<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER
0-25970
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
33-0642614
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a 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.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 31, 1997 there were 3,250,000 shares of callable common stock
outstanding, and 200 shares of special common stock outstanding.
Panretin(TM) is a trademark of ALRT.
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ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Statements of Operations - 3
Three and Nine Months Ended September 30, 1997
and 1996
Condensed Balance Sheets at September 30, 1997 4
and December 31, 1996
Statements of Cash Flows - 5
Nine Months Ended September 30, 1997 and 1996
Notes to Financial Statements 6-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-19
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
Signature 21
</TABLE>
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PART I - FINANCIAL INFORMATION
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 211 $ 926 $ 1,323 $ 3,014
Costs and expenses:
Research and development 10,331 9,379 29,426 22,089
General and administrative
expenses 341 404 1,111 1,192
-------- -------- -------- --------
Total costs and expenses 10,672 9,783 30,537 23,281
-------- -------- -------- --------
Net loss $(10,461) $ (8,857) $(29,214) $(20,267)
======== ======== ======== ========
Net loss per callable
common share $ (3.22) $ (2.73) $ (8.99) $ (6.24)
======== ======== ======== ========
Weighted average callable
common shares outstanding 3,250 3,250 3,250 3,250
</TABLE>
See accompanying notes.
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Allergan Ligand Retinoid Therapeutics, Inc.
Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 21,969 $ 29,897
Marketable securities -- 20,394
Other assets 148 720
------------- ------------
$ 22,117 $ 51,011
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Allergan, Inc. and Ligand
Pharmaceuticals Incorporated $ 3,911 $ 3,889
Accounts payable and accrued liabilities 389 261
------------- ------------
Total current liabilities 4,300 4,150
Stockholders' equity:
Callable Common stock, $.001 par value;
3,250,000 shares authorized, issued
and outstanding 3 3
Additional paid-in capital 94,256 94,256
Accumulated deficit (76,442) (47,228)
Unrealized holding loss on
marketable securities -- (170)
------------- ------------
Total stockholders' equity 17,817 46,861
------------- ------------
$ 22,117 $ 51,011
============= ============
</TABLE>
See accompanying notes.
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Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (29,214) $ (20,267)
Changes in operating assets and liabilities:
Other assets 572 (547)
Payable to Allergan, Inc. and
Ligand Pharmaceuticals Incorporated 22 1,101
Accounts payable and accrued liabilities 128 (563)
------------- -------------
Net cash used in operating activities (28,492) (20,276)
INVESTING ACTIVITIES:
Sale(purchase) of marketable securities 20,564 (20,564)
------------- -------------
Net decrease in cash and equivalents (7,928) (40,840)
Cash and equivalents at beginning of period 29,897 79,793
------------- -------------
Cash and equivalents at end of period $ 21,969 $ 38,953
============= =============
</TABLE>
See accompanying notes.
5
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Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements
1. Allergan Ligand Retinoid Therapeutics, Inc. (the Company) was incorporated in
Delaware in 1994 and commenced operations on June 3, 1995 to continue the
efforts of the Allergan Ligand Joint Venture (Joint Venture), established by
Allergan, Inc. (Allergan) and Ligand Pharmaceuticals Incorporated (Ligand) in
June 1992, to discover, develop and commercialize drugs based on retinoids.
On June 3, 1995, the Company and Ligand completed a public offering (the
Offering) of 3.25 million units (the Units), each Unit consisting of one share
of the Company's callable common stock (Callable Common Stock) and two warrants
(the Warrants), each to purchase one share of Ligand common stock. The Offering
raised net proceeds for the Company of $26.8 million. At the completion of the
Offering, Ligand contributed $17.5 million in cash, as well as warrants in
exchange for (i) a right to acquire all of the Callable Common Stock at
specified future dates and amounts (Stock Purchase Option) and (ii) a right to
acquire all rights to the Panretin (ALRT1057) product, jointly with Allergan,
currently under development by the Company. At the same time, Allergan
contributed $50.0 million in cash to the Company in exchange for (i) 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 (Asset Purchase
Option), (ii) a similar right to acquire all of the Callable Common Stock if
Ligand does not exercise its right and (iii) a right to acquire all rights to
the Panretin (ALRT1057) product, jointly with Ligand.
On June 3, 1997, the Units separated and the Callable Common Stock and Warrants
currently trade separately.
ALRT's Board of Directors approved a research and development plan for the year
ending December 31, 1997 which represents an acceleration in spending on ALRT's
retinoid programs. The accelerated spending is the result of more rapid
discovery and development of a significantly larger library of viable retinoid
compounds than anticipated at the time of formation of ALRT. ALRT anticipates
the acceleration in spending could result in the use of substantially all of the
funds available for research and development remaining in ALRT in late 1997 or
early 1998.
On September 24, 1997, Ligand and Allergan announced that they had exercised
their respective options to purchase the Callable Common Stock and certain
assets of ALRT. Ligand's notice of exercise of the Stock Purchase Option
included a stock purchase option exercise price of $21.97 per share of
outstanding Callable Common Stock (in the aggregate, "Stock Purchase Option
Exercise Price"), the original exercise price designated for the exercise of the
Stock Purchase Option at any time prior to June 3, 1998. Ligand has filed a
registration statement with the Securities and Exchange Commission registering
the issuance of up to $46,410,000 in Ligand Common Stock as partial payment of
the Stock Purchase Option Exercise Price. Ligand has reserved the right, at any
time prior to the closing of the exercise of the Stock Purchase Option, to make
payment of a greater amount of the Stock Purchase Option Exercise Price in cash
than set forth in its notice of exercise.
Allergan's notice of exercise of its Asset Purchase Option included an aggregate
asset purchase price of $8.9 million (Asset Purchase Option Exercise Price), the
original exercise price designated for the exercise of the Asset Purchase Option
at any time prior to June 3, 1998 under the governing asset purchase agreement.
The Asset Purchase Option Exercise Price will be paid in cash to ALRT
concurrently with the payment to holders of Callable Common Stock of the Stock
Purchase Option Exercise Price and may be used to pay a portion of such Stock
Purchase Option Exercise Price.
The record date for the purchase of the Callable Common Stock is October 14,
1997, and the scheduled closing date was November 3, 1997, pending an effective
registration statement.
6
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Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
2. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial information contained therein. These statements
do not include all disclosures required by generally accepted accounting
principles. The results of operations for the quarter and nine months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the year ending December 31, 1997. Net loss per callable common share is
computed by dividing the net loss by the number of callable common shares
outstanding, which was 3,250,000 at all times during the periods reported.
3. The Company invests its excess cash in money market funds and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines with respect to the
diversification and maturities in order to maintain safety and liquidity. The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company's investments are
classified as available-for-sale and are carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity. The
investments are adjusted for amortization of premiums and discounts to maturity
and such amortization is included in interest income.
7
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ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997
This Quarterly Report on Form 10-Q may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents management's current judgment on
the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
The following should be read in conjunction with "--Risks and Uncertainties"
below and the Company's Financial Statements and notes thereto in Item 1 above.
Allergan Ligand Retinoid Therapeutics, Inc. (ALRT) commenced operations in June
1995 and received net proceeds of approximately $26.8 million upon issuance of
3.25 million Units (the Offering), each of which consisted of one share of
Callable Common Stock and two Warrants, each to purchase one share of Ligand
Pharmaceuticals Incorporated (Ligand) common stock. At that time, ALRT also
received cash contributions of $50.0 million from Allergan, Inc. (Allergan) and
$17.5 million from Ligand (the Contributions). ALRT is utilizing substantially
all of the net proceeds of the Offering and the Contributions to continue the
efforts of the Allergan Ligand Joint Venture (the Joint Venture), established by
Allergan and Ligand in June 1992, to discover, develop and commercialize drugs
based on retinoids.
On June 3, 1997, the Units separated and the Callable Common Stock and Warrants
currently trade separately. The shares of Callable Common Stock are subject to a
stock purchase option (the Stock Purchase Option), pursuant to which Ligand, and
in the event not exercised by Ligand, Allergan, has an irrevocable option to
purchase all, but not less than all, of the Callable Common Stock outstanding at
the time such option is exercised at stated exercise prices from June 3, 1997
until the expiration of the Stock Purchase Option on the earlier of June 3, 2000
or a limited period of time after the use of substantially all of the funds
available for research and development or the termination of a major agreement
among ALRT, Ligand and Allergan due to an event of default. Ligand and Allergan
also have the option, which must be exercised together, to acquire assets
related to the development of Panretin(TM) (ALRT1057).
On September 24, 1997, Ligand and Allergan announced that they had exercised
their respective options to purchase the Callable Common Stock and certain
assets of ALRT. Ligand's notice of exercise of the Stock Purchase Option
included a stock purchase option exercise price of $21.97 per share of
outstanding Callable Common Stock the original exercise price designated for the
exercise of the Stock Purchase Option at any time prior to June 3, 1998. Ligand
has filed a registration statement with the Securities and Exchange Commission
registering the issuance of up to $46,410,000 in Ligand Common Stock as partial
payment of the Stock Purchase Option Exercise Price. Ligand has reserved the
right, at any time prior to the closing of the exercise of the Stock Purchase
Option, to make payment of a greater amount of the Stock Purchase Option
Exercise Price in cash than set forth in its notice of exercise.
Allergan's notice of exercise of its Asset Purchase Option included an aggregate
asset purchase price of $8.9 million, the original exercise price designated for
the exercise of the Asset Purchase Option at any time prior to June 3, 1998
under the governing asset purchase agreement. The Asset Purchase Option Exercise
Price will be paid in cash to ALRT concurrently with the payment to holders of
Callable Common Stock of the Stock Purchase Option Exercise Price and may be
used to pay a portion of such Stock Purchase Option Exercise Price.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
The record date for the purchase of the Callable Common Stock is October 14,
1997, and the scheduled closing date was November 3, 1997, pending an effective
registration statement.
RESULTS OF OPERATIONS
The Company incurred net losses of $10.5 million for the third quarter and $29.2
million for the nine months ended September 30, 1997 compared to net losses of
$8.9 million and $20.3 million for the comparable periods in 1996. Interest
income was $0.2 million for the third quarter and $1.3 million for the first
nine months of 1997 compared to $0.9 million and $3.0 million for the comparable
periods in 1996. Interest income was earned as a result of investment of the
remaining unexpended cash held by ALRT. The decrease in interest income in 1997
compared to 1996 was the result of the decrease in unexpended funds as ALRT
funds its operating activities.
Research and development expenses were $10.3 million in the third quarter and
$29.4 million for the nine months ended September 30, 1997 compared to $9.4
million and $22.1 million for the comparable periods in 1996. Research and
development activities were performed primarily by Ligand and Allergan under
contracts with ALRT since June 1995. Research and development spending increased
in 1997 compared to 1996 as a result of more rapid discovery and development of
a significantly larger library of viable retinoid compounds than anticipated at
the time of formation of ALRT.
General and administrative expenses were $341,000 in the third quarter and
$1,111,000 for the nine months ended September 30, 1997 compared to $404,000 and
$1,192,000 for the comparable periods in 1996.
The Company's activities will be limited to conducting research and development
under the agreements with Ligand and Allergan until such time that either Ligand
or Allergan successfully completes the acquisition of the Callable Common Stock
pursuant to the exercise of the Stock Purchase Option. The Company does not
expect to generate any revenues other than interest income during subsequent
periods. Consequently, it expects to continue to incur net losses in subsequent
periods.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, ALRT had cash and cash equivalents and marketable
securities of $22.0 million. On September 24, 1997, Ligand and Allergan
announced that they had exercised their respective options to purchase the
Callable Common Stock and certain assets of ALRT. Ligand has filed a
registration statement with the Securities and Exchange Commission registering
the issuance of up to $46,410,000 in Ligand Common Stock as partial payment of
the Stock Purchase Option Exercise Price. Promptly following the effectiveness
of such registration statement, Ligand and Allergan intend to complete the
exercise of their respective options. Absent this event, the proceeds of the
Offering together with the Contributions will not be sufficient to enable ALRT
to successfully develop and commercialize any products (Products), and ALRT will
need to obtain significant additional funds to continue to develop its
compounds. Until the expiration of the Stock Purchase Option, which will occur
on the earlier of June 3, 2000 or a limited period of time after the use of
substantially all the funds available for research and development (which date
is currently anticipated to occur in late 1997 or early 1998) or the termination
of a major agreement among ALRT, Ligand and Allergan due to an event of default,
ALRT is significantly restricted from raising additional funds without
Allergan's and Ligand's consent and there can be no assurance that ALRT will
have sufficient funds to successfully develop any Products. Such funds will be
advanced to ALRT, if at all, at the option of Ligand and Allergan and the
decision to make such advances must be a joint decision. As a result, ALRT does
not anticipate any future cash inflows other than
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
earnings on unexpended cash balances. Substantial funding will be necessary to
complete the development of and to commercialize the Products, if any.
In January 1997, ALRT's Board of Directors approved a research and development
plan for the year ending December 31, 1997 which represents an acceleration in
spending on ALRT's retinoid programs. The accelerated spending is the result of
more rapid discovery and development of a significantly larger library of viable
retinoid compounds than anticipated at the time of formation of ALRT. ALRT
anticipates the acceleration in spending could result in the use of
substantially all of the funds available for research and development remaining
in ALRT in late 1997 or early 1998.
If the exercise of the Stock Purchase Option is not completed by Ligand or
Allergan, ALRT would have to raise substantial funding from third parties
through the sale of securities or the licensing of Products or technology rights
or both. There can be no assurance that such funds will be available or, if
available, will be on commercially reasonable terms.
In addition, until the termination of the Stock Purchase Option, ALRT is not
able to issue additional capital stock, borrow more than $1 million in the
aggregate, declare or pay dividends or make other distributions to stockholders,
merge, consolidate or reorganize or liquidate or sell all or substantially all
of its assets without the prior written approval of Allergan and Ligand.
If ALRT does not use the available funds as provided in the development
agreement or otherwise breaches any of its material obligations under any of the
major agreements, Allergan and Ligand may have the right to terminate the
technology license agreement, and thereby reacquire rights to all technology
licensed to ALRT thereunder, including improvements made to such technology
using funds provided by ALRT. In the event of such a termination by Allergan and
Ligand, ALRT will not receive any royalty or other compensation therefor.
During the first nine months of 1997, ALRT invested its excess cash in money
market funds and debt instruments of financial institutions and corporations
with strong credit ratings. ALRT has established guidelines relative to
diversification and maturities designed to maintain safety and liquidity. The
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The net proceeds from the Offering, combined with
income on unexpended cash balances, are anticipated to provide funding for
research and development and related administrative activities through the end
of 1997 or early 1998.
The Company does not currently maintain any line of credit agreements. The
Company believes the impact of inflation on its business activities has not been
significant to date.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES
No Assurance of Closing of Exercise of Ligand's and Allergan's Options. On
September 24, 1997, Ligand and Allergan announced that they had exercised their
respective options to purchase the Callable Common Stock and certain assets of
ALRT. Ligand has filed a registration statement with the Securities and Exchange
Commission registering the issuance of up to $46,410,000 in Ligand Common Stock
as partial payment of the Stock Purchase Option Exercise Price. The number of
shares to be delivered in payment of a portion of the Stock Purchase Option
Exercise Price shall be determined by dividing the portion of the Stock Purchase
Option Exercise Price to be paid in shares of Ligand Common Stock by the average
of the closing price of a share of Ligand Common Stock on the Nasdaq National
Market for the 20 trading days immediately preceding the day prior to the
closing of the Stock Purchase Purchase Option Exercise (Average Value). If the
Stock Purchase Option Exercise closed on November 3, 1997, the Average Value of
the Ligand Common Stock would be $16.396875, resulting in a total of 2,830,417
shares of Ligand Common Stock being issued in connection with the Stock Purchase
Option Exercise. Ligand has the ability to increase the amount of cash paid in
connection with the Stock Purchase Option from the amount contained in the
notice of Ligand's exercise of the Stock Purchase Option.
The holders of Callable Common Stock who receive Ligand Common Stock upon
exercise of the Stock Purchase Option will bear the investment risks associated
with the ownership of such stock.
If Ligand does not successfully complete the Stock Purchase Option, Allergan
will have the right to acquire all of the outstanding Callable Common Stock for
cash or shares of Ligand Common Stock or Allergan Common Stock, provided the
issuance of such stock is covered by an effective registration statement.
Allergan has a period of 10 days following Ligand's failure to successfully
complete the Stock Purchase Option to exercise its stock purchase option, and
must complete such exercise within 40 days of the delivery of its notice of
exercise.
If the Stock Purchase Option lapses without Ligand or Allergan completing the
exercise, the Core Technologies together with improvements made during the term
of the Development Agreement will continue to be exclusively licensed to ALRT,
the commercialization agreement executed by ALRT, Allergan and Ligand (the
Commercialization Agreement) will remain in effect (subject to termination on
12-months' notice by ALRT, Ligand or Allergan) and each of ALRT, Ligand and
Allergan will be free to pursue their own respective business strategies. In
such an event, however, ALRT will require substantial additional funds. In such
circumstances it is unlikely that such funds will be available on attractive
terms, if at all. Furthermore, Allergan or Ligand or a third party could make an
offer to acquire ALRT or the Callable Common Stock at a price lower than that
set forth in the Stock Purchase Option.
Early Stage of Development; No Assurance of Successful Development of
Technologies or Related Products. ALRT has acquired from Joint Venture (the Core
Technologies) for the purpose of accelerating the development and
commercialization of retinoid drugs for therapeutic uses. ALRT has agreed with
Allergan and Ligand that Allergan and Ligand will conduct research and
development on Products in accordance with the development agreement executed by
ALRT, Allergan and Ligand (the Development Agreement) for the purpose of
identifying and developing Products for commercialization. While some research
and development on the Core Technologies and certain Products has been conducted
to date, significant product development, including extensive human clinical
testing, is still to be undertaken. There can be no assurance that ALRT will be
able to complete the development of any marketable products or that such
products can be introduced in a timely manner. The successful development of any
such
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
products will require, in addition to technical advances, demonstration through
human clinical studies that such products are safe and efficacious.
Requirement for Additional Funds. The net proceeds of the Offering together with
the Contributions will not be sufficient to enable ALRT to successfully develop
and commercialize any Products and ALRT will need to obtain significant
additional funds to continue the development of its compounds. Until the
expiration of the Stock Purchase Option, which will occur on the earlier of June
3, 2000 or a limited period of time after the use of substantially all the funds
available for research and development (which date is currently anticipated to
occur in late 1997 or early 1998) or the termination of a major agreement among
ALRT, Ligand and Allergan due to an event of default, ALRT is significantly
restricted from raising additional funds without Allergan's and Ligand's consent
and there can be no assurance that ALRT will have sufficient funds to
successfully develop any Products. If the exercise of the Stock Purchase Option
is not successfully completed, ALRT would have to raise substantial additional
funding while hiring, or otherwise obtaining access to, research, development
and management personnel. See "--No Assurance of Closing of Exercise of
Ligand's and Allergan's Options" and "--Dependence on Ligand and Allergan."
ALRT's Board of Directors approved a research and development plan for the year
ending December 31, 1997 which represents an acceleration in spending on ALRT's
retinoid programs. The accelerated spending is the result of more rapid
discovery and development of a significantly larger library of viable retinoid
compounds than anticipated at the time of formation of ALRT. ALRT anticipates
the acceleration in spending could result in the use of substantially all of the
funds available for research and development remaining in ALRT in late 1997 or
early 1998. See "--No Assurance of Closing of Exercise of Ligand's and
Allergan's Options."
Dependence on Ligand and Allergan. Substantially all of the net proceeds of the
Offering and the Contributions will be paid by ALRT to Allergan and Ligand under
the Development Agreement and, under the Commercialization Agreement, Allergan
and Ligand will be primarily responsible for the marketing and manufacturing of
the Products, if any are commercialized during its term. ALRT is not expected to
have its own research, development, clinical licensing, administration,
manufacturing or marketing employees or facilities and thus will be entirely
dependent on Allergan and Ligand in all these areas. Subject to their respective
obligations under the Development Agreement, consistent with commercially
reasonable practices, Allergan and Ligand will have sole discretion to determine
the allocation of their respective research, development, clinical, licensing,
administration, manufacturing and marketing employees and facilities. Allergan's
and Ligand's proprietary and collaborative development, licensing, manufacturing
and marketing projects may compete for time and resources with projects
undertaken for ALRT pursuant to the Development Agreement and the
Commercialization Agreement, thereby delaying development, manufacture and
marketing of the Products. Any material adverse change in the business or
financial condition of Ligand or Allergan would have a material adverse effect
upon ALRT.
The Development Agreement and Commercialization Agreement. Allergan and Ligand
are the contractors under the Development Agreement and will perform, or cause
to be performed, all development activities thereunder. Additionally, Allergan
and Ligand will be primarily responsible for the manufacture and marketing of
Products under the Commercialization Agreement. ALRT will be responsible for and
will pay the development costs that are incurred by Allergan and Ligand under
the Development Agreement and the manufacturing and marketing costs incurred by
Allergan and Ligand under the Commercialization Agreement.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Ligand and Allergan determine certain activities to be undertaken under the
Development Agreement and in all events Ligand and Allergan will have
substantial influence over all activities and procedures (including the timing
and priorities thereof) to be undertaken under such agreements, subject to the
approval of the Board of Directors of ALRT. Neither Ligand nor Allergan has any
obligation to complete any development activity after all funds have been
expended under the Development Agreement. Ligand's and Allergan's own projects
and other third-party projects may compete for time and resources with projects
undertaken pursuant to the Development Agreement and with the manufacture and
marketing of Products under the Commercialization Agreement and the resources
that Allergan and Ligand expend under such agreements may therefore be limited.
No Assurance of Successful Manufacturing or Marketing. ALRT has no manufacturing
or marketing capability. ALRT will be required to rely on Allergan, Ligand and
other third parties approved by Allergan and Ligand to manufacture, sell and
otherwise market Products. If ALRT is required to rely on third-party
manufacturing and marketing, there can be no assurance that, prior to the
expiration of the Commercialization Agreement, Allergan and Ligand will approve
such third-party arrangements, that such third-party arrangements can be
successfully negotiated or that any such arrangements will be available on
commercially reasonable terms. Even if acceptable and timely manufacturing and
marketing are available, including manufacturing and marketing of Products by
Allergan and Ligand pursuant to the Commercialization Agreement, there can be no
assurance that Products developed in accordance with the Development Agreement
will be accepted in the marketplace.
Losses; No Assurance of Profitability; Lack of Dividends. ALRT was recently
formed and has incurred significant operating losses to date. ALRT anticipates
that substantially all of the net proceeds of the Offering and the Contributions
will be expended prior to the receipt of any revenues by ALRT, resulting in
additional significant losses. Further, even if ALRT is able to obtain the funds
necessary to successfully develop any Products, there can be no assurance that
they can be marketed profitably. Even if such Products are commercialized
profitably, the initial losses incurred by ALRT may never be recovered. ALRT is
prevented from paying dividends on the Callable Common Stock without the
approval of Allergan and Ligand, and accordingly, does not expect to pay any
dividends. See "-- Requirement for Additional Funds."
Limitation on Certain ALRT Activities. Under its Amended and Restated
Certificate of Incorporation, ALRT and its stockholders are prohibited from
taking any action or permitting any action to be taken which is inconsistent
with Allergan's and Ligand's rights under the Stock Purchase Option. Until the
termination of the Stock Purchase Option, ALRT is not be able to issue
additional capital stock, borrow more than $1 million in the aggregate, declare
or pay dividends or make other distributions to stockholders, merge, consolidate
or reorganize, or liquidate or sell all or substantially all of its assets
without the prior written approval of Allergan and Ligand.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Potential Competition from Allergan or Ligand. Both Allergan and Ligand are
engaged in ongoing in-licensing and development of new products. While Allergan
and Ligand have licensed all their rights with respect to the Core Technologies,
each is allowed under the technology license agreement executed by ALRT,
Allergan and Ligand (the Technology License Agreement) to pursue the development
of retinoid compounds under certain circumstances which may, in some
circumstances, lead to the development of products competitive with the
Products, including, in the case of the exercise of the option to acquire all
assets related to the Panretin (ALRT1057) development program (the Panretin
(ALRT1057) Purchase Option), products based on Panretin (ALRT1057). See
"--Competition; Technological Change."
Potential Loss of Technology by ALRT. Under the Development Agreement and the
Commercialization Agreement, ALRT is obligated to make payments to Ligand and
Allergan equal in the aggregate to substantially all of the available funds. If
ALRT does not use such available funds as provided in the Development Agreement
or otherwise breaches any of its material obligations under any of the major
agreements with Allergan and Ligand (the Major Agreements), Allergan and Ligand
may have the right to terminate the Technology License Agreement, and thereby
reacquire rights to all technology licensed to ALRT thereunder, including
improvements made to such technology using funds provided by ALRT. In the event
of such a termination by Allergan and Ligand, ALRT will not receive any royalty
or other compensation therefor.
No Assurance of Market for Warrants or Callable Common Stock. Since June 3, 1997
(the Separation Date), the Warrants and the Callable Common Stock have been
separately transferable. There can be no assurance that factors related to
Ligand, Allergan, their relationship or otherwise will not depress the value of
the Warrants, or that factors related to Ligand, Allergan, ALRT or otherwise
will not depress the value of Callable Common Stock, in either case reducing the
liquidity of an investment in the Callable Common Stock. The existence of the
Stock Purchase Option and the Panretin (ALRT1057) Purchase Option may also place
a cap on the upside potential of the trading price of
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
the Warrants and/or Callable Common Stock. The value of the Callable Common
Stock or the Warrants on the public market may be further affected by the
uncertainties associated with the exercise of the Stock Purchase Option, factors
related to Ligand's business or factors unrelated to either ALRT or Ligand.
There can be no assurance that there will be an active trading market for the
Warrants or the Callable Common Stock.
Attraction and Retention of Key Employees. ALRT is highly dependent on the
principal members of Ligand's and Allergan's scientific and management staff,
the loss of whose services might impede the achievement of development
objectives. Furthermore, Ligand is currently experiencing a period of rapid
growth which will require the hiring of significant numbers of scientific,
management and operational personnel. Accordingly, the success of Allergan and
Ligand in recruiting and retaining management and operational personnel and
qualified scientific personnel to perform research and development work in the
future will also be critical to ALRT's success. There can be no assurance that
Ligand or Allergan will be able to attract and retain personnel required to
support ALRT projects on acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies, universities and other research
institutions for such personnel.
No Assurance that Exclusive Relationships will Continue. Ligand has entered into
exclusive relationships relating to the in-licensing of technology with certain
companies, academic institutions and scientists, including Dr. Ronald Evans of
The Salk Institute. The agreements with these companies, institutions and
scientists expire at various times, including the consulting agreement with Dr.
Evans which expires in July 1998. There can be no assurance that Ligand will
desire or be able to continue these relationships upon the expiration of the
current agreements. ALRT is unable to ascertain what impact the loss of the
services, or relationship, with any of these companies, institutions or
scientists would have on its operations or financial position.
Patents and Proprietary Technology. The patent positions of pharmaceutical and
biopharmaceutical firms, including ALRT, are uncertain and involve complex legal
and technical questions for which important legal principles are largely
unresolved. In addition, the coverage sought in a patent application can be
significantly reduced before or after a patent is issued. This uncertain
situation is also affected by revisions to the United States patent law adopted
in recent years to give effect to international accords to which the United
States has become a party. The extent to which such changes in law will affect
the operations of ALRT cannot be ascertained. In addition, there is currently
pending before Congress legislation providing
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
for other changes to the patent law which may adversely affect pharmaceutical
and biopharmaceutical firms. If such pending legislation is adopted, the extent
to which such changes would affect the operations of ALRT cannot be ascertained.
ALRT's success will depend in part upon the ability of Ligand, Allergan or ALRT,
as the case may be, to obtain strong patent protection both in the United States
and other countries. A number of pharmaceutical and biotechnology companies and
research and academic institutions have developed technologies, filed patent
applications or received patents on various technologies that may be related to
the Core Technologies. Some of these patent applications, patents or
technologies may conflict with the Core Technologies or patent applications of
Ligand, Allergan or ALRT. Any such conflict could limit the scope of the
patents, if any, that Ligand, Allergan or ALRT, as the case may be, may be able
to obtain or result in the denial of the patent applications of Ligand, Allergan
or ALRT, as the case may be. In addition, if patents that cover ALRT's
activities are issued to other companies, there can be no assurance that ALRT
would be able to obtain licenses to these patents at a reasonable cost or be
able to develop or obtain alternative technology.
The commercial success of ALRT will also depend in part on ALRT not infringing
patents issued to competitors and not breaching the technology licenses that
might cover technology used in ALRT's products. It is uncertain whether any
third-party patents will require ALRT to alter its products or processes, obtain
licenses or cease certain activities. If any licenses are required, there can be
no assurance that ALRT will be able to obtain any such license on commercially
favorable terms, if at all. Failure by ALRT to obtain a license to any
technology that it may require to commercialize its products may have a material
adverse impact on ALRT. Litigation, which could result in substantial cost to
ALRT, may also be necessary to enforce any patents issued to ALRT or to
determine the scope and validity of third-party proprietary rights. Should any
of its competitors have prepared and filed patent applications in the United
States which claim technology also invented by ALRT, ALRT may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office (the PTO) in order to determine priority of invention and,
thus, the right to a patent for the technology, all of which could result in
substantial cost to ALRT to determine its rights.
ALRT acquired rights to Panretin (ALRT1057) under an exclusive license from
Ligand of a pending patent application. Ligand has informed ALRT that a United
States patent has issued to, and foreign counterparts have been filed by,
Hoffman-La Roche (Roche) that include claims to a formulation of 9-cis-Retinoic
acid (Panretin (ALRT1057)) and use of that compound to treat epithelial cancers.
Ligand, on behalf of ALRT, had previously filed an application which has an
earlier filing date than the Roche patent and which has claims that Ligand
believes are broader than but overlap in part with claims under the Roche
patent. Ligand and ALRT are currently investigating the scope and validity of
this patent to determine its impact upon the Oral and Topical Panretin
(ALRT1057) products. The PTO has informed Ligand that the overlapping claims are
patentable to Ligand and has initiated an interference proceeding to determine
whether Ligand or Roche is entitled to a patent by having been first to invent
the common subject matter. ALRT cannot be assured that Ligand
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
will obtain a favorable outcome in the interference proceeding because of
factors not known at this time upon which the outcome may depend. In addition,
the interference proceeding may delay the decision of the PTO regarding the
Ligand's application, on behalf of ALRT, with claims covering the Oral and
Topical Panretin (ALRT1057) products. While the Company believes that the Roche
patent does not cover the use of Oral and Topical Panretin (ALRT1057) to treat
leukemias such as APL and sarcomas such as KS, or the treatment of skin diseases
such as psoriasis, if Ligand, on behalf of ALRT, does not prevail in the
interference proceeding, the Roche patent might block the use of Oral and
Topical Panretin (ALRT1057) in certain cancers, and Ligand, on behalf of ALRT,
may not be able to obtain patent protection for the Oral and Topical Panretin
(ALRT1057) products.
Competition; Technological Change. Other products and therapies currently exist
on the market that would compete directly with the products that ALRT is seeking
to develop and market. There can be no assurance that ALRT's products, even if
successfully tested and developed, will have sufficient advantages over existing
products to cause physicians to adopt them over such other products, or that
ALRT's products will offer an economically feasible alternative to such existing
products.
ALRT is engaged in a rapidly developing field. A number of companies are
currently seeking to develop new products and therapies to address many of the
diseases addressed by ALRT's IR technology. A number of companies are also
pursuing IR-related or STAT-related approaches to drug discovery and
development, including Ligand and Allergan. It is expected that the number of
companies seeking to develop products and therapies for these markets and the
future markets which ALRT may address will increase. There can be no assurance
that alternative products and therapies will not be developed that will either
render ALRT's proposed products obsolete or that will have advantages that will
significantly outweigh those of the products and therapies that ALRT is seeking
to develop.
Many of ALRT's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than ALRT. In addition, many of these competitors have
significantly greater experience than ALRT in undertaking preclinical testing
and human clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. Accordingly, ALRT's competitors
may succeed in obtaining FDA approval for products more rapidly than ALRT.
Furthermore, if ALRT is permitted to commence commercial sales of products, they
may also be competing with respect to marketing capabilities, an area in which
ALRT does not have substantial experience.
In addition to the activities to be performed by each of Ligand and Allergan
under the Development Agreement, it is anticipated that Ligand and Allergan will
perform research and development work on products other than the retinoid
Products being developed by ALRT. Such other products may utilize certain
aspects of the Core Technologies or related or similar technologies in other or
related areas. Allergan and Ligand, either jointly or alone, are entitled to
develop and commercialize using their own funds compounds that ALRT elects not
to continue to develop after the compound enters clinical trials or after
sufficient data to file an Investigational New Drug Application for the compound
has been gathered, so long as (i) the Board of
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Directors of ALRT shall have first made a reasonable determination that
continued work on such compound would not materially conflict or interfere with
the interests of the ALRT retinoid program or impair a party's ability to
perform its obligations under the Major Agreements and (ii) at least $1 million
per year is committed to development of such compound during each of the first
two years of development of such compound. In addition, retinoid products
acquired by Ligand or Allergan from third parties may be commercialized by
Ligand or Allergan, as the case may be, so long as such product was being
commercially sold or is a product for which an application to market has been
filed in the United States or other major market country at the time of its
licensing or acquisition. See "-- Potential Competition from Allergan and
Ligand."
Government Regulation. The manufacturing and marketing of ALRT's products and
its ongoing research and development activities are subject to regulation by
numerous governmental authorities in the United States and other countries.
Prior to marketing, any drug developed by ALRT must undergo rigorous preclinical
and clinical testing and an extensive regulatory approval process mandated by
the United States Food and Drug Administration (the FDA) and equivalent foreign
authorities. These processes can take a number of years and require the
expenditure of substantial resources.
The time required for completing such testing and obtaining such approvals is
uncertain, and approval itself may not be obtained. ALRT may decide to replace
its compounds in testing with modified or optimized compounds, thus extending
the testing process. In addition, delays or rejections may be encountered based
upon changes in FDA policy during the period of product development and FDA
regulatory review of each submitted new drug application or product license
application. Similar delays may also be encountered in other countries. There
can be no assurance that even after such time and expenditures, regulatory
approval will be obtained for any products developed by ALRT. Moreover, prior to
receiving FDA approval to market its products, ALRT may have to demonstrate that
its products represent improved forms of treatment over existing therapies. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
Further, even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
Third Party Reimbursement and Health Care Reform. ALRT's commercial success will
be heavily dependent upon the reimburseability of the use of its products. There
can be no assurance that Medicare and third-party payors will authorize or
otherwise budget reimbursement for such usage at the current authorized levels.
Furthermore, federal and state regulations govern or influence the reimbursement
to health care providers of fees and capital equipment costs in connection with
medical treatment of certain patients. There can be no assurance that action
taken by the federal government, if any, with regard to health care reform will
not have a material adverse effect on ALRT. If any actions are taken by the
federal government, such actions could adversely affect the prospects for future
sales of ALRT's products.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Product Liability and Insurance. ALRT is subject to the potential product
liability risks which are inherent in the testing, manufacturing and marketing
of human therapeutic products. ALRT currently does not have product liability
insurance, but Allergan and Ligand have added ALRT as an additional named
insured on their respective product liability insurance policies.
There can be no assurance that Ligand and/or Allergan, as the case may be, will
be able to maintain such insurance, that ALRT will be able to obtain product
liability insurance at commercially reasonable rates or at all if Ligand and/or
Allergan are not able to maintain such insurance on acceptable terms, that any
insurance ALRT may obtain can be maintained on acceptable terms, or that
insurance will provide adequate coverage against potential liabilities.
Hazardous Materials. ALRT's research and development is conducted by Ligand and
Allergan on ALRT's behalf and involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although ALRT believes
that Ligand's and Allergan's safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of an accident, ALRT could be held
liable for any damages that result and any such liability could exceed the
resources of ALRT. ALRT may be required to reimburse Ligand and/or Allergan for
substantial costs they incur to comply with environmental regulations.
Conflicts of Interest. ALRT, Allergan and Ligand are separate companies. The
best interests of the stockholders of the three companies may not be the same,
and decisions made by Ligand or Allergan may adversely affect the interests of
the holders of Callable Common Stock and/or the Warrants.
Common Management. The Technology License Agreement, Development Agreement,
Commercialization Agreement and other agreements executed by ALRT, Allergan and
Ligand in connection with the Offering were approved by Allergan and Ligand, as
the controlling stockholders of ALRT at the time of such approvals, which may
have influenced the Board of Directors of ALRT to enter into such agreements.
The current Board of Directors of ALRT is comprised of two persons who are
directors and officers of Allergan or Ligand and three persons who are
unaffiliated with Allergan or Ligand.
Terms of Agreements and Special Stock. The terms of the Technology License
Agreement, the Development Agreement, the Commercialization Agreement and other
agreements executed by ALRT, Allergan and Ligand in connection with the Offering
were determined by Allergan, Ligand and ALRT with the financial advisor to ALRT,
Ligand and Allergan in connection with the Offering. The terms of these
agreements were not negotiated at arm's-length.
The Stock Purchase Option Exercise Price; Panretin (ALRT1057) Purchase Option
Exercise Price; Warrant Exercise Price. The exercise prices for the Stock
Purchase Option and the Panretin (ALRT1057) Purchase Option and the exercise
price of the Warrants were each determined by ALRT, Ligand and Allergan giving
consideration to the stage of development of the Core Technologies, the
agreements among ALRT, Allergan and Ligand, such other factors as ALRT, Allergan
and Ligand deemed appropriate, and other advice given by their financial
advisor. Such prices were not determined on an arms'-length basis.
19
<PAGE> 20
Allergan Ligand Retinoid Therapeutics, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
Exhibit 27. Financial Data Schedule
- Reports on Form 8-K.
A Current Report on Form 8-K dated September 24, 1997 was filed
with the Commission on October 9, 1997 reporting the exercise of the
Stock Purchase Option and Asset Purchase Option by Ligand and Allergan,
respectively.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1997 ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
/s/ Dwight J. Yoder
-----------------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
21
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND THE STATEMENTS OF OPERATIONS OF ALLERGAN LIGAND
RETINOID THERAPEUTICS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997.
</LEGEND>
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