<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
____ OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE
REQUIRED)
For fiscal year ended December 31, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to _______.
Commission File Number: 0-25970
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0642614
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
2525 Dupont Drive, Irvine, California 92612
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (714) 246-4500
Securities registered pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Callable Common Stock, $.001 par value(1)
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
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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 voting stock held by non-affiliates
of the registrant as of February 28, 1997 was approximately $58,200,000 based
on the last sale price as reported by the Nasdaq National Market.(2) For the
purposes of this calculation, securities owned by officers, directors and 10%
securityholders known to the registrant have been excluded. Such exclusion is
not intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
The number of shares outstanding of the registrant's callable common
stock, $.001 par value (the "Callable Common Stock") as of February 28, 1997
was 3,250,000.
Documents Incorporated by Reference
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on June 2, 1997, referred to herein as the
"Proxy Statement", are incorporated by reference into Part III of this Annual
Report on Form 10-K.
Trademark Claims
Panretin(TM) is a trademark of the Company and Targretin(TM) is a
trademark of Ligand Pharmaceuticals Incorporated. Zorac(R) and Tazorac(TM)
(tazarotene) are trademarks of Allergan, Inc.
_________________________________
(1) The Callable Common Stock is registered pursuant to Section 12(g) of
the Act separately and as part of Units, each Unit consisting of one
share of Callable Common Stock of Allergan Ligand Retinoid
Therapeutics, Inc. and two warrants (each a "Warrant" and
collectively, the "Warrants"), each to purchase one share of Ligand
Pharmaceuticals Incorporated common stock. The Callable Common Stock
is not separately tradeable apart from the Units prior to June 3, 1997
or upon the earlier occurrence of certain events.
(2) Market value is the market value of the Units, each Unit consisting of
one share of Callable Common Stock of Allergan Ligand Retinoid
Therapeutics, Inc. and two Warrants. There is no quoted market value
for the shares of Callable Common Stock apart from the Units.
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PART I
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 hereof.
OVERVIEW
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT" or the "Company")
was incorporated in Delaware in 1994 to continue the efforts of the Allergan
Ligand Joint Venture ("Joint Venture"), established by Ligand Pharmaceuticals
Incorporated ("Ligand") and Allergan, Inc. ("Allergan") in June 1992, to
discover, develop and commercialize drugs based on retinoids. Retinoic acid, a
natural regulatory hormone and its synthetic analogues, also called retinoids,
are a principal class of non-peptide hormones which activate intracellular
receptors ("IRs"). Retinoids have a broad range of biological actions, and
evidence suggests that retinoids are useful in the treatment of dermatological
diseases and a variety of cancers, including kidney cancer and certain forms of
leukemia, as well as other possible indications. ALRT believes that it is one
of the leading retinoid research and development programs, combining a library
of 3,100 retinoid compounds with the product development expertise of Allergan
and the leading IR technology of Ligand.
In May 1995, ALRT and Ligand commenced an offering (the "Offering")
which was completed on June 3, 1995, of 3.25 million units (each, a "Unit"),
each Unit consisting of one share of Callable Common Stock of ALRT and two
Warrants, each to purchase one share of Ligand common stock. The Offering
raised net proceeds for ALRT of $26.8 million. At the completion of the
Offering, Ligand contributed $17.5 million in cash (the "Ligand Cash
Contribution") and the Warrants valued at $8.0 million to ALRT in exchange for
(i) a right to acquire all of the Callable Common Stock at specified future
dates and amounts and (ii) a right to acquire all rights to the Panretin(TM)
(ALRT1057) product currently under development by ALRT. At the same time,
Allergan contributed $50.0 million in cash (together with the Ligand Cash
Contribution, the "Contributions") to ALRT in exchange for (i) the right to
acquire one-half of all technologies and other assets in the event Ligand
exercises its right to acquire all of the Callable Common Stock, (ii) a similar
right to acquire all of the Callable Common Stock if Ligand does not exercise
its right and (iii) a similar right to acquire all rights to the Panretin
ALRT(1057) product. See "Relationship among ALRT, Ligand and Allergan." Prior
to the consummation of the Offering, the Joint Venture was dissolved and its
technology transferred to ALRT.
ALRT received from Allergan and Ligand a worldwide exclusive license
to use the retinoid technologies developed and utilized by the Joint Venture
(the "Core Technologies") in performing research, development and
commercialization of ALRT products (the "Products"). The licenses granted by
Allergan and Ligand are subject in each case to certain exceptions that allow
Allergan and
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Ligand to pursue limited research activities, to pursue development and
commercialization of the Panretin (ALRT1057) products (following exercise of
the Panretin (ALRT1057) Purchase Option, as defined below) (see "Relationship
among ALRT, Ligand and Allergan--Panretin (ALRT1057) Purchase Option"), to
pursue development and commercialization of, with respect to Ligand,
Targretin(TM) (LGD1069), and, with respect to Allergan, Zorac(R)/Tazorac(TM)
(AGN190168), and to pursue development and commercialization of certain other
defined products. ALRT, Ligand and Allergan also entered into a research and
development agreement (the "Development Agreement") under which Ligand and
Allergan are performing research and development for ALRT on retinoid compounds
and products.
ALRT is utilizing substantially all of the net proceeds of the
Offering and the Contributions to continue the research and development of
potential retinoid compounds begun by the Joint Venture. Prior to transferring
its technology to ALRT, the Joint Venture had identified two development
retinoids, Oral Panretin (ALRT1057) and Topical Panretin (ALRT1057), and a
number of other preclinical lead compounds with distinctive subtype
selectivity. Ligand, on behalf of ALRT, has initiated Phase II/III human
clinical trials with Oral Panretin (ALRT1057) for the treatment of acute
promyelocytic leukemia ("APL"), Phase I/II human clinical trials with Topical
Panretin (ALRT1057) and Phase I/IIa human clinical trials with ALRT1550 Oral in
cancer. Based on interim results of the trials with Topical Panretin
(ALRT1057), Ligand, on behalf of ALRT, has initiated Phase III human clinical
trials with Topical Panretin (ALRT1057) for the treatment of Kaposi's sarcoma
("KS"). A number of other compounds are in preclinical development.
ALRT's Board of Directors recently 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. Ligand and Allergan have certain purchase
options over the Callable Common Stock and the assets of ALRT which could be
triggered by the use of substantially all of ALRT's funds. There can be no
assurance that Ligand or Allergan will exercise these options. See "Risks and
Uncertainties -- No Assurance of Exercise of Ligand's and Allergan's Options."
THE ALLERGAN AND LIGAND JOINT VENTURE
Ligand and Allergan formed the Joint Venture in June 1992 to combine
each of their significant resources in the field of retinoid research and
development. Ligand and Allergan believed that the Joint Venture offered an
opportunity to accelerate research and development of novel retinoid
therapeutics and that a combined effort would provide a critical mass of
research personnel and resources to accelerate the project. After forming the
Joint Venture, except for certain permitted activities (including research and
development of Zorac(R)/Tazorac(TM) (AGN190168) and Targretin (LGD1069)), Ligand
and Allergan conducted all of their respective retinoid-related research and
development through the Joint Venture. The combined efforts of medicinal
chemists at Ligand and Allergan (including through the Joint Venture) produced
over 3,100 novel retinoid compounds, with five preclinical lead development
candidates selected.
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For eight years prior to the formation of the Joint Venture, Allergan
had a productive retinoid research and development program which resulted in
the synthesis of over 400 retinoids and 17 U.S. and 113 foreign issued
composition of matter patents, a topical compound Zorac(R)/Tazorac(TM)
(AGN190168), for which a New Drug Application ("NDA") for the treatment of
psoriasis has been filed with the United States Food and Drug Administration
("FDA"), and considerable expertise in the development of drugs for topical use
in eye and skin disease. Ligand has a productive proprietary approach to
retinoid based drug development, primarily through its exclusive licenses to IR
technology developed by Ligand's scientists and its collaborators, The Salk
Institute of Biological Studies ("The Salk Institute"), Rockefeller University
and Baylor College of Medicine ("Baylor"). Patent applications covering
members of both subfamilies of the six retinoid-responsive IRs that have been
discovered to date have been exclusively licensed to Ligand, primarily from The
Salk Institute.
Based on the results of the research and development activities
completed by Ligand, Allergan and the Joint Venture, Ligand and Allergan
believed that important and commercially viable products might be developed
using the Core Technologies. Ligand and Allergan expected that, based upon
their experience in developing (and Allergan in marketing) pharmaceutical
products, both for their own accounts and in conjunction with corporate
collaborators, the funding of development of ALRT would enable Ligand, Allergan
and ALRT to accelerate the development of potential novel retinoid
therapeutics. The development of the Core Technologies by ALRT, and of new
products based on pre-clinical and clinical stage compounds licensed to ALRT,
however, involve significant risks as compared to Allergan's activities based
on its currently available products and a risk profile that is different from
Ligand's other non-retinoid research and development projects that are at
earlier stages. See "Risks and Uncertainties."
RETINOIDS
Retinoic acid, a derivative of Vitamin A, is one of the body's natural
regulatory hormones and has a broad range of biological actions, influencing
cell growth, differentiation, apoptosis and embryonic development. Many
chemical analogues of retinoic acid, also 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 ("ATRA") has been approved by the FDA for the treatment
of APL. Retinoids have also shown an ability to reverse precancerous
(premalignant) changes in tissues, reducing the risk of development of cancer,
and have potential as preventive agents for a variety of epithelial
malignancies, including skin, head and neck, bladder and prostate cancer.
Despite the therapeutic benefits of currently-marketed retinoids,
their use to date has been limited by their propensity to 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 for their therapeutic benefits prior to the
discovery of retinoid-responsive IRs ("RRs"), and were developed with
suboptimal tools.
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The six RRs that have been identified to date can be grouped in two
subfamilies: Retinoic Acid Receptors ("RARs") and Retinoid X Receptors
("RXRs"). Patent applications covering members of both families of RRs have
been licensed exclusively to Ligand primarily from The Salk Institute, and have
been further sublicensed to ALRT as part of the Offering. See "Relationship
among ALRT, Ligand and Allergan -- Technology License Agreement." The RR
subtypes appear to have different functions, based on their distribution in the
various tissues within the body and data rising from in vitro studies and from
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. ALRT is developing chemically synthesized retinoids which,
by selectively activating RR subtypes, may preserve desired therapeutic effects
while reducing side effects. Because of their subtype selectivity or other
desirable activities, ALRT's retinoid agonists are expected to have more
specific pharmacological effects and less side effects, thus providing a better
therapeutic index then currently used retinoids, many of which are not RR
subtype specific or are suboptimal for other reasons.
Ligand, on behalf of ALRT, has three retinoid products in clinical
trials, Topical Panretin (ALRT1057), Oral Panretin (ALRT1057) and ALRT1550
Oral, and three retinoid compounds in preclinical evaluation. There can be no
assurance, however, that ALRT will be able to successfully develop any
marketable products. See "Risks and Uncertainties -- Early Stage of
Development; No Assurance of Successful Development of Technologies or Related
Products."
CORE TECHNOLOGIES
Allergan has established substantial expertise in the research and
development of retinoid compounds. Allergan has synthesized more than 2,000
retinoid compounds, including tazarotene, since beginning its medical chemistry
program in 1984. Allergan has developed proprietary compounds that are potent
and efficacious in classical retinoid assays and which have receptor and
functional selectivity. Certain compounds are completely specific for the RAR
or RXR families or are selective against RAR subtypes. Other compounds exhibit
functional activity ranging from full agonist to partial agonist to antagonist.
In addition, Allergan has identified lead structures that differentiate between
the positive and negative gene regulatory functions of RARs. The
identification of these types of receptor and functional selectivities is
critical for developing retinoids that have desirable pharmacological activity
without undesirable side effects. Allergan's patent estate covers a broad
range of structural types. These structural patents and other Allergan
retinoid discoveries have been exclusively licensed by Allergan to ALRT for use
in the discovery and development of retinoids under the agreements among ALRT,
Ligand and Allergan.
Ligand's early recognition of the drug discovery opportunities
inherent in emerging IR research has enabled it to build a strong proprietary
position and accumulate valuable expertise in IRs applicable to drug discovery
and development. Ligand has created powerful new tools to explore and
manipulate non-peptide hormone action for therapeutic benefit, building on its
recent scientific findings about the molecular basis of hormone action. Ligand
has exclusive relationships in the field of IRs with Dr. Ronald Evans of The
Salk Institute, Rockefeller University and Baylor where many of the core
discoveries have been made. Ligand has exclusively licensed most of these
discoveries. Ligand has also developed proprietary IR assays that can rapidly
and accurately predict the probable therapeutic
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and side-effect profiles of compounds with potential as drugs. These
proprietary technologies have been exclusively licensed by Ligand to ALRT for
use in the discovery and development of retinoids under the agreements among
ALRT, Ligand and Allergan. See "Relationship among ALRT, Ligand and Allergan
- -- Technology License Agreement."
PRODUCT DEVELOPMENT PROGRAM
Prior to transferring its technology to ALRT, the Joint Venture had
identified two development retinoids, Oral Panretin (ALRT1057) and Topical
Panretin (ALRT1057), and a number of other preclinical lead compounds with
distinctive RR subtype selectivity that ALRT has continued to develop. Ligand,
first on behalf of the Joint Venture and now on behalf of ALRT, has initiated
Phase I/IIa human clinical trials with Oral Panretin (ALRT1057) and Phase I/II
human clinical trials with Topical Panretin (ALRT1057). Based on interim
results of the trials with Topical Panretin (ALRT1057), Ligand, on behalf of
ALRT, has initiated Phase III human clinical trials with Topical Panretin
(ALRT1057) for the treatment of KS. Ligand has also initiated Phase I/IIa
human clinical trials with ALRT1550 Oral in cancer on behalf of ALRT. Certain
of the potential compounds listed below act on the same IRs and may be
applicable to similar indications. To the extent that compounds have
application to similar indications, there is a potential that sales of one
compound, if any, may detract from sales of the other compound. In addition,
ALRT may decide to proceed with only one of the compounds with application to
similar indications. The following table summarizes the status of ALRT's
product research and development programs:
<TABLE>
<CAPTION>
STAGE OF DISTINGUISHING
RECEPTOR ACTIVITY TARGET INDICATION DEVELOPMENT(1) PRECLINICAL FEATURES
----------------- ----------------- -------------- --------------------
<S> <C> <C> <C> <C>
Topical Panretin Panagonist Kaposi's sarcoma Phase III Naturally occurring
(ALRT1057) RAR/RXR hormone; balanced
panagonist;
favorable
metabolism;
generally well
tolerated;
bioavailable
Oral Panretin Panagonist APL Phase III Naturally occurring
(ALRT1057) RAR/RXR Cancers, including Phase IIb hormone; balanced
kidney cancer, non- International Phase panagonist;
Hodgkin's lymphoma, II favorable
KS metabolism;
generally well
Psoriasis Phase II tolerated;
Proliferative bioavailable
vitreo-retinopathy
ALRT1550 Oral RARaB Cancer Phase I/IIa Selective RAR
selective agonist agonist; potent
antiproliferative
with reduced lipid
toxicities
ALRT1109 & RAR antagonist Retinoid induced Preclinical Highly selective,
analogues mucocutaneous potent antagonist
toxicity of RAR agonists
ALRT268 & analogues RXRaB Type II diabetes, Preclinical Highly selective,
(formerly 620) cancer, skin and potent RXRaB
metabolic diseases agonist (a
Rexinoid); good
oral
bioavailability;
better therapeutic
index than prototype
retinoids
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
ALRT1455 & RARa selective Leukemia, lymphoma, Preclinical Highly selective,
analogues agonist breast cancer potent agonist of
RARa subtype; less
bone toxicity;
increased
therapeutic index
Other RR Subtype Antagonists Not yet determined Research Novel antagonists
Selective Compounds identified
Agonists Cancer, skin and Research Individual receptor
eye disease selective compounds
identified
</TABLE>
(1) "Stage of Development" refers to the current stage of development of
the most advanced indication. "Research" activities include research
related to specific IR targets and the identification of lead
compounds. "Preclinical" includes pharmacology and toxicology testing
in preclinical models (in vitro and animal), formulation work and
manufacturing scale-up to gather necessary data to comply with
applicable regulations prior to commencement of human clinical trials.
Clinical trials are typically conducted in three sequential phases
that may overlap. In "Phase I," the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on
testing for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. "Phase II"
involves studies in a limited patient population to determine the
efficacy of the pharmaceutical for specific targeted indications, to
determine dosage tolerance and optimal dosage and to identify possible
adverse side effects and safety risks. In the development of drugs
for the treatment of cancer, the initial studies are often conducted
in patients with otherwise untreatable cancers rather than in healthy
volunteers. These trials are referred to as "Phase I/II" trials and
are primarily intended to determine side effects, human
pharmacokinetics and maximum tolerated dose. Once a suitable dose is
established, limited trials in specific types of cancer to evaluate
efficacy are conducted. These are referred to as "Phase IIb" trials.
Once a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, "Phase III" trials (or "Phase
II/III" trials for certain life- threatening indications) are
undertaken to evaluate clinical efficacy further and to test further
for safety within an expanded patient population at multiple clinical
study sites. 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 risks.
Topical Panretin (ALRT1057). 9-cis-Retinoic acid (Panretin
(ALRT1057)) is a non-peptide hormone isolated and characterized by Ligand in
1992 in collaboration with scientists at The Salk Institute and Baylor. This
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.
9-cis-Retinoic acid has pharmacological properties which ALRT believes give it
therapeutic utility.
In June 1994, prior to the formulation of ALRT, Ligand imitated a
Phase I/II human clinical trial for Topical Panretin (ALRT1057) in
AIDS-related, cutaneous KS. Interim results of this Phase I/II clinical trial
reported in January 1996 showed that, when evaluated at 12 weeks after the
start of each patient's therapy, Topical Panretin (ALRT1057) induced a partial
or complete clinical response in 30% of 43 patients with AIDS-related,
cutaneous KS evaluated by AIDS Clinical Trial Group criteria as applied to
topical therapy, compared with 9% of patients with untreated control lesions.
This interim assessment supports results of an earlier assessment reported in
September 1995. Following a meeting with the FDA in November 1995, ALRT
launched in the second quarter of 1996 a pivotal Phase III study to evaluate
Topical Panretin (ALRT1057) in over 200 patients with AIDS-related, cutaneous
KS. In addition, Topical Panretin (ALRT1057) began international Phase III
trials for KS in the third quarter of 1996. Ligand has informed ALRT that it
intends to file an NDA for Topical Panretin (ALRT1057) on behalf of ALRT for
treating KS in 1997 in the event that Phase III trials demonstrate sufficient
safety and efficacy.
Oral Panretin (ALRT1057). In completed Phase I/IIa human clinical
trials, Oral Panretin (ALRT1057) was well tolerated at doses as high as 140
mg/m2/day (milligram per square meter of body surface, per day), the maximum
tolerated dose ("MTD"). At the MTD level, side effects, including headaches,
elevated triglyceride levels, hypercalcemia and mucocutaneous irritation, were
dose limiting toxicities. Memorial Sloan- Kettering Cancer Center
("Sloan-Kettering") interim data
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indicate that nine of 39 patients with advanced or otherwise untreatable cancer
treated with Oral Panretin (ALRT1057) experienced no disease progression for
periods ranging from 14 to 28 weeks. The Phase I/IIa clinical data also
indicate that Oral Panretin (ALRT1057) has good bioavailability. Patient
exposure to Oral Panretin (ALRT1057) is proportional to the administered dose
of the compound over a broad range of doses.
United States and international Phase IIb trials have been launched
with Oral Panretin (ALRT1057) in a number of cancer indications, including
kidney cancer (in combination with interferon alpha), KS, prostate cancer,
ovarian cancer, non-Hodgkin's lymphoma and multiple myeloma. In addition, a
Phase III trial with Oral Panretin (ALRT1057) at a dose of 140 mg/m2/day in APL
was initiated in the fourth quarter of 1996. In a Phase I/IIa trial, six out
of 15 patients with APL treated with Oral Panretin (ALRT1057) had complete
remissions, of which three had lapsed from previous ATRA treatment and/or
chemotherapy and three were newly diagnosed. Cell culture based analysis of
leukemia cells from some of the patients in this study indicated that
resistance to ATRA was not overcome by Oral Panretin (ALRT1057). Additional
Phase IIb trials of Oral Panretin (ALRT1057) in other indications including
ovarian cancer (with cis-platin) were launched in the fourth quarter of 1996.
Oral Panretin (ALRT1057) entered a Phase II trial for psoriasis in the United
States in September 1995, a Phase IIb trial for myelodysplastic syndrome in
Europe in the second quarter of 1996 and a Phase II trial for proliferative
vitreo-retinopathy, a serious complication of retinal detachment which can lead
to blindness, in the United States in the third quarter of 1996. The FDA has
approved an application by Ligand, on behalf of ALRT, to have Oral Panretin
(ALRT1057) designated an "Orphan Drug" for the treatment of APL.
There is currently substantial interest among oncologists in the
potential of retinoids as evidenced by the existence of over 60 open protocols
at the National Cancer Institute ("NCI") to examine the effects of retinoids on
a variety of cancers. A Phase I/II study is currently being conducted by the
NCI to evaluate the safety and efficacy of Oral Panretin (ALRT1057) in children
with malignancies, and trials are underway sponsored by the NCI to evaluate the
safety and efficacy of Oral Panretin (ALRT1057) in patients with lung cancer,
cervical cancer and those with breast cancer. There were 25 clinical trials
conducted with Panretin in 1996 and 1997.
ALRT1550 Oral. ALRT1550 Oral is a potent activator of all three RAR
subtypes. The preclinical pharmacological profile of ALRT1550 indicates that
it is a highly potent inhibitor of proliferation in a broad spectrum of human
cancer cell lines and experimental models of cancer. ALRT believes that
ALRT1550 may prove useful in the treatment of cancer when used alone or in
combination with other drugs. An IND was filed in December 1996 and Phase
I/IIa clinical trials of ALRT1550 in advanced cancer at Sloan-Kettering and the
Lombardi Comprehensive Cancer Center at Georgetown University began in the
first quarter of 1997.
ALRT1109 and analogues. ALRT1109 and analogues function as potent
antagonists to RAR agonist activity. They have demonstrated no skin, lipid or
bone toxicity in animal models. ALRT believes that these agents will be useful
in the topical prevention and/or treatment of mucocutaneous toxicity caused by
systemic retinoid use. Additionally, their ability to reduce psoriasis
associated markers in keratinocytes suggests that they may be useful in
inflammatory diseases of the skin. ALRT is currently undertaking an extensive
evaluation to select a lead compound from this class to enter into preclinical
development. There can be no assurance that a lead compound will be selected.
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ALRT268 and analogues. ALRT268 represents a class of chemically novel
synthetic retinoids (Rexinoids) which are potent and selective agonists for the
RXR subfamily of retinoid receptors. The ability of these RXR agonists to
lower serum glucose, triglycerides and insulin levels in db/db and ob/ob mice,
which are well accepted models of non-insulin dependent diabetes mellitus,
suggests potential usefulness in the treatment of Type II (insulin resistant)
diabetes as well as other metabolic diseases. ALRT is currently undertaking a
more extensive evaluation to select a lead compound from this class to enter
into preclinical development. There can be no assurance that a lead compound
will be selected.
ALRT1455 and analogues. This class of unique compounds are
characterized by their ability to selectively and potently activate the RARa
subtype of receptors. They have demonstrated activity in a broad spectrum of
experimental leukemia and breast cancer cell lines, with a greatly improved
therapeutic index (less mucocutaneous and bone toxicity). ALRT believes that
ALRT1455, or an analog, may have utility in the treatment of leukemias and
breast cancer. ALRT is currently undertaking a more extensive evaluation to
select a lead compound from this class to enter into preclinical development.
There can be no assurance that a lead compound will be selected.
Other RR Subtype Selective Compounds. To date, the combined efforts
of medicinal chemists at Ligand and Allergan have produced over 3,100 novel
synthetic retinoids, from which many novel patentable or patented retinoids
have been identified with distinct patterns of RR subtype activity translating
into distinctive preclinical pharmacological profiles. With the exceptions of
Targretin (LGD1069) and Zorac(R)/Tazorac(TM) (AGN190168), all of these
compounds have been licensed to ALRT. See "Relationship among ALRT, Ligand and
Allergan -- Technology License Agreement." Some of these compounds react
selectively with the RAR or RXR subfamilies of the retinoid receptors and
others show additional selectivity with individual members of the RAR
subfamily. ALRT believes these compounds may be useful in the treatment of
cancers, including solid tumors and leukemia, premalignancy and skin diseases.
There can be no assurance that any of these compounds will be selected to enter
preclinical development.
RELATIONSHIP AMONG ALRT, LIGAND AND ALLERGAN
Technology License Agreement. In connection with the Offering, ALRT,
Ligand and Allergan entered into a license agreement (the "Technology License
Agreement") under which (i) Allergan granted ALRT a worldwide, exclusive (even
as to Allergan) right and license, terminable only as set forth therein, to use
the Core Technologies developed by Allergan in research, development and
commercialization of the Products and (ii) Ligand granted ALRT a worldwide,
exclusive (even as to Ligand) right and license, terminable only as set forth
therein, to use the Core Technologies developed by Ligand in research,
development and commercialization of the Products. The licenses granted by
Allergan and Ligand are subject in each case to certain exceptions that allow
Allergan and Ligand to pursue limited research activities, to pursue
development and commercialization of the Panretin (ALRT1057) products
(following exercise of the Panretin (ALRT1057) Purchase Option, as defined
below), to pursue development and commercialization of, with respect to Ligand,
Targretin (LGD1069) and, with respect to Allergan, Zorac(R)/Tazorac(TM)
(AGN190168), to pursue development and commercialization of Acquired Products
(as defined below) and to pursue development and commercialization of
Independent Products (as defined below) (collectively, the "Permitted
-10-
<PAGE> 11
Activities"). See "-- Development Agreement" and "--Panretin (ALRT1057)
Purchase Option." In consideration of the license grants and in recognition of
Allergan's and Ligand's expertise which they developed over a period of years
through the Joint Venture and otherwise, ALRT agreed to pay to Allergan and
Ligand a royalty, to be divided equally between them, of 3% of net sales of
Products during the life of applicable patents or, in certain circumstances,
for 10 years.
Pursuant to the Technology License Agreement, ALRT granted to Allergan
and Ligand the licenses required by them to perform their duties under the
Development Agreement and the Commercialization Agreement. In addition, ALRT
granted to Allergan and Ligand a nonexclusive, royalty- free irrevocable
license (including the right to sublicense) to allow Allergan and Ligand to
perform the Permitted Activities.
ALRT may terminate the Technology License Agreement if either Allergan
or Ligand (i) breaches any material obligation under the Technology License
Agreement, the Development Agreement or the Commercialization Agreement (the
"Major Agreements"), which breach continues for a period of 60 days after
written notice thereof from ALRT, (ii) enters into any voluntary proceeding in
bankruptcy, reorganization or arrangement for the benefit of its creditors, or
its Board of Directors or stockholders authorize such an action or (iii) fails
to dismiss any such proceeding within 45 days after the same is involuntarily
commenced (each an "Event of Default"). Allergan and Ligand each have the
right, but not the obligation, to assume all of the breaching party's rights
and obligations under the Major Agreements, the Panretin (ALRT1057) Purchase
Option and the Stock Purchase Option (as defined below), in which case the
breaching party's rights under the Major Agreements, the Panretin (ALRT1057)
Purchase Option and the Stock Purchase Option terminate, except the breaching
party retains the right to receive its share of the 3% royalty described above.
In addition, Allergan and Ligand may terminate the Technology License Agreement
upon an Event of Default by ALRT.
If the Technology License Agreement is terminated by Allergan and
Ligand prior to expiration in the circumstances described above, (i) ALRT's
license to use the Core Technologies under the Technology License Agreement
will terminate and (ii) Allergan and Ligand will retain the right to research,
develop, manufacture and sell the Products. If the Technology License
Agreement is terminated by ALRT prior to expiration in the circumstances
described above, ALRT's license to use the Core Technologies will continue, and
ALRT will be free to enter into arrangements with third parties to research,
develop and commercialize the Products worldwide. There can be no assurance
that, upon termination of the Technology License Agreement by ALRT, ALRT will
be able to make alternative arrangements for the research, development and
commercialization of some or all of the Products.
Development Agreement. ALRT, Ligand and Allergan also entered into
the Development Agreement under which Ligand and Allergan perform research and
development for ALRT on retinoid compounds and products in accordance with
annual budgets and development plans jointly proposed by Ligand and Allergan.
The budgets and research and development plans are subject to approval and
acceptance by ALRT's Board of Directors, including members of the Board of
Directors affiliated with Ligand and Allergan. Although ALRT believes that, in
general, the terms of the Development Agreement are consistent with customary
practices in the pharmaceutical industry, the Development Agreement was not
negotiated on an arm's-length basis.
-11-
<PAGE> 12
Upon approval of a development plan by ALRT's Board of Directors,
responsibilities for performing and managing clinical trials and for assembling
drug approval applications will be generally as follows:
<TABLE>
<CAPTION>
DEVELOPMENT RESPONSIBILITY SPONSOR
-------------------------- -------
<S> <C>
Development of compounds for eye and skin indications, Allergan
excluding cancer indications
Development in North America of compounds for eye and Ligand
skin cancer where the dosage form involves systemic
administration
Development in North America of compounds for eye and Allergan
skin cancer where the dosage form involves topical
administration
Development in North America of compounds for cancer Ligand
indications other than eye and skin cancer
Development, other than in North America, of compounds Allergan
for cancer indications, including eye and skin cancer
</TABLE>
Additional development responsibilities for compounds for indications
other than those described above will be allocated between Ligand and Allergan
in accordance with a determination by ALRT, following a recommendation by
Ligand and Allergan, as to which company is best suited to carry out the work.
Payments to Ligand and Allergan under the Development Agreement for
research and development of potential products are made out of Available Funds
(as defined below) for the full amount of all Development Costs (as defined in
the Development Agreement) incurred by Ligand and Allergan in performing these
activities plus 10%, up to the maximum amount of funds available to ALRT, which
includes substantially all of the net proceeds raised in the Offering, plus the
Contributions, the Additional Contributions (as defined below), if any, and, if
designated by ALRT, any licensing or marketing income earned by ALRT, plus
interest earned on such funds, less amounts paid pursuant to the Services
Agreement (as defined below) and the Major Agreements and less $1 million to be
retained by ALRT as working capital (the "Available Funds"). Any funds
received by ALRT from Allergan and Ligand upon exercise of the Panretin
(ALRT1057) Purchase Option will be excluded from Available Funds. Development
Costs will be charged in a manner consistent with industry practices.
Development Costs paid by ALRT under the Development Agreement include
approximately $6.5 million in costs for research and development incurred by
Ligand and Allergan from January 1 through June 3, 1995, the date the Offering
was completed. Each of Ligand and Allergan has agreed, subject to customary
business constraints and limitations, to provide appropriate scientific and
technical personnel, necessary laboratories and equipment and administration of
research and development operations. Under the Development Agreement, however,
neither Ligand nor Allergan is required to allocate any specified amount of
time or resources to perform its obligations thereunder. See "Risks and
Uncertainties -- Dependence on Allergan and Ligand."
-12-
<PAGE> 13
Prior to June 3, 1998, if Ligand and Allergan receive quarterly
financial statements of ALRT which show Available Funds of less than $10
million (the "Statement Date"), Ligand and Allergan, at their option, may
jointly provide, on a quarterly basis, cash advances (the "Quarterly
Contributions") to ALRT, in an amount which the Board of Directors of ALRT
determines will be sufficient to permit ALRT to continue its research and
development of Products for the quarter following the date of such financial
statements. Additionally, prior to June 3, 1999, Ligand and Allergan, at their
option, may jointly provide, on a one-time basis, a cash advance of $10 million
or more (such amount, together with the Quarterly Contributions, the
"Additional Contributions") to ALRT for use in research, development and
commercialization of Products. Any advances provided by Allergan and Ligand
may be made pursuant to loans on terms reasonably acceptable to a majority of
the independent directors of ALRT. Neither Allergan nor Ligand, however, is
required to advance any additional funds to ALRT. See "Risks and Uncertainties
- -- Requirement for Additional Funds."
If ALRT determines not to proceed with or to discontinue development
of a program compound after such compound has entered clinical trials, or after
sufficient data to file an Investigational New Drug Application ("IND") on such
compound has been gathered (an "Independent Product"), then Allergan and
Ligand, either jointly or alone, are entitled to develop and commercialize such
compound using their own funds, so long as (i) the Board of Directors of ALRT
has 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. ALRT will receive a royalty equal to 6% of net sales of any
Independent Product. ALRT has retained the right to reacquire any Independent
Product prior to the earlier of the commencement of Phase III clinical trials
for such product or the exercise or expiration of the Stock Purchase Option,
exercisable by reimbursing Ligand and/or Allergan, as the case may be, for all
research, development and commercialization costs expended on such product,
together with an amount representing interest (in an amount which will provide
an internal rate of return of 25% to the developing party on such reimbursed
costs). Additionally, with respect to any Independent Product which ALRT
reacquires, ALRT will pay a royalty equal to 4% of net sales to the developing
party. In addition, any retinoid product licensed or acquired by Ligand or
Allergan (an "Acquired Product") may be commercialized by Ligand or Allergan
separate from ALRT, 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.
The development obligations of ALRT, Ligand and Allergan under the
Development Agreement will terminate upon the earlier to occur of (i) the
expenditure of all Available Funds, (ii) the expiration of the Stock Purchase
Option, or (iii) at such other time as ALRT, Ligand and Allergan may mutually
determine. In addition, Allergan and Ligand may terminate the Development
Agreement upon an Event of Default by ALRT, and ALRT may terminate the
Development Agreement upon an Event of Default by either Allergan or Ligand,
subject to the non-breaching party's right to assume the breaching party's
rights and obligations under the Major Agreements, the Panretin (ALRT1057)
Purchase Option and the Stock Purchase Option.
Commercialization Agreement. ALRT, Ligand and Allergan also entered
into a commercialization agreement (the "Commercialization Agreement") which
provides for the marketing,
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<PAGE> 14
manufacture and sale by Ligand and/or Allergan of the Products developed under
the Development Agreement which have received regulatory approval for
commercial sale. The developed compounds will be marketed in a manner
determined by Ligand and Allergan, except that generally in marketing such
compounds (i) Allergan will have the worldwide exclusive right to market drugs
for eye and skin indications (other than cancer indications), (ii) Ligand will
have the exclusive right to market drugs to oncologists in North America for
use in eye and skin cancer, (iii) Allergan will have the exclusive right to
market drugs to dermatologists and eye specialists in North America for use in
eye and skin cancer, (iv) Ligand will have the exclusive right to market drugs
for cancer indications in North America (other than eye and skin cancer), and
(v) Allergan will have the exclusive right to market drugs for cancer
indications outside of North America. Additional marketing responsibilities
for compounds for indications other than those set forth above will be
allocated between Ligand and Allergan in accordance with a determination by
ALRT, following a recommendation by Ligand and Allergan, as to which company is
best suited to carry out the work. Ligand, Allergan or other third parties
will manufacture Products based on a determination by ALRT, following a
recommendation by Ligand and Allergan, of relative quality and cost
effectiveness, except with respect to drugs for eye and skin indications which
will be manufactured by Allergan. Products manufactured and marketed by Ligand
and/or Allergan will be done so at cost plus a margin to be negotiated, with
all remaining profit being retained by ALRT. If the Stock Purchase Option
expires unexercised, the obligations of Ligand and Allergan to manufacture and
market products for ALRT will continue until terminated on 12-months' advance
written notice from ALRT, Ligand or Allergan, as the case may be. In addition,
Allergan and Ligand may terminate the Commercialization Agreement upon an Event
of Default by ALRT, and ALRT may terminate the Commercialization Agreement upon
an Event of Default by either Allergan or Ligand, subject to the non-breaching
party's right to assume the breaching party's rights and obligations under the
Major Agreements, the Panretin (ALRT1057) Purchase Option and the Stock
Purchase Option.
Stock Purchase Option. 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 (the "Stock Purchase Option"). Subject to acceleration of the
exercise of the Stock Purchase Option as described below, the Stock Purchase
Option is exercisable at any time beginning on the earlier of (i) June 3, 1997,
and (ii) the Statement Date, and ending on the date (the "Stock Purchase Option
Expiration Date") which is the earliest to occur of (a) June 3, 2000, (b) the
90th day after the Statement Date, and (c) subject to the inability of the
non-breaching party to perform the breaching party's obligations under the
Major Agreements, the date ALRT terminates a Major Agreement due to an Event of
Default by either Allergan or Ligand. The Stock Purchase Option is not
exercisable prior to June 3, 1998 unless the Available Funds are less than $60
million at the date of exercise. If Ligand exercises the Stock Purchase
Option, Ligand must provide notice (the "Stock Purchase Option Exercise
Notice") to ALRT, each holder of record of Callable Common Stock and any other
holder of shares of ALRT special common stock, $1.00 par value per share
("Special Stock") on or before 20 days prior to the Stock Purchase Option
Expiration Date (the "Ligand Expiration Date"). See "Special Stock." If no
such notice is given by Ligand, and Allergan exercises the Stock Purchase
Option, Allergan will provide notice to ALRT after the Ligand Expiration Date
and on or before the Stock Purchase Option Expiration Date.
In the event that ALRT terminates a Major Agreement as a result of the
occurrence of an Event of Default thereunder by Allergan or Ligand, if the
non-breaching party is unable to continue the
-14-
<PAGE> 15
retinoid program under the Major Agreements, such non-breaching party may
exercise the Stock Purchase Option.
If the Stock Purchase Option is exercised, the purchase price per
share (the "Stock Purchase Option Exercise Price") for the period before June
3, 1998 and the last quarter of each of the fourth and fifth years from June 3,
1995 will be as follows:
<TABLE>
<CAPTION>
STOCK PURCHASE OPTION
IF THE STOCK PURCHASE OPTION IS EXERCISED EXERCISE PRICE PER SHARE
----------------------------------------- ------------------------
<S> <C>
Before June 3, 1998 $21.97
During the last quarter of the fourth year 28.56
During the last quarter of the fifth year 37.13
</TABLE>
The Stock Purchase Option Exercise Price is adjusted on a
straight-line basis at quarterly intervals beginning on June 3, 1998, through
the Stock Purchase Option Expiration Date. The Stock Purchase Option Exercise
Price was determined based on a number of factors and was not determined on an
arms'-length basis.
The Stock Purchase Option Exercise Price may be paid (i) by Ligand, in
its sole discretion, in cash, in shares of Ligand common stock, in shares of
Allergan common stock or in any combination thereof, provided that the number
of shares of Allergan common stock to be used to pay all or any portion of the
Stock Purchase Option Exercise Price shall not exceed the greater of (a) the
number of shares of Allergan common stock then owned by ALRT and which were
received from Allergan in payment of all or a portion of the Panretin
(ALRT1057) Purchase Option Exercise Price and (b) the number of shares of
Allergan common stock received by ALRT in connection with Allergan's exercise
of the Asset Purchase Option (as defined below), or (ii) by Allergan, in its
sole discretion, in cash, in shares of Ligand common stock, in shares of
Allergan common stock, or in any combination thereof, provided that the number
of shares of Ligand common stock to be used to pay all or any portion of the
Stock Purchase Option Exercise Price will not exceed the number of shares then
owned by ALRT and which were received from Ligand in payment of all or a
portion of the Panretin (ALRT1057) Purchase Option Exercise Price. Any such
Ligand common stock or Allergan common stock will be valued based upon the
average of the closing prices for such stock for the 20 trading days
immediately preceding the day prior to the closing date of the Stock Purchase
Option. The Stock Purchase Option Exercise Price will be paid generally within
60 days after the date of exercise of the Stock Purchase Option. All shares of
Ligand common stock and Allergan common stock used to pay all or any portion of
the Stock Purchase Option Exercise Price will be registered under the
Securities Act and listed or approved for quotation on such national securities
exchange or the over-the-counter trading market where such stock is listed or
traded at the time of payment.
Under ALRT's Amended and Restated Certificate of Incorporation, ALRT
is prohibited, until the expiration of the Stock Purchase Option, from taking
or permitting certain actions inconsistent with Ligand's and Allergan's rights
under the Stock Purchase Option. For example, until the expiration of the
Stock Purchase Option, ALRT is not able, among other things, without the
consent of each of Ligand and Allergan to pay any dividends, issue additional
shares of capital stock, borrow money in
-15-
<PAGE> 16
excess of $1 million in the aggregate outstanding at any one time, merge,
liquidate or sell all or substantially all of its assets or amend its Amended
and Restated Certificate of Incorporation to change the Stock Purchase Option.
See "Special Stock."
Asset Purchase Agreement. ALRT, Ligand and Allergan also entered into
an agreement (the "Asset Purchase Agreement") whereby, if Ligand exercises the
Stock Purchase Option, Allergan has the right to acquire certain assets from
ALRT (the "Asset Purchase Option"). Upon exercise of the Asset Purchase
Option, Allergan will acquire (i) a co-exclusive (with ALRT) right to ALRT
technology as of the date of the acquisition, (ii) 50% of all tangible assets
related to ALRT's activities in the retinoid program, (iii) 50% of any
remaining Available Funds, and (iv) the consideration, cash, Allergan common
stock and/or Ligand common stock, paid by Allergan to ALRT in connection with
the exercise, if any, by Ligand and Allergan of the Panretin (ALRT1057)
Purchase Option, subject to Allergan's assumption of 50% of the liabilities of
ALRT. The Asset Purchase Option is exercisable upon notice given prior to the
record date for the exercise of the Stock Purchase Option and will close
concurrently with the Stock Purchase Option.
If the Asset Purchase Option is exercised, the exercise price for the
Asset Purchase Option (the "Asset Purchase Exercise Price"), which will be paid
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, for the period before June 3, 1998
and the last quarter of each of the fourth and fifth years from June 3, 1995,
will be as follows:
<TABLE>
<CAPTION>
AGGREGATE
ASSET PURCHASE
IF THE ASSET PURCHASE OPTION IS EXERCISED EXERCISE PRICE
----------------------------------------- --------------
(IN MILLIONS)
<S> <C>
Before June 3, 1998 $ 8.9
During the last quarter of the fourth year 11.5
During the last quarter of the fifth year 15.0
</TABLE>
The Asset Purchase Exercise Price is adjusted on a straight-line basis
at quarterly intervals beginning on June 3, 1998, through the Stock Purchase
Option Expiration Date. The Asset Purchase Exercise Price was determined based
on a number of factors and was not determined on an arms'-length basis.
The Asset Purchase Exercise Price may be paid by Allergan, in its sole
discretion, in cash, in shares of Allergan common stock, in shares of Ligand
common stock, or in any combination of the foregoing. Any such Allergan common
stock or Ligand common stock will be valued based upon the average of the
closing prices for Allergan common stock on the New York Stock Exchange, or the
Nasdaq National Market in the case of Ligand common stock, for the 20 trading
days immediately preceding the closing date of the Stock Purchase Option. If
Allergan pays all or any portion of the Asset Purchase Exercise Price in shares
of Allergan common stock or Ligand common stock, such shares will be registered
under the Securities Act and listed or approved for quotation on the New York
Stock Exchange in the case of Allergan common stock, or the Nasdaq National
Market in the
-16-
<PAGE> 17
case of Ligand common stock. Ligand may cause any such cash or stock to be
distributed as a credit against the Stock Purchase Option Exercise Price.
Panretin (ALRT1057) Purchase Option. ALRT, Ligand and Allergan also
entered into an agreement (the "Panretin (ALRT1057) Purchase Option Agreement")
pursuant to which ALRT has granted to Ligand and Allergan an option (the
"Panretin (ALRT1057) Purchase Option") to acquire the Panretin (ALRT1057)
Program Assets (as defined below). Unless the Panretin (ALRT1057) Purchase
Option has been terminated as to either Ligand or Allergan as the result of an
occurrence of an Event of Default with respect to such party under a Major
Agreement (in which case the Panretin (ALRT1057) Purchase Option will only be
exercisable by the party for which such option has not been terminated), Ligand
and Allergan, jointly, may exercise the Panretin (ALRT1057) Purchase Option
beginning on the earlier of (i) June 3, 1997 and (ii) the receipt of regulatory
approval for commercial sale of any Panretin (ALRT1057) Product in the United
States or in certain other major countries and ending on the earlier of (a) 90
days after receipt of such regulatory approval and (b) June 3, 2000.
Additionally, the Panretin (ALRT1057) Purchase Option will terminate on the
date the Stock Purchase Option terminates as to both Allergan and Ligand,
whether by exercise or otherwise.
If the Panretin (ALRT1057) Purchase Option is exercised, the purchase
price (the "Panretin (ALRT1057) Purchase Option Exercise Price") for the period
before June 3, 1998 and the last quarter of each of the fourth and fifth years
from June 3, 1995 will be as follows:
<TABLE>
<CAPTION>
AGGREGATE
PANRETIN (ALRT1057)
PURCHASE OPTION
IF THE PANRETIN (ALRT1057) PURCHASE OPTION IS EXERCISED EXERCISE PRICE
------------------------------------------------------- --------------
(IN MILLIONS)
<S> <C>
Before June 3, 1998 $21.4
During the last quarter of the fourth year 27.8
During the last quarter of the fifth year 36.2
</TABLE>
The Panretin (ALRT1057) Purchase Option Exercise Price is adjusted on
a straight-line basis at quarterly intervals beginning on June 3, 1998, through
the termination of the Panretin (ALRT1057) Purchase Option. The Panretin
(ALRT1057) Purchase Option Exercise Price was determined based on a number of
factors and was not determined on an arms'-length basis.
The Panretin (ALRT1057) Purchase Option Exercise Price may be paid in
cash, in shares of Ligand common stock, in shares of Allergan common stock or
in any combination thereof, provided that Allergan is not permitted to use any
Ligand common stock that has not been registered under the Securities Act to
pay any portion of the Panretin (ALRT1057) Purchase Option Exercise Price
unless Ligand uses Ligand common stock to pay a portion of the Panretin
(ALRT1057) Purchase Option Exercise Price. Any such shares of Ligand common
stock and any such shares of Allergan common stock will be valued based upon
the average of the closing prices for such stock for the 20 trading days
immediately preceding the day prior to the closing date of the Panretin
(ALRT1057) Purchase Option. If any of the Ligand common stock or Allergan
common stock used to pay the Panretin (ALRT1057) Purchase Option Exercise Price
is not registered under the Securities Act and listed or approved for
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<PAGE> 18
quotation where such Ligand common stock or Allergan common stock, as the case
may be, is then listed or traded, each of Ligand, with respect to such Ligand
common stock, and Allergan, with respect to such Allergan common stock, will
use its best efforts to register such shares under the Securities Act and have
such registered shares listed or approved for quotation on such national
securities exchange or over-the-counter-trading market as the Ligand common
stock or Allergan common stock, as the case may be, is then listed or traded,
within 90 days after the earliest of (i) the date the Stock Purchase Option
terminates, (ii) the date the Stock Purchase Option is exercised and (iii) the
date ALRT and its advisors determine that the retention of the Panretin
(ALRT1057) Stock (as defined herein) would subject ALRT to the requirements of
the Investment Company Act of 1940, as amended (the "Investment Company Act").
ALRT may not distribute or otherwise expend any proceeds received upon
the exercise of the Panretin (ALRT1057) Purchase Option until the earlier of
the closing of the Stock Purchase Option or the date the Stock Purchase Option
terminates or expires unexercised. The Panretin (ALRT1057) Purchase Option
Exercise Price does not exceed the aggregate amount of funds raised pursuant to
the Offering until the third quarter of the fifth year following June 3, 1995.
In the event that the Stock Purchase Option is not exercised following exercise
of the Panretin (ALRT1057) Purchase Option, holders of Callable Common Stock
may not recoup their entire investment in the Units.
Based on information now available to them, Ligand and Allergan have
not formed any current plan or intention as to whether or not to exercise the
Panretin (ALRT1057) Purchase Option at any particular time and they will not be
able to formulate such plan or intention prior to further clinical development
of Panretin (ALRT1057). In addition, even if clinical development is
successful, such decision is dependent upon several other factors including,
but not limited to, potential market size and market penetration possible with
the approved formulation of Panretin (ALRT1057), factors which are currently
indeterminable.
In the event that the Panretin (ALRT1057) Purchase Option is exercised
by Ligand and Allergan by payment in whole or in part in shares of Ligand
common stock and/or shares of Allergan common stock (the "Panretin (ALRT1057)
Stock"), ALRT may become subject to the Investment Company Act. If, under all
the facts and circumstances known and available to ALRT and its advisors within
one year following exercise of the Panretin (ALRT1057) Purchase Option by
payment in shares of the Panretin (ALRT1057) Stock, it is the opinion of ALRT
and its advisors that the retention of the Panretin (ALRT1057) Stock would
subject ALRT to the requirements of the Investment Company Act, ALRT will take
such action as is necessary so as not to be subject to the Investment Company
Act, including divesting itself of shares of Panretin (ALRT1057) Stock then
held by ALRT and investing such proceeds in short-term government securities.
Services Agreement. ALRT also entered into a services agreement with
Ligand and Allergan (the "Services Agreement") under which Ligand and Allergan
provide management and administrative services to ALRT at 110% of direct and
indirect costs for services performed internally by Ligand and Allergan and on
a cost reimbursement basis for services performed by third parties for Ligand
and Allergan on ALRT's behalf. Such costs include all expenses incurred by
Ligand and Allergan in connection with the Offering. The Services Agreement
terminates on the earlier of (i) the closing of the exercise of the Stock
Purchase Option or (ii) 12 months after expiration or termination of the Stock
Purchase Option (other than by exercise). In addition, Allergan and Ligand may
terminate the Services Agreement upon an Event of Default by ALRT, and ALRT may
terminate the Services
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<PAGE> 19
Agreement upon an Event of Default by either Allergan or Ligand, subject to the
non-breaching party's right to assume the breaching party's rights and
obligations under the Major Agreements, the Panretin (ALRT1057) Purchase Option
and the Stock Purchase Option.
GOVERNMENT REGULATION
The manufacturing and marketing of products by the Company 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 FDA regulation. 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
products. 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 (i) preclinical laboratory and animal tests, (ii) the
submission to the FDA of an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug, (iv) the submission of
an NDA to the FDA and (v) 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. Domestic manufacturing establishments are subject to preapproved
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.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the pharmaceutical
product to healthy volunteers or to patients identified as having the condition
for which the pharmaceutical is being tested. The pharmaceutical is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols previously submitted
to the FDA as part of the IND that detail the objectives of the study, the
parameters used to monitor safety and the efficacy criteria that are being
evaluated. Each clinical study is conducted under the auspices of an
Institutional Review Board ("IRB") at the institution at which the study is
conducted. The IRB considers, among other things, ethical factors, the safety
of the human subjects and the possible liability risk for the institution.
Clinical trials are typically conducted in three sequential phases
that may overlap. In Phase I, the initial introduction of the pharmaceutical
into healthy human volunteers, the emphasis is on testing for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and clinical
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pharmacology. Phase II involves studies in a limited patient population to
determine the efficacy of the pharmaceutical for specific targeted indications,
to determine dosage tolerance and optimal dosage and to identify possible
adverse side effects and safety risks. In the development of drugs for the
treatment of cancer, the initial studies are often conducted in patients with
otherwise untreatable cancers rather than in healthy volunteers. These trials
are referred to as Phase I/II trials and are primarily intended to determine
side effects, human pharmacokinetics and maximum tolerated dose. Once a
suitable dose is established, limited trials in specific types of cancer to
evaluate efficacy are conducted. These are referred to as Phase IIb trials.
Once a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials (or Phase II/III trials for
certain life-threatening indications) are undertaken to evaluate clinical
efficacy further and to further test for safety within an expanded patient
population at multiple clinical study sites. 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.
The results of the preclinical and clinical trials are submitted to
the FDA in the form of an NDA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review process and may delay
marketing approval. After FDA approval for the initial indications, further
clinical trials would be necessary to gain approval for the use of the product
for any additional indications. The FDA may also require postmarketing testing
to monitor for adverse effects, which can involve significant expense.
The results of preclinical studies and initial clinical trials are not
necessarily predictive of results that will be obtained from large-scale
clinical trials, and there can be no assurance that clinical trials of any
product under development will demonstrate the safety and efficacy of such
product or will result in a marketable product. The safety and efficacy of a
therapeutic product under development by the Company must be supported by
extensive data from clinical trials. A number of companies have suffered
significant setbacks in advanced clinical trials, despite promising results in
earlier trials. The failure to demonstrate adequately the safety and efficacy
of a therapeutic drug under development would delay or prevent regulatory
approval of the product and could have a material adverse effect on the
Company. In addition, the FDA may require additional clinical trials, which
could result in increased costs and significant development delays.
The rate of completion of clinical trials of the Company's products is
dependent upon, among other factors, the efforts of Ligand and Allergan on its
behalf, obtaining adequate clinical supplies and the rate of patient accrual.
Patient accrual is a function of many factors, including the size of the
patient population, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Delays in planned patient enrollment in
clinical trials may result in increased costs, program delays or both, which
could have a material adverse effect on the Company. There can be no assurance
that, if clinical trials are completed, the Company will submit an NDA with
respect to any potential products or that any such application will be reviewed
and approved by the FDA in a timely manner, if at all.
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
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regulatory approval, as well as possible civil and criminal sanctions. In
addition, changes in existing regulations could have a material adverse effect
on ALRT.
A drug that receives Orphan Drug designation by the FDA and is the
first product to receive FDA marketing approval for its product claim is
currently entitled to a seven-year exclusive marketing period in the United
States for that product claim. A drug that is considered by the FDA to be
different than a particular Orphan Drug, however, is not barred from sale in
the United States during such seven-year exclusive marketing period. The FDA
has approved an application by Ligand on behalf of ALRT to have Oral Panretin
(ALRT1057) designated an "Orphan Drug" for the treatment of APL. Ligand is
preparing additional applications on behalf of ALRT for Orphan Drug
designations in other indications. Congress is currently considering
significant changes to the Orphan Drug Act, including a reduction in the
exclusive marketing period from seven years to four years, with the possibility
of a three-year extension for certain drugs.
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.
PATENTS
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 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.
Pursuant to the Technology License Agreement, prior to the expiration
or termination of the Stock Purchase Option (other than by exercise) each of
Ligand and Allergan will cause to be filed any patent applications with respect
to the Core Technologies that they believe to be of commercial importance.
After the expiration or termination of the Stock Purchase Option (other than by
exercise), ALRT will have the sole right to file any patent applications with
respect to the Core Technologies it believes to be of commercial importance.
ALRT's success will therefore 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
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<PAGE> 22
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.
To date, Ligand owns or has exclusively licensed over 193 currently
pending patent applications in the United States relating to the Core
Technologies, as well as foreign counterparts of certain of these applications
in many countries. In addition, Ligand is the owner or exclusive licensee of
rights covered by approximately 102 United States patents issued or allowed to
it or to 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. Subject to certain exceptions,
Ligand's rights under the patents and patent applications relating to the Core
Technologies have been licensed to ALRT pursuant to the Technology License
Agreement.
With respect to retinoid compounds, Allergan has filed 113 patent
applications in the United States Patent and Trademark Office and 96 of such
applications have been allowed or issued. Approximately 247 foreign patent
applications corresponding to such United States patent applications have been
filed in Europe, Japan, Canada, Australia and various other foreign countries.
The patents issued and applications filed, to date, are essentially patents to
the individual compounds and, therefore, seek to protect Allergan's interest in
developing its proprietary retinoid compounds. Other companies, such as BASF,
Hoffman-La Roche ("Roche") and L'Oreal, have also obtained patents with respect
to proprietary retinoid compounds. Subject to certain exceptions, Allergan's
rights under the patents and patent applications relating to the Core
Technologies have been licensed to ALRT pursuant to the Technology License
Agreement.
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 ("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, 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
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<PAGE> 23
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 stated
its intention to initiate an interference proceeding to determine whether
Ligand or Roche is entitled to a patent by having been first to invent the
common subject matter. ALRT cannot be assured that Ligand 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, for 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
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. 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. 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 ALRT.
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<PAGE> 24
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 Independent Products using their own
funds, so long as (i) the Board of 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, an Acquired Product 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 "Risks and Uncertainties -- Potential Competition from
Allergan or Ligand."
EMPLOYEES
ALRT has one employee, its president and chief executive officer, Dr.
Marvin Rosenthale. Other than Dr. Rosenthale, the officers of ALRT are
affiliated with Ligand or Allergan.
SPECIAL STOCK
ALRT has issued 200 shares of Special Stock, 50% of which are held by
Ligand and 50% of which are held by Allergan. The holders of shares of Special
Stock are not entitled to vote, except: (i) as required by law and (ii) the
holders of Special Stock, voting as a separate class, are entitled to elect two
directors of ALRT. When entitled to vote, each holder of Special Stock has one
vote for each share standing in his or her name.
The holders of shares of Special Stock do not have the right to any
profits of ALRT as a result of the ownership of such shares. In the event of
the liquidation, dissolution or winding up of ALRT, holders of the Callable
Common Stock shall have a priority over the holders of the Special Stock with
respect to return of capital, and the holders of the shares of Special Stock
shall not otherwise be entitled to participate in any way in the profits or
assets of ALRT. ALRT does not presently intend to issue any additional shares
of Special Stock.
Until the Stock Purchase Option is exercised or terminates
unexercised, ALRT shall not without the affirmative vote of the holders of a
majority of the issued and outstanding shares of Special Stock, voting
separately and as a class: (i) issue any additional shares of capital stock
through a stock split, sale, reorganization or otherwise, (ii) alter, change or
amend the rights, powers, preferences and restrictions of the Special Stock,
(iii) alter or change the provisions of ALRT's Certificate of Incorporation
relating to ALRT's capital stock and the Stock Purchase Option, (iv) merge,
consolidate or reorganize ALRT with or into any other corporation, (v) sell,
liquidate or otherwise dispose of all or substantially all of the assets of
ALRT, (vi) borrow an aggregate of in excess of $1 million outstanding at any
one time; (vii) declare or pay dividends or make any other distributions to
stockholders; or (viii) adopt, amend or repeal the Bylaws of ALRT. Thus, each
of Ligand and Allergan, as a result of their
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<PAGE> 25
ownership of 50% of the outstanding shares of Special Stock, could preclude the
holders of a majority of the outstanding Callable Common Stock and the Board of
Directors of ALRT from taking any of the foregoing actions during such period.
ALRT may, from time to time on and after the termination of the Stock
Purchase Option, redeem all of the outstanding shares of Special Stock by
paying in cash $1.00 per share on each redeemed share. No other preemptive
rights, conversion rights, redemption rights or sinking fund provisions will be
applicable to Special Stock.
RISKS AND UNCERTAINTIES
Early Stage of Development; No Assurance of Successful Development of
Technologies or Related Products. ALRT has acquired from each of Ligand and
Allergan a license to 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 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 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 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 date it is anticipated that ALRT will have expended all of the Available
Funds (which date is currently late 1997 or early 1998), 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. While Allergan and Ligand may, at their
option, provide funds for further development of the Products, they are not
obligated to do so. If the Stock Purchase Option is not exercised, ALRT would
have to raise substantial funding while hiring, or otherwise obtaining access
to, research, development and management personnel. See "--Dependence on
Ligand and Allergan."
ALRT's Board of Directors recently 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. Ligand and Allergan have certain purchase
options over the Callable Common Stock and the assets of ALRT which could be
triggered by the use of substantially all of ALRT's funds. There can be no
assurance that Ligand or Allergan will exercise these options. See "--No
Assurance of Exercise of Ligand's and Allergan's Options."
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No Assurance of Exercise of Ligand's and Allergan's Options. Neither
Ligand nor Allergan is obligated to exercise either the Stock Purchase Option
to acquire the shares of Callable Common Stock or the Panretin (ALRT1057)
Purchase Option to acquire the Panretin (ALRT1057) Program Assets, and such
options will be exercised only if, in the opinion of their respective Boards of
Directors, it is in their respective best interests to do so. There can be no
assurance that either Ligand or Allergan will conclude that exercise of either
or both options is in their respective best interests. In addition, the
exercise of the Panretin (ALRT1057) Purchase Option requires both Allergan and
Ligand to conclude that a mutual decision to exercise the Panretin (ALRT1057)
Purchase Option is in both of their best interests. If Ligand or Allergan
exercises the Stock Purchase Option and pays all or a portion of the exercise
price thereof with Ligand common stock or Allergan common stock, rather than
with cash, the holders of Callable Common Stock who receive Ligand common stock
or Allergan common stock will bear the investment risks associated with the
ownership of such stock. Additionally, if Ligand and Allergan exercise the
Panretin (ALRT1057) Purchase Option, ALRT will be unable to use the proceeds
therefrom until the Stock Purchase Option is exercised or expires unexercised,
and, to the extent such exercise price is paid for in Ligand common stock or
Allergan common stock, ALRT will bear the investment risks associated with the
ownership of such stock. If the Stock Purchase Option lapses without 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 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.
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. 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. See "Relationship among ALRT, Ligand and
Allergan -- Development Agreement."
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
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the marketing and manufacture 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 marketing and manufacturing costs incurred by Allergan and Ligand under the
Commercialization Agreement. Ligand and Allergan will 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 have 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 marketing and manufacture 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 operating losses to date. ALRT anticipates
that substantially all of the 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 approval of Allergan and Ligand. See "Relationship among
ALRT, Ligand and Allergan -- Stock Purchase Option."
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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 to
pursue the Permitted Activities. Permitted Activities may, in some
circumstances, lead to the development of products competitive with the
Products, including, in the case of the exercise of the Panretin (ALRT1057)
Purchase Option, products based on Panretin (ALRT1057). In addition, following
termination of the Stock Purchase Option, Allergan and Ligand will be free to
develop products that may compete with the Products. It is possible that the
existence of any such competitive products could reduce Allergan's or Ligand's
incentive to exercise either the Panretin (ALRT1057) Purchase Option or the
Stock Purchase Option.
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, 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 and it is unlikely that Ligand or Allergan would exercise either the
Panretin (ALRT1057) Purchase Option or the Stock Purchase Option.
Acceleration of Stock Purchase Option. If ALRT terminates a Major
Agreement due to an Event of Default by either Allergan or Ligand, the Stock
Purchase Option will be exercisable for a period of 30 days by the
non-breaching party if the non-breaching party, despite its best efforts, is
unable to continue all or a substantial majority of the obligations of the
breaching party under such Major Agreement. There can be no assurance that, at
that time, the development of the Products will have progressed to a point
where Allergan or Ligand will have sufficient information to determine whether
to exercise the Stock Purchase Option. As a result, Allergan and Ligand may
determine not to exercise the Stock Purchase Option. There can be no assurance
that, upon termination of the Development Agreement by ALRT as described above,
alternative arrangements for the development of some or all of the Products
could be made or that such development of the Products by ALRT would be
successful.
No Assurance of Market for Units, Warrants or Callable Common Stock.
Until the Separation Date, the Warrants and the Callable Common Stock that
constitute the Units are transferable only as Units. After the Separation
Date, the Warrants and the Callable Common Stock will be 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 Units. 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 the Units and/or Callable Common Stock
and may further reduce the liquidity of an investment in the Units. In
addition, while the Panretin (ALRT1057) Purchase Option remains outstanding,
the possibility of exercise of such option by Allergan and Ligand may cause the
Callable Common Stock to trade at a price which reflects the maximum
consideration to be received by ALRT upon exercise of
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the Panretin (ALRT1057) Purchase Option and the progress made by ALRT in the
development of other retinoid compounds. Furthermore, the value of the
Callable Common Stock on the public market may be further affected by the
uncertainties associated with the exercise of both the Panretin (ALRT1057)
Purchase Option and the Stock Purchase Option. In the event of the exercise of
the Panretin (ALRT1057) Purchase Option, the value of the Callable Common Stock
on the public market will be affected by the progress made by ALRT in the
development of other retinoid compounds. After the Separation Date, there can
be no assurance that there will be an active trading market for the Warrants or
the Callable Common Stock. Prior to the Separation Date, application will be
made to list the Warrants and the Callable Common Stock for trading on the
Nasdaq National Market.
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
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
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<PAGE> 30
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 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, 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 stated its intention to initiate an interference proceeding to
determine whether Ligand or Roche is entitled to a patent by having been first
to invent the common subject matter. ALRT cannot be assured that Ligand 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, for 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
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<PAGE> 31
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 Independent Products using their own
funds, so long as (i) the Board of 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, an Acquired Product 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 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
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<PAGE> 32
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.
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 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 Units.
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<PAGE> 33
Common Management. The Technology License Agreement, Development
Agreement, Commercialization Agreement, Stock Purchase Option, Panretin
(ALRT1057) Purchase Option Agreement, Asset Purchase Option Agreement and
Services Agreement 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/or
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,
the Stock Purchase Option, the Panretin (ALRT1057) Purchase Option Agreement,
Asset Purchase Option Agreement, Services Agreement, and the Special Stock 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 Stock Purchase Option
Exercise Price, the Panretin (ALRT1057) Purchase Option Exercise Price 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.
Item 2. PROPERTIES
ALRT's offices are located at 2525 Dupont Drive, Irvine, California
92612. ALRT does not own or lease any properties.
Item 3. LEGAL PROCEEDINGS
From time to time, ALRT may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Annual Report on Form 10-K, the Company is not a party to any
legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 34
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of Callable Common Stock are subject to the Stock Purchase
Option. See "Relationship among ALRT, Ligand and Allergan--Stock Purchase
Option" under Part I above.
The Callable Common Stock is not traded separately. The Units, each
of which consists of one share of Callable Common Stock and two Warrants, each
to purchase one share of Ligand common stock, are traded in the over the
counter market on the Nasdaq National Market under the symbol "ALRIZ." The
following table sets forth, for the period from June 5, 1995, the date of the
first sale of Units in the Unit offering, through December 31, 1996, the range
of high and low sale prices for the Units on the Nasdaq National Market.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- ---
<S> <C> <C>
Second Quarter (from June 5, 1995) . . . . . . . . . . . . . . . 16 11 3/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1/2 13 7/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 18 - 13 1/2
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1/2 17
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 32 20 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 30 21 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 31 26 1/2
</TABLE>
At March 11, 1997, there were approximately 1,200 Unit holders of
record. These numbers do not reflect persons or entities who hold their Units
in nominee or "street name" through various brokerage firms.
The Company has not declared or paid any cash dividends on its
Callable Common Stock to date. ALRT is prevented from paying dividends on the
Callable Common Stock without the approval of Allergan and Ligand until the
termination of the Stock Purchase Option, and accordingly, does not expect to
pay any dividends.
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<PAGE> 35
Item 6. SELECTED FINANCIAL DATA
The following data has been derived from audited financial statements
of ALRT. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 and the Company's Financial Statements and notes thereto
in Item 8.
<TABLE>
<CAPTION>
JUNE 3, 1995
(DATE OPERATIONS COMMENCED)
RESULTS OF OPERATIONS: 1996 TO DECEMBER 31, 1995
----------- --------------------
<S> <C> <C>
Interest income . . . . . . . . . . . . . . . . . $ 3,626,713 $ 2,863,989
Costs and expenses
Research and development . . . . . . . . . . . 31,726,438 19,495,346
General and administrative . . . . . . . . . . 1,344,876 1,152,188
------------ ------------
Total costs and expenses . . . . . . . . . . . 33,071,314 20,647,534
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . $(29,444,601) $(17,783,545)
============ ============
Net loss per callable common share(1) . . . . . . $(9.06) $(5.47)
====== ======
Weighted average callable common shares(1) . . . 3,250,000 3,250,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . $29,897,327 $79,792,554
Marketable securities . . . . . . . . . . . . . . 20,394,182 --
Total assets . . . . . . . . . . . . . . . . . . 51,011,518 80,127,555
Payable to Allergan, Inc. and
Ligand Pharmaceuticals Incorporated . . . . 3,889,188 2,886,234
Total current liabilities . . . . . . . . . . . . 4,149,921 3,651,604
Total stockholders' equity(2) . . . . . . . . . . 46,861,597 76,475,951
- --------------------------
</TABLE>
(1) See Note 2 of Notes to Financial Statements set forth in Item 8 for
basis of computation.
(2) No cash dividends have been declared since inception.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 above at "Business - 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" in Item 1, "Selected Financial Data" in Item 6 and the Company's
Financial Statements and notes thereto in Item 8.
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<PAGE> 36
ALRT commenced operations in June 1995 and received net proceeds of
approximately $26.8 million upon issuance of 3.25 million Units, each of which
consists of one share of Callable Common Stock and two Warrants, each to
purchase one share of Ligand common stock. At that time, ALRT also received
contributions of $50.0 million from Allergan and $17.5 million from Ligand.
ALRT is utilizing substantially all of the net proceeds of the Offering and the
Contributions to continue the research and development of potential retinoid
compounds.
The shares of Callable Common Stock are subject to 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 a Major Agreement is terminated due to an Event of Default. Ligand and
Allergan also have the option, which must be exercised together, to acquire the
Panretin (ALRT1057) Program Assets. See Notes 3 and 4 of Notes to Financial
Statements.
RESULTS OF OPERATIONS
The Company incurred a net loss of $29.4 million in 1996 and $17.8
million in 1995. Interest income was $3.6 million in 1996 and $2.9 million in
1995 as a result of investment of the unexpended cash held by ALRT from the
completion of the Offering on June 3, 1995. Interest income will decrease in
future periods as funds are used in performance of research and development
activities, subject to general interest rate trends.
Research and development expenses were $31.7 million in 1996 and $19.5
million in 1995. Since ALRT assumed responsibility for research and
development costs of the Joint Venture in 1995, the research and development
expenses for 1995 include research and development conducted by the Joint
Venture in 1995 from January 1 to June 3, in addition to research and
development activities of ALRT for the remaining period to December 31.
Research and development activities were performed primarily by Ligand and
Allergan under contracts with ALRT since June 1995. The Company expects
research and development spending to continue to increase in 1997. This
increase in 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. The Company anticipates the increase 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.
General and administrative expenses were $1.3 million in 1996 and $1.2
million in 1995. Included in the general and administrative expenses was
approximately $0.2 million in both 1996 and 1995 that the Company incurred
under the Services Agreement with Ligand and Allergan, of which $0.1 million
was paid to Ligand and $0.1 million was paid to Allergan in 1996 and 1995,
respectively.
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<PAGE> 37
During the term of the Development Agreement, the Company's activities
will be limited to conducting research and development under the agreements
with Ligand and Allergan. The Company does not expect to generate any revenues
other than interest income during this period. Consequently, it expects to
continue to incur net losses in subsequent periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, ALRT had cash and cash equivalents and
marketable securities of $50.3 million. The 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 to develop its compounds. Until the
expiration of the Stock Purchase Option, which will occur on the date it is
anticipated that ALRT will have expended all of the available funds (which date
is currently late 1997 or early 1998), 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. While Allergan and Ligand may, at their option, provide funds
for further development of the Products, they are not obligated to do so. 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 earnings on
unexpended cash balances. Substantial funding will be necessary to complete
the development of and to commercialize the Products, if any.
ALRT's Board of Directors recently 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. Ligand and Allergan have certain purchase
options over the Callable Common Stock and the assets of ALRT which could be
triggered by the use of substantially all of ALRT's funds. There can be no
assurance that Ligand or Allergan will exercise these options. See "Item 1 -
Business - Risks and Uncertainties - No Assurance of Exercise of Ligand's and
Allergan's Options."
If the Stock Purchase Option is not exercised, ALRT would have to
raise substantial funding from third parties through the sale of securities or
the licensing of Product or technology rights. 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
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<PAGE> 38
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 and it is unlikely that
Ligand or Allergan would exercise either the Panretin (ALRT1057) Purchase
Option or the Stock Purchase Option.
During 1996, ALRT invested its excess cash in money market accounts,
certificates of deposit, treasury bills 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.
At December 31, 1996, the Company had federal and California net
operating loss carryforwards of approximately $45.5 million and $2.4 million,
respectively. The federal and California tax loss carryforwards will expire in
2010 and 2003, respectively, unless previously utilized. A valuation allowance
has been recognized at December 31, 1996 as an offset to the deferred tax assets
related to these net operating loss carryforwards as realization of such assets
is uncertain. The Company also has federal and California research and
development tax credit carryforwards totaling $1.5 million and $1.3 million,
respectively, which will begin to expire in 2010 unless previously utilized.
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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<PAGE> 39
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 40
Balance Sheets at December 31, 1996 and 1995 41
Statements of Operations for the year ended December 31, 1996
and for the period June 3, 1995 (date operations
commenced) to December 31, 1995 42
Statements of Stockholders' Equity for the period December 16, 1994
(date of incorporation) to December 31, 1995
and the year ended December 31, 1996 43
Statements of Cash Flows for the period December 16, 1994
(date of incorporation) to December 31, 1995
and the year ended December 31, 1996 44
Notes to Financial Statements 45-50
</TABLE>
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<PAGE> 40
Report of Independent Auditors
The Board of Directors and Shareholders
Allergan Ligand Retinoid Therapeutics, Inc.
We have audited the accompanying balance sheets of Allergan Ligand Retinoid
Therapeutics, Inc. as of December 31, 1996 and 1995, the related statement of
operations for the period June 3, 1995 (date operations commenced) through
December 31, 1995 and the year ended December 31, 1996, and the statements of
stockholders' equity, and cash flows for the period December 16, 1994 (date of
incorporation) through December 31, 1995 and the year ended December 31, 1996.
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 financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements 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 financial position of Allergan Ligand Retinoid
Therapeutics, Inc. at December 31, 1996 and 1995, and the results of its
operations for the period June 3, 1995 (date operations commenced) through
December 31, 1995 and the year ended December 31, 1996, and its cash flows for
the period December 16, 1994 (date of incorporation) through December 31, 1995
and the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Orange County, California
March 26, 1997
-40-
<PAGE> 41
Allergan Ligand Retinoid Therapeutics, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,897,327 $ 79,792,554
Marketable securities 20,394,182 --
Interest receivable and other current assets 720,009 335,001
------------ ------------
Total current assets $ 51,011,518 $ 80,127,555
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable to Allergan, Inc. $ 812,710 $ 1,038,409
Accounts payable to Ligand Pharmaceuticals Incorporated 3,076,478 1,847,825
Accrued offering costs -- 434,759
Other accounts payable and accrued liabilities 260,733 330,611
------------ ------------
Total current liabilities 4,149,921 3,651,604
Stockholders' equity:
Callable Common Stock, $.001 par value, 3,250,000 shares
authorized, issued and outstanding 3,250 3,250
Special Common Stock, $1 par value, 1,000 shares authorized,
200 shares issued and outstanding 200 200
Additional paid-in capital 94,256,046 94,256,046
Unrealized holding loss on marketable securities (169,753) --
Accumulated deficit (47,228,146) (17,783,545)
------------ ------------
Total stockholders' equity 46,861,597 76,475,951
------------ ------------
$ 51,011,518 $ 80,127,555
============ ============
</TABLE>
See accompanying notes.
-41-
<PAGE> 42
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Operations
<TABLE>
<CAPTION>
June 3, 1995 (date
operations commenced)
1996 to December 31, 1995
---- --------------------
<S> <C> <C>
Interest income $ 3,626,713 $ 2,863,989
Costs and expenses:
Research and development expenses 31,726,438 19,495,346
General and administrative expenses 1,344,876 1,152,188
------------- --------------
Total costs and expenses 33,071,314 20,647,534
------------ -------------
Net loss $(29,444,601) $(17,783,545)
============ ============
Net loss per callable common share $(9.06) $(5.47)
====== ======
Weighted average callable common shares outstanding 3,250,000 3,250,000
============ ============
</TABLE>
See accompanying notes.
-42-
<PAGE> 43
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Stockholders' Equity
December 16, 1994 (date of incorporation) to December 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
CALLABLE SPECIAL HOLDING
COMMON STOCK COMMON STOCK ADDITIONAL LOSS ON TOTAL
---------------- --------------- PAID-IN MARKETABLE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT EQUITY
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued upon incorporation
- December 16, 1994
(date of incorporation) -- $ -- 200 $200 $ -- $ -- $ -- $ 200
----------------------------------------------------------------------------------------------
Balance at December 31, 1994 -- -- 200 200 -- -- -- 200
Issuance of callable common
stock in initial public
offering, net of offering
costs of $5,740,704 3,250,000 3,250 -- -- 26,756,046 -- -- 26,759,296
Contribution from Allergan, Inc. -- -- -- -- 50,000,000 -- -- 50,000,000
Contribution from Ligand
Pharmaceuticals Incorporated -- -- -- -- 17,500,000 -- -- 17,500,000
Net loss -- -- -- -- -- -- (17,783,545) (17,783,545)
----------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,250,000 3,250 200 200 94,256,046 -- (17,783,545) 76,475,951
Net loss -- -- -- -- -- -- (29,444,601) (29,444,601)
Unrealized holding loss
on marketable securities -- -- -- -- -- (169,753) -- (169,753)
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,250,000 $3,250 200 $200 $94,256,046 $(169,753) $(47,228,146) $46,861,597
==============================================================================================
</TABLE>
See accompanying notes.
-43-
<PAGE> 44
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Cash Flows
December 16, 1994 (date of incorporation) to December 31, 1996
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net loss $(29,444,601) $(17,783,545)
Adjustments to reconcile net loss to net cash used
in operating activities:
Changes in operating assets and liabilities:
Interest receivable and other current assets (385,008) (335,001)
Accounts payable to Allergan, Inc. (225,699) 1,038,409
Accounts payable to Ligand Pharmaceuticals
Incorporated 1,228,653 1,847,825
Accrued offering costs (434,759) 434,759
Other accounts payable and accrued liabilities (69,878) 330,611
------------ ------------
Net cash used in operating activities (29,331,292) (14,466,942)
Investing activities:
Purchase of marketable securities (20,563,935) --
Financing activities:
Proceeds from issuance of callable common stock
in initial public offering, net -- 26,759,296
Proceeds from issuance of special common stock -- 200
Contribution from Allergan, Inc. -- 50,000,000
Contribution from Ligand Pharmaceuticals
Incorporated -- 17,500,000
------------ ------------
Net cash provided by financing activities -- 94,259,496
------------ ------------
Net increase (decrease) in cash and cash equivalents (49,895,227) 79,792,554
Cash and cash equivalents at beginning of period 79,792,554 --
------------ ------------
Cash and cash equivalents at end of period $ 29,897,327 $ 79,792,554
============ ============
</TABLE>
See accompanying notes.
-44-
<PAGE> 45
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND BUSINESS OPERATIONS
BUSINESS
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 (the
Products).
On June 3, 1995, the Company and Ligand completed a public offering (the
Offering) of 3.25 million units, each unit consisting of one share of the
Company's callable common stock and two 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 and (ii) a right to
acquire all rights to the Panretin (ALRT1057) products, 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 all technologies and other assets in the event Ligand
exercises its right to acquire all of the Callable Common Stock, (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)
products, jointly with Ligand.
ALRT's Board of Directors recently 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. Ligand and Allergan have certain purchase
options over the Callable Common Stock and the assets of ALRT which could be
triggered by the use of substantially all of ALRT's funds. There can be no
assurance that Ligand or Allergan will exercise these options.
2. SIGNIFICANT ACCOUNTING POLICIES
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 accompanying financial statements.
Actual results could differ from those estimates.
-45-
<PAGE> 46
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF BUSINESS RISK
The Company conducts research and development for the purpose of identifying
and developing retinoid drugs for therapeutic uses and is subject to intense
competition and technological changes in the biotechnology industry. The
Company is also dependent upon Allergan and Ligand who are primarily
responsible for research, development, marketing and manufacturing on behalf of
the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of demand deposits and bank certificates of
deposit carried at cost which approximates fair value.
MARKETABLE SECURITIES
Marketable securities consist of United States Treasury Bills and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company determines the fair value of marketable securities based
upon quoted market values. At December 31, 1996, the fair value of marketable
securities was $169,753 less than cost. Such reduction in value was recorded
as a charge in stockholders' equity as the marketable securities are available
for sale.
CONCENTRATION OF CREDIT RISKS
The Company invests its excess cash in certificates of deposit and marketable
securities. The Company has established guidelines with respect to
diversification and maturities designed to maintain safety and liquidity.
RESEARCH AND DEVELOPMENT EXPENSES
The Company contracts with Allergan and Ligand to conduct research, development
and initial clinical testing. The costs of such work are expensed as incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
-46-
<PAGE> 47
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER CALLABLE COMMON SHARE
Net loss per callable common share is calculated by dividing the net loss by
the number of callable common shares outstanding, which was 3,250,000 at all
times during the period from commencement of operations following the closing
of the initial public offering on June 3, 1995 to December 31, 1996.
3. RELATIONSHIP WITH ALLERGAN AND LIGAND
TECHNOLOGY LICENSE AGREEMENT
Under a technology license agreement (the License), the Company has an
exclusive license to use the retinoid technologies developed first by Allergan
and Ligand and subsequently by the Joint Venture. The License granted is
subject to certain exceptions that allow Allergan and Ligand to pursue limited
research activities and development and commercialization of certain products.
In consideration for the License, the Company will pay to Allergan and Ligand a
royalty aggregating 3% of net sales of Products under the License during the
life of applicable patents or, in certain circumstances, for 10 years.
RESEARCH AND DEVELOPMENT AGREEMENT
The Company entered into a research and development agreement (the Development
Agreement) under which Allergan and Ligand perform research and development for
the Company on retinoid compounds and products in accordance with annual
budgets and development plans jointly proposed by Allergan and Ligand and
approved by the Company's Board of Directors. Under the Development Agreement,
the Company has agreed to reimburse Allergan and Ligand for their internal
costs plus 10% and the cost of services performed by third parties. Total
amounts charged to the Company during 1996 and 1995 by Allergan and Ligand
under the Development Agreement were (in millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allergan $10.6 $ 6.6
Ligand 21.8 12.7
</TABLE>
If the Company discontinues development of compounds meeting certain criteria,
Allergan and Ligand are entitled to develop and commercialize such compounds
using their own funds. The Company is entitled to receive a royalty equal to
6% of net sales of any such independently developed products. The Company also
has the right to reacquire any such product prior to the earlier of the
commencement of Phase III clinical trials for such product or the exercise or
expiration of the Stock Purchase Option, for an amount equal to costs incurred
by Allergan and/or Ligand plus interest at 25% per year. Additionally, with
respect to any reacquired product, the Company will pay a royalty equal to 4%
of net sales to the developing party.
-47-
<PAGE> 48
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
3. RELATIONSHIP WITH ALLERGAN AND LIGAND (CONTINUED)
COMMERCIALIZATION AGREEMENT
The Company also entered into a commercialization agreement (the
Commercialization Agreement) which provides for the marketing, manufacture and
sale by Allergan and/or Ligand of the Products developed under the Development
Agreement which have received regulatory approval for commercial sale.
SERVICES AGREEMENT
The Company also entered into a services agreement (the Services Agreement)
under which Allergan and Ligand provide management and administrative services
to the Company at 110% of direct and indirect costs for services performed
internally by Allergan and Ligand and on a cost reimbursement basis for
services performed by third parties. Total amounts charged to the Company
during 1996 and 1995 by Allergan and Ligand for these services under the
Services Agreement were (in millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allergan $0.1 $0.1
Ligand 0.1 0.1
</TABLE>
PANRETIN (ALRT1057) PURCHASE OPTION
The Company has granted Allergan and Ligand an option (the Panretin (ALRT1057)
Purchase Option) to acquire the Company's Panretin (ALRT1057) Products. Unless
the Panretin (ALRT1057) Purchase Option has been terminated as to either
Allergan or Ligand as a result of default under the agreement (in which case
the Panretin (ALRT1057) Purchase Option will only be exercisable by the party
for which such option has not been terminated), Allergan and Ligand, jointly,
may exercise the Panretin (ALRT1057) Purchase Option beginning on the earlier
of (i) June 3, 1997 or (ii) the receipt of regulatory approval for commercial
sale of any Panretin (ALRT1057) Product in the United States or in certain
other major countries and ending on the earlier of (a) 90 days after receipt of
such regulatory approval or (b) June 3, 2000. Additionally, the Panretin
(ALRT1057) Purchase Option will terminate on the date the Stock Purchase Option
is exercised or expires.
The Panretin (ALRT1057) Purchase Option exercise price is $21.4 million prior
to June 3, 1998 and increases in equal amounts on a quarterly basis to $27.8
million on March 3, 1999 and to $36.2 million on March 3, 2000. The exercise
price may be paid in cash, shares of Allergan or Ligand, or any combination
thereof.
-48-
<PAGE> 49
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
3. RELATIONSHIP WITH ALLERGAN AND LIGAND (CONTINUED)
The Company may not distribute or otherwise expend any proceeds received upon
the exercise of the Panretin (ALRT1057) Purchase Option until the earlier of
the exercise or expiration of the Stock Purchase Option.
4. STOCKHOLDERS' EQUITY
STOCK PURCHASE OPTION
The Company's Callable Common Stock is subject to a Stock Purchase Option
agreement pursuant to which Ligand and, in the event not exercised by Ligand,
Allergan may purchase all, but not less than all, of the Callable Common Stock
outstanding at specified prices, subject to adjustment. The option becomes
exercisable on the earlier of (i) June 3, 1997 or (ii) the quarter in which the
Company's available funds, as defined, decline below $10 million and expires on
the earlier of (a) June 3, 2000 or (b) 90 days subsequent to such a decline in
cash. The option is not exercisable prior to June 3, 1998 unless the available
funds are less than $60 million at the date of exercise.
The Stock Purchase Option exercise price is $21.97 per share prior to June 3,
1998 and increases in equal amounts on a quarterly basis to $28.56 per share on
March 3, 1999 and to $37.13 per share on March 3, 2000. The exercise price may
be paid in cash, shares of Allergan or Ligand, or any combination thereof.
The Company may not, until the expiration of the Stock Purchase Option, pay any
dividends, issue additional shares of capital stock, borrow money in excess of
$1 million, merge, liquidate or sell all or substantially all of its assets.
WARRANTS
Each unit sold by the Company in its initial public offering includes two
warrants, each warrant giving the holder the right to purchase one share of
Ligand common stock at a price of $7.12 per share. The warrants are
exercisable at any time from June 3, 1997 through June 2, 2000, subject to
certain acceleration provisions including the exercise or expiration of the
Stock Purchase Option. The warrants will trade with the Company's Callable
Common Stock as units until they become exerciseable on June 3, 1997. After
such date, the warrants will separate from the Company's common stock and
become independently tradable.
-49-
<PAGE> 50
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
SPECIAL STOCK
The Company has issued 200 shares of Special Stock to Allergan and Ligand. The
Special Stock does not entitle Allergan and Ligand to vote, except in certain
circumstances, or have the right to any profits of the Company. The Special
Stock, however, entitles Allergan and Ligand to elect two directors to the
Company's Board.
5. INCOME TAXES
Valuation allowances of $21 million at December 31, 1996 and $7.6 million at
December 31, 1995 have been recognized as offsets to the deferred tax assets as
realization of such assets is uncertain. Significant components of the
Company's deferred tax assets as of December 31, 1996 and 1995 are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $16,076 $ 6,777
Research and development credits 2,440 327
Capitalized costs and other 2,470 482
------- -------
Total deferred tax assets 20,986 7,586
Valuation allowance for deferred tax assets (20,986) (7,586)
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
At December 31, 1996, the Company had federal and California net operating loss
carryforwards of approximately $45.5 million and $2.4 million, respectively.
The federal and California tax loss carryforwards will expire in 2010 and 2003,
respectively, unless previously utilized. The Company also has federal and
California research and development tax credit carryforwards totaling $1.5
million and $1.3 million, respectively, which will begin to expire in 2010
unless previously utilized.
-50-
<PAGE> 51
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-51-
<PAGE> 52
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under
the caption "Election of ALRT Directors," appearing in the Proxy Statement, is
incorporated herein by reference.
(b) Identification of Executive Officers. The
information under the caption "Executive Officers," appearing in the Proxy
Statement, is incorporated herein by reference.
(c) Section 16(a) Beneficial Ownership Reporting
Compliance. The information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," appearing in the Proxy Statement, is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information under the caption "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 information under the captions "Principal Stockholders" and
"Security Ownership of Directors and Management," appearing in the Proxy
Statement, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions," appearing in the Proxy Statement, is incorporated herein by
reference.
-52-
<PAGE> 53
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The financial statements of the Company are included
herein as required under Item 8 of this Annual Report
on Form 10- K. See Index to Financial Statements on
page 39.
(2) Financial Statement Schedules
All schedules have been omitted because they are not
applicable or the required information is presented
in the financial statements or notes thereto.
(b) No reports on Form 8-K have been filed during
the last quarter of the period covered by this report.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
<S> <C> <C>
*3.1 Amended and Restated Certificate of Incorporation of ALRT (Exhibit
3.3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
*3.2 By-laws of ALRT . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
*4.1 Form of stock certificate for shares of ALRT Callable Common Stock . . --
*10.1 Technology License Agreement (Exhibit 10.85) . . . . . . . . . . . . . --
*10.2 Research and Development Agreement (Exhibit 10.86) . . . . . . . . . . --
*10.3 Commercialization Agreement (Exhibit 10.87) . . . . . . . . . . . . . . --
*10.4 Administrative Agreement (Exhibit 10.88) . . . . . . . . . . . . . . . --
*10.5 Services Agreement (Exhibit 10.89) . . . . . . . . . . . . . . . . . . --
*10.6 1057 Purchase Option Agreement (Exhibit 10.90) . . . . . . . . . . . . --
*10.7 Asset Purchase Option Agreement (Exhibit 10.91) . . . . . . . . . . . . --
*10.8 Joint Venture Dissolution Agreement (Exhibit 10.92) . . . . . . . . . . --
</TABLE>
-53-
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
<S> <C> <C>
*10.9 Indemnity Agreement (Exhibit 10.93) . . . . . . . . . . . . . . . . . . --
*10.10 Tax Allocation Agreement (Exhibit 10.94) . . . . . . . . . . . . . . . --
+10.11 Letter agreement effective June 5, 1995 between the Company and Dr. --
Marvin Rosenthale . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.12 Form of Indemnification Agreement between ALRT and each of its --
directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.13 Form of Indemnification Agreement between ALRT and each of its --
officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Statement regarding computation of net loss per callable common share .
24.1 Power of Attorney (see page 55) . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . .
----------------------------
</TABLE>
+ These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered exhibit
filed with the Annual Report on Form 10-K (File No. 0-25970)
filed on March 29, 1996.
* These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered exhibit
(unless otherwise indicated) filed with the Registration
Statement on Form S-1/S-3 (No. 33-87598 and 33-87600) filed on
December 20, 1994, as amended.
Supplemental Information
Copies of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held June 2, 1997 and copies of the form
of proxy to be used for such Annual Meeting will be furnished to the
Commission prior to the time they are distributed to the Registrant's
stockholders.
-54-
<PAGE> 55
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.
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
Date: March 28, 1997 By: /s/ Marvin E. Rosenthale
------------------ -----------------------------------
Marvin E. Rosenthale, President and
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints William L. Respess, Marvin E.
Rosenthale or Dwight J. Yoder, 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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Marvin E. Rosenthale President and Chief Executive March 28, 1997
- -------------------------- Officer (Principal Executive -------------------------
Marvin E. Rosenthale Officer)
/s/ Dwight J. Yoder Chief Financial Officer March 28, 1997
- ---------------------------------- (Principal Financial and ------------------------
Dwight J. Yoder Accounting Officer)
/s/ Harry F. Hixson Director March 28, 1997
- ---------------------------------- -----------------------
Harry F. Hixson
/s/ Glenn F. Kiplinger Director March 28, 1997
- ---------------------------------- -------------------------
Glenn F. Kiplinger
/s/ Gary L. Neil Director March 28, 1997
- ---------------------------------- ------------------------
Gary L. Neil
/s/ David E. Robinson Director March 28, 1997
- ---------------------------------- -------------------------
David E. Robinson
/s/ William C. Shepherd Director March 28, 1997
- -------------------------- -------------------------
William C. Shepherd
</TABLE>
-55-
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of ALRT (Exhibit 3.3)
*3.2 By-laws of ALRT
*4.1 Form of stock certificate for shares of ALRT Callable Common Stock
*10.1 Technology License Agreement (Exhibit 10.85)
*10.2 Research and Development Agreement (Exhibit 10.86)
*10.3 Commercialization Agreement (Exhibit 10.87)
*10.4 Administrative Agreement (Exhibit 10.88)
*10.5 Services Agreement (Exhibit 10.89)
*10.6 1057 Purchase Option Agreement (Exhibit 10.90)
*10.7 Asset Purchase Option Agreement (Exhibit 10.91)
*10.8 Joint Venture Dissolution Agreement (Exhibit 10.92)
*10.9 Indemnity Agreement (Exhibit 10.93)
*10.10 Tax Allocation Agreement (Exhibit 10.94)
+10.11 Letter agreement effective June 5, 1995 between the Company and Dr.
Marvin Rosenthale
+10.12 Form of Indemnification Agreement between ALRT and each of its
directors
+10.13 Form of Indemnification Agreement between ALRT and each of its
officers
11.1 Statement regarding computation of net loss per callable common share
24.1 Power of Attorney (see page 55)
27.1 Financial Data Schedule
</TABLE>
- ----------------------------
+ These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered exhibit
filed with the Annual Report on Form 10-K (File No. 0-25970)
filed on March 29, 1996.
* These exhibits were previously filed as part of, and are
hereby incorporated by reference to, the same numbered exhibit
(unless otherwise indicated) filed with the Registration
Statement on Form S-1/S-3 (No. 33-87598 and 33-87600) filed on
December 20, 1994, as amended.
<PAGE> 1
EXHIBIT 11.1
Statement regarding computation of net loss per callable common share
<TABLE>
<CAPTION>
For the year For the period
ended ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net loss $(29,444,601) $(17,783,545)
============ ============
Weighted average callable common
shares outstanding 3,250,000 3,250,000
========= =========
Net loss per callable common share $(9.06) $(5.47)
====== ======
</TABLE>
Exhibit 11.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 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-K
FOR THE YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,897
<SECURITIES> 20,394
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,012
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,012
<CURRENT-LIABILITIES> 4,150
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 46,859
<TOTAL-LIABILITY-AND-EQUITY> 51,012
<SALES> 0
<TOTAL-REVENUES> 3,627
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (29,445)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,445)
<EPS-PRIMARY> (9.06)
<EPS-DILUTED> (9.06)
</TABLE>
