<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997.........................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
- --------------------------------------------------------------------------------
COMMISSION FILE NUMBER
0-25970
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
33-0642614
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of May 8, 1997 there were 3,250,000 shares of callable common stock
outstanding, and 200 shares of special common stock outstanding.
Panretin(TM) is a trademark of ALRT.
1
<PAGE> 2
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Statements of Operations - 3
Three Months Ended March 31, 1997 and 1996
Condensed Balance Sheets at March 31, 1997 4
and December 31, 1996
Statements of Cash Flows - 5
Three Months Ended March 31, 1997 and 1996
Notes to Financial Statements 6-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-19
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
Signature 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Interest income $ 619 $ 955
Costs and expenses:
Research and development 9,516 5,878
General and administrative expenses 304 353
------- -------
Total costs and expenses 9,820 6,231
------- -------
Net loss $(9,201) $(5,276)
======= =======
Net loss per callable common share $ (2.83) $ (1.62)
======= =======
Weighted average callable common
shares outstanding 3,250 3,250
</TABLE>
See accompanying notes.
3
<PAGE> 4
Allergan Ligand Retinoid Therapeutics, Inc.
Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 20,580 $ 29,897
Marketable securities 20,318 20,394
Other assets 418 720
-------- --------
$ 41,316 $ 51,011
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Allergan, Inc. and Ligand
Pharmaceuticals Incorporated $ 3,466 $ 3,889
Accounts payable and accrued liabilities 260 261
-------- --------
Total current liabilities 3,726 4,150
Stockholders' equity:
Callable Common Stock, $.001 par value;
3,250,000 shares authorized, issued
and outstanding 3 3
Additional paid-in capital 94,256 94,256
Accumulated deficit (56,429) (47,228)
Unrealized holding loss on
marketable securities (240) (170)
-------- --------
Total stockholders' equity 37,590 46,861
-------- --------
$ 41,316 $ 51,011
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
Allergan Ligand Retinoid Therapeutics, Inc.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,201) $ (5,276)
Changes in operating assets and liabilities:
Other assets 302 (168)
Payable to Allergan, Inc. and
Ligand Pharmaceuticals Incorporated (423) 694
Accounts payable and accrued liabilities (1) (358)
-------- --------
Net cash used in operating activities (9,323) (5,108)
INVESTING ACTIVITIES:
Sale (purchase) of marketable securities 6 (20,623)
-------- --------
Net decrease in cash and equivalents (9,317) (25,731)
Cash and equivalents at beginning of period 29,897 79,793
-------- --------
Cash and equivalents at end of period $ 20,580 $ 54,062
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements
1. Allergan Ligand Retinoid Therapeutics, Inc. (the Company) was incorporated in
Delaware in 1994 and commenced operations on June 3, 1995 to continue the
efforts of the Allergan Ligand Joint Venture (Joint Venture), established by
Allergan, Inc. (Allergan) and Ligand Pharmaceuticals Incorporated (Ligand) in
June 1992, to discover, develop and commercialize drugs based on retinoids.
On June 3, 1995, the Company and Ligand completed a public offering (the
Offering) of 3.25 million units (the Units), each Unit consisting of one share
of the Company's callable common stock (Callable Common Stock) and two warrants
(the Warrants), each to purchase one share of Ligand common stock. The Offering
raised net proceeds for the Company of $26.8 million. At the completion of the
Offering, Ligand contributed $17.5 million in cash, as well as warrants in
exchange for (i) a right to acquire all of the Callable Common Stock at
specified future dates and amounts and (ii) a right to acquire all rights to the
Panretin (ALRT1057) product, jointly with Allergan, currently under development
by the Company. At the same time, Allergan contributed $50.0 million in cash to
the Company in exchange for (i) the right to acquire one-half of technologies
and other assets in the event Ligand exercises its right to acquire all of the
Callable Common Stock, (ii) a similar right to acquire all of the Callable
Common Stock if Ligand does not exercise its right and (iii) a right to acquire
all rights to the Panretin (ALRT1057) product, jointly with Ligand.
ALRT's Board of Directors approved a research and development plan for the year
ending December 31, 1997 which represents an acceleration in spending on ALRT's
retinoid programs. The accelerated spending is the result of more rapid
discovery and development of a significantly larger library of viable retinoid
compounds than anticipated at the time of formation of ALRT. ALRT anticipates
the acceleration in spending could result in the use of substantially all of the
funds available for research and development remaining in ALRT in late 1997 or
early 1998. 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. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial information contained therein. These statements
do not include all disclosures required by generally accepted accounting
principles. The results of operations for the quarter ended March 31, 1997 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1997. Net loss per callable common share is computed by dividing
the net loss by the number of callable common shares outstanding, which was
3,250,000 at all times during the quarter.
3. The Company invests its excess cash in money market funds and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines with respect to the
diversification and maturities in order to maintain safety and liquidity. The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company's investments are
classified as available-for-sale and are carried at fair
6
<PAGE> 7
Allergan Ligand Retinoid Therapeutics, Inc.
Notes to Financial Statements (continued)
value, with unrealized gains and losses reported as a separate component of
stockholders' equity. The investments are adjusted for amortization of premiums
and discounts to maturity and such amortization is included in interest income.
7
<PAGE> 8
ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997
This Quarterly Report on Form 10-Q may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents management's current judgment on
the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
The following should be read in conjunction with "--Risks and Uncertainties"
below and the Company's Financial Statements and notes thereto in Item 1 above.
Allergan Ligand Retinoid Therapeutics, Inc. (ALRT) commenced operations in June
1995 and received net proceeds of approximately $26.8 million upon issuance of
3.25 million Units (the Offering), each of which consists of one share of
Callable Common Stock and two Warrants, each to purchase one share of Ligand
Pharmaceuticals Incorporated (Ligand) common stock. At that time, ALRT also
received cash contributions of $50.0 million from Allergan, Inc. (Allergan) and
$17.5 million from Ligand (the Contributions). ALRT is utilizing substantially
all of the net proceeds of the Offering and the Contributions to continue the
research and development of potential retinoid compounds.
The shares of Callable Common Stock are subject to a stock purchase option (the
Stock Purchase Option), pursuant to which Ligand, and in the event not exercised
by Ligand, Allergan, has an irrevocable option to purchase all, but not less
than all, of the Callable Common Stock outstanding at the time such option is
exercised at stated exercise prices from June 3, 1997 until the expiration of
the Stock Purchase Option on the earlier of June 3, 2000 or a limited period of
time after a major agreement among ALRT, Ligand and Allergan is terminated due
to an event of default. Ligand and Allergan also have the option, which must be
exercised together, to acquire assets related to the development of Panretin(TM)
(ALRT1057).
RESULTS OF OPERATIONS
The Company incurred a net loss of $9.2 million in the quarter ended March 31,
1997. Interest income was $0.6 million for the first quarter of 1997 and $1.0
million for the first quarter of 1996, as a result of investment of the
remaining unexpended cash held by ALRT. The decrease in interest income in 1997
compared to 1996 was the result of the decrease in unexpended funds as ALRT
funds its operating activities. 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 in the first quarter were $9.5 million in 1997
and $5.9 million in 1996. 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
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RESULTS OF OPERATIONS (Continued)
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 in the first quarter were $304,000 in 1997
and $353,000 in 1996.
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 subsequent periods.
Consequently, it expects to continue to incur net losses in subsequent periods.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, ALRT had cash and cash equivalents and marketable
securities of $40.9 million. The proceeds of the Offering together with the
Contributions will not be sufficient to enable ALRT to successfully develop and
commercialize any products (Products), and ALRT will need to obtain significant
additional funds to continue to develop its compounds. Until the expiration of
the Stock Purchase Option, which will occur on the 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.
If the Stock Purchase Option is not exercised, ALRT would have to raise
substantial funding from the 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.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In addition, until the termination of the Stock Purchase Option, ALRT is not
able to issue additional capital stock, borrow more than $1 million in the
aggregate, declare or pay dividends or make other distributions to stockholders,
merge, consolidate or reorganize or liquidate or sell all or substantially all
of its assets without the prior written approval of Allergan and Ligand.
If ALRT does not use the available funds as provided in the development
agreement or otherwise breaches any of its material obligations under any of the
major agreements, Allergan and Ligand may have the right to terminate the
technology license agreement, and thereby reacquire rights to all technology
licensed to ALRT thereunder, including improvements made to such technology
using funds provided by ALRT. In the event of such a termination by Allergan and
Ligand, ALRT will not receive any royalty or other compensation therefor and it
is unlikely that Ligand or Allergan would exercise either their option to
acquire all assets related to the Panretin (ALRT1057) development program (the
Panretin (ALRT1057) Purchase Option) or the Stock Purchase Option.
During the first quarter of 1997, ALRT invested its excess cash in money market
funds and debt instruments of financial institutions and corporations with
strong credit ratings. ALRT has established guidelines relative to
diversification and maturities designed to maintain safety and liquidity. The
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The net proceeds from the Offering, combined with
income on unexpended cash balances, are anticipated to provide funding for
research and development and related administrative activities through the end
of 1997, or early 1998.
The Company does not currently maintain any line of credit agreements. The
Company believes the impact of inflation on its business activities has not been
significant to date.
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 retinoid technologies developed and utilized by the
Joint Venture (the Core Technologies) for the purpose of accelerating the
development and commercialization of retinoid drugs for therapeutic uses. ALRT
has agreed with Allergan and Ligand that Allergan and Ligand will conduct
research and development on Products in accordance with the development
agreement executed by ALRT, Allergan and Ligand (the Development Agreement) for
the purpose of identifying and developing Products for commercialization. While
some research and development on the Core Technologies and certain Products has
been conducted to date, significant product development, including extensive
human clinical testing, is still to be undertaken. There can be no assurance
that ALRT will be able to complete the development of any marketable products or
that such products can be introduced in a timely manner. The successful
development of any such products will require, in addition to technical
advances, demonstration through human clinical studies that such products are
safe and efficacious.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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."
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 executed
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
by ALRT, Allergan and Ligand (the Commercialization Agreement) will remain in
effect (subject to termination on 12-months' notice by ALRT, Ligand or Allergan)
and each of ALRT, Ligand and Allergan will be free to pursue their own
respective business strategies. In such an event, however, ALRT will require
substantial additional funds. In such circumstances it is unlikely that such
funds will be available on attractive terms, if at all. Furthermore, Allergan or
Ligand or a third party could make an offer to acquire ALRT or the Callable
Common Stock at a price lower than that set forth in the Stock Purchase Option.
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.
The Development Agreement and Commercialization Agreement. Allergan and Ligand
are the contractors under the Development Agreement and will perform, or cause
to be performed, all development activities thereunder. Additionally, Allergan
and Ligand will be primarily responsible for the 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.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
No Assurance of Successful Manufacturing or Marketing. ALRT has no manufacturing
or marketing capability. ALRT will be required to rely on Allergan, Ligand and
other third parties approved by Allergan and Ligand to manufacture, sell and
otherwise market Products. If ALRT is required to rely on third-party
manufacturing and marketing, there can be no assurance that prior to the
expiration of the Commercialization Agreement Allergan and Ligand will approve
such third-party arrangements, that such third-party arrangements can be
successfully negotiated or that any such arrangements will be available on
commercially reasonable terms. Even if acceptable and timely manufacturing and
marketing are available, including manufacturing and marketing of Products by
Allergan and Ligand pursuant to the Commercialization Agreement, there can be no
assurance that Products developed in accordance with the Development Agreement
will be accepted in the marketplace.
Losses; No Assurance of Profitability; Lack of Dividends. ALRT was recently
formed and has incurred significant operating losses to date. ALRT anticipates
that substantially all of the 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.
Potential Competition from Allergan or Ligand. Both Allergan and Ligand are
engaged in ongoing in-licensing and development of new products. While Allergan
and Ligand have licensed all their rights with respect to the Core Technologies,
each is allowed under the technology license agreement executed by ALRT,
Allergan and Ligand (the Technology License Agreement) to pursue the development
of retinoid compounds under certain circumstances which may, in some
circumstances, lead to the development of products competitive with the
Products, including, in the case of the exercise of the 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. See "--Competition; Technological Change."
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Potential Loss of Technology by ALRT. Under the Development Agreement and the
Commercialization Agreement, ALRT is obligated to make payments to Ligand and
Allergan equal in the aggregate to substantially all of the available funds. If
ALRT does not use such available funds as provided in the Development Agreement
or otherwise breaches any of its material obligations under any of the major
agreements with Allergan and Ligand (the Major Agreements), Allergan and Ligand
may have the right to terminate the Technology License Agreement, and thereby
reacquire rights to all technology licensed to ALRT thereunder, including
improvements made to such technology using funds provided by ALRT. In the event
of such a termination by Allergan and Ligand, ALRT will not receive any royalty
or other compensation therefor 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 June
3, 1997 (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 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
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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 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
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
or ALRT, as the case may be, may be able to obtain or result in the denial of
the patent applications of Ligand, Allergan or ALRT, as the case may be. In
addition, if patents that cover ALRT's activities are issued to other companies,
there can be no assurance that ALRT would be able to obtain licenses to these
patents at a reasonable cost or be able to develop or obtain alternative
technology.
The commercial success of ALRT will also depend in part on ALRT not infringing
patents issued to competitors and not breaching the technology licenses that
might cover technology used in ALRT's products. It is uncertain whether any
third-party patents will require ALRT to alter its products or processes, obtain
licenses or cease certain activities. If any licenses are required, there can be
no assurance that ALRT will be able to obtain any such license on commercially
favorable terms, if at all. Failure by ALRT to obtain a license to any
technology that it may require to commercialize its products may have a material
adverse impact on ALRT. Litigation, which could result in substantial cost to
ALRT, may also be necessary to enforce any patents issued to ALRT or to
determine the scope and validity of third-party proprietary rights. Should any
of its competitors have prepared and filed patent applications in the United
States which claim technology also invented by ALRT, ALRT may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office (the PTO) in order to determine priority of invention and,
thus, the right to a patent for the technology, all of which could result in
substantial cost to ALRT to determine its rights.
ALRT acquired rights to Panretin (ALRT1057) under an exclusive license from
Ligand of a pending patent application. Ligand has informed ALRT that a United
States patent has issued to, and foreign counterparts have been filed by,
Hoffman-La Roche (Roche) that include claims to a formulation of 9-cis-Retinoic
acid (Panretin (ALRT1057)) and use of that compound to treat epithelial cancers.
Ligand, on behalf of ALRT, had previously filed an application which has an
earlier filing date than the Roche patent and which has claims that Ligand
believes are broader than but overlap in part with claims under the Roche
patent. Ligand and ALRT are currently investigating the scope and validity of
this patent to determine its impact upon the Oral and Topical Panretin
(ALRT1057) products. The PTO has informed Ligand that the overlapping claims are
patentable to Ligand and has initiated an interference proceeding to determine
whether Ligand or Roche is entitled to a patent by having been first to invent
the common subject matter. ALRT cannot be assured that Ligand 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.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
Competition; Technological Change. Other products and therapies currently exist
on the market that would compete directly with the products that ALRT is seeking
to develop and market. There can be no assurance that ALRT's products, even if
successfully tested and developed, will have sufficient advantages over existing
products to cause physicians to adopt them over such other products, or that
ALRT's products will offer an economically feasible alternative to such existing
products.
ALRT is engaged in a rapidly developing field. A number of companies are
currently seeking to develop new products and therapies to address many of the
diseases addressed by ALRT's IR technology. A number of companies are also
pursuing IR-related or STAT-related approaches to drug discovery and
development, including Ligand and Allergan. It is expected that the number of
companies seeking to develop products and therapies for these markets and the
future markets which ALRT may address will increase. There can be no assurance
that alternative products and therapies will not be developed that will either
render ALRT's proposed products obsolete or that will have advantages that will
significantly outweigh those of the products and therapies that ALRT is seeking
to develop.
Many of ALRT's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than ALRT. In addition, many of these competitors have
significantly greater experience than ALRT in undertaking preclinical testing
and human clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. Accordingly, ALRT's competitors
may succeed in obtaining FDA approval for products more rapidly than ALRT.
Furthermore, if ALRT is permitted to commence commercial sales of products, they
may also be competing with respect to marketing capabilities, an area in which
ALRT does not have substantial experience.
In addition to the activities to be performed by each of Ligand and Allergan
under the Development Agreement, it is anticipated that Ligand and Allergan will
perform research and development work on products other than the retinoid
Products being developed by ALRT. Such other products may utilize certain
aspects of the Core Technologies or related or similar technologies in other or
related areas. Allergan and Ligand, either jointly or alone, are entitled to
develop and commercialize using their own funds compounds that ALRT elects not
to continue to develop after the compound enters clinical trials or after
sufficient data to file an Investigational New Drug Application for the compound
has been gathered, so long as (i) the Board of Directors of ALRT shall have
first made a reasonable determination that continued work on such compound would
not materially conflict or interfere with the interests of the ALRT retinoid
program or impair a party's ability to perform its obligations under the Major
Agreements and (ii) at least $1 million per year is committed to development of
such compound during each of the first two years of development of such
compound. In addition, retinoid products acquired by Ligand or Allergan 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."
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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 the United States Food and Drug Administration (the FDA) and equivalent
foreign authorities. These processes can take a number of years and require the
expenditure of substantial resources.
The time required for completing such testing and obtaining such approvals is
uncertain, and approval itself may not be obtained. ALRT may decide to replace
its compounds in testing with modified or optimized compounds, thus extending
the testing process. In addition, delays or rejections may be encountered based
upon changes in FDA policy during the period of product development and FDA
regulatory review of each submitted new drug application or product license
application. Similar delays may also be encountered in other countries. There
can be no assurance that even after such time and expenditures, regulatory
approval will be obtained for any products developed by ALRT. Moreover, prior to
receiving FDA approval to market its products, ALRT may have to demonstrate that
its products represent improved forms of treatment over existing therapies. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
Further, even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
Third Party Reimbursement and Health Care Reform. ALRT's commercial success will
be heavily dependent upon the reimburseability of the use of its products. There
can be no assurance that Medicare and third-party payors will authorize or
otherwise budget reimbursement for such usage at the current authorized levels.
Furthermore, federal and state regulations govern or influence the reimbursement
to health care providers of fees and capital equipment costs in connection with
medical treatment of certain patients. There can be no assurance that action
taken by the federal government, if any, with regard to health care reform will
not have a material adverse effect on ALRT. If any actions are taken by the
federal government, such actions could adversely affect the prospects for future
sales of ALRT's products.
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
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 (Continued)
RISKS AND UNCERTAINTIES (Continued)
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.
Common Management. The Technology License Agreement, Development Agreement,
Commercialization Agreement and other agreements executed by ALRT, Allergan and
Ligand in connection with the Offering were approved by Allergan and Ligand, as
the controlling stockholders of ALRT at the time of such approvals, which may
have influenced the Board of Directors of ALRT to enter into such agreements.
The current Board of Directors of ALRT is comprised of two persons who are
directors and officers of Allergan or Ligand and three persons who are
unaffiliated with Allergan or Ligand.
Terms of Agreements and Special Stock. The terms of the Technology License
Agreement, the Development Agreement, the Commercialization Agreement and other
agreements executed by ALRT, Allergan and Ligand in connection with the Offering
were determined by Allergan, Ligand and ALRT with the financial advisor to ALRT,
Ligand and Allergan in connection with the Offering. The terms of these
agreements were not negotiated at arm's-length.
The Stock Purchase Option Exercise Price; Panretin (ALRT1057) Purchase Option
Exercise Price; Warrant Exercise Price. The exercise prices for the Stock
Purchase Option and the Panretin (ALRT1057) Purchase Option and the exercise
price of the Warrants were each determined by ALRT, Ligand and Allergan giving
consideration to the stage of development of the Core Technologies, the
agreements among ALRT, Allergan and Ligand, such other factors as ALRT, Allergan
and Ligand deemed appropriate, and other advice given by their financial
advisor. Such prices were not determined on an arms'-length basis.
19
<PAGE> 20
Allergan Ligand Retinoid Therapeutics, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
None.
- Reports on Form 8-K. None.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1997 ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
---------------------
/s/ Dwight J. Yoder
--------------------------------------------
Dwight J. Yoder
Chief Financial Officer
and Duly Authorized Officer
21
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND THE STATEMENTS OF OPERATIONS OF ALLERGAN LIGAND
RETINOID THERAPEUTICS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997.
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