred, describing all
such Defaults or Events of Default of which he or she may have knowledge
and what action the Company is taking or proposes to take with respect
thereto).
(ii) The Company shall, so long as any of the Securities are
outstanding, deliver to each Holder, forthwith upon any Officer becoming
aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
(d) Further Instruments and Acts. Upon request of the Holders of at least a
majority in the aggregate Principal Amount of the outstanding Securities
(excluding Securities at the time owed by the Company and its Affiliates), the
Company will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
provisions of the Securities.
(e) Taxes. The Company shall, and shall cause each of its Subsidiaries to,
pay prior to delinquency all material taxes, assessments and governmental
levies, except as contested in good faith and by appropriate proceedings.
(f) Legal Existence. Subject to paragraph 8 hereof, the Company shall do or
cause to be done all things necessary to preserve and keep in full force and
effect its legal existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with their respective organizational
documents (as the same may be amended from time to time) and the rights (charter
and statutory), licenses and franchises of the Company and its Subsidiaries;
provided that the Company shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any of
its Subsidiaries if the board of directors of the Com-
<PAGE> 35
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pany shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and its Subsidiaries, taken as a whole.
(g) Withholding Taxes. All transfers of Securities by the Holders thereof
and all payments made by the Company under or with respect to the Securities
(including the issuance of securities upon the conversion of the Securities)
shall be made free and clear of and without withholding or deduction for or on
account of any present or future Taxes, unless the Company is required to
withhold or deduct Taxes by law or by the interpretation or administration
thereof. If the Company is required by law or by the interpretation or
administration thereof to withhold or deduct any amount of Taxes in connection
with the Securities, such amount shall be withheld and deducted by the Company
without alteration of or increase in its obligations under the Securities;
provided, however, that, if the Holder thereof has delivered to the Company a
complete, manually-signed copy of Internal Revenue Service Form 1001 (or any
successor form) or Internal Revenue Service Form 4224 (or any successor form)
properly certifying to such Holder's entitlement to a complete exemption from
U.S. withholding Tax with respect to such payment under applicable United States
Treasury Regulations, such payment shall be made free and clear of and without
withholding or deduction for or on account of any Taxes. In connection with any
payment made by the Company under any Security which is made in whole or in part
through the delivery of shares of Common Stock of the Company (including upon
the conversion of the Securities), the amount required to be withheld or
deducted shall first be withheld or deducted from the amount of cash (up to the
total amount thereof) which would otherwise be paid at such time. Any additional
amount required to be withheld or deducted, unless otherwise agreed by the
Company and the Holder of a Security, shall be withheld and deducted by reducing
the number of shares of Common Stock to be delivered by that number of shares of
Common Stock equal to the remaining amount required to be withheld or deducted
divided by the Conversion Price in effect on the date of such payment.
(h) Line of Business. The Company and its Subsidiaries will not engage in
any businesses other than the business of researching, developing, marketing,
selling, manufacturing, distributing or licensing pharmaceutical, medical,
biologic, genetic or related products and services and financing activities
related solely thereto, including the businesses in which the Company and its
Subsidiaries are engaged on the Issue Date.
<PAGE> 36
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(i) Use of Proceeds. The Company will use the gross proceeds from the
issuance of any Additional Notes in accordance with Section 1(b) of the Purchase
Agreement and otherwise in accordance with the Purchase Request related thereto.
(j) Maintenance of Properties; Insurance; Books and Records; Compliance
with Law.
(i) The Company shall, and shall cause each of its Subsidiaries to, at
all times cause all material properties used or useful in the conduct of
its business to be maintained and kept in good condition, repair and
working order (reasonable wear and tear excepted) and supplied with all
necessary equipment, and shall cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereto; provided
that, subject to the other provisions of the Securities, nothing in this
paragraph 7(j)(i) shall prevent the Company or any of its Subsidiaries from
selling, abandoning or otherwise disposing of any property (including any
lease of property) if in the judgment of the Company the same is no longer
useful in the business of the Company or such Subsidiary, as the case may
be.
(ii) The Company shall maintain, and shall cause to be maintained for
each of its Subsidiaries, insurance covering such risks as are usually and
customarily insured against by corporations similarly situated, in such
amounts as shall be customary for corporations similarly situated and with
such deductibles and by such methods as shall be customary and reasonably
consistent with past practice.
(iii) The Company shall, and shall cause each of its Subsidiaries to,
keep proper books of record and account, in which full and correct entries
shall be made of all financial transactions and the assets and business of
the Company and each Subsidiary of the Company, in accordance with U.S.
generally accepted accounting principles consistently applied to the
Company and its Subsidiaries, taken as a whole.
(iv) The Company shall, and shall cause each of its Subsidiaries to,
comply with all statutes, laws, ordinances or government rules and
regulations to which they are subject, non-compliance with which would
materially adversely affect the business, prospects, earnings, prop-
<PAGE> 37
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erties, assets or financial condition of the Company and its Subsidiaries,
taken as a whole.
8. SUCCESSOR CORPORATION
(a) The Company shall not consolidate with, amalgamate with, merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets (as an entirety or substantially as an entirety
in one transaction or a series of related transactions), to any Person unless:
(i)(x) the Company shall be the continuing Person, or (y) the Person
(if other than the Company) formed by such consolidation or amalgamation or
into which the Company is merged or to which the properties and assets of
the Company are sold, assigned, transferred, leased, conveyed or otherwise
disposed of (in any case, the "Successor Company") shall be a corporation
organized and existing under the laws of the United States or any State
thereof or the District of Columbia and the Successor Company shall
expressly affirm, in writing, the due and punctual performance of all of
the terms, covenants, agreements and conditions of the Securities to be
performed or observed by the Company, and such obligations shall remain in
full force and effect; and
(i) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing.
(b) In connection with any consolidation, amalgamation, merger or sale,
assignment, transfer, lease, conveyance or other disposition of assets
contemplated by this paragraph 8, prior to the consummation of such transaction
or transactions the Company shall deliver, or cause to be delivered, to each
Holder, by first-class mail, postage prepaid, at its address appearing in the
register maintained by the Company, an Opinion of Counsel stating that (i) such
consolidation, amalgamation, merger or sale, assignment, transfer, lease,
conveyance or other disposition of assets complies with this paragraph 8, (ii)
all conditions precedent herein provided for relating to such transaction or
transactions have been complied with and (iii) the affirmation provided for in
this paragraph 8 has been duly authorized, executed and delivered by the
Successor Company and the Securities are valid and legally binding obligations
of the Successor Company enforceable against it in accordance with their terms
(subject to bankruptcy, insolvency, re-
<PAGE> 38
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organization and similar laws affecting the rights and remedies of creditors
generally and general equitable principles).
(c) For purposes of paragraph 8(a) and (b) hereof, the transfer (by sale,
assignment, lease, conveyance or other disposition, in a single transaction or
series of related transactions) of all or substantially all of the properties or
assets of one or more Subsidiaries of the Company, the Capital Stock of which
constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
(d) Upon any consolidation, amalgamation or merger, or any sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the assets of the Company in accordance with this paragraph
8, the Successor Company shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Securities with the
same effect as if such Successor Company had been named as the Company in the
Securities, and thereafter the predecessor corporation shall be relieved of all
obligations and covenants under the Securities.
9. DEFAULTS AND REMEDIES
(a) An "Event of Default" occurs if:
(i) after exercise of its option pursuant to paragraph 12 hereof
following a Tax Event, the Company defaults in the payment of interest upon
any Security or delivery of any Tax Event Option related thereto, when such
interest becomes due and payable, and such default continues for a period
of 30 days;
(ii) the Company defaults in the payment of the Principal Amount,
Issue Price, accrued Original Issue Discount, Redemption Price, Purchase
Price, Company Change of Control Purchase Price or Elan Change of Control
Purchase Price on any Security when the same becomes due and payable at its
Stated Maturity, upon redemption, upon declaration, when due for purchase
by the Company or otherwise;
(iii) the Company defaults in the observance or performance of any
agreement, covenant, term or condition contained in any Security (other
than those referred to in clause (i) and (ii) above) and such failure
continues for 30 days after receipt by the Company of notice thereof
<PAGE> 39
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(except in the case of a failure or default with respect to paragraph 8
hereof, which shall constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(iv) the Company defaults in any payment of principal of or interest
on any other obligation for money borrowed or the Company fails to perform
or observe any other agreement, covenant, term or condition contained in
any agreement under which any such obligation is created and the effect of
such default or failure is to cause, or the holder or holders of such
obligation (or a trustee on behalf of such holder or holders), as a
consequence of such default or failure shall take action to cause, such
obligation to become due prior to any stated maturity thereof; provided
that the aggregate amount of all obligations as to which such acceleration
shall occur is equal to or greater than $4.0 million;
(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $4.0 million (in excess of amounts
covered by insurance and as to which the insurer has acknowledged coverage)
shall be rendered against the Company or any Subsidiary thereof, and shall
not be discharged for any period of 60 consecutive days during which a stay
of enforcement shall not be in effect;
(vi) the Company or any Subsidiary thereof pursuant to or within the
meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property,
(D) makes a general assignment for the benefit of its creditors,
or
(E) generally is not paying its debts as they become due;
(vii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
<PAGE> 40
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(A) is for relief against either of the Company or any Subsidiary
thereof in an involuntary case,
(B) appoints a Custodian of either of the Company or any
Subsidiary thereof or for all or substantially all of the property of
either of the Company or any Subsidiary thereof, or
(C) orders the liquidation of either of the Company or any
Subsidiary thereof,
and the order or decree remains unstayed and in effect for 60 days; or
(viii) the Company fails to deliver shares of Common Stock (or cash in
lieu of fractional shares) when such Common Stock (or cash in lieu of
fractional shares) is required to be delivered, upon conversion of a
Security and such failure is not remedied for a period of 10 days.
(b) If an Event of Default (other than an Event of Default specified in
paragraph 9(a)(vi) or (vii) hereof occurs and is continuing, the Holders of at
least 25% in aggregate Principal Amount of the Securities at the time
outstanding (excluding Securities at the time owned by the Company and its
Affiliates) by notice to the Company, may declare the Issue Price and accrued
Original Issue Discount (or, if the Securities have been converted to a
semiannual coupon note following a Tax Event, the Restated Principal Amount and
accrued and unpaid interest) through the date of declaration on all the
Securities to be immediately due and payable. Upon such a declaration, such
Issue Price and accrued Original Issue Discount (or, if the Securities have been
converted to a semiannual coupon note following a Tax Event, the Restated
Principal Amount and accrued and unpaid interest) shall become and be due and
payable immediately. If an Event of Default specified in paragraph 9(a)(vi) or
(vii) hereof occurs and is continuing, the issue Price and accrued original
Issue Discount (or, if the Securities have been converted to a semiannual coupon
note following a Tax Event, the Restated Principal Amount and accrued and unpaid
interest) on all the Securities shall become and be immediately due and payable
without any declaration or other act on the part of any Holders. The Holders of
a majority in aggregate Principal Amount of the Securities at the time
outstanding (excluding Securities at the time owned by the Company and its
Affiliates), by notice to the Company (and without notice to any other Holder),
may rescind an acceleration and its consequences if the rescission would not
conflict with any
<PAGE> 41
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judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of the Issue Price and accrued Original Issue Discount
(or accrued and unpaid interest) that have become due solely as a result of
acceleration. No such rescission shall affect any subsequent or other Default or
Event of Default or impair any consequent right.
(c) If an Event of Default occurs and is continuing, any Holder may pursue
any available remedy to collect the payment of the Issue Price and accrued
Original Issue Discount (or, if the Securities have been converted to a
semiannual coupon note following a Tax Event, the Restated Principal Amount and
accrued and unpaid interest) on the Securities or to enforce the performance of
any provision of the Securities.
A delay or omission by any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of, or acquiescence in, the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
(d) The Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding (excluding Securities at the time owned by
the Company and its Affiliates), by notice to the Company (and without notice to
any other Holder), may waive an existing Default or Event of Default and its
consequences except (i) an Event of Default described in paragraph 9(a)(i), (ii)
or (viii) hereof or (ii) a Default in respect of a provision that under
paragraph 11 hereof cannot be amended without the consent of each Holder
affected. When a Default or Event of Default is waived, it is deemed cured, but
no such waiver shall extend to any subsequent or other Default or Event of
Default or impair any consequent right.
(e) Notwithstanding any other provision of the Securities, the right of any
Holder to receive payment of the Principal Amount, Issue Price, accrued Original
Issue Discount, Redemption Price, Purchase Price, Company Change of Control
Purchase Price, Elan Change of Control Purchase Price or interest, if any, in
respect of the Securities held by such Holder, on or after the respective due
dates expressed in the Securities and to convert the Securities in accordance
with paragraph 6 hereof, or to bring suit for the enforcement of any such
payment on or after such respective dates or the right to convert the
Securities, shall not be impaired or affected adversely without the consent of
each such Holder.
<PAGE> 42
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(f) The Company covenants (to the extent it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Company from paying all or any portion of the Principal
Amount, Issue Price plus accrued Original Issue Discount, Redemption Price,
Purchase Price, Company Change of Control Purchase Price or Elan Change of
Control Purchase Price, in each case, in respect of Securities, or any interest
on such amounts, as contemplated herein, or which may affect the covenants or
the performance of the Securities; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Holders, but will suffer and permit the execution of
every power as though no such law had been enacted.
10. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE
(a) The Company shall cause to be kept at its offices a register in which
the Company shall provide for the registration of Securities and of transfers of
Securities. Upon surrender for registration of transfer of any Security, the
Company shall execute, in the name of the designated transferee or transferees,
one or more Securities of a like aggregate Principal Amount and bearing such
restrictive legends as may be required by the terms of the Securities.
At the option of the Holder, and subject to the other provisions of the
Securities, Securities may be exchanged for other Securities of a like aggregate
Principal Amount, upon surrender of the Securities to be exchanged to the
Company. Whenever any Securities are so surrendered for exchange, and subject to
the other provisions of the Securities, the Company shall execute and deliver
the Securities which the Holder making the exchange is entitled to receive.
Every Security presented for registration of transfer or exchange shall be
accompanied by the written instrument of transfer in the form attached hereto as
Annex C, duly executed by the Holder thereof.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and subject to the same provisions as the Securities surrendered upon such
registration of transfer or exchange.
<PAGE> 43
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Subject to paragraph 7(g) hereof and notwithstanding any other provision of
this Section 10(a), no transfer of any Security shall be permitted, and no
registration of transfer shall be effected unless, prior to the time of such
transfer or registration of transfer, the Holder has made arrangements
reasonably satisfactory to the Company for payment or reimbursement of any and
all Taxes which would, in the absence of payment by the transferor, be required
to be paid by the Company as a result of such transfer. No service charge shall
be made for any registration of transfer or exchange. The Company acknowledges
that Treasury Regulation Section 1.441-2(b)(3) (effective January 1, 1999) is
not applicable to any Security issued prior to January 1, 1999.
In the event of a redemption of the Securities, the Company will not be
required (i) to register the transfer of or exchange Securities for a period of
5 days immediately preceding the date notice of any redemption is given pursuant
to paragraph 3(e) hereof or (ii) to register the transfer of or exchange any
Security, or portion thereof, called for redemption.
(b) Except as permitted by this paragraph (b), each Security (and all
Securities issued in exchange therefor or substitution thereof) shall, so long
as appropriate, bear a legend (the "Legend") to substantially the following
effect, (each, a "Transferred Restricted Security"):
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO A VALID EXEMPTION THEREFROM.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE CONDITIONS
SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF NOVEMBER 6, 1998,
BY AND AMONG THE COMPANY, ELAN INTERNATIONAL SERVICES, LTD. AND ELAN
CORPORATION, PLC, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER
OF SUCH SECURITY UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO
SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY
TO THE HOLDER HEREOF WITHOUT CHARGE.
<PAGE> 44
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At such time as any Transfer Restricted Security may be freely transferred
without registration under the Securities Act and without being subject to
transfer restrictions pursuant to the Securities Act, the Company shall permit
the Holder of such Transfer Restricted Security to exchange such Transfer
Restricted Security for a new Security which does not bear the applicable
portion of the Legend upon receipt of certification from such Holder
substantially in the form attached hereto as Annex D and, at the request of the
Company, upon receipt of an opinion of counsel addressed to the Company that the
transfer restrictions contained in the Legend are no longer applicable. In
addition, at such time as such Security is no longer subject to the transfer
conditions set forth in the Purchase Agreement, the Company shall permit the
Holder of such Security to exchange such Security for a new Security which does
not bear the portion of the Legend referring to such transfer conditions.
In addition to the Legend, until the expiration of the "one-year
distribution compliance period" within the meaning of Rule 903 of Regulation S
under the Securities Act, each Security (and all Securities issued in exchange
therefor or substitution thereof) shall bear a legend (the "Reg. S Legend") to
substantially the following effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S (SECTION 230.901 THROUGH SECTION 230.905, AND PRELIMINARY
NOTES). HEDGING TRANSACTIONS INVOLVING THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE ACT.
At the expiration of such "one-year distribution compliance period," the
Company shall permit the Holder of such Security to exchange such Security for a
new Security which does not bear the Reg. S Legend.
(c) If any mutilated Security is surrendered to the Company, the Company
shall execute and deliver a new Security of like aggregate Principal Amount.
If there is delivered to the Company:
(i) evidence to its reasonable satisfaction of the destruction, loss
or theft of any Security; and
<PAGE> 45
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(ii) such security or indemnity as may be reasonably satisfactory to
the Company to save it harmless,
then, in the absence of actual notice to the Company that such Security has
been acquired by a bona fide purchaser, the Company shall execute and deliver,
in lieu of any such destroyed, lost or stolen Security, a new Security of like
aggregate Principal Amount.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company, in its discretion, but
subject to conversion rights, may, instead of issuing a new Security, pay such
Security, upon satisfaction of the conditions set forth in the preceding
paragraph.
11. AMENDMENTS AND WAIVERS
(a) Any term, covenant, agreement or condition of the Securities may,
with the consent of the Company, be amended, or compliance therewith may be
waived (either generally or in a particular instance and either retroactively or
prospectively), by one or more substantially concurrent written instruments
signed by the Holders of at least a majority in aggregate Principal Amount of
the Securities at the time outstanding (excluding Securities at the time owned
by the Company and its Affiliates); provided that, without the consent of each
Holder affected, no such amendment or waiver, including a waiver pursuant to
paragraph 9(d) hereof, shall:
(i) make any change in the Principal Amount of Securities whose
Holders must consent to an amendment or waiver;
(ii) make any change to the manner or rate of accrual in connection
with Original Issue Discount, reduce the interest rate referred to in
paragraph 1 of the Securities, reduce the rate of interest referred to in
paragraph 12 of the Securities upon the occurrence of a Tax Event or extend
the time for payment of accrued Original Issue Discount or interest, if
any, on any Security;
(iii) reduce the Principal Amount or the Issue Price of or extend the
Stated Maturity of any Security;
(iv) reduce the Redemption Price, Purchase Price, Company Change of
Control Purchase Price or Elan Change of Control Purchase Price or extend
the date on which the Re-
<PAGE> 46
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demption Price, Purchase Price, Company Change of Control Purchase Price or
Elan Change of Control Purchase Price of any Security is payable;
(v) make any Security payable in money or securities other than that
stated in the Securities;
(vi) make any change in paragraph 9(d) hereof or this paragraph 11(a),
except to increase any percentage referred to, or make any change in
paragraph 9(e) hereof;
(vii) make any change that adversely affects the right to convert any
Security (including the right to receive cash in lieu of fractional
shares);
(viii) make any change that adversely affects the right to require the
Company to purchase Securities in accordance with their terms; or
(ix) impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the Securities.
(b) No waiver shall extend to or affect any obligation not expressly waived
or impair any right consequent thereto.
(c) The Company will not solicit, request or negotiate for or with respect
to any proposed amendment or waiver of any provisions of any Security unless
each Holder of Securities (irrespective of the amount of Securities then owned
by it) shall be informed thereof by the Company and shall be afforded the
opportunity of considering the same and shall be supplied by the Company with
sufficient information to enable it to make an informed decision with respect
thereto; provided, however, that preliminary discussions with one or more
Holders regarding any such proposed amendment shall not constitute any such
solicitation, request or negotiation. Executed or true copies of any amendment
or waiver effected pursuant to this paragraph 11 shall be delivered by the
Company to each Holder of Securities, by first class mail, postage prepaid, at
its address appearing on the register maintained by the Company, forthwith
following the date on which the same shall have been executed and delivered by
the Holder or Holders of the requisite amount of outstanding Securities. The
Company will not, directly or indirectly, pay or cause to be paid, remuneration,
whether by way of fees or otherwise, to any Holder of Securities as
consideration for or as an inducement to the entering into by such Holder of any
amendment or waiver unless such remuneration is
<PAGE> 47
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concurrently paid, on the same terms, ratably to the Holders of all Securities
then outstanding.
(d) Any amendment or waiver pursuant to this paragraph 11 shall (except as
provided in paragraph 11(a)(i) through (ix) above) apply equally to all Holders
and shall be binding upon them, upon each future Holder and upon the Company.
(e) in determining whether the Holders of the requisite amount of
outstanding Securities have given any authorization, consent or waiver under
this paragraph 11, Securities owned by the Company or any of its Affiliates
shall be disregarded and deemed not to be outstanding.
12. TAX EVENT CONVERSION
(a) From and after the date (the "Tax Event Date") of the occurrence of a
Tax Event, at the option of the Company, interest in lieu of future Original
Issue Discount shall accrue at 8.0% per annum on a principal amount per Security
(the "Restated Principal Amount") equal to the Issue Price plus accrued Original
Issue Discount to the date immediately prior to the Tax Event Date or the date
on which the Company exercises the option described in this paragraph 12(a),
whichever is later (such date, the "Option Exercise Date"). Such interest shall
accrue from the Option Exercise Date and shall be payable on November 9 and May
9 of each year (the "Interest Payment Date") to the Holders of record at the
close of business on October 25 and April 24 (each, a "Regular Record Date")
immediately preceding such Interest Payment Date. Interest will be computed on
the basis of a 360-day year consisting of twelve 30-day months and will accrue
from the most recent date on which interest has been paid or, if no interest has
been paid, from the Option Exercise Date. Within 15 days of the occurrence of a
Tax Event, the Company shall mail a written notice of such Tax Event to each
Holder, by first-class mail, postage prepaid, at its address appearing on the
register maintained by the Company.
(b) On each Interest Payment Date, concurrently with the payment of the
interest due and payable on such date, the Company shall issue and deliver to
each Holder of a Security to whom such interest is paid, an option (which option
shall be in the form of a written instrument duly executed by the Company (a
"Tax Event Option") to purchase a number of shares of Common Stock equal to the
quotient obtained by dividing (x) the aggregate amount of such interest due and
payable to such Holder on
<PAGE> 48
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such Interest Payment Date in respect of such Security by (y) the Conversion
Price of such Security in effect on the Business Day immediately prior to such
Interest Payment Date. Such Tax Event Option shall be exercisable, in whole at
any time or in part from time to time, on or prior to November 9, 2008. Each Tax
Event Option shall include provisions substantially similar to those set forth
in paragraph 6(c), (d), (e), (f), (g), (h) and (i) hereof. Each Tax Event Option
shall be transferable by the holder thereof only together with the Security in
respect of which such Tax Event Option was issued, subject to compliance with
all applicable transfer restrictions of federal and state securities laws.
(c) Interest on any Security that is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the person in
whose name that Security is registered at the close of business on the Regular
Record Date for such interest. Each installment of interest on any Security
shall be paid by wire transfer in immediately - available funds to an account
designated in writing by the payee at least 2 Business Days prior to the
Interest Payment Date applicable thereto.
(d) Subject to the foregoing provisions of this paragraph 12, each Security
upon registration of transfer, or in exchange for or in lieu of any other
Security, shall carry the rights to interest accrued and unpaid, and to accrue,
which were carried by such other Security.
13. MISCELLANEOUS
(a) Any notices or other communications required or permitted hereunder
shall be sufficiently given if delivered personally, sent by nationally
recognized overnight delivery service or facsimile (receipt confirmed) or mailed
by first-class mail, postage prepaid, addressed as follows:
(i) if to the Company, to:
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attn: General Counsel
Fax No.: (619) 550-1825
with a copy to:
Brobeck, Phleger & Harrison LLP
<PAGE> 49
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550 West C Street, Suite 1300
San Diego, California 92101-3532
Attn: Faye H. Russell, Esq.
Fax No.: (619) 234-3848
(ii) if to any Holder, at its address appearing in the register
maintained by the Company pursuant to paragraph 10(a) hereof.
(iii) (x) on the date delivered, if delivered by facsimile or
personally, (y) on the day after the notice is delivered into the
possession and control of a nationally recognized overnight delivery
service, duly marked for delivery to the receiving party or (z) three
Business Days after being mailed by first-class mail, postage prepaid. The
Company, by written notice to each of the Holders, may designate a
different address for subsequent notices or communications.
(b) All agreements of the Company in this Security shall bind its
successor.
(c) Each provision of this Security shall be considered separable and if
for any reason any provision which is not essential to the effectuation of the
basic purpose of this Security shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(d) THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF
LAW TO THE EXTENT THAT THE APPLICATION OF LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
(e) Upon conversion of this Security in accordance with the terms hereof,
the Holder will be entitled to the benefits of the Registration Rights Agreement
or the New Registration Rights Agreement, as the case may be, with respect to
the shares of Common Stock issuable to such Holder upon such conversion.
14. DEFINITIONS
"Accrual Increase", has the meaning specified in paragraph 1(c) hereof.
<PAGE> 50
-47-
"Additional Amounts" has the meaning specified in paragraph 7(g) hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of Voting Stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"Business Day" means each day of the year on which banking institutions are
not required or authorized to close in The City of New York.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership interests or any other
participation, right or other interest in the nature of an equity interest in
such Person including, without limitation, common stock and preferred stock of
such Person, or any option, warrant or other security convertible into any of
the foregoing.
A "Change of Control" of any Person shall be deemed to have occurred at
such time as (i) any other Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act ("Group") becomes the beneficial owner (as
defined under Rule 13d-3 under the Exchange Act), directly or indirectly, of
50.0% or more of the total Voting Stock of such specified Person, (ii) there
shall be consummated any consolidation or merger of such specified Person in
which such specified Person is not the continuing or surviving corporation or
pursuant to which the Voting Stock of such specified Person would be converted
into cash, securities or other property, other than a merger or consolidation of
such specified Person in which the holders of the Voting Stock of such specified
Person outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of all Voting Stock of the
continuing or surviving corporation immediately after such consolidation or
merger or (iii) during any period of two consecutive years, individuals who at
the beginning of such pe-
<PAGE> 51
-48-
riod constituted the board of directors of such specified Person (together with
any new directors whose election by such board of directors or whose nomination
for election by the shareholders of such specified Person has been approved by a
majority of the directors then still in office who either were directors at the
beginning of such period or whose election or recommendation for election was
previously so approved) cease to constitute a majority of the board of directors
of such specified Person.
"close of business" means, with respect to any date, 5:00 PM, San Diego
time, on such date, or such other city in which the Company's principal place of
business may then be located.
"Closing Price" means, with respect to the Common Stock on any trading day,
the last reported per share sales price of the Common Stock on such trading day,
as reported by the Nasdaq National Market or, if the Common Stock is listed on a
United States securities exchange, the closing per share sales price, regular
way, on such trading day on the principal United States securities exchange on
which the Common Stock is traded or, if no such sale takes place on such trading
day, the average of the closing bid and asked prices on such day.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company, as such class exists on the date of this Security as originally
executed or any other shares of Capital Stock into which such common stock shall
be reclassified or changed.
"Company" means Ligand Pharmaceuticals Incorporated, a Delaware
corporation.
"Company Change of Control Offer" has the meaning specified in paragraph
4(b) hereof.
"Company Change of Control Offer Notice" has the meaning specified in
paragraph 4(b)(i) hereof.
"Company Change of Control Payment Date" has the meaning specified in
paragraph 4(b)(i)(C) hereof.
"Company Change of Control Purchase Price" has the meaning specified in
paragraph 4(b) hereof.
"Company Notice" has the meaning specified in paragraph 4(a)(v) hereof.
<PAGE> 52
-49-
"Company Notice Date" has the meaning referred to in paragraph 4(a)(v)
hereof .
"Conversion Date" has the meaning specified in paragraph 6(d) hereof.
"Conversion Notice" has the meaning specified in paragraph 6(d) hereof.
"Conversion Price" has the meaning specified in paragraph 6(b) hereof.
"Conversion Shares" has the meaning specified in the Purchase Agreement.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Distributed Securities" has the meaning specified in paragraph 6(i)(iv)
hereof.
"Elan" means Elan Corporation, plc, a public limited company organized and
existing under the laws of Ireland.
"Elan Change of Control Notice" has the meaning specified in the Purchase
Agreement.
"Elan Change of Control Payment Date" has the meaning specified in
paragraph 5(b)(ii) hereof.
"Elan Change of Control Purchase" has the meaning specified in paragraph
5(a) hereof.
"Elan Change of Control Purchase Notice" has the meaning specified in
paragraph 5(b) hereof.
"Elan Change of Control Purchase Price" has the meaning specified in
paragraph 5(a) hereof.
"Event of Default" has the meaning specified in paragraph 10(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
<PAGE> 53
-50-
"Extraordinary Cash Dividend" means cash dividends with respect to the
Common Stock the aggregate amount of which in any fiscal year exceeds the
greater of (i) 10% of the consolidated net income of the Company for the fiscal
year immediately preceding the payment of such dividend and (ii) $200,000.
"Holder" means a Person in whose name this Security is registered on the
books of the Company.
"Initial Shares" has the meaning specified in the Purchase Agreement.
"Interest Payment Date" has the meaning specified in paragraph 12(a)
hereof.
"Issue Date" of this Security means the date on which this Security was
originally issued or deemed issued as set forth on the face of this Security.
"Issue Price" of this Security means, in connection with the original
issuance of this Security, the initial issue price at which this Security is
issued as set forth on the face of this Security.
"Legend" has the meaning specified in paragraph 10(b) hereof.
"License Agreement" has the meaning specified in the Purchase Agreement.
"License Shares" has the meaning specified in the Purchase Agreement.
"Nasdaq National Market" means the electronic interdealer quotation system
operated by Nasdaq Stock Market, Inc., a subsidiary of the National Association
of Securities Dealers, Inc.
"New Registration Rights Agreement" has the meaning specified in the
Purchase Agreement.
"Officer" means the Chief Executive Officer, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a written certificate, signed in the name
of the Company by (i) its Chief Executive
<PAGE> 54
-51-
Officer, its President or any Vice President and (ii) its Treasurer or its
Secretary.
"Opinion of Counsel" means a written opinion from legal counsel. The
counsel may be an employee of, or counsel to, the Company or any Successor
Company.
"Option Exercise Date" has the meaning specified in paragraph 12(a)
hereof.
"Original Issue Discount" of this Security means the difference between
the Issue Price and the Principal Amount of this Security as set forth on the
face of this Security. For purposes of this Security, accrual of Original Issue
Discount shall be calculated on a semi-annual bond equivalent basis using a 360
day year consisting of twelve 30-day months.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization or government, or any agency or political subdivision thereof.
"Principal" or "Principal Amount" of this Security means the Principal
Amount as set forth on the face of this Security.
"Purchase Agreement" has the meaning specified on the face of this
Security.
"Purchase Date" has the meaning specified in paragraph 4(a) hereof.
"Purchase Notice" has the meaning specified in paragraph 4(a)(i) hereof.
"Purchase Price" has the meaning specified in paragraph 4(a) hereof.
"Purchase Request" has the meaning specified in the Purchase Agreement.
"Redemption Date" means a date specified for redemption of this Security
in accordance with the terms hereof.
"Redemption Price" has the meaning specified in paragraph 3(a) hereof.
"Registration Rights Agreement" has the meaning specified in the
Purchase Agreement.
<PAGE> 55
-52-
"Registration Rights Default" has the meaning specified in paragraph 1(c)
hereof.
"Regular Record Date" has the meaning specified in paragraph 12(a) hereof.
"Restated Principal Amount" has the meaning specified in paragraph 12(a)
hereof.
"SEC" means the Securities and Exchange Commission.
"Securities" means any of the Company's Zero Coupon Convertible Senior
Notes due 2008, as amended and supplemented from time to time in accordance with
the terms hereof, issued pursuant to the Purchase Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Shares" has the meaning specified in the Purchase Agreement.
"Stated Maturity" means November 9, 2008.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired, (i) in the case of a
corporation, of which more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, officers or trustees thereof is held by such
specified Person or any of its Subsidiaries or (ii) in the case of a
partnership, joint venture, limited liability company, association or other
business entity, with respect to which such specified Person or any of its
Subsidiaries has the power to direct or cause the direction of the management
and policies of such entity by contract or otherwise.
"Successor Company" has the meaning specified in paragraph 8 (a) (1)
hereof.
"Tax Event" means that the Company shall have received an opinion from
independent tax counsel experienced in such matters to the effect that, on or
after the date of this Security, as a result of (a) any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
<PAGE> 56
-53-
thereunder) of the United Sates or any political subdivision or taxing authority
thereof or therein or (b) any amendment to, or change in, an interpretation or
application of such laws or regulations by any legislative body, court,
governmental agency or regulatory authority, in each case, which amendment or
change is enacted, promulgated, issued or announced or which interpretation is
issued or announced or which action is taken, on or after the date of this
Security, there is more than an insubstantial risk that interest (including
Original Issue Discount) payable on the Securities either (i) would not be
deductible on a current accrual basis or (ii) would not be deductible under any
other method, in either case, in whole or in part, by the Company, by reason of
deferral, disallowance or otherwise) for United States federal income tax
purposes.
"Tax Event Date" has the meaning specified in paragraph 12(a) hereof.
"Tax Event Option" has the meaning specified in paragraph 12(b) hereof.
"Taxes" means any present or future tax, duty, levy, impost, assessment or
other government charge (including penalties, interest and any other liabilities
related thereto) imposed or levied by or on behalf of any government or any
political subdivision or territory or possession of any government or any
authority or agency therein or thereof having power to tax.
"Transfer Restricted Security" has the meaning specified in paragraph
10(b) hereof.
"Voting Stock" means stock of any class or classes, however designated,
having general voting power under ordinary circumstances to elect a majority of
the board of directors, managers or trustees of a Person, other than stock
having such power only by reason of the occurrence of a contingency.
<PAGE> 57
ANNEX A
FORM OF PURCHASE NOTICE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Pursuant to the terms of the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ]in the Principal Amount of $[ ] (the
"Security"), the undersigned hereby elects to cause Ligand Pharmaceuticals
Incorporated (the "Company") to purchase $[ ] Principal Amount of the
Security at the Purchase Price set forth in the Security on [November 9, 2002]
[November 9, 2005], subject to the right of the undersigned to convert the
Security at any time prior to the close of business on the Purchase Date.
Capitalized terms used herein and not otherwise defined have the meanings
specified in the Security.
2. In the event that the Security is purchased in part, please execute and
deliver to the undersigned a new Security in a denomination equal in Principal
Amount to the unpurchased portion of the Security.
3. In the event that the Company has elected to pay the Purchase Price
with Common Stock (the "Shares") pursuant to paragraph 4(a)(iv) of the Security,
the undersigned confirms that:
(a) We understand that the Shares have not been registered under the
Securities Act and may not be offered or sold except as permitted in the
following sentence. We agree that if we should sell or otherwise transfer
the Shares, we will do so only (i) to the Company or its Subsidiaries,
(ii) inside the United States to an institutional "accredited investor"
(as defined below), (iii) outside the United States in accordance with
Regulation S under the Securities Act, (iv) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available)
or (v) pursuant to an effective registration statement under the
Securities Act.
A-1
<PAGE> 58
(b) We understand that the certificates representing the Shares
will, so long as appropriate, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") , MAY NOT
BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO A
VALID EXEMPTION THEREFROM. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S (SECTION
230.901 THROUGH SECTION 230.905, AND PRELIMINARY NOTES). HEDGING
TRANSACTIONS INVOLVING THE SHARES REPRESENTED BY THIS CERTIFICATE
MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE ACT.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE
CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF
NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN INTERNATIONAL
SERVICES, LTD. AND ELAN CORPORATION, PLC, AND THE COMPANY RESERVES
THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITY UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY
OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER
HEREOF WITHOUT CHARGE.
(c) We are acquiring the Shares for our own account and are either (i) an
institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or
(7) of Regulation D under the Securities Act) or (ii) a foreign purchaser that
is outside the United States (as such terms are used under Regulations S under
the Securities Act). We have such knowledge and experience in financial and
business matters to be capable of evaluating the merits and risks of our
investment in the Shares and we are able to bear the economic risk of our
investment for an indefinite period of time.
A-2
<PAGE> 59
This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
-------------
A-3
<PAGE> 60
ANNEX B
CONVERSION NOTICE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Pursuant to the terms of the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ] attached
hereto (the "Security"), the undersigned hereby elects to cause Ligand
Pharmaceuticals Incorporated (the "Company") to convert $[ ] Principal
Amount of the Security pursuant to paragraph 6 of the Security at the Conversion
Price. Capitalized terms used herein and not otherwise defined have the meanings
specified in the Security.
2. In the event that the undersigned has elected to convert the Security
in part, please execute and deliver to the undersigned a new Security in a
denomination equal in Principal Amount to the unconverted portion of the
Security.
3. In connection with the conversion of the Security, the undersigned
confirms that:
(a) We understand that the securities to be issued upon such
conversion have not been registered under the Securities Act and may not
be offered or sold except as permitted in the following sentence. We agree
that if we should sell or otherwise transfer such securities, we will do
so only (i) to the Company or its Subsidiaries, (ii) inside the United
States to an institutional "accredited investor" (as defined below), (iii)
outside the United States in accordance with Regulation S under the
Securities Act, (iv) pursuant to the exemption from registration provided
by Rule 144 under the Securities Act (if available) or (v) pursuant to an
effective registration statement under the Securities Act.
(b) We understand that the certificates representing such securities
will, so long as appropriate, bear the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES
B-1
<PAGE> 61
ACT OF 1933, AS AMENDED (THE "ACT"), MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR PURSUANT TO A VALID EXEMPTION THEREFROM.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE
PROVISIONS OF REGULATION S (SECTION 230.901 THROUGH SECTION 230.905,
AND PRELIMINARY NOTES). HEDGING TRANSACTIONS INVOLVING THE SHARES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE ACT.
THE TRANSFER OF THE SECURITY EVIDENCED HEREBY IS SUBJECT TO THE
CONDITIONS SPECIFIED IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF
NOVEMBER 6, 1998, BY AND AMONG THE COMPANY, ELAN INTERNATIONAL
SERVICES, LTD. AND ELAN CORPORATION, PLC, AND THE COMPANY RESERVES
THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITY UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY
OF SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER
HEREOF WITHOUT CHARGE.
(c) We are acquiring the securities to be issued upon conversion of
the Security for our own account and are either (i) an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act) or (ii) a foreign purchaser that is
outside the United States. We have such knowledge and experience in
financial and business matters to be capable of evaluating the merits and
risks of our investment in the securities and we are able to bear the
economic risk of our investment for an indefinite period of time.
This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
-------------
B-2
<PAGE> 62
ANNEX C
FORM OF CERTIFICATE FOR
REGISTRATION OF TRANSFER
OR EXCHANGE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Reference is hereby made to the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ] attached
hereto (the "Security"). Capitalized terms used herein and not otherwise defined
have the meanings specified in the Security.
2. In connection with the registration of transfer or exchange of such
Security, the undersigned hereby certifies that:
CHECK ONE
_____ The Security is being acquired for the undersigned's own
account, without transfer; or
_____ The Security is being transferred to the Company; or
_____ The Security is being transferred in a transaction permitted
by Rule 144 under the Securities Act; or
_____ The Security is being transferred pursuant to an effective
registration statement; or
_____ The Security is being transferred in a transaction permitted
by Rule 904 under the Securities Act; or
_____ The Security is being transferred pursuant to an exemption
from the registration requirements of the Securities Act other than Rule
144 or Rule 904, and the undersigned hereby further certifies that the
Security is being transferred in compliance with the exemption claimed,
which certification is supported by an opinion of
C-1
<PAGE> 63
counsel, if required by the Company, provided by the undersigned or the
transferee (a copy of which the undersigned has attached to this
certification) in form reasonably satisfactory to the Company, to the
effect that such transfer is in compliance with the Securities Act;
and the Security is being transferred in compliance with any applicable state
securities or "Blue Sky" laws of any state of the United States.
(3) This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
-------------
C-2
<PAGE> 64
ANNEX D
FORM OF UNRESTRICTED SECURITIES CERTIFICATE
OF
ZERO COUPON CONVERTIBLE SENIOR NOTE DUE 2008
Ligand Pharmaceuticals Incorporated
10275 Science Center Drive
San Diego, California 92121
Attention: General Counsel
1. Reference is hereby made to the Zero Coupon Convertible Senior Note due
2008 (certificate no. [ ] in the Principal Amount of $[ ] attached
hereto (the "Security"). Capitalized terms used herein and not otherwise defined
have the meanings specified in the Security.
2. The undersigned, the registered owner of the Security, has requested
that the Security be exchanged for a new Security bearing no portion of the
Legend (excluding that portion of the Legend relating to transfer conditions
set forth in the Purchase Agreement). In connection with such exchange, the
undersigned hereby certifies that the exchange is occurring after a period of at
least two years has elapsed since the date the Security was acquired from the
Company or any affiliate (as such term is defined under Rule 144 under the
Securities Act) of the Company, whichever is later, and the undersigned is not,
and during the preceding three months has not been, an affiliate of the Company.
The undersigned also acknowledges that future transfers of the Security must
comply with all applicable state securities or "Blue Sky" laws.
3. This certificate and the statements contained herein are made for the
benefit of the Company.
----------------------------------------
Signature of Holder
Date:
-------------
D-1
<PAGE> 1
EXHIBIT 21.1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
LIGAND PHARMACEUTICALS, INCORPORATED
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Glycomed Incorporated California
Ligand Pharmaceuticals, (Canada) Incorporated Saskatchewan, Canada
Allergan Ligand Retinoid Therapeutics, Inc. Delaware
Seragen Incoporated Massachusetts
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Forms S-3 and Forms S-8 of our report dated February 5, 1999 with respect to
the consolidated financial statements of Ligand Pharmaceuticals Incorporated
included in Ligand Pharmaceuticals Incorporated's Annual Report (Form 10-K) for
the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-K for the twelve months ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements. (in thousands except
earnings per share)
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 32,801
<SECURITIES> 39,720
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 6,166
<CURRENT-ASSETS> 77,973
<PP&E> 41,503
<DEPRECIATION> 17,781
<TOTAL-ASSETS> 156,020
<CURRENT-LIABILITIES> 26,895
<BONDS> 140,487
0
0
<COMMON> 46
<OTHER-SE> (10,915)
<TOTAL-LIABILITY-AND-EQUITY> 156,020
<SALES> 406
<TOTAL-REVENUES> 17,673
<CGS> 316
<TOTAL-COSTS> 14,701
<OTHER-EXPENSES> 56,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,322
<INCOME-PRETAX> (117,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> (117,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (117,886)
<EPS-PRIMARY> (2.92)
<EPS-DILUTED> (2.92)
</TABLE>
