Ligand Pharmaceuticals, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
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þ |
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Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2006 or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the Transition Period From to .
Commission File Number: 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
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77-0160744
(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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10275 Science Center Drive
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92121-1117 |
San Diego, CA
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(Zip Code) |
(Address of Principal Executive Offices) |
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Registrants Telephone Number, Including Area Code: (858) 550-7500
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As
of October 31, 2006, the registrant had 79,229,629 shares of common stock outstanding.
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS
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* |
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No information provided due to inapplicability of item
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2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
10,029 |
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$ |
66,756 |
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Short-term investments |
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21,862 |
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20,174 |
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Accounts receivable, net |
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7,077 |
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20,954 |
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Current portion of inventories, net |
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5,039 |
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9,333 |
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Other current assets |
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12,465 |
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15,750 |
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Current portion of assets held for sale |
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8,055 |
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Total current assets |
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64,527 |
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132,967 |
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Restricted investments |
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1,826 |
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1,826 |
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Long-term portion of inventories, net |
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5,869 |
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Property and equipment, net |
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21,453 |
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22,483 |
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Acquired technology and product rights, net |
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84,990 |
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146,770 |
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Long-term portion of assets held for sale |
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57,807 |
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Other assets |
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1,264 |
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4,704 |
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Total assets |
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$ |
231,867 |
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$ |
314,619 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
16,080 |
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$ |
15,360 |
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Accrued liabilities |
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52,902 |
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59,587 |
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Current portion of deferred revenue, net |
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80,395 |
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157,519 |
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Current portion of co-promote termination liability |
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47,722 |
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Current portion of equipment financing obligations |
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2,150 |
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2,401 |
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Current portion of long-term debt |
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363 |
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344 |
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Current portion of liabilities related to assets held for sale |
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26,803 |
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Total current liabilities |
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226,415 |
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235,211 |
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Long-term debt |
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139,371 |
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166,745 |
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Long-term portion of co-promote termination liability |
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95,258 |
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Long-term portion of equipment financing obligations |
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2,699 |
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3,430 |
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Long-term portion of deferred revenue, net |
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2,546 |
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4,202 |
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Long-term portion of liabilities related to assets held for sale |
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2,017 |
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Other long-term liabilities |
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2,406 |
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3,105 |
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Total liabilities |
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470,712 |
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412,693 |
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Commitments and contingencies |
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Common stock subject to conditional redemption; 997,568 shares issued and
outstanding at September 30, 2006 and December 31, 2005 |
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12,345 |
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12,345 |
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Stockholders deficit: |
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Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued |
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Common stock, $0.001 par value; 200,000,000 shares authorized; 77,789,924 and 73,136,340 shares
issued at September 30, 2006 and December 31, 2005, respectively |
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78 |
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73 |
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Additional paid-in capital |
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753,947 |
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720,988 |
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Accumulated other comprehensive (loss) income |
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(138 |
) |
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490 |
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Accumulated deficit |
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(1,004,166 |
) |
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(831,059 |
) |
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(250,279 |
) |
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(109,508 |
) |
Treasury stock, at cost; 73,842 shares |
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(911 |
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(911 |
) |
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Total stockholders deficit |
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(251,190 |
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(110,419 |
) |
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$ |
231,867 |
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$ |
314,619 |
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See accompanying notes.
3
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)
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Three Months |
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Nine Months |
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Ended September 30, |
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Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Product sales |
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$ |
36,707 |
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$ |
29,908 |
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$ |
102,853 |
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$ |
79,367 |
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Collaborative research and development and other revenues |
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2,095 |
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3,977 |
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7,944 |
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Total revenues |
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36,707 |
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32,003 |
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106,830 |
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87,311 |
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Operating costs and expenses: |
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Cost of products sold |
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5,800 |
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6,422 |
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16,768 |
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17,987 |
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Research and development |
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10,468 |
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7,920 |
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29,013 |
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23,787 |
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Selling, general and administrative |
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20,085 |
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14,484 |
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58,077 |
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43,133 |
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Co-promotion |
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11,776 |
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7,766 |
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33,656 |
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22,472 |
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Co-promote termination charges |
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3,643 |
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142,980 |
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Total operating costs and expenses |
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51,772 |
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36,592 |
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280,494 |
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107,379 |
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Loss from operations |
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(15,065 |
) |
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(4,589 |
) |
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(173,664 |
) |
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(20,068 |
) |
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Other income (expense): |
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Interest income |
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577 |
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483 |
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1,737 |
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1,325 |
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Interest expense |
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(2,547 |
) |
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(3,118 |
) |
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(7,920 |
) |
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(9,247 |
) |
Other, net |
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66 |
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(60 |
) |
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1,068 |
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173 |
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Total other expense, net |
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(1,904 |
) |
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(2,695 |
) |
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(5,115 |
) |
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(7,749 |
) |
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Loss before income taxes |
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(16,969 |
) |
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(7,284 |
) |
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(178,779 |
) |
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(27,817 |
) |
Income tax benefit |
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828 |
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2,290 |
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Loss from continuing operations |
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(16,141 |
) |
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(7,284 |
) |
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(176,489 |
) |
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(27,817 |
) |
Income (loss) from discontinued operations, net of income tax |
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1,223 |
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1,003 |
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3,382 |
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(5,860 |
) |
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Net loss |
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$ |
(14,918 |
) |
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$ |
(6,281 |
) |
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$ |
(173,107 |
) |
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$ |
(33,677 |
) |
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Basic and diluted per share amounts: |
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Loss from continuing operations |
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$ |
(0.21 |
) |
|
$ |
(0.10 |
) |
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$ |
(2.26 |
) |
|
$ |
(0.38 |
) |
Income (loss) from discontinued operations |
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|
0.02 |
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|
0.02 |
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|
0.05 |
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(0.08 |
) |
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Net loss |
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$ |
(0.19 |
) |
|
$ |
(0.08 |
) |
|
$ |
(2.21 |
) |
|
$ |
(0.46 |
) |
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Weighted average number of common shares |
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78,670,137 |
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74,041,204 |
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78,239,868 |
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73,998,594 |
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See accompanying notes.
4
LIGAND PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Nine Months Ended September 30, |
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2006 |
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2005 |
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Operating activities |
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Net loss |
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$ |
(173,107 |
) |
|
$ |
(33,677 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Amortization of acquired technology and license rights |
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10,248 |
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|
10,376 |
|
Depreciation and amortization of property and equipment |
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2,576 |
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|
2,779 |
|
Amortization of debt issue costs |
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|
705 |
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|
775 |
|
Gain on sale of Exelixis stock |
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(953 |
) |
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|
(171 |
) |
Stock-based compensation |
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3,981 |
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Non-cash interest expense |
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60 |
|
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Other |
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(16 |
) |
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|
79 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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|
13,877 |
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|
6,469 |
|
Inventories, net |
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|
(514 |
) |
|
|
(3,103 |
) |
Other current assets |
|
|
1,976 |
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|
5,041 |
|
Accounts payable and accrued liabilities |
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|
(5,753 |
) |
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|
2,286 |
|
Other liabilities |
|
|
(14 |
) |
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|
(24 |
) |
Deferred revenue, net |
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|
(50,498 |
) |
|
|
5,463 |
|
Co-promote termination liability |
|
|
142,980 |
|
|
|
|
|
|
|
|
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Net cash used in operating activities |
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|
(54,452 |
) |
|
|
(3,707 |
) |
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Investing activities |
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Purchases of short-term investments |
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|
(18,324 |
) |
|
|
(28,253 |
) |
Proceeds from sale of short-term investments |
|
|
16,963 |
|
|
|
24,748 |
|
Increase in restricted investments |
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¾ |
|
|
|
(170 |
) |
Purchases of property and equipment |
|
|
(1,592 |
) |
|
|
(1,770 |
) |
Payment to buy-down ONTAK royalty obligation |
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¾ |
|
|
|
(33,000 |
) |
Capitalized portion of payment of lasofoxifene royalty rights |
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|
¾ |
|
|
|
(558 |
) |
Other, net |
|
|
72 |
|
|
|
165 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,881 |
) |
|
|
(38,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Principal payments on equipment financing obligations |
|
|
(2,012 |
) |
|
|
(2,147 |
) |
Proceeds from equipment financing arrangements |
|
|
1,030 |
|
|
|
1,390 |
|
Repayment of long-term debt |
|
|
(255 |
) |
|
|
(238 |
) |
Proceeds from issuance of common stock |
|
|
1,981 |
|
|
|
912 |
|
Decrease in other long-term liabilities |
|
|
(138 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
606 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(56,727 |
) |
|
|
(42,722 |
) |
Cash and cash equivalents at beginning of period |
|
|
66,756 |
|
|
|
92,310 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
10,029 |
|
|
$ |
49,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
5,283 |
|
|
$ |
5,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash impact of the conversion of 6% convertible subordinated notes
into common stock: |
|
|
|
|
|
|
|
|
Conversion of principal amount of convertible notes |
|
$ |
27,100 |
|
|
$ |
|
|
Conversion of unamortized debt issue costs |
|
|
(362 |
) |
|
|
|
|
Conversion of unpaid accrued interest |
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,002 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIGAND PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Ligand Pharmaceuticals
Incorporated (the Company or Ligand) were prepared in accordance with instructions for Form
10-Q and, therefore, do not include all information necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with accounting principles
generally accepted in the United States of America. However, all adjustments, consisting of normal
recurring adjustments, which, in the opinion of management, are necessary for a fair presentation
of the condensed consolidated financial statements, have been included. The results of operations
for the three and nine month periods ended September 30, 2006 and 2005 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any other future
period.
As further discussed in Note 2, the Company sold its oncology products (Oncology) effective
October 25, 2006. The operating results for Oncology for all periods presented have been presented
in the accompanying condensed consolidated financial statements as Discontinued Operations.
Likewise, assets and liabilities associated with Oncology are presented as Assets held for sale
and Liabilities related to assets held for sale as of September 30, 2006. Additionally, as
discussed in Note 13, on September 7, 2006 the Company announced plans to sell its AVINZA product
line, subject to shareholder approval. Due to the uncertainty surrounding shareholder approval,
the operating results for the AVINZA product line do not qualify for discontinued operations (held
for sale) presentation and therefore are presented in the accompanying condensed consolidated
financial statements as continuing operations. Furthermore, the Company, along with its
wholly-owned subsidiary Nexus Equity VI, LLC (Nexus) entered into an agreement with Slough
Estates USA, Inc. (Slough) for the sale of the Companys real property located in San Diego,
California. The transaction closed in November 2006 and includes an agreement between the Company
and Slough for the Company to leaseback the building for a period of 15 years. In connection with
the sale transaction, on November 6, 2006, the Company paid off the existing mortgage on the
building of approximately $11.6 million.
These statements should be read in conjunction with the consolidated financial statements and
related notes, which are included in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.
Principles of Consolidation
The condensed consolidated financial statements include the Companys wholly owned
subsidiaries, Ligand Pharmaceuticals International, Inc., Ligand Pharmaceuticals (Canada)
Incorporated, Seragen, Inc. (Seragen) and Nexus Equity VI LLC (Nexus). Intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, including disclosure of contingent assets and contingent
liabilities, at the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting period. The Companys critical accounting policies are
those that are most important to both the Companys financial condition and results of operations
and require the most difficult, subjective or complex judgments on the part of management in their
application, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Because of the uncertainty of factors surrounding the estimates or judgments
used in the preparation of the consolidated financial statements, actual results may materially
vary from these estimates.
Income (Loss) Per Share
Net loss per share is computed using the weighted average number of common shares outstanding.
Basic and diluted income (loss) per share amounts are equivalent for the periods presented as the
inclusion of potential common shares in the number of shares used for the diluted computation would
be anti-dilutive to loss per share from continuing operations. In accordance with SFAS No. 128,
Earnings Per Share, no potential common shares
6
are included in the computation of any diluted per share amounts, including income (loss) per
share from discontinued operations, as the Company reported a net loss from continuing operations
for all periods presented. Potential common shares, the shares that would be issued upon the
conversion of convertible notes and the exercise of outstanding warrants and stock options, were
28.6 million and 32.6 million at September 30, 2006 and 2005, respectively. As of October 6, 2006,
all outstanding warrants to purchase 748,800 shares of the Companys common stock expired.
Guarantees and Indemnifications
The Company accounts for and discloses guarantees in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34. The following is a
summary of the Companys agreements that the Company has determined are within the scope of FIN 45:
Under its bylaws, the Company has agreed to indemnify its officers and directors for certain
events or occurrences arising as a result of the officers or directors serving in such capacity.
The term of the indemnification period is for the officers or directors lifetime. The maximum
potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors and officers
liability insurance policy that limits its exposure and enables it to recover a portion of any
future amounts paid. As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has no liabilities recorded
for these agreements as of September 30, 2006 and December 31, 2005.
The Company enters into indemnification provisions under its agreements with other companies
in its ordinary course of business, typically with business partners, contractors, customers and
landlords. Under these provisions the Company generally indemnifies and holds harmless the
indemnified party for direct losses suffered or incurred by the indemnified party as a result of
the Companys activities or, in some cases, as a result of the indemnified partys activities under
the agreement. The maximum potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited. The Company has not incurred material
costs to defend lawsuits or settle claims related to these indemnification agreements. As a
result, the Company believes the estimated fair value of these agreements is minimal. Accordingly,
the Company has no liabilities recorded for these agreements as of September 30, 2006 and December
31, 2005.
Accounting for Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. The pro forma effects of employee stock options were disclosed as
required by Financial Accounting Standard Board Statement (SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) 123 (revised 2004), Share-Based Payment (SFAS 123(R)), using the modified prospective
transition method. No stock-based employee compensation cost was recognized prior to January 1,
2006, as all options granted prior to 2006 had an exercise price equal to the market value of the
underlying common stock on the date of the grant. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Under the transition
method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted in the nine months ended September 30, 2006, based on
grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
7
Additionally, the Company accounts for the fair value of options granted to non-employee
consultants under Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Results for the three and nine months ended September 30, 2005 have not been retrospectively
adjusted. The fair value of the options was estimated using a Black-Scholes option-pricing formula
and amortized to expense over the options vesting periods.
The following table illustrates the pro forma effect of share-based compensation on net loss
and loss per share for the three and nine months ended September 30, 2005 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net loss, as reported |
|
$ |
(6,281 |
) |
|
$ |
(33,677 |
) |
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense included in reported net
loss |
|
|
|
|
|
|
|
|
Less: total stock-based
compensation expense determined
under fair value based method for
all awards continuing to vest |
|
|
(723 |
) |
|
|
(2,261 |
) |
Less: total stock-based
compensation expense determined
under fair value based method for
options accelerated in January 2005
(1) |
|
|
|
|
|
|
(12,455 |
) |
|
|
|
|
|
|
|
Net loss, pro forma |
|
$ |
(7,004 |
) |
|
$ |
(48,393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share amounts: |
|
|
|
|
|
|
|
|
Net loss per share as reported |
|
$ |
(0.08 |
) |
|
$ |
(0.46 |
) |
|
|
|
|
|
|
|
Net loss per share pro forma |
|
$ |
(0.09 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents pro forma unrecognized expense for accelerated options as of
the date of acceleration. |
The estimated weighted average fair value at grant date for the options granted for the three
and nine months ended September 30, 2005 was $7.37 and $7.25, respectively.
On January 31, 2005, Ligand accelerated the vesting of certain unvested and out-of-the-money
stock options previously awarded to the executive officers and other employees under the Companys
1992 and 2002 stock option plans which had an exercise price greater than $10.41, the closing price
of the Companys stock on that date. The vesting for options to purchase approximately 1.3 million
shares of common stock (of which approximately 450,000 shares were subject to options held by the
executive officers) were accelerated. Options held by non-employee directors were not accelerated.
Holders of incentive stock options (ISOs) within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, were given the election to decline the acceleration of their
options if such acceleration would have the effect of changing the status of such option for
federal income tax purposes from an ISO to a non-qualified stock option. In addition, the
executive officers plus other members of senior management agreed that they will not sell any
shares acquired through the exercise of an accelerated option prior to the date on which the
exercise would have been permitted under the options original vesting terms. This agreement does
not apply to a) shares sold in order to pay applicable taxes resulting from the exercise of an
accelerated option or b) upon the officers retirement or other termination of employment.
The purpose of the acceleration was to eliminate any future compensation expense the Company
would have otherwise recognized in its statement of operations with respect to these options upon
the implementation of SFAS 123(R).
8
Other Stock-Related Information
The 2002 Stock Incentive Plan contains four separate equity programs Discretionary Option
Grant Program, Automatic Option Grant Program, Stock Issuance Program and Director Fee Option Grant
Program (the 2002 Plan). On January 31, 2006, shareholders of the Company approved an amendment
to the 2002 Plan to increase the number of shares of the Companys common stock authorized for
issuance by 750,000 shares, from 8.3 million shares to 9.1 million shares. As of September 30,
2006, options for 7,058,435 shares of common stock were outstanding under the 2002 plan and 499,535
shares remained available for future option grant or direct issuance.
The Company grants options to employees, non-employee consultants, and non-employee directors.
Additionally, the Company granted restricted stock to non-employee directors in the first quarter
of 2006. Non-employee directors are accounted for as employees under SFAS 123(R). Options and
restricted stock granted to certain directors vest in equal monthly installments over one year.
Options granted to employees vests 1/8 on the six month anniversary and 1/48 each month thereafter
for forty-two months. Options granted to non-employee consultants generally vest between 24 and 36
months. All option awards generally expire ten years from the date of the grant.
Stock-based compensation cost for awards to employees and non-employee directors is recognized
on a straight-line basis over the vesting period until the last tranche vests. Compensation cost
for consultant awards is recognized over each separate tranches vesting period. The Company
recognized compensation expense of approximately $1.9 million and $4.0 million for the three and
nine months ended September 30, 2006, respectively, associated with option awards and restricted
stock. Of the total compensation expense associated with option awards, approximately $0.1 million
and $0.3 million related to options granted to non-employee consultants for the three and nine
months ended September 30, 2006, respectively. There was no deferred tax benefit recognized in
connection with this cost.
The fair-value for options that were awarded to employees and directors was estimated at the
date of grant using the Black-Scholes option valuation model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
4.2 |
% |
|
|
4.8 |
% |
|
|
4.2 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70 |
% |
|
|
73 |
% |
|
|
70 |
% |
|
|
73 |
% |
Expected term |
|
5.7 years |
|
5 years |
|
5.9 years |
|
5 years |
The expected term of the employee and non-employee director options is the estimated
weighted-average period until exercise or cancellation of vested options (forfeited unvested
options are not considered). SAB 107 guidance permits companies to use a safe harbor expected
term assumption for grants up to December 31, 2007 based on the mid-point of the period between
vesting date and contractual term, averaged on a tranche-by-tranche basis. The Company used the
safe harbor in selecting the expected term assumption in 2006. The expected term for consultant
awards is the remaining period to contractual expiration.
Volatility is a measure of the expected amount of variability in the stock price over the
expected life of an option expressed as a standard deviation. SFAS 123(R) requires an estimate of
future volatility. In selecting this assumption, the Company used the historical volatility of the
Companys stock price over a period equal to the expected term.
For options granted to the Companys former Chief Executive Officer (CEO) and for shares
purchased under the Companys employee stock purchase plan (ESPP), an expected volatility of 50%
was used for the three and nine months ended September 30, 2006. The expected term of the options
granted to the former CEO is 5.5 months. The expected term for shares issued under the ESPP is
three months.
9
Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual Term |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Price |
|
|
in Years |
|
|
(in thousands) |
|
Balance at December 31, 2005 |
|
|
7,001,657 |
|
|
$ |
11.76 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,161,518 |
|
|
|
10.84 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(233,885 |
) |
|
|
7.98 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(177,834 |
) |
|
|
9.51 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(693,021 |
) |
|
|
13.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
7,058,435 |
|
|
$ |
11.66 |
|
|
|
6.11 |
|
|
$ |
4,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
5,384,044 |
|
|
$ |
12.20 |
|
|
|
5.18 |
|
|
$ |
2,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest as of
September 30, 2006 |
|
|
6,891,572 |
|
|
$ |
11.70 |
|
|
|
6.03 |
|
|
$ |
4,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of all stock options granted during the nine months
ended September 30, 2006 was $7.15 per share. The total intrinsic value of all options exercised
during the nine months ended September 30, 2006 was approximately $0.9 million. As of September
30, 2006, there was approximately $8.3 million of total unrecognized compensation cost related to
nonvested stock options. That cost is expected to be recognized over a weighted average period of
2.7 years.
Cash received from options exercised for the nine months ended September 30, 2006 and 2005 was
approximately $1.9 million and $0.9 million, respectively. There is no current tax benefit related
to options exercised because of net operating losses (NOLs) for which a full valuation allowance
has been established.
Restricted Stock Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Stock Price |
|
Balance at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
15,566 |
|
|
|
11.56 |
|
Vested |
|
|
(11,677 |
) |
|
|
11.56 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
3,889 |
|
|
$ |
11.56 |
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $47,000 of total unrecognized compensation cost related to
nonvested restricted stock. That cost is expected to be recognized over the remainder of 2006.
Employee Stock Purchase Plan
The Company also has an employee stock purchase plan (the 2002 ESPP). The 2002 ESPP was
originally adopted July 1, 2001 and amended through June 30, 2003 to allow employees to purchase a
limited amount of common stock at the end of each three month period at a price equal to the lesser
of 85% of fair market value on a) the first trading day of the period, or b) the last trading day
of the Lookback period (the Lookback Provision). The 15% discount and the Lookback Provision
make the 2002 ESPP compensatory under SFAS 123(R). Stock purchases under the 2002 ESPP in the
third quarter of 2006 resulted in an expense of $0.03 million. There were no stock purchases under
the 2002 ESPP during the six months ended June 30, 2006. Since the adoption of the 2002 ESPP in
2001, a total of 510,248 shares of common stock has been reserved for issuance by Ligand under the
2002 ESPP (includes shares transferred from the predecessor plan). As of September 30, 2006,
376,937 shares of
10
common stock had been issued under the 2002 ESPP to employees and 133,311 shares are available
for future issuance. For the nine months ended September 30, 2006, there were 14,199 shares of
common stock issued under the 2002 ESPP.
Accounts Receivable
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Trade accounts receivable |
|
$ |
6,164 |
|
|
$ |
1,344 |
|
Due from finance company (Note 3) |
|
|
1,197 |
|
|
|
20,464 |
|
Less: discounts and allowances |
|
|
(284 |
) |
|
|
(854 |
) |
|
|
|
|
|
|
|
|
|
$ |
7,077 |
|
|
$ |
20,954 |
|
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
¾ |
|
|
$ |
1,508 |
|
Work-in-process |
|
|
1,074 |
|
|
|
9,115 |
|
Finished goods |
|
|
4,021 |
|
|
|
6,324 |
|
Less: inventory reserves |
|
|
(56 |
) |
|
|
(1,745 |
) |
|
|
|
|
|
|
|
|
|
|
5,039 |
|
|
|
15,202 |
|
Less: current portion |
|
|
(5,039 |
) |
|
|
(9,333 |
) |
|
|
|
|
|
|
|
Long-term portion of inventories, net |
|
$ |
|
|
|
$ |
5,869 |
|
|
|
|
|
|
|
|
Inventories related to the Oncology product line have been reclassified as assets held for
sale as of September 30, 2006 (Refer to Note 2).
Property and Equipment
Property and equipment is stated at cost and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Land |
|
$ |
5,176 |
|
|
$ |
5,176 |
|
Equipment, building, and leasehold
improvements |
|
|
62,526 |
|
|
|
61,732 |
|
Less accumulated depreciation and
amortization |
|
|
(46,249 |
) |
|
|
(44,425 |
) |
|
|
|
|
|
|
|
|
|
$ |
21,453 |
|
|
$ |
22,483 |
|
|
|
|
|
|
|
|
Depreciation of equipment and building is computed using the straight-line method over the
estimated useful lives of the assets which range from three to thirty years. Leasehold
improvements are amortized using the straight-line method over their estimated useful lives or
their related lease term, whichever is shorter. Property and equipment related to the Oncology
product line have been reclassified as assets held for sale as of September 30, 2006 (Refer to Note
2).
11
Other Current Assets
Other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred royalty cost |
|
$ |
2,575 |
|
|
$ |
5,203 |
|
Deferred cost of products sold |
|
|
3,327 |
|
|
|
5,103 |
|
Prepaid insurance |
|
|
381 |
|
|
|
1,071 |
|
Prepaid other |
|
|
1,550 |
|
|
|
2,807 |
|
Due from insurance company (Note 6) |
|
|
4,000 |
|
|
|
|
|
Other |
|
|
632 |
|
|
|
1,566 |
|
|
|
|
|
|
|
|
|
|
$ |
12,465 |
|
|
$ |
15,750 |
|
|
|
|
|
|
|
|
Other current assets related to the Oncology product line have been reclassified as assets
held for sale as of September 30, 2006 (Refer to Note 2).
Other Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Prepaid royalty buyout, net |
|
$ |
|
|
|
$ |
2,312 |
|
Debt issue costs, net |
|
|
1,125 |
|
|
|
2,193 |
|
Other |
|
|
139 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
$ |
1,264 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
Other assets related to the Oncology product line have been reclassified as assets held for
sale as of September 30, 2006 (Refer to Note 2).
Amortization of debt issue costs was $0.2 million and $0.3 million for the three months ended
September 30, 2006 and 2005, respectively, and $0.7 and $0.8 million for the nine months ended
September 30, 2006 and 2005, respectively. Estimated annual amortization of this asset in both of
2006 and 2007 is approximately $1.0 million. As further discussed under Long-term Debt, during
the three and six months ended June 30, 2006, convertible notes with a face value of $1.0 million
and $27.1 million, respectively, were converted into approximately 0.2 million and 4.4 million
shares of common stock. In connection with the conversions, unamortized debt issue costs of $0.01
million and $0.4 million for the three and six months ended June 30, 2006, respectively, were
recorded as additional paid-in capital. There were no conversions during the three months ended
September 30, 2006.
Acquired Technology and Product Rights, Net
In accordance with SFAS No. 142, Goodwill and Other Intangibles, the Company amortizes
intangible assets with finite lives in a manner that reflects the pattern in which the economic
benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably
determined, the assets are amortized using the straight-line method.
Acquired technology and product rights, net as of September 30, 2006 represent payments
related to the Companys acquisition of license rights for AVINZA. Because the Company cannot
reliably determine the pattern in which the economic benefits of the acquired technology and
products rights are realized, acquired technology and product rights are amortized on a
straight-line basis over 15 years, which approximated the remaining patent life at the time the
asset was acquired and otherwise represents the period estimated to be benefited. Specifically,
the AVINZA asset is being amortized through November 2017, the expiration of its U.S. patent.
12
Acquired technology and product rights, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
AVINZA |
|
$ |
114,437 |
|
|
$ |
114,437 |
|
Less accumulated amortization |
|
|
(29,447 |
) |
|
|
(23,725 |
) |
|
|
|
|
|
|
|
|
|
|
84,990 |
|
|
|
90,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ONTAK |
|
|
|
|
|
|
78,312 |
|
Less accumulated amortization |
|
|
|
|
|
|
(22,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,058 |
|
|
|
|
|
|
|
|
|
|
$ |
84,990 |
|
|
$ |
146,770 |
|
|
|
|
|
|
|
|
Amortization of AVINZA acquired technology and product rights was $1.9 million and $5.7
million for the three and nine month periods ended September 30, 2006 and 2005, respectively.
Estimated annual amortization for this asset in each of the years in the period from 2006 through
2010 is approximately $7.6 million and a total of $52.6 million, thereafter. Acquired technology
and product rights related to ONTAK have been reclassified as assets held for sale as of September
30, 2006 (Refer to Note 2).
Deferred Revenue, Net
Under the sell-through revenue recognition method, the Company does not recognize revenue upon
shipment of product to the wholesaler. For these shipments, the Company invoices the wholesaler,
records deferred revenue at gross invoice sales price, and classifies the inventory held by the
wholesaler (and subsequently held by retail pharmacies for AVINZA) as deferred cost of goods sold
within other current assets. Deferred revenue is presented net of deferred cash and other
discounts. Other deferred revenue reflects certain collaborative research and development payments
and the sale of certain royalty rights.
Deferred revenue related to the Oncology product line has been reclassified as liabilities
related to assets held for sale as of September 30, 2006 (Refer to Note 2).
13
The composition of deferred revenue, net is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred product revenue |
|
$ |
81,436 |
|
|
$ |
158,030 |
|
Other deferred revenue |
|
|
2,546 |
|
|
|
5,296 |
|
Deferred discounts |
|
|
(1,041 |
) |
|
|
(1,605 |
) |
|
|
|
|
|
|
|
Deferred revenue, net |
|
$ |
82,941 |
|
|
$ |
161,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, net: |
|
|
|
|
|
|
|
|
Current, net |
|
$ |
80,395 |
|
|
$ |
157,519 |
|
Long term, net |
|
|
2,546 |
|
|
|
4,202 |
|
|
|
|
|
|
|
|
|
|
$ |
82,941 |
|
|
$ |
161,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product revenue, net (1): |
|
|
|
|
|
|
|
|
Current |
|
$ |
80,395 |
|
|
$ |
156,425 |
|
Long term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80,395 |
|
|
$ |
156,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferred revenue: |
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
1,094 |
|
Long term |
|
|
2,546 |
|
|
|
4,202 |
|
|
|
|
|
|
|
|
|
|
$ |
2,546 |
|
|
$ |
5,296 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred product revenue, net does not include other gross to net
revenue adjustments made when the Company reports net product sales. Such
adjustments include Medicaid rebates, managed health care rebates, and government
chargebacks, which are included in accrued liabilities in the accompanying
condensed consolidated financial statements. |
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Allowances for loss on returns, rebates, chargebacks, other
discounts, ONTAK end-customer and Panretin product returns
(1) |
|
$ |
10,397 |
|
|
$ |
15,729 |
|
Co-promotion |
|
|
18,443 |
|
|
|
24,778 |
|
Distribution services |
|
|
2,477 |
|
|
|
4,044 |
|
Employee compensation |
|
|
8,106 |
|
|
|
5,746 |
|
Securities class action and derivative lawsuit liability (2) |
|
|
4,150 |
|
|
|
|
|
Royalties |
|
|
1,662 |
|
|
|
1,994 |
|
Seragen purchase liability (2) |
|
|
¾ |
|
|
|
2,925 |
|
Interest |
|
|
2,883 |
|
|
|
1,164 |
|
Other |
|
|
4,784 |
|
|
|
3,207 |
|
|
|
|
|
|
|
|
|
|
$ |
52,902 |
|
|
$ |
59,587 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liabilities related to ONTAK end-customer and Panretin product returns will be
retained by the Company after the close of the sale of the Companys oncology products
(refer to Note 2) and therefore have not been classified as Liabilities related to
assets held for sale. |
|
(2) |
|
Refer to Note 6, Litigation. |
14
The following summarizes the activity in the accrued liability accounts related to allowances
for loss on returns, rebates, chargebacks, other discounts, and ONTAK end-customer and Panretin
returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on |
|
|
|
|
|
|
Managed |
|
|
|
|
|
|
ONTAK End- |
|
|
|
|
|
|
Returns Due |
|
|
|
|
|
|
Care and |
|
|
|
|
|
|
customer and |
|
|
|
|
|
|
to Changes |
|
|
Medicaid |
|
|
Other |
|
|
|
|
|
|
Panretin |
|
|
|
|
|
|
In Price |
|
|
Rebates |
|
|
Rebates |
|
|
Chargebacks |
|
|
Returns |
|
|
Total |
|
Nine Months Ended
September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
4,038 |
|
|
$ |
5,348 |
|
|
$ |
3,467 |
|
|
$ |
200 |
|
|
$ |
2,676 |
|
|
$ |
15,729 |
|
Provision |
|
|
2,126 |
|
|
|
3,645 |
|
|
|
6,682 |
|
|
|
5,026 |
|
|
|
1,812 |
|
|
|
19,291 |
|
Payments |
|
|
¾ |
|
|
|
(8,022 |
) |
|
|
(6,040 |
) |
|
|
(5,028 |
) |
|
|
¾ |
|
|
|
(19,090 |
) |
Charges |
|
|
(3,350 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(2,183 |
) |
|
|
(5,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
2,814 |
|
|
$ |
971 |
|
|
$ |
4,109 |
|
|
$ |
198 |
|
|
$ |
2,305 |
|
|
$ |
10,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accrual for other rebates as of September 30, 2006, reflects the release of a $1.8
million accrual previously recorded for billings received from the Department of Veteran Affairs
under the Department of Defenses TriCare Retail Pharmacy refund program. In September 2006, the
U.S. Court of Appeals for the Federal Circuit struck down the TriCare program.
Long-term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
6% Convertible Subordinated Notes |
|
$ |
128,150 |
|
|
$ |
155,250 |
|
Note payable to bank |
|
|
11,584 |
|
|
|
11,839 |
|
|
|
|
|
|
|
|
|
|
|
139,734 |
|
|
|
167,089 |
|
Less current portion |
|
|
(363 |
) |
|
|
(344 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
139,371 |
|
|
$ |
166,745 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2006, certain holders of the Companys outstanding 6%
convertible subordinated notes converted notes with face values of $27.1 million into approximately
4.4 million shares of common stock. Accrued interest and unamortized debt issue costs related to
the converted notes of $0.3 million and $0.4 million, respectively, were recorded to additional
paid-in capital during the six months ended June 30, 2006. There were no conversions during the
three months ended September 30, 2006.
On October 30, 2006, the Company gave notice of redemption to the noteholders of its 6%
convertible subordinated notes due November 2007. The redemption date of the notes has been set
for November 29, 2006. The noteholders may elect to convert the 6% notes, on or before November
29, 2006, into shares of common stock at a conversion rate of 161.9905 shares per $1,000 principal
amount of the notes (approximately $6.17 per share). Based on the current price of the Companys
common stock, the majority of the noteholders are expected to convert their notes into shares of
the Companys common stock prior to the redemption date. The $128.2 million of principal amount of
the notes outstanding may be converted into approximately 20.8 million shares of common stock. The
Company will pay the holders of those notes that are not converted into shares a redemption price
equal to 101.2% of the outstanding principal amount plus accrued and unpaid interest.
As discussed more fully in Note 14, on October 25, 2006, the Company, along with its
wholly-owned subsidiary Nexus Equity VI, LLC (Nexus) entered into an agreement with Slough
Estates USA, Inc. (Slough) for the sale of the Companys real property located in San Diego,
California. The transaction closed in November 2006 and includes an agreement between the Company
and Slough for the Company to leaseback the building for a period of 15 years. In connection with
the sale transaction, on November 6, 2006, the Company paid off the existing mortgage on the
building of approximately $11.6 million.
15
Condensed Changes in Stockholders Deficit
Condensed changes in stockholders deficit for the nine months ended September 30, 2006 are as
follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
Treasury Stock |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
Shares |
|
|
Amount |
|
|
deficit |
|
Balance at December 31, 2005 |
|
|
73,136,340 |
|
|
$ |
73 |
|
|
$ |
720,988 |
|
|
$ |
490 |
|
|
$ |
(831,059 |
) |
|
|
(73,842 |
) |
|
$ |
(911 |
) |
|
$ |
(110,419 |
) |
Issuance of common stock
upon exercise of stock
options and restricted stock
grants |
|
|
263,650 |
|
|
|
1 |
|
|
|
1,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,981 |
|
Issuance of common stock on
conversion of debt |
|
|
4,389,934 |
|
|
|
4 |
|
|
|
26,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,002 |
|
Unrealized losses on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(613 |
) |
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
Equity- based compensation |
|
|
|
|
|
|
|
|
|
|
3,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,981 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173,107 |
) |
|
|
|
|
|
|
|
|
|
|
(173,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
77,789,924 |
|
|
$ |
78 |
|
|
$ |
753,947 |
|
|
$ |
(138 |
) |
|
$ |
(1,004,166 |
) |
|
|
(73,842 |
) |
|
$ |
(911 |
) |
|
$ |
(251,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
Comprehensive loss represents net loss adjusted for the change during the periods presented in
unrealized gains and losses on available-for-sale securities less reclassification adjustments for
realized gains or losses included in net loss, as well as foreign currency translation adjustments.
The accumulated unrealized gains or losses and cumulative foreign currency translation adjustments
are reported as accumulated other comprehensive income (loss) as a separate component of
stockholders deficit. Comprehensive loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net loss as reported |
|
$ |
(14,918 |
) |
|
$ |
(6,281 |
) |
|
$ |
(173,107 |
) |
|
$ |
(33,677 |
) |
Unrealized (losses) gains on
available-for-sale securities |
|
|
(93 |
) |
|
|
108 |
|
|
|
282 |
|
|
|
(512 |
) |
Reclassification adjustment for
(losses) gains on sale of
available-for-sale securities |
|
|
(75 |
) |
|
|
143 |
|
|
|
(895 |
) |
|
|
143 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
(13 |
) |
|
|
(15 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(15,086 |
) |
|
$ |
(6,043 |
) |
|
$ |
(173,735 |
) |
|
$ |
(34,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive (loss) income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Net unrealized holding gain on
available-for-sale securities |
|
$ |
130 |
|
|
$ |
743 |
|
Net unrealized loss on foreign
currency translation |
|
|
(268 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
$ |
(138 |
) |
|
$ |
490 |
|
|
|
|
|
|
|
|
16
Net Product Sales
The Companys AVINZA net product sales are determined on a sell-through basis less allowances
for rebates, chargebacks, discounts, and losses to be incurred on returns from wholesalers
resulting from increases in the selling price of the Companys products. In addition, the Company
incurs certain distributor service agreement fees related to the management of its product by
wholesalers. These fees have been recorded within net product sales.
The Companys total net product sales from continuing operations for the three months ended
September 30, 2006 were $36.7 million compared to $29.9 million for the same 2005 period. Total
net product sales from continuing operations for the nine months ended September 30, 2006 were
$102.9 million compared to $79.4 million for the same 2005 period.
Collaborative Research and Development and Other Revenues
Collaborative research and development and other revenues are recognized as services are
performed consistent with the performance requirements of the contract. Non-refundable contract
fees for which no further performance obligation exists and where the Company has no continuing
involvement are recognized upon the earlier of when payment is received or collection is assured.
Revenue from non-refundable contract fees where the Company has continuing involvement through
research and development collaborations or other contractual obligations is recognized ratably over
the development period or the period for which the Company continues to have a performance
obligation. Revenue from performance milestones is recognized upon the achievement of the
milestones as specified in the respective agreement. Payments received in advance of performance
or delivery are recorded as deferred revenue and subsequently recognized over the period of
performance or upon delivery.
The composition of collaborative research and development and other revenues is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Collaborative research and development |
|
$ |
|
|
|
$ |
894 |
|
|
$ |
1,678 |
|
|
$ |
2,618 |
|
Development milestones and other |
|
|
|
|
|
|
1,201 |
|
|
|
2,299 |
|
|
|
5,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,095 |
|
|
$ |
3,977 |
|
|
$ |
7,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
The Company recognizes liabilities or assets for the deferred tax condensed consolidated
consequences of temporary differences between the tax bases of assets or liabilities and their
reported amounts in the condensed consolidated financial statements in accordance with SFAS No.
109, Accounting for Income Taxes (SFAS 109). These temporary differences will result in taxable
or deductible amounts in future years when the reported amounts of the assets or liabilities are
recovered or settled. SFAS 109 requires that a valuation allowance be established when management
determines that it is more likely than not that all or a portion of a deferred tax asset will not
be realized. The Company evaluates the reliability of its net deferred tax assets on a quarterly
basis and valuation allowances are provided, as necessary. During this evaluation, the Company
reviews its forecasts of income in conjunction with other positive and negative evidence
surrounding the reliability of its deferred tax assets to determine if a valuation allowance is
required. Adjustments to the valuation allowance will increase or decrease the Companys income tax
provision or benefit. At September 30, 2006 and December 31, 2005, the Company has established a
full valuation allowance against net deferred tax assets. In accordance with SFAS 109, income
taxes from continuing operations for the three and nine months ended September 30, 2006 reflect a
tax benefit equal to the tax expense attributed to the income from discontinued operations. Tax
expense on income from discontinued operations was computed using statutory rates.
17
2. Discontinued Operations
On September 7, 2006, the Company, Eisai Inc., a Delaware corporation and Eisai Co., Ltd., a
Japanese company (together with Eisai Inc., Eisai), entered into a purchase agreement (the
Oncology Purchase Agreement) pursuant to which Eisai agreed to acquire all of the Companys
worldwide rights in and to the Companys oncology products, including, among other things, all
related inventory, equipment, records and intellectual property, and assume certain liabilities
(the Oncology Product Line) as set forth in the Oncology Purchase Agreement. The Oncology Product
Line includes the Companys four marketed oncology drugs: ONTAK, Targretin capsules, Targretin gel
and Panretin gel. Pursuant to the Oncology Purchase Agreement, at closing on October 25, 2006,
Ligand received approximately $205.0 million in cash and Eisai assumed certain liabilities. As of
the closing date, the Company was also required to transfer manufactured product to Eisai of at
least $9.8 million. To the extent the actual inventory amount is less than $9.8 million, the
Oncology Purchase Agreement provides for a corresponding decrease to the purchase price. The
Company believes that oncology inventory on October 25, 2006 exceeded $9.8 million. Until Eisai
agrees with the determination of the amount transferred, however, there can be no assurance that
the final purchase price will not be adjusted. Of the $205.0 million, $20.0 million was funded into
an escrow account to support any indemnification claims made by Eisai following the closing of the
sale.
As more fully described in Note 13, $38.6 million of the funds received from Eisai have been
deposited into a restricted account to be used to repay a loan, plus interest, the Company received
from the expected acquirer of the Companys product, AVINZA. If the transaction to sell the AVINZA
product line closes as expected, the principal and interest on the loan will be forgiven.
After closing of the Oncology purchase, Ligand will receive no further direct cash flows
related to the oncology products. The Company has, however, in connection with the Oncology
Purchase Agreement with Eisai, entered into a transition services agreement whereby Ligand will
perform certain transition services for Eisai, in order to effect, as rapidly as practicable, the
transition of purchased assets from Ligand to Eisai. In exchange for these services, Eisai will
pay a monthly service fee to the Company. The term of the transition services provided is
generally three months; however, certain services will be provided for a period of up to eight
months.
18
Assets and liabilities of the Companys Oncology Product Line classified as held for sale as
of September 30, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
|
|
(unaudited) |
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Current portion of inventories, net (1) |
|
$ |
6,764 |
|
Other current assets (2) |
|
|
1,291 |
|
|
|
|
|
Total current portion of assets held for sale |
|
|
8,055 |
|
|
|
|
|
Long-term portion of inventories, net (1) |
|
|
3,913 |
|
Equipment, net of accumulated depreciation (1) |
|
|
50 |
|
Acquired technology, product rights and royalty buy-down, net (1) |
|
|
51,717 |
|
Other assets
(1) |
|
|
2,127 |
|
|
|
|
|
Total long-term portion of assets held for sale |
|
|
57,807 |
|
|
|
|
|
Total assets held for sale |
|
$ |
65,862 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of deferred revenue, net (2) |
|
$ |
26,803 |
|
|
|
|
|
Total current portion of liabilities related to assets held for sale |
|
|
26,803 |
|
|
|
|
|
Long-term portion of deferred revenue, net (2) |
|
|
1,479 |
|
Other long-term liabilities (1) |
|
|
538 |
|
|
|
|
|
Total long-term portion of liabilities related to assets held for
sale |
|
|
2,017 |
|
|
|
|
|
Total liabilities related to assets held for sale |
|
$ |
28,820 |
|
|
|
|
|
|
|
|
(1) |
|
Represents assets acquired or liabilities assumed by Eisai in accordance
with the terms of the Oncology Purchase Agreement. |
|
(2) |
|
Represents assets or liabilities that will be eliminated from the Companys
condensed consolidated balance sheet in connection with the Oncology sale
transaction. |
19
The following table summarizes results from discontinued operations for the three and nine
months ended September 30, 2006 and 2005 included in the condensed consolidated statements of
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
Product sales |
|
$ |
13,292 |
|
|
$ |
12,676 |
|
|
$ |
42,457 |
|
|
$ |
39,997 |
|
Collaborative research and development
and other revenues |
|
|
75 |
|
|
|
77 |
|
|
|
188 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
13,367 |
|
|
|
12,753 |
|
|
|
42,645 |
|
|
|
40,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
3,410 |
|
|
|
3,385 |
|
|
|
12,448 |
|
|
|
13,552 |
|
Research and development |
|
|
4,166 |
|
|
|
4,991 |
|
|
|
11,734 |
|
|
|
18,383 |
|
Selling, general and administrative |
|
|
3,722 |
|
|
|
3,303 |
|
|
|
12,688 |
|
|
|
14,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
11,298 |
|
|
|
11,679 |
|
|
|
36,870 |
|
|
|
45,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,069 |
|
|
|
1,074 |
|
|
|
5,775 |
|
|
|
(5,724 |
) |
Interest expense |
|
|
(1 |
) |
|
|
(54 |
) |
|
|
(51 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,068 |
|
|
|
1,020 |
|
|
|
5,724 |
|
|
|
(5,806 |
) |
Income tax expense |
|
|
(845 |
) |
|
|
(17 |
) |
|
|
(2,342 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,223 |
|
|
$ |
1,003 |
|
|
$ |
3,382 |
|
|
$ |
(5,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Information Regarding Discontinued Operations
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
Raw materials |
|
$ |
1,246 |
|
Work-in-process |
|
|
8,004 |
|
Finished goods |
|
|
2,631 |
|
Less: inventory reserves |
|
|
(1,204 |
) |
|
|
|
|
|
|
|
10,677 |
|
Less: current portion |
|
|
(6,764 |
) |
|
|
|
|
Long-term portion of inventories, net |
|
$ |
3,913 |
|
|
|
|
|
In 2005, the Company completed a multi-year process of transferring its filling and finishing
of ONTAK from Eli Lilly (Lilly) and Company to Hollister-Stier. In anticipation of this transfer,
the Company used Lilly to fill and finish, in 2003, a higher than normal number of ONTAK lots, each
of which required a forward dating determination. ONTAK otherwise has a shelf life projection of
up to 36 months. As of September 30, 2006 total ONTAK inventory amounted to approximately $7.0
million, of which $2.0 million is classified as long-term, respectively.
During 2005, the Company manufactured a higher than normal amount of drug substance
(bexarotene) for Targretin capsules in the event the Companys non-small cell lung cancer (NSCLC)
clinical trials were successful. In March 2005, the Company disclosed that the trials did not meet
their endpoints of improved overall survival and projected two year survival. The additional
manufactured bexarotene has a shelf life projection of approximately 10
20
years. As of September 30, 2006, total Targretin capsules inventory amounted to $3.4 million,
of which $1.9 million is classified as long-term.
Acquired Technology, Product Rights and Royalty Buy-Down, Net
Acquired technology, product rights and royalty buy-down, net as of September 30, 2006 include
payments made in 2005 totaling $33.0 million to Lilly in exchange for the elimination of the
Companys ONTAK royalty obligations in 2005 and 2006 and a reduced reverse-tiered royalty scale on
ONTAK sales in the U.S. thereafter. Other acquired technology and product rights represent
payments related to the Companys acquisition of ONTAK. As these assets are classified as held for
sale effective September 7, 2006, the Company ceased amortizing these assets as of that date.
Acquired technology, product rights, and royalty buy-down, net consist of the following (in
thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
ONTAK |
|
|
78,312 |
|
Less accumulated amortization |
|
|
(26,595 |
) |
|
|
|
|
|
|
$ |
51,717 |
|
|
|
|
|
Amortization of acquired technology, product rights and royalty buy-down, net was $1.2 million
and $4.3 million for the three and nine months ended September 30, 2006 and $1.6 million and $4.5
million, respectively, for the same 2005 periods.
Deferred Revenue, Net
The composition of deferred revenue, net is as follows (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
Deferred product revenue |
|
$ |
26,648 |
|
Other deferred revenue |
|
|
1,778 |
|
Deferred discounts |
|
|
(144 |
) |
|
|
|
|
Deferred revenue, net |
|
$ |
28,282 |
|
|
|
|
|
|
|
|
|
|
Deferred revenue, net: |
|
|
|
|
Current, net |
|
$ |
26,803 |
|
Long term, net |
|
|
1,479 |
|
|
|
|
|
|
|
$ |
28,282 |
|
|
|
|
|
|
|
|
|
|
Deferred product revenue, net: |
|
|
|
|
Current |
|
$ |
26,504 |
|
Long term |
|
|
|
|
|
|
|
|
|
|
$ |
26,504 |
|
|
|
|
|
|
|
|
|
|
Other deferred revenue: |
|
|
|
|
Current |
|
$ |
299 |
|
Long term |
|
|
1,479 |
|
|
|
|
|
|
|
$ |
1,778 |
|
|
|
|
|
21
Net Product Sales
A comparison of sales by product is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
ONTAK |
|
$ |
6,574 |
|
|
$ |
7,371 |
|
|
$ |
23,960 |
|
|
$ |
24,173 |
|
Targretin capsules |
|
|
5,610 |
|
|
|
4,394 |
|
|
|
15,608 |
|
|
|
13,080 |
|
Targretin gel and Panretin gel |
|
|
1,108 |
|
|
|
911 |
|
|
|
2,889 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
$ |
13,292 |
|
|
$ |
12,676 |
|
|
$ |
42,457 |
|
|
$ |
39,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Accounts Receivable Factoring Arrangement
During 2003, the Company entered into a one-year accounts receivable factoring arrangement
under which eligible accounts receivable are sold without recourse to a finance company. The
agreement was renewed for a one-year period in the second quarter of 2004 and for two years in the
second quarter of 2005 through December 2007. Commissions on factored receivables are paid to the
finance company based on the gross receivables sold, subject to a minimum annual commission.
Additionally, the Company pays interest on the net outstanding balance of the uncollected factored
accounts receivable at an interest rate equal to the JPMorgan Chase Bank prime rate. The Company
continues to service the factored receivables. The servicing expenses for the three and nine
months ended September 30, 2006 and 2005 were not material. There were no material gains or losses
on the sale of such receivables. The Company accounts for the sale of receivables under this
arrangement in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. The gross amount due from the finance company at
September 30, 2006 and December 31, 2005 was $1.2 million and $20.5 million, respectively.
4. Buyout of Salk Royalty Obligations
In January 2005, Ligand paid the Salk Institute (Salk) $1.1 million to exercise an option to
buy out milestone payments, other payment-sharing obligations and royalty payments due on future
sales of lasofoxifene for vaginal atrophy. This payment resulted from a supplemental lasofoxifene
new drug application (NDA) filing by Pfizer. As the Company had previously sold rights to
Royalty Pharma AG of approximately 50% of any royalties to be received from Pfizer for sales of
lasofoxifene, it recorded approximately 50% of the payment made to Salk, approximately $0.6
million, as development expense in the first quarter of 2005. The balance of approximately $0.5
million was capitalized to be amortized over the period any such royalties were to be received from
Pfizer for the vaginal atrophy indication. In connection with Pfizers receipt of a non-approvable
letter from the FDA for the vaginal atrophy indication in February 2006, however, the Company
wrote-off the remaining capitalized balance of $0.5 million in the fourth quarter of 2005.
In August 2006, Ligand paid Salk $0.8 million to exercise an option to buy out milestone
payments, other payment sharing obligations and royalty payments due on future sales of
bazedoxifene, a product being developed by Wyeth. This payment resulted from a bazedoxifene NDA
filed by Wyeth for postmenopausal osteoporosis therapy. The Company recognized the $0.8 million
payment as development expense in the three months ended September 30, 2006.
22
5. AVINZA Co-Promotion
In February 2003, Ligand and Organon Pharmaceuticals USA Inc. (Organon) announced that they
had entered into an agreement for the co-promotion of AVINZA. Under the terms of the agreement,
Organon committed to a specified minimum number of primary and secondary product calls delivered to
certain high prescribing physicians and hospitals beginning in March 2003. Organons compensation
was structured as a percentage of net sales based on generally accepted accounting principles
(GAAP), which paid Organon for their efforts and also provided Organon an economic incentive for
performance and results. In exchange, Ligand paid Organon a percentage of AVINZA net sales based
on the following schedule:
|
|
|
|
|
|
|
% of Incremental Net Sales |
Annual Net Sales of AVINZA |
|
Paid to Organon by Ligand |
$0-150 million |
|
30% (0% for 2003) |
$150-300 million |
|
|
40 |
% |
$300-425 million |
|
|
50 |
% |
> $425 million |
|
|
45 |
% |
In January 2006, Ligand signed an agreement with Organon that terminated the AVINZA
co-promotion agreement between the two companies and returned AVINZA co-promotion rights to Ligand.
The effective date of the termination agreement is January 1, 2006; however, the parties agreed to
continue to cooperate during a transition period that ended September 30, 2006 (the Transition
Period) to promote the product. The Transition Period co-operation included a minimum number of
product sales calls per quarter (100,000 for Organon and 30,000 for Ligand with an aggregate of
375,000 and 90,000, respectively, for the Transition Period) as well as the transition of ongoing
promotions, managed care contracts, clinical trials and key opinion leader relationships to Ligand.
During the Transition Period, Ligand was responsible for paying Organon an amount equal to 23% of
AVINZA net sales as reported by Ligand. Ligand was also responsible for the design and execution
of all clinical, advertising and promotion expenses and activities.
Additionally, in consideration of the early termination and return of rights under the terms
of the agreement, Ligand agreed to pay Organon $37.8 million on or before October 15, 2006. Ligand
will further pay Organon $10.0 million on or before January 15, 2007, provided that Organon has
made its minimum required level of sales calls. Under certain conditions, including closing of the
planned sale of AVINZA to King as further discussed below, the $10.0 million payment will
accelerate. In addition, after the termination, Ligand agreed to make quarterly payments to
Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0% through
patent expiration, currently anticipated to be November of 2017.
The unconditional payment of $37.8 million to Organon and the estimated fair value of the
amounts to be paid to Organon after the termination ($95.2 million as of January 1, 2006), based on
the net sales of the product (currently anticipated to be paid quarterly through November 2017)
were recognized as liabilities and expensed as costs of the termination as of the effective date of
the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which
represents an approximation of the fair value of the service element of the agreement during the
Transition Period (when the provision to pay 23% of AVINZA net sales is also considered), was
recognized ratably as additional co-promotion expense over the Transition Period. For the three
and nine months ended September 30, 2006, the pro-rata recognition of this element of co-promotion
expense amounted to $3.3 million and $10.0 million, respectively.
Although the quarterly payments to Organon will be based on net reported AVINZA product sales,
such payments will not result in current period expense in the period upon which the payment is
based, but instead will be charged against the co-promote termination liability. The liability
will be adjusted at each reporting period to fair value and will be recognized, utilizing the
interest method, as additional co-promote termination charges for that period at a rate of 15%, the
discount rate used to initially value this component of the termination liability. Note that for
the three month periods ended March 31, 2006 and June 30, 2006, this adjustment was presented as a
component of interest expense. For the nine months ended September 30, 2006, such amounts
previously reported as interest expense were properly reclassified to co-promote termination
charges in accordance with SFAS 146, Accounting
23
for Costs Associated with Exit or Disposal Activities. Any changes to the Companys estimates
of future net AVINZA product sales will result in a change to the liability which will be
recognized as an increase or decrease to co-promote termination charges in the period such changes
are identified. The adjustment to recognize the fair value of the termination liability for the
three and nine months ended September 30, 2006 was $3.6 million and $10.4 million, respectively.
On a quarterly basis, management reviews the carrying value of the co-promote termination
liability. Due to assumptions and judgments inherent in determining the estimates of future net
AVINZA sales through November 2017, the actual amount of net AVINZA sales used to determine the
current fair value of the Companys co-promote termination liability may be materially different
from its current estimates. In addition, because of the inherent difficulties of predicting
possible changes to the estimates and assumptions used to determine the estimate of future AVINZA
product sales, the Company is unable to quantify an estimate of the reasonably likely effect of any
such changes on its results of operations or financial position. For the three months ended June
30, 2006, the Company recorded a reduction in the co-promote termination liability and a
corresponding credit to co-promote termination charges of approximately $0.4 million based on the
Companys updated estimate of future AVINZA net sales.
The components of the co-promote termination liability as of September 30, 2006 are as follows
(in thousands):
|
|
|
|
|
Payment due October 15, 2006 |
|
$ |
37,750 |
|
Net present value of payments based on estimated future net
AVINZA product sales as of January 1, 2006 |
|
|
95,191 |
|
Reduction in net present value of liability resulting from
updated estimate of net AVINZA product sales |
|
|
(404 |
) |
Fair value adjustment to payments based on net AVINZA
product sales as of September 30, 2006 |
|
|
10,443 |
|
|
|
|
|
|
|
|
142,980 |
|
Less: current portion of co-promote termination liability |
|
|
(47,722 |
) |
|
|
|
|
Long-term portion of co-promote termination liability |
|
$ |
95,258 |
|
|
|
|
|
On September 6, 2006, Ligand and King entered into a Purchase Agreement (the Purchase
Agreement), pursuant to which King agreed to acquire all of the Companys rights in and to AVINZA
and to assume certain liabilities, including the product-related liabilities owed by the Company to
Organon of approximately $47.8 million (or reimbursement to Ligand at closing of the asset sale to
the extent any such amounts have been paid). King will also assume the Companys co-promote
termination obligation to make payments to Organon based on net sales of AVINZA (approximately
$105.2 million as of September 30, 2006). In connection with the transaction, King committed to
loan the Company, at the Companys option, $37.8 million to be used to pay the portion of the
Companys co-promote termination obligation to Organon due October 15, 2006. This loan was drawn,
and the $37.8 million co-promote liability settled in October 2006. As more fully described in
Note 13, $38.6 million of the funds received from Eisai have been deposited into a restricted
account to be used to repay the loan, plus interest. If the transaction to sell the AVINZA product
line closes as expected, the principal and interest will be forgiven.
6. Litigation
Securities Litigation
Since August 2004, the Company has been involved in several securities class action and
shareholder derivative actions which followed announcements by the Company in 2004 and the
subsequent restatement of its financial results in 2005. In June 2006, the Company announced that
these lawsuits had been settled, subject to certain conditions such as court approval.
Background
Beginning in August 2004, several purported class action stockholder lawsuits were filed in
the United States District Court for the Southern District of California against the Company and
certain of its directors and officers.
24
The actions were brought on behalf of purchasers of the Companys common stock during several
time periods, the longest of which runs from July 28, 2003 through August 2, 2004. The complaints
generally allege that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 of the Securities and Exchange Commission by making false and misleading
statements, or concealing information about the Companys business, forecasts and financial
performance, in particular statements and information related to drug development issues and AVINZA
inventory levels. These lawsuits have been consolidated and lead plaintiffs appointed. A
consolidated complaint was filed by the plaintiffs in March 2005. On September 27, 2005, the court
granted the Companys motion to dismiss the consolidated complaint, with leave for plaintiffs to
file an amended complaint within 30 days. In December 2005, the plaintiffs filed a second amended
complaint again alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act
against the Company, David Robinson and Paul Maier. The amended complaint asserts an expanded
Class Period of March 19, 2001 through May 20, 2005 and includes allegations arising from the
Companys announcement on May 20, 2005 that it would restate certain financial results. Defendants
filed their motion to dismiss plaintiffs second amended complaint in January 2006.
Beginning on or about August 13, 2004, several derivative actions were filed on behalf of the
Company by individual stockholders in the Superior Court of California. The complaints name the
Companys directors and certain of its officers as defendants and name the Company as a nominal
defendant. The complaints are based on the same facts and circumstances as the purported class
actions discussed in the previous paragraph and generally allege breach of fiduciary duties, abuse
of control, waste and mismanagement, insider trading and unjust enrichment. These actions were in
the discovery phase.
In October 2005, a shareholder derivative action was filed on behalf of the Company in the
United States District Court for the Southern District of California. The complaint names the
Companys directors and certain of its officers as defendants and the Company as a nominal
defendant. The action was brought by an individual stockholder. The complaint generally alleges
that the defendants falsified Ligands publicly reported financial results throughout 2002 and 2003
and the first three quarters of 2004 by improperly recognizing revenue on product sales. The
complaint generally alleges breach of fiduciary duty by all defendants and requests disgorgement,
e.g., under Section 304 of the Sarbanes-Oxley Act of 2002. In January 2006, the defendants filed a
motion to dismiss plaintiffs verified shareholder derivative complaint. Plaintiffs opposition
was filed in February 2006.
The Settlement Agreements
In June 2006, the Company entered into agreements to resolve all claims by the parties in each
of these matters, including those asserted against the Company and the individual defendants in
these cases. Under the agreements, the Company agreed to pay a total of $12.2 million in cash for a
release and in full settlement of all claims. $12.0 million of the settlement amount and a portion
of the Companys total legal expenses was funded by the Companys Directors and Officers Liability
insurance carrier while the remainder of the legal fees incurred ($1.4 million for the three months
ended June 30, 2006) was paid by the Company. Of the $12.2 million settlement liability, $4.0
million was paid in October 2006 to the Company directly from the insurance carrier and then
disbursed to the claimants attorneys, while $8.0 million will be paid by the insurance carrier
directly to an independent escrow agent responsible for disbursing the funds to the class action
suit claimants. In July 2006, the Companys insurance carrier funded the escrow account with the
$8.0 million to be disbursed to the claimants. Under SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, funding of the escrow account
represents the extinguishment of the Companys liability to the claimants. Accordingly, the
Company derecognized the $8.0 million receivable and accrued liability in its consolidated
financial statements as of September 30, 2006.
As part of the settlement of the state derivative action, the Company has agreed to adopt
certain corporate governance enhancements including the formalization of certain Board practices
and responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with
gradual phase-in) and one-time enhanced independence requirements for a single director to succeed
the current shareholder representatives on the Board. Neither the Company nor any of its current or
former directors and officers has made any admission of liability or wrongdoing. On October 12,
2006, the Superior Court of California approved the settlement of the state derivative actions and
entered final judgment of dismissal. The United States District Court has preliminarily approved
the
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settlement of the Federal class action, however, that settlement and the settlement of the
Federal derivative actions are all subject to final approval and orders of the court.
SEC Investigation and Other Matters
In connection with the restatement of the Companys consolidated financial statements, the SEC
instituted a formal investigation concerning the consolidated financial statements. These matters
were previously the subject of an informal SEC inquiry. Ligand has been cooperating fully with the
SEC and will continue to do so in order to bring the investigation to a conclusion as promptly as
possible.
The Companys subsidiary, Seragen, Inc. and Ligand, were named parties to Sergio M. Oliver, et
al. v. Boston University, et al., a putative shareholder class action filed on December 17, 1998 in
the Court of Chancery in the State of Delaware in and for New Castle County, C.A. No. 16570NC, by
Sergio M. Oliver and others against Boston University and others, including Seragen, its subsidiary
Seragen Technology, Inc. and former officers and directors of Seragen. The complaint, as amended,
alleged that Ligand aided and abetted purported breaches of fiduciary duty by the Seragen related
defendants in connection with the acquisition of Seragen by Ligand and made certain
misrepresentations in related proxy materials and seeks compensatory and punitive damages of an
unspecified amount. On July 25, 2000, the Delaware Chancery Court granted in part and denied in
part defendants motions to dismiss. Seragen, Ligand, Seragen Technology, Inc. and the Companys
acquisition subsidiary, Knight Acquisition Corporation, were dismissed from the action. Claims of
breach of fiduciary duty remain against the remaining defendants, including the former officers and
directors of Seragen. The court certified a class consisting of shareholders as of the date of the
acquisition and on the date of the proxy sent to ratify an earlier business unit sale by Seragen.
On January 20, 2005, the Delaware Chancery Court granted in part and denied in part the defendants
motion for summary judgment. Prior to trial, several of the Seragen director-defendants reached a
settlement with the plaintiffs. The trial in this action then went forward as to the remaining
defendants and concluded on February 18, 2005. On April 14, 2006, the court issued a memorandum
opinion finding for the plaintiffs and against Boston University and individual directors
affiliated with Boston University on certain claims. The opinion awards damages on these claims in
the amount of approximately $4.8 million plus interest. Judgment, however, has not been entered
and the matter is subject to appeal. While Ligand and its subsidiary Seragen have been dismissed
from the action, such dismissal is also subject to appeal, and Ligand and Seragen may have possible
indemnification obligations with respect to certain defendants. As of September 30, 2006, the
Company has not accrued an indemnification obligation based on its assessment that the Companys
responsibility for any such obligation is not probable or estimable.
In addition, the Company is subject to various lawsuits and claims with respect to matters
arising out of the normal course of business. Due to the uncertainty of the ultimate outcome of
these matters, the impact on future financial results is not subject to reasonable estimates.
7. New Accounting Pronouncements
In November 2005, the FASB issued Staff Positions (FSPs) Nos. FSPs 115-1 and 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, in response
to EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). FSPs 115-1 and 124-1 provide guidance regarding the determination as to
when an investment is considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. FSPs 115-1 and 124-1 also include accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as other-than
temporary-impairments. These requirements are effective for annual reporting periods beginning
after December 15, 2005. The adoption of the impairment guidance contained in FSPs 115-1 and 124-1
did not have a material impact on the Companys results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, Inventory Pricing (SFAS 151). SFAS 151
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
This statement requires that those items be recognized as current-period charges. In addition,
SFAS 151 requires that allocation of fixed production overheads
26
to the costs of conversion be based on the normal capacity of the production facilities. This
statement is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The adoption of SFAS No. 151 did not have a material impact on the Companys results of
operations or financial position.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS 155) which amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) and SFAS 140, Accounting or the Impairment or Disposal of
Long-Lived Assets (SFAS 140). Specifically, SFAS 155 amends SFAS 133 to permit fair value
remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided the whole instrument is accounted for on a fair value basis.
Additionally, SFAS 155 amends SFAS 140 to allow a qualifying special purpose entity to hold a
derivative financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 applies to all financial instruments acquired or issued
after the beginning of an entitys first fiscal year that begins after September 15, 2006, with
early application allowed. The adoption of SFAS 155 is not expected to have a material impact on
the Companys results of operations or financial position.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
(SFAS 156) to simplify accounting for separately recognized servicing assets and servicing
liabilities. SFAS 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Additionally, SFAS 156 applies to all separately
recognized servicing assets and liabilities acquired or issued after the beginning of an entitys
fiscal year that begins after September 15, 2006, although early adoption is permitted. The
adoption of SFAS 156 is not expected to have a material impact on the Companys results of
operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes- an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance with FASB
Statement No. 109. It prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a
material impact on the Companys results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements where fair value has previously been concluded to be
the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to
have a material impact on the Companys results of operations or financial position.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statement No. 87, 88, 106 and 132(R)
(FAS 158). Under FAS 158, companies must recognize a net liability or asset to report the funded
status of their defined benefit pension and other postretirement benefit plans (collectively
referred to herein as benefit plans) on their balance sheets, starting with balance sheets as of
December 31, 2006 if they are calendar year-end public company. FAS 158 also changed certain
disclosures related to benefit plans. The adoption of FAS 158 is not expected to have a material
impact on the Companys results of operations or financial position.
In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 provides guidance on how the effects of prior-year uncorrected
financial statement misstatements should be considered in quantifying a current year misstatement.
SAB 108 requires registrants to quantify misstatements using both an income statement (rollover)
and balance sheet (iron curtain) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are considered, is
material. If prior year errors that had been previously considered immaterial are now considered
material based on either approach, no restatement is required as long as management properly
applied its previous approach and all relevant
27
facts and circumstances were considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening retained earnings as of the beginning of the fiscal year
of adoption. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The
Company does not expect the adoption of SAB 108 to have a material impact on our consolidated
financial condition or results of operations.
8. Commitments and Contingencies
Stockholders Agreement
In October 2005, a lawsuit was filed in the Court of Chancery in the State of Delaware by
Third Point Offshore Fund, Ltd. requesting the Court to order Ligand to hold an annual meeting for
the election of directors within 60 days of an order by the Court. Ligands annual meeting had
been delayed as a result of the previously announced restatement. The complaint sought payment of
plaintiffs costs and attorneys fees. Ligand agreed on November 11, 2005 to settle this lawsuit
and schedule the annual meeting for January 31, 2006. On December 2, 2005, Ligand and Third Point
also entered into a stockholders agreement under which, among other things, Ligand agreed to expand
its board from eight to eleven, elect three designees of Third Point to the new board seats and pay
certain of Third Points expenses, not to exceed approximately $0.5 million. Of such amount,
approximately 50% was paid and expensed in the fourth quarter of 2005. A second payment of
approximately $0.2 million was made and expensed in the second quarter of 2006. Unless approved by
the Board of Directors of the Company, Third Point may not purchase additional shares of Ligand,
sell its Ligand shares, solicit proxies or take certain other stockholder actions as long as its
designees remain on the board.
9. Employee Retention and Severance Agreements
In March 2006, the Company entered into letter agreements with approximately 67 of its key
employees, including a number of its executive officers. In September 2006, the Company entered
into letter agreements with ten additional key employees and modified existing agreements with two
employees. These letter agreements provide for certain retention or stay bonus payments in cash
under specified circumstances as an additional incentive to remain employed in good standing with
the Company. The Compensation Committee of the Board of Directors has approved the Companys entry
into these agreements. The retention or stay bonus payments generally vest at the end of 2006 and
total payments to employees of approximately $3.0 million would be made in January 2007 if all
participants qualify for the payments. In accordance with SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, the cost of the plan is ratably accrued over the term
of the agreements. For the three and nine months ended September 30, 2006, the Company recognized
approximately $1.0 million and $2.1 million, respectively, of expense under the plan. As an
additional retention incentive, certain employees were also granted stock options totaling
approximately 122,000 shares at an exercise price of $11.90 per share.
In August 2006 and October 2006, the Companys Compensation Committee approved and ratified,
and the Company provided additional severance agreements to certain of its officers and executive
officers as additional retention incentives and to provide severance benefits to these officers
that are more closely equivalent to severance benefits already in place for other executive
officers.
These additional agreements consist of a) change of control severance agreements (Change of
Control Severance Agreement) and b) ordinary severance agreements that apply regardless of a
change of control (Ordinary Severance Agreement). Each Change of Control Severance Agreement
provides for payment of certain benefits to the officer in the event their employment is terminated
without cause in connection with a change of control of the Company.
These benefits include one year of salary, plus the average bonus (if any) for the prior two
years and payment of health care premiums for one year. With certain exceptions, the officer must
be available for consulting services for one year and must abide by certain restrictive covenants,
including non-competition and non-solicitation of the Companys employees. Each Ordinary Severance
Agreement provides for payment of six months salary in the event the officers employment is
terminated without cause, regardless of a change of control.
28
Additionally, in October 2006, the Company implemented a 2006 Employee Severance Plan for
those employees who were not covered by another severance arrangement. The plan provides that if
such an employee is involuntarily terminated without cause, and not offered a similar or better job
by one of the purchasers of the Companys product lines (i.e. King or Eisai) such employee will be
eligible for severance benefits. The benefits consist of two months salary, plus one week of
salary for every full year of service with the Company plus payment of COBRA health care coverage
premiums for that same period.
10. Lilly Collaboration Update
In May 2006, after review of all preclinical and clinical data including recently completed
two year animal safety studies, Lilly informed the Company that it had decided not to pursue
further development at this time of LY818 (Naveglitazar), a compound in Phase II development for
the treatment of Type II diabetes. Naveglitazar, a dual PPAR agonist was developed through the
Companys collaborative research and development agreement with Lilly. This decision is specific
with regard to Naveglitazar.
In September 2006, Lilly informed the Company that it had suspended an ongoing mid-stage human
trial of LY674 in order to assess unexpected findings noted during animal safety studies of the
same compound and evaluate collective clinical efficacy and safety from the human data already
gathered. LY674, a PPAR alpha agonist compound in Phase II development for the treatment of
atherosclerosis, was developed through the Companys collaborative research and development
agreement with Lilly. This decision is specific with regard to LY674.
11. NASDAQ Relisting
On June 12, 2006, NASDAQ approved the Companys application for relisting its common stock on
the NASDAQ Global Market (formerly National Market). The Company commenced trading on the NASDAQ
Global Market on June 14, 2006, under the symbol LGND. The Companys common stock was previously
delisted from the NASDAQ National Market on September 7, 2005.
12. Resignation of CEO and Appointment of New Interim CEO
On July 31, 2006, the Company entered into a separation agreement with David Robinson
providing for Mr. Robinsons resignation as Chairman, President, and Chief Executive Officer of the
Company. Under the separation agreement, Mr. Robinson will receive his base salary and certain
benefits for 24 months, payable in five equal monthly installments beginning August 1, 2006 and
ending December 1, 2006. In addition, the agreement provides for the immediate vesting of Mr.
Robinsons unvested stock options and an extension of the exercise period of his options to January
15, 2007. In connection with the resignation, the Company recognized expense of approximately $1.9
million for the three months ended September 30, 2006, comprised of cash payments of $1.4 million
and stock-based compensation of $0.5 million associated with the modification of the vesting and
exercise period of the stock options.
On August 1, 2006, the Company announced that current director Henry F. Blissenbach had been
named Chairman and interim Chief Executive Officer. The Company has agreed to pay Dr. Blissenbach
$40,000 per month, commencing August 1, 2006, subject to cancellation by either party on thirty
days notice, for his services as Chairman and interim Chief Executive Officer. In addition, Dr.
Blissenbach will be eligible to receive incentive compensation of up to 50% of his base salary, but
not more than $100,000, based upon his performance of certain objectives incorporated within the
employment agreement which the Company and Dr. Blissenbach have entered into. Also, Dr.
Blissenbach received a stock option grant to purchase 150,000 shares of the Companys common stock
at an exercise price of $9.20 per share. These stock options will vest 50% at the end of six
months and the remaining 50% will vest at the end of one year, except that all of these stock
options will vest upon the appointment of a new chief executive officer. Finally, the Company will
reimburse Dr. Blissenbach for all reasonable expenses incurred in discharging his duties as interim
Chief Executive Officer, including, but not limited to commuting costs to San Diego and living and
related costs during the time he spends in San Diego.
29
13. Sale of AVINZA Product Line
On September 6, 2006, Ligand and King Pharmaceuticals, Inc. (King), entered into a purchase
agreement (the AVINZA Purchase Agreement), pursuant to which King agreed to acquire all of the
Companys rights in and to AVINZA in the United States, its territories and Canada, including,
among other things, all AVINZA inventory, equipment, records and related intellectual property, and
assume certain liabilities as set forth in the AVINZA Purchase Agreement (collectively, the
Transaction). In addition, King has, subject to the terms and conditions of the AVINZA Purchase
Agreement, agreed to offer employment following the closing of the Transaction (the Closing) to
certain of the Companys existing AVINZA sales representatives or otherwise reimburse the Company
for agreed upon severance arrangements offered to any such non-hired representatives.
Pursuant to the AVINZA Purchase Agreement, at Closing, the Company will be paid a $265.0
million cash payment, $15.0 million of which will be funded into an escrow account to support any
indemnification claims made by King following the Closing and King will assume certain liabilities,
including product-related liabilities owed by the Company to Organon of approximately $47.8 million
and all other existing product royalty obligations including the Organon co-promote termination
obligation to Organon ($105.2 million as of September 30, 2006). The closing payment is subject to
adjustment based on the Companys ability to reduce wholesale and retail inventory levels of AVINZA
to certain targeted levels by Closing in accordance with the AVINZA Purchase Agreement.
In addition to the assumption of existing royalty obligations, King will pay Ligand a 15%
royalty on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments
will be based upon calendar year net sales. If calendar year net sales are less than $200 million,
the royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200
million, the royalty payment will be 10% of all net sales less than $250 million, plus 15% of net
sales greater than $250 million.
In connection with the Transaction, King committed to loan the Company, at the Companys
option, $37.8 million (the Loan) to be used to pay the Companys co-promote termination
obligation to Organon due October 15, 2006. This loan was drawn, and the $37.8 million co-promote
liability settled in October 2006. Amounts due under the loan are subject to certain market terms,
including a 9.5% interest rate. In addition, and as a condition of the $37.8 million loan received
from King, $38.6 million of the funds received from Eisai was deposited into a restricted account
to be used to repay the loan to King, plus interest, due January 1, 2007. If the Transaction
closes as contemplated by the AVINZA Purchase Agreement, the interest and principal will be
forgiven.
The AVINZA Purchase Agreement may be terminated by either King or the Company if the Closing
has not occurred by December 31, 2006, or upon the occurrence of certain customary matters. In
addition, if the AVINZA Purchase Agreement is terminated under certain circumstances, including a
determination by the Companys Board of Directors to accept an acquisition proposal it deems
superior, the Company has agreed to pay King a termination fee of $12.0 million. The Closing is
subject to certain closing conditions, including, but not limited to, Ligand stockholder approval
of the transaction, the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR, the conversion or
redemption prior to Closing of all of our outstanding 6% Convertible Subordinated Notes due 2007 of
the Company, and certain other customary closing conditions. Early termination of the waiting
period under HSR occurred on October 5, 2006.
Also on September 6, 2006, the Company entered into a contract sales force agreement (the
Sales Agreement) with King, pursuant to which King agreed to conduct a sales detailing program to
promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales
Agreement. Pursuant to the Sales Agreement, King agreed to perform certain minimum monthly product
details (i.e. sales calls), which commenced effective October 1, 2006 and will continue for a
period of six months following such date or until the Closing or earlier termination of the AVINZA
Purchase Agreement. The Company estimates that, assuming the Closing were to occur at the end of
December 2006, the amount due to King under the Sales Agreement would be approximately $4.0
million.
30
14. Subsequent Events
Sale and Leaseback of Premises
On October 25, 2006, the Company, along with its wholly-owned subsidiary Nexus entered into an
agreement with Slough for the sale of the Companys real property located in San Diego, California
for a purchase price of approximately $47.6 million. This property, with a net book value of
approximately $14.5 million, includes one building totaling approximately 82,500 square feet, the
land on which the building is situated, and two adjacent vacant lots. As part of the sale
transaction, the Company agreed to leaseback the building for a period of 15 years, as further
described below. In connection with the sale transaction, on November 6, 2006, the Company paid
off the existing mortgage on the building of approximately $11.6 million. The early payment
triggered a prepayment penalty of approximately $0.4 million. The sale transaction subsequently
closed on November 9, 2006.
Under the terms of the lease, the Company will pay a basic annual rent of $3.0 million
(subject to an annual fixed percentage increase, as set forth in the agreement), plus a 1% annual
management fee, property taxes and other normal and necessary expenses associated with the lease
such as utilities, repairs and maintenance, etc. The Company will have the right to extend the
lease for two five-year terms and will have the first right of refusal to lease, at market rates,
any facilities built on the sold lots.
In accordance with SFAS 13, Accounting for Leases, the Company expects to recognize an
immediate pre-tax gain on the sale transaction of approximately $2.9 million and defer a gain of
approximately $29.5 million on the sale of the building. The deferred gain will be recognized on a
straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per
year.
Stockholder Rights Plan
In October 2006, the Companys Board of Directors renewed the Companys stockholder rights
plan, which was originally adopted and has been in place since September 2002, and which expired on
September 13, 2006, through the adoption of a new 2006 Stockholder Rights Plan (the 2006 Rights
Plan). The 2006 Rights Plan provides for a dividend distribution of one preferred share purchase
right (a Right) on each outstanding share of the Companys common stock. Each Right entitles
stockholders to buy 1/1000th of a share of Ligand Series A Participating Preferred Stock at an
exercise price of $100. The Rights will become exercisable if a person or group announces an
acquisition of 20% or more of the Companys common stock, or announces commencement of a tender
offer for 20% or more of the common stock. In that event, the Rights permit stockholders, other
than the acquiring person, to purchase the Companys common stock having a market value of twice
the exercise price of the Rights, in lieu of the Preferred stock. In addition, in the event of
certain business combinations, the Rights permit the purchase of the common stock of an acquiring
person at a 50% discount. Rights held by the acquiring person become null and void in each case.
The 2006 Rights Plan expires in 2016.
Conversion/Redemption of 6% Convertible Subordinated Notes
On October 30, 2006, the Company announced that it had given notice of redemption to the
noteholders of its 6% convertible subordinated notes due November 2007. The redemption date of the
notes has been set for November 29, 2006. The noteholders may elect to convert the 6% notes, on or
before November 29, 2006, into shares of the Companys common stock at a conversion rate of
161.9905 shares per $1,000 principal amount of the notes (approximately $6.17 per share). Based on
the Companys current stock price, the Company expects that the majority of the notes will be
converted into shares of Ligand common stock. The $128.2 million of principal amount of the notes
outstanding may be converted into approximately 20.8 million shares of common stock. The Company
will pay the holders of those notes that are not converted into shares a redemption price equal to
101.2% of the outstanding principal amount plus accrued and unpaid interest.
31
Potential Dividend/Modification to 2002 Stock Incentive Plan
The Companys Board of Directors is evaluating the distribution of a substantial portion of
the net cash proceeds from the asset sales transactions to the Companys stockholders in the form
of a special dividend following the consummation of the AVINZA sale transactions. Additionally,
the Company is seeking stockholder approval to modify its 2002 Stock Incentive Plan (the 2002
Plan) to allow equitable adjustments to be made to options outstanding under the 2002 Plan in the
event of a special cash dividend. Assuming stockholder approval of the change to the 2002 Plan, any
such adjustments to outstanding options would be considered a modification and result in the
recognition of compensation expense in the Companys consolidated statement of operations under the
requirements of Statement of Financial Accounting Standard No 123(R) Share-Based Payment (SFAS
123(R)). Any such expense could be material.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution: This discussion and analysis may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties, including those
discussed in Part II. Item 1A. Risk Factors. This outlook represents our current judgment on
the future direction of our business. These statements include those related to our products,
product sales and other revenues, expenses, our revenue recognition models and policies, material
weaknesses or deficiencies in internal control over financial reporting, revenue recognition, and
strategic alternatives, including the pending sale of our AVINZA assets and related restructuring.
Actual events or results may differ materially from Ligands expectations. For example, there can
be no assurance that our product sales efforts or recognized revenues or expenses will meet any
expectations or follow any trend(s), that our internal control over financial reporting will be
effective or produce reliable financial information on a timely basis, or that our pending sale of
the AVINZA assets and subsequent company restructuring will be timely or successfully completed.
We cannot assure you that the Company will be able to successfully remediate any identified
material weakness or significant deficiencies, or that the sell-through revenue recognition models
will not require adjustment and not result in a subsequent restatement. In addition, the SEC
investigation related to the Companys 2005 restatement of financial results or future litigation
may have an adverse effect on the Company, and our corporate or partner pipeline products may not
gain approval or success in the market. Such risks and uncertainties, and others, could cause
actual results to differ materially from any future performance suggested. We undertake no
obligation to release publicly the results of any revisions to these forward-looking statements to
reflect events or circumstances arising after the date of this quarterly report. This caution is
made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended.
Our trademarks, trade names and service marks referenced herein include Ligand ®
and AVINZA . Each other trademark, trade name or service mark appearing in this
quarterly report belongs to its owner.
References to Ligand Pharmaceuticals Incorporated (Ligand, the Company, we or our)
include our wholly owned subsidiaries Ligand Pharmaceuticals (Canada) Incorporated; Ligand
Pharmaceuticals International, Inc.; Seragen, Inc. (Seragen); and Nexus Equity VI LLC (Nexus).
Overview
We discover, develop and market drugs that address patients critical unmet medical needs in
the areas of cancer, pain, mens and womens health or hormone-related health issues, skin
diseases, osteoporosis, blood disorders and metabolic, cardiovascular and inflammatory diseases.
Our drug discovery and development programs are based on our proprietary gene transcription
technology, primarily related to Intracellular Receptors, also known as IRs, a type of sensor or
switch inside cells that turns genes on and off, and Signal Transducers and Activators of
Transcription, also known as STATs, which are another type of gene switch.
As of September 30, 2006, we marketed five products in the United States: AVINZA, for the
relief of chronic, moderate to severe pain; ONTAK, for the treatment of patients with persistent or
recurrent cutaneous T-cell lymphoma (CTCL); Targretin capsules, for the treatment of CTCL in
patients who are refractory to at least one prior systemic therapy; Targretin gel, for the topical
treatment of cutaneous lesions in patients with early stage CTCL; and Panretin gel, for the
treatment of Kaposis sarcoma in AIDS patients. In Europe, we held marketing authorizations for
PanretinÒ gel and Targretin capsules and marketed these products under
arrangements with local distributors.
As further discussed below under Recent Developments, on September 7, 2006, we announced the
sale of ONTAK, Targretin capsules, Targretin gel, and Panretin to Eisai, Inc. (Eisai) and the
sale of AVINZA to King Pharmaceuticals, Inc. (King). The Eisai sales transaction subsequently
closed on October 25, 2006. Accordingly, the results for the Oncology business have been presented
in our condensed consolidated statements of operations and cash flows for the three and nine months
ended September 30, 2006 and 2005 as Discontinued Operations. Likewise, assets and liabilities
related to the operations sold to Eisai have been presented in our condensed consolidated balance
sheet as of September 30, 2006 as assets held for sale and liabilities related to assets held
33
for sale. The AVINZA sale transaction is subject to shareholder approval. Accordingly,
results of operations for the AVINZA product are included in the continuing operations of the
Company.
In February 2003, we entered into an agreement for the co-promotion of AVINZA with Organon
Pharmaceuticals USA Inc. (Organon). Under the terms of the agreement, Organon committed to a
specified minimum number of primary and secondary product calls delivered to certain high
prescribing physicians and hospitals beginning in March 2003. Organons compensation through 2005
was structured as a percentage of net sales, which paid Organon for their efforts and also provided
Organon an economic incentive for performance and results. In exchange, we paid Organon a
percentage of AVINZA net sales based on the following schedule:
|
|
|
|
|
|
|
% of Incremental Net Sales |
Annual Net Sales of AVINZA |
|
Paid to Organon by Ligand |
$0-150 million |
|
30% (0% for 2003) |
$150-300 million |
|
|
40 |
% |
$300-425 million |
|
|
50 |
% |
> $425 million |
|
|
45 |
% |
In January 2006, we signed an agreement with Organon that terminated the AVINZA co-promotion
agreement between the two companies and returned AVINZA rights to Ligand. The effective date of the
termination agreement is January 1, 2006; however, the parties agreed to continue to cooperate
during a transition period that ended September 30, 2006 (the Transition Period) to promote the
product. The Transition Period co-operation included a minimum number of product sales calls per
quarter (100,000 for Organon and 30,000 for Ligand with an aggregate of 375,000 and 90,000,
respectively, for the Transition Period) as well as the transition of ongoing promotions, managed
care contracts, clinical trials and key opinion leader relationships to Ligand. During the
Transition Period, we were responsible for paying Organon an amount equal to 23% of AVINZA net
sales as reported. We were also responsible for the design and execution of all AVINZA clinical,
advertising and promotion expenses and activities.
Additionally, in consideration of the early termination and return of co-promotion rights
under the terms of the agreement, we agreed to unconditionally pay Organon $37.8 million on or
before October 15, 2006. We will further pay Organon $10.0 million on or before January 15, 2007,
provided that Organon has made its minimum required level of sales calls. Under certain conditions,
including closing the planned sale of AVINZA to King, as further discussed below, the $10.0 million
cash payment will accelerate. In addition, after the termination, we agreed to make quarterly
payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0%
through patent expiration, currently anticipated to be November 2017.
The unconditional payment of $37.8 million to Organon and the estimated fair value of the
amounts to be paid to Organon after the termination ($95.2 million as of January 1, 2006), based on
the net sales of the product (currently anticipated to be paid quarterly through November 2017)
were recognized as liabilities and expensed as costs of the termination as of the effective date of
the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which
represents an approximation of the fair value of the service element of the agreement during the
Transition Period (when the provision to pay 23% of AVINZA net sales is also considered), was
recognized ratably as additional co-promotion expense over the Transition Period. For the three
and nine months ended September 30, 2006, the pro-rata recognition of this element of co-promotion
expense amounted to $3.3 million and $10.0 million, respectively.
Although the quarterly payments to Organon will be based on net reported AVINZA product sales,
such payments will not result in current period expense in the period upon which the payment is
based, but instead will be charged against the co-promote termination liability. The liability
will be adjusted at each reporting period to fair value and will be recognized, utilizing the
interest method, as co-promote termination charge for that period at a rate of 15%, the discount
rate used to initially value this component of the termination liability. The accretion expense to
the fair value of the termination liability for the three and nine months ended September 30, 2006
totaled $3.6 million and $10.4 million, respectively. Additionally, any changes to our estimates
of future net AVINZA product sales will result in a change to the liability which will be
recognized as an increase or decrease to co-promote
34
termination charges in the period such changes are identified. Any such changes could be
material and potentially result in adjustments to our consolidated statement of operations that are
inconsistent with the underlying trend in net AVINZA product sales.
In June 2006, we concluded the research phase of a research and development collaboration with
TAP Pharmaceutical Products Inc. (TAP). Collaborations in the development phase are being
pursued by Eli Lilly and Company, GlaxoSmithKline, Pfizer, TAP, and Wyeth. We receive funding
during the research phase of the arrangements and milestone and royalty payments as products are
developed and marketed by our corporate partners. In addition, in connection with some of these
collaborations, we received non-refundable up-front payments.
We have been unprofitable since our inception on an annual basis. We achieved quarterly net
income of $17.3 million during the fourth quarter of fiscal 2004, which was primarily the result of
recognizing approximately $31.3 million from the sale of royalty rights to Royalty Pharma.
However, we have incurred a net loss in each of the subsequent quarters including the three months
ended September 30, 2006, for which we incurred a net loss of $14.9 million. We expect to incur
net losses in the future. To be profitable, we must successfully develop, clinically test, market
and sell our products. Even if we achieve profitability, we cannot predict the level of that
profitability or whether we will be able to sustain profitability. We expect that our operating
results will fluctuate from period to period as a result of differences in the timing of revenues,
expenses incurred, collaborative arrangements and other sources. Some of these fluctuations may be
significant.
Recent Developments
Sale of Oncology Product Line
On September 7, 2006, the Company, Eisai Inc., a Delaware corporation and Eisai Co., Ltd., a
Japanese company (together with Eisai Inc., Eisai), entered into a purchase agreement (the
Oncology Purchase Agreement) pursuant to which Eisai agreed to acquire all of our worldwide
rights in and to our oncology products, including, among other things, all related inventory,
equipment, records and intellectual property, and assume certain liabilities (together Oncology
or the Oncology Product Line) as set forth in the Oncology Purchase Agreement. The Oncology
Product Line includes the Companys four marketed oncology drugs: ONTAK, Targretin capsules,
Targretin gel and Panretin gel. Pursuant to the Oncology Purchase Agreement, at closing on October
25, 2006, we received approximately $205.0 million in cash and Eisai assumed certain liabilities.
As of the closing date, we were also required to transfer manufactured product to Eisai of at least
$9.8 million. To the extent the actual inventory amount is less than $9.8 million, the Oncology
Purchase Agreement provides for a corresponding decrease to the purchase price. We believe that
oncology inventory on October 25, 2006 exceeded $9.8 million. Until Eisai agrees with the
determination of the amount transferred, however, there can be no assurance that the final purchase
price will not be adjusted. Of the $205.0 million, $20.0 million was funded into an escrow account
to support any indemnification claims made by Eisai following the closing of the sale.
In addition, and as a condition of the $37.8 million loan received from King Pharmaceuticals,
Inc. (King) in connection with the proposed sale of AVINZA to King (as discussed below), $38.6
million of the funds received from Eisai was deposited into a restricted account to be used to
repay the loan plus interest, due January 1, 2007. If the transaction with King closes as
contemplated by the AVINZA Purchase Agreement, the interest will be forgiven and the principal will
be credited against the purchase price.
After closing of the Oncology purchase, we will receive no further direct cash flows related
to the oncology products. We have, however, in connection with the Oncology Purchase Agreement
with Eisai, entered into a transition services agreement with Eisai whereby we will perform certain
transition services for Eisai, in order to effect, as rapidly as practicable, the transition of
purchased assets from us to Eisai. In exchange for these services, Eisai will pay us a monthly
service fee. The term of the transition services provided is generally three months, however,
certain services will be provided for a period of up to eight months.
35
Sale of AVINZA Product
On September 6, 2006, we entered into a purchase agreement (the AVINZA Purchase Agreement)
with King, pursuant to which King agreed to acquire all of our rights in and to AVINZA in the
United States, its territories and Canada, including, among other things, all AVINZA inventory,
equipment, records and related intellectual property, and assume certain liabilities as set forth
in the AVINZA Purchase Agreement. In addition, King has, subject to the terms and conditions of the
AVINZA Purchase Agreement, agreed to offer employment following the closing of the transaction (the
Closing) to certain of our existing AVINZA sales representatives or otherwise reimburse us for
agreed upon severance arrangements offered to any such non-hired representatives.
Pursuant to the AVINZA Purchase Agreement, at Closing, we will be paid a $265.0 million cash
payment, $15.0 million of which will be funded into an escrow account to support any
indemnification claims made by King following the Closing and King will assume certain liabilities,
including product-related liabilities owed by us to Organon of approximately $47.8 million and all
other existing product royalty obligations including the ongoing co-promote termination obligation
to Organon ($105.2 million as of September 30, 2006). The Closing payment is subject to adjustment
based on our ability to reduce wholesale and retail inventory levels of AVINZA to certain targeted
levels by Closing in accordance with the AVINZA Purchase Agreement.
In addition to the assumption of existing royalty obligations, King will pay us a 15% royalty
on AVINZA net sales during the first 20 months after Closing. Subsequent royalty payments will be
based upon calendar year net sales. If calendar year net sales are less than $200 million, the
royalty payment will be 5% of all net sales. If calendar year net sales are greater than $200
million, the royalty payments will be 10% of all net sales less than $250 million, plus 15% of net
sales greater than $250 million.
In connection with the transaction, King committed to loan us, at our option, $37.8 million
(the Loan) to be used to pay our co-promote termination obligation to Organon due October 15,
2006. This loan was drawn, and the $37.8 million co-promote liability settled in October 2006.
Amounts due under the loan are subject to certain market terms, including a 9.5% interest rate. In
addition, and as a condition of the $37.8 million loan received from King, $38.6 million of the
funds received from Eisai was deposited into a restricted account to be used to repay the loan to
King, plus interest, due January 1, 2007. If the transaction with King closes as contemplated by
the AVINZA Purchase Agreement, the interest and principal will be forgiven.
The AVINZA Purchase Agreement may be terminated by either King or us if the Closing has not
occurred by December 31, 2006, or upon the occurrence of certain customary matters. In addition,
if the AVINZA Purchase Agreement is terminated under certain circumstances, including a
determination by our Board of Directors to accept an acquisition proposal it deems superior, we
have agreed to pay King a termination fee of $12.0 million. The Closing is subject to certain
closing conditions, including, but not limited to, Ligand stockholder approval of the transaction,
the conversion or redemption prior to Closing of all of our outstanding 6% Convertible Subordinated
Notes due 2007, the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR, and certain other
customary closing conditions. Early termination of the waiting period under HSR occurred on
October 5, 2006.
Also on September 6, 2006, we entered into a contract sales force agreement (the Sales
Agreement) with King, pursuant to which King agreed to conduct a sales detailing program to
promote the sale of AVINZA for an agreed upon fee, subject to the terms and conditions of the Sales
Agreement. Pursuant to the Sales Agreement, King agreed to perform certain minimum monthly product
details (i.e. sales calls), which commenced effective October 1, 2006 and will continue for a
period of six months following such date or until the Closing or earlier termination of the AVINZA
Purchase Agreement. We estimate that, assuming the Closing were to occur at the end of December
2006, the amount due to King under the Sales Agreement would be approximately $4.0 million.
Sale and Leaseback of Premises
On October 25, 2006, we, along with our wholly-owned subsidiary Nexus Equity VI, LLC (Nexus)
entered into an agreement with Slough Estates USA, Inc. (Slough) for the sale of our real
property located in San Diego, California for a purchase price of approximately $47.6 million.
This property, with a net book value of
36
approximately $14.5 million, includes one building totaling approximately 82,500 square feet,
the land on which the building is situated, and two adjacent vacant lots. As part of the sale
transaction, we agreed to leaseback the building for a period of 15 years, as further described
below. In connection with the sale transaction, on November 6, 2006, we paid off the existing
mortgage on the building of approximately $11.6 million. The early payment triggered a prepayment
penalty of approximately $0.4 million. The sale transaction subsequently closed on November 9,
2006.
Under the terms of the lease, we will pay a basic annual rent of $3.0 million (subject to an
annual fixed percentage increase, as set forth in the agreement), plus a 1% annual management fee,
property taxes and other normal and necessary expenses associated with the lease such as utilities,
repairs and maintenance, etc. We will have the right to extend the lease for two five-year terms
and will have the first right of refusal to lease, at market rates, any facilities built on the
sold lots.
In accordance with SFAS 13, Accounting for Leases, we expect to recognize an immediate pre-tax
gain on the sale transaction of approximately $2.9 million and defer a gain of approximately $29.5
million on the sale of the building. The deferred gain will be recognized on a straight-line basis
over the 15 year term of the lease at a rate of approximately $2.0 million per year.
Termination of Organon Co-promotion Agreement
As further discussed under Overview above, in January 2006, we signed an agreement with
Organon that terminates the AVINZA co-promotion agreement between the two companies and returns
AVINZA rights to Ligand.
Accounting for Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS 123 (revised 2004), Share-Based Payment (SFAS
123(R)), using the modified prospective transition method. No stock-based employee compensation
cost was recognized prior to January 1, 2006, as all options granted prior to 2006 had an exercise
price equal to the market value of the underlying common stock on the date of the grant. Under the
modified prospective transition method, compensation cost recognized in 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
SFAS 123, and (b) compensation cost for all share-based payments granted in the nine months ended
September 30, 2006, based on grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). Results for the three and nine months ended September 30, 2005 have not been
retrospectively adjusted. The implementation of SFAS 123(R) resulted in employee compensation
expense of approximately $2.0 million and $4.0 million for the three and nine months ended
September 30, 2006.
Employee Retention Agreements and Severance Arrangements
In March 2006, we entered into letter agreements with approximately 67 of our key employees,
including a number of our executive officers. In September 2006, we entered into letter agreements
with ten additional employees and modified existing agreements with two employees. These letter
agreements provide for certain retention or stay bonus payments to be paid in cash under specified
circumstances as an additional incentive to remain employed in good standing with the Company. The
Compensation Committee of the Board of Directors has approved the Companys entry into these
agreements. The retention or stay bonus payments generally vest at the end of 2006 and total
payments to employees of approximately $3.0 million would be made in January 2007 if all
participants qualify for the payments. In accordance with the SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, the cost of the plan is ratably accrued over the term
of the agreements. For the three and nine months ended September 30, 2006, we recognized
approximately $1.0 million and $2.1 million, respectively, of expense under the plan. As an
additional retention incentive, certain employees were also granted stock options totaling
approximately 122,000 shares at an exercise price of $11.90 per share.
In August 2006 and October 2006, the Companys Compensation Committee approved and ratified,
and began entering into additional severance agreements with certain of our officers and executive
officers as additional retention incentives and to provide severance benefits to these officers
that are more closely equivalent to severance benefits already in place for other executive
officers.
37
These additional agreements consist of (a) change of control severance agreements (Change of
Control Severance Agreement) and b) ordinary severance agreements that apply regardless of a
change of control (Ordinary Severance Agreement). Each Change of Control Severance Agreement
provides for a payment of certain benefits to the officer in the event their employment is
terminated without cause in connection with a change of control of the Company.
These benefits include one year of salary, plus the average bonus (if any) for the prior two
years and payment of health care premiums for one year. With certain exceptions, the officer must
be available for consulting services for one year and must abide by certain restrictive covenants,
including non-competition and non-solicitation of our employees. Each Ordinary Severance Agreement
provides for payment of six months salary in the event the officers employment is terminated
without cause, regardless of change of control.
Additionally, in October 2006, we implemented a 2006 Employee Severance Plan for those
employees who were not covered by another severance arrangement. The plan provides that if such an
employee is involuntarily terminated without cause, and not offered a similar or better job by one
of the purchasers of our product lines (i.e. King or Eisai) such employee will be eligible for
severance benefits. The benefits consist of two months salary, plus one week of salary for every
full year of service with the Company plus payment of COBRA health care coverage premiums for that
same period.
Conversion/Redemption of 6% Convertible Subordinated Notes
On October 30, 2006, we gave notice of redemption to the noteholders of our 6% convertible
subordinated notes due November 2007. The redemption date of the notes has been set for November
29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into
shares of our common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of
the notes (approximately $6.17 per share). Based on our current stock price, we expect that the
majority of the notes will be converted into shares of Ligand common stock. The $128.2 million of
principal amount of the notes outstanding may be converted into approximately 20.8 million shares
of common stock. We will pay the holders of those notes that are not converted into shares a
redemption price equal to 101.2% of the outstanding principal amount plus accrued and unpaid
interest.
Lilly Collaboration Update
In May 2006, after review of all preclinical and clinical data including recently completed
two year animal safety studies, Lilly informed us that it had decided not to pursue further
development at this time of LY818 (Naveglitazar), a compound in Phase II development for the
treatment of Type II diabetes. Naveglitazar, a dual PPAR agonist, was developed through our
collaborative research and development agreement with Lilly. This decision is specific with regard
to Naveglitazar.
In September 2006, Lilly informed us that it had suspended an ongoing mid-stage human trial of
LY674 in order to assess unexpected findings noted during animal safety studies of the same
compound and evaluate collective clinical efficacy and safety from the human data already gathered.
LY674, a PPAR alpha agonist compound in Phase II development for the treatment of atherosclerosis,
was developed through our collaborative research and development agreement with Lilly. This
decision is specific with regard to LY674.
Agreements to Settle Securities Class Action and Derivative Lawsuits
On June 29, 2006, we announced that we reached agreement to settle the securities class action
litigation filed in the United States District Court for the Southern District of California
against us and certain of our directors and officers. In addition, we also reached agreement to
settle the shareholder derivative actions filed on behalf of the Company in the Superior Court of
California and the United States District Court for the Southern District of California.
The settlements resolve all claims by the parties, including those asserted against Ligand and
the individual defendants in these cases. Under the agreements, we agreed to pay a total of $12.2
million in cash in full settlement of all claims. $12.0 million of the settlement amount and a
portion of our total legal expenses was funded by our Directors and Officers Liability insurance
carrier while the remainder of the legal fees incurred ($1.4 million for the
38
three months ended June 30, 2006) was paid by us. Of the $12.2 million settlement liability,
$4.0 million was paid in October 2006 to us directly from the insurance carrier and then disbursed
to the claimants attorneys, while $8.0 million will be paid by the insurance carrier directly to
an independent escrow agent responsible for disbursing the funds to the class action suit
claimants. In July 2006, our insurance carrier funded the escrow account with the $8.0 million to
be disbursed to the claimants. Under SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, funding of the escrow account represents the
extinguishment of our liability to the claimants. Accordingly, we derecognized the $8.0 million
receivable and accrued liability in our consolidated financial statements as of September 30, 2006.
As part of the settlement of the state derivative action, we have agreed to adopt certain corporate
governance enhancements including the formalization of certain Board practices and
responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with
gradual phase-in) and one-time enhanced independent requirements for a single director to succeed
the current shareholder representatives on the Board. Neither we nor any of our current or former
directors and officers has made any admission of liability or wrongdoing. On October 12, 2006, the
Superior Court of California approved the settlement of the state derivative actions and entered
final judgment of dismissal. The United States District Court has preliminarily approved the
settlement of the Federal class action, however, that settlement and the settlement of the Federal
derivative actions are all subject to final approval and orders of the court.
The related investigation by the Securities and Exchange Commission is ongoing and is not
affected by the settlements discussed above.
Resignation of CEO and Appointment of New Interim CEO
On July 31, 2006, we entered into a separation agreement with David Robinson providing for Mr.
Robinsons resignation as Chairman, President, and Chief Executive Officer of the Company. Under
the separation agreement, Mr. Robinson will receive his base salary and certain benefits for 24
months, payable in five equal monthly installments beginning August 1, 2006 and ending December 1,
2006. In addition, the agreement provides for the immediate vesting of Mr. Robinsons unvested
stock options and an extension of the exercise period of his options to January 15, 2007. In
connection with the resignation, we recognized expense of approximately $1.9 million for the three
months ended September 30, 2006 comprised of cash payments of $1.4 million and stock-based
compensation of $0.5 million associated with the modification of the vesting and exercise period of
the stock options.
On August 1, 2006, we announced that current director Henry F. Blissenbach had been named
Chairman and interim Chief Executive Officer. We have agreed to pay Dr. Blissenbach $40,000 per
month, commencing August 1, 2006, subject to cancellation by either party on thirty days notice,
for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach
will be eligible to receive incentive compensation of up to 50% of his base salary, but not more
than $100,000, based upon his performance of certain objectives incorporated within the employment
agreement which we and Dr. Blissenbach have entered into. Also, Dr. Blissenbach received a stock
option grant to purchase 150,000 shares of our common stock at an exercise price of $9.20 per
share. These stock options will vest 50% at the end of six months and the remaining 50% will vest
at the end of one year, except that all of these stock options will vest upon the appointment of a
new chief executive officer. Finally, we will reimburse Dr. Blissenbach for all reasonable
expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not
limited to commuting costs to San Diego and living and related costs during the time he spends in
San Diego.
Salk Royalty Buyout
In August 2006, we paid the Salk Institute $0.8 million to exercise an option to buy out
milestone payments, other payment sharing obligations and royalty payments due on future sales of
bazedoxifene, a product being developed by Wyeth. This payment resulted from a bazedoxifene new
drug application (NDA) filed by Wyeth for postmenopausal osteoporosis therapy. We recognized the
$0.8 million payment as development expense in our third quarter 2006 consolidated financial
statements.
39
Results of Continuing Operations
Total revenues from continuing operations for the three and nine months ended September 30,
2006 were $36.7 million and $106.8 million compared to $32.0 million and $87.3 million,
respectively, for the same 2005 periods. Operating loss from continuing operations was $15.1
million and $173.7 million for the three and nine months ended September 30, 2006 compared to $4.6
million and $20.1 million, respectively, for the same 2005 periods. Loss from continuing
operations for the three and nine months ended September 30, 2006 was $16.1 million ($0.21 per
share) and $176.5 million ($2.26 per share) compared to
$7.3 million ($0.10 per share) and $27.8
million ($0.38 per share) for the same 2005 periods.
Product Sales
Our product sales for any individual period can be influenced by a number of factors including
changes in demand, competitive products, the timing of announced price increases, and the level of
prescriptions subject to rebates and chargebacks. Additionally, AVINZA is included on the
formularies (or lists of approved and reimbursable drugs) of many states health care plans, as
well as the formulary for certain Federal government agencies. In order to be placed on these
formularies, we generally sign contracts which provide discounts to the purchaser off the
then-current list price and limit how much of an annual price increase we can implement on sales to
these groups. As a result, the discounts off list price for these groups can be significant for
products where we have implemented list price increases. We monitor the portion of our sales
subject to these discounts, and accrue for the cost of these discounts at the time of the
recognition of product sales. We believe that by being included on these formularies, we will gain
better physician acceptance, which will then result in greater overall usage of our products. If
the relative percentage of our sales subject to these discounts increases materially in any period,
our sales and gross margin could be substantially lower than historical levels.
Net Product Sales
Our AVINZA product sales are determined on a sell-through basis less allowances for rebates,
chargebacks, discounts, and losses to be incurred on returns from wholesalers resulting from
increases in the selling price of our products. In addition, we incur certain distributor service
agreement fees related to the management of our product by wholesalers. These fees have been
recorded within net product sales.
Sales of AVINZA were $36.7 million and $102.9 million for the three and nine months ended
September 30, 2006 compared to $29.9 million and $79.4 million, respectively, for the same 2005
periods. According to IMS data, quarterly prescription market share of AVINZA for the three months
ended September 30, 2006 was 3.7% compared to 4.5% for the same 2005 period.
The increase in sales for the three and nine months ended September 30, 2006 reflects the
impact of a 7% price increase effective April 1, 2005, as well as a shift in the mix of
prescriptions to the higher doses of AVINZA. Net sales for the three and nine months ended
September 30, 2006 also benefited from the release of a $1.5 million accrual previously recorded
for billings received from the Department of Veteran Affairs under the Department of Defenses
TriCare Retail Pharmacy refund program. In September 2006, the U.S. Court of Appeals for the
Federal Circuit struck down the TriCare program. The increase in AVINZA net sales for the three and
nine months ended September 30, 2006 further reflects a reduction in Medicaid rebates of
approximately $4.3 million and $11.2 million, respectively. This reduction was partially offset by
an increase in managed care rebates of approximately $1.0 million for the nine months ended
September 30, 2006 under contracts with pharmacy benefit managers (PBMs), group purchasing
organizations (GPOs), and health maintenance organizations (HMOs), and under Medicare Part D.
The increases in AVINZA net sales for the 2006 periods was partially offset by decreases in
prescriptions. Specifically, net sales for the nine months ended September 30, 2006 reflect an
approximate 2% decrease in prescriptions compared to the prior year period while prescriptions for
the three months ended September 30, 2006 experienced an 8% decrease compared to the three months
ended September 30, 2005. Additionally, prescriptions for the three months ended September 30,
2006 were 3% lower compared to the three months ended June 30, 2006. These trends reflect a
continuing decrease in prescriptions under Medicaid contracts as marginal Medicaid contracts are
terminated, partially offset by increases in prescriptions under managed care contracts and
Medicare Part D. We
40
also believe that the decrease in prescriptions is due in part to a lower
level of co-promote activity in the third quarter of 2006, as our co-promotion arrangement with
Organon reached its conclusion effective September 30, 2006.
AVINZA net sales for the nine months ended September 30, 2006 also reflect an approximate
charge of $2.1 million for losses expected to be incurred on product returns resulting from a 6%
price increase effective July 1, 2006. This compares to a charge of $3.5 million recorded for the
three months ended March 31, 2005 in connection with a 7% AVINZA price increase effective April 1,
2005. Upon an announced price increase, we revalue our estimate of deferred product revenue to be
returned to recognize the potential higher credit a wholesaler may take upon product return
determined as the difference between the new price and the previous price used to value the
allowance. The decrease in the charge for the 2006 period reflects lower rates of return on lots
that closed out in 2006, thereby lowering the historical weighted average rate of return used for
estimating the allowance for return losses. AVINZA net sales for the three and nine months ended
September 30, 2006, also benefited from a reduction in the existing allowance for return losses of
$0.5 million and $3.5 million, respectively, due to the lower rates of return on lots that closed
in 2006.
Any changes to our estimates for Medicaid prescription activity or prescriptions written under
our managed care contracts may have an impact on our rebate liability and a corresponding impact on
AVINZA net product sales. For example, a 20% variance to our estimated Medicaid and managed care
contract rebate accruals for AVINZA as of September 30, 2006 could result in adjustments to our
Medicaid and managed care contract rebate accruals and net product sales of approximately $0.1
million and $0.8 million, respectively.
As discussed under Recent Developments, we entered into an agreement to sell the AVINZA
product to King following Ligand shareholder approval. In connection with that agreement, the
Company entered into a Contract Sales Force Agreement (the Sales Agreement) with King, pursuant
to which King agreed to conduct a detailing program to promote the sale of AVINZA for an agreed
upon fee, subject to the terms and conditions of the Sales Agreement. Pursuant to the Sales
Agreement, King agreed to perform certain minimum monthly product details (i.e. sales calls), which
commenced effective October 1, 2006 and will continue for a period of six months following such
date or until the closing or earlier termination of the purchase agreement. We estimate that,
assuming the Closing were to occur at the end of December 2006, the amount due to King under the
Sales Agreement would be approximately $4.0 million.
Collaborative Research and Development and Other Revenue
We earned no collaborative research and development and other revenues for the three months
ended September 30, 2006, compared to $2.1 million for the same 2005 period. For the nine months
ended September 30, 2006, collaborative research and development and other revenues were $4.0
million, compared to $7.9 million for the same 2005 period. Collaborative research and development
and other revenues include reimbursement for ongoing research activities, earned development
milestones, and recognition of prior years up-front fees previously deferred in accordance with
Staff Accounting Bulletin (SAB) No. 101Revenue Recognition, as amended by SAB 104. Revenue
from distribution agreements includes recognition of up-front fees collected upon contract signing
and deferred over the life of the distribution arrangement and milestones achieved under such
agreements.
A comparison of collaborative research and development and other revenues is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Collaborative research and development |
|
$ |
|
|
|
$ |
894 |
|
|
$ |
1,678 |
|
|
$ |
2,618 |
|
Development milestones and other |
|
|
|
|
1,201 |
|
|
2,299 |
|
|
5,326 |
|
|
|
$ |
|
|
|
$ |
2,095 |
|
|
$ |
3,977 |
|
|
$ |
7,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Collaborative Research and Development
The decrease in collaborative research and development revenue for the three and nine months
ended September 30, 2006 compared to the prior year periods is due to the completion of the
research phase of our collaborative arrangement with TAP, which concluded in June 2006.
Development milestones and other
Development milestones for the nine months ended September 30, 2006 period reflect a milestone
of $2.0 million earned in the three months ended March 31, 2006 from GlaxoSmithKline in connection
with the commencement of Phase III studies of eltrombopag and a $0.3 million milestone earned in
the three months ended June 30, 2006 from Wyeth in connection with the filing of an NDA for
bazedoxifene. This compares to milestones earned in the nine months
ended September 30, 2005 of $3.0
million from GlaxoSmithKline, $1.2 million from Lilly and $1.1 million from TAP.
Gross Margin
Gross margin on product sales was 84.2% for the three months ended September 30, 2006 compared
to 78.5% for the same 2005 period. For the nine months ended September 30, 2006, gross margin on
product sales was 83.7% compared to 77.3% for the same 2005 period. The improvement in the gross
margin percentages for the 2006 periods reflects the impact of a 7% price increase effective April
1, 2005. Under the sell-through revenue recognition method, changes to prices do not impact net
product sales and therefore gross margins until the product sells through the distribution channel.
Accordingly, the price increases did not have a full period impact on the margins for the three
and nine months ended September 30, 2005. Additionally, as further discussed above under Net
Product Sales, net sales and therefore the gross margin percentage benefited from: 1) the impact
of lower Medicaid rebates; 2) lower net charges related to the impact of price increases on
expected returns; and 3) the release of an accrual in the third quarter of 2006 related to a court
ruling by the U.S. Court of Appeals against the Department of Defenses TriCare Retail Pharmacy
refund program.
Furthermore, cost of sales in terms of absolute dollars decreased in the 2006 periods compared
to the 2005 periods due primarily to a decrease in the number of prescriptions of 8% and 2% for the
three and nine months ended September 30, 2006 relative to the prior year periods.
Research and Development Expenses
Research and development expenses were $10.5 million and $29.0 million, respectively, for the
three and nine months ended September 30, 2006 compared to $7.9 million and $23.8 million for the
same 2005 periods. The major components of research and development expenses are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Research |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research performed under collaboration agreements |
|
$ |
|
|
|
$ |
816 |
|
|
$ |
1,968 |
|
|
$ |
2,777 |
|
Internal research programs |
|
|
5,631 |
|
|
|
5,133 |
|
|
|
15,522 |
|
|
|
15,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research |
|
|
5,631 |
|
|
|
5,949 |
|
|
|
17,490 |
|
|
|
18,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New product development |
|
|
3,709 |
|
|
|
53 |
|
|
|
8,610 |
|
|
|
746 |
|
Existing product support (1) |
|
|
1,128 |
|
|
|
1,918 |
|
|
|
2,913 |
|
|
|
4,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development |
|
|
4,837 |
|
|
|
1,971 |
|
|
|
11,523 |
|
|
|
5,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development |
|
$ |
10,468 |
|
|
$ |
7,920 |
|
|
$ |
29,013 |
|
|
$ |
23,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes costs incurred to comply with post-marketing regulatory commitments. |
Spending for research expenses was $5.6 million and $17.5 million, respectively, for the three
and nine months ended September 30, 2006 compared to $5.9 million and $18.3 million for the same
2005 periods. The decrease in research expenses for the three and nine months ended September 30,
2006 compared to the same 2005 periods
42
primarily reflects decreased research expenses incurred
under our collaboration arrangement with TAP which concluded in June 2006.
Spending for development expenses increased to $4.8 million and $11.5 million, respectively,
for the three and nine months ended September 30, 2006 compared to $2.0 million and $5.5 million
for the same 2005 periods. These increases reflect a higher level of expense for new product
development partially offset by a lower level of expense in existing product support. The increase
in spending on new product development was primarily due to the increase in LGD4665 thrombopoietin
(TPO) and LGD5552 (Glucocorticoid agonist) expenses as our lead drug candidates in these areas were
moved to IND track. The decreases in the 2006 periods for existing product support are due to
lower product support for our AVINZA product.
A summary of our significant internal research and development programs for continuing
operations is as follows:
|
|
|
|
|
Program |
|
Disease/Indication |
|
Development Phase |
AVINZA
|
|
Chronic, moderate-to-severe pain
|
|
Marketed in U.S.
Phase IV |
|
|
|
|
|
LGD4665 (Thrombopoietin oral mimic)
|
|
Idiopathic
Thrombocytopenia (ITP),
other Thrombocytopenias
|
|
IND Track |
|
|
|
|
|
LGD5552 (Glucocorticoid agonists)
|
|
Inflammation, cancer
|
|
IND Track |
|
|
|
|
|
Selective androgen receptor modulators,
e.g., LGD3303 (agonist/antagonist)
|
|
Male hypogonadism, female
& male osteoporosis, male
& female sexual
dysfunction, frailty.
Prostate cancer,
hirsutism, acne,
androgenetic alopecia.
|
|
Pre-clinical |
We do not provide forward-looking estimates of costs and time to complete our ongoing research
and development projects, as such estimates would involve a high degree of uncertainty.
Uncertainties include our ability to predict the outcome of complex research, our ability to
predict the results of clinical studies, regulatory requirements placed upon us by regulatory
authorities such as the FDA and EMEA, our ability to predict the decisions of our collaborative
partners, our ability to fund research and development programs, competition from other entities of
which we may become aware in future periods, predictions of market potential from products that may
be derived from our research and development efforts, and our ability to recruit and retain
personnel or third-party research organizations with the necessary knowledge and skills to perform
certain research. Refer to Risk Factors below for additional discussion of the uncertainties
surrounding our research and development initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense was $20.1 million and $58.1 million, respectively,
for the three and nine months ended September 30, 2006 compared to $14.5 million and $43.1 million
for the same 2005 periods. The increase is due primarily to legal costs (incurred in connection
with the ongoing SEC investigation, shareholder litigation and our strategic alternatives process)
which increased by approximately $2.0 million and $6.0 million for the three and nine months ended
September 30, 2006 compared to the prior year periods. In June 2006, we announced that we had
reached a settlement with the plaintiffs in the Companys shareholder litigation. The amounts to
be paid to the plaintiffs and the plaintiffs attorneys and a portion of our legal expenses
incurred in connection with the shareholder litigation were covered by proceeds provided under our
Directors and Officers (D&O) Liability insurance.
General and administrative expenses were also higher for the three and nine months ended
September 30, 2006 due to higher audit and consultant fees in connection with the completion of the
Companys assessment of internal controls as of December 31, 2005 under the Sarbanes-Oxley Act and
consultant costs incurred in the second and third quarters of 2006 in connection with our 2006 SOX
compliance program. A significant portion of the
43
Companys 2005 assessment of internal controls
was performed in 2006 due to the fact that the restatement of our financial statements was not
completed until late 2005.
In addition, general and administrative expenses for the three months ended September 30, 2006
include expenses of approximately $1.6 million for investment banker fees related to the oncology
product sale transaction with Eisai and the AVINZA product sale transaction with King, as well as
approximately $1.9 million of expenses in connection with the resignation of the Companys CEO.
(Refer to Recent Developments above).
In addition, AVINZA advertising and promotion expenses increased in the three and nine months
ended September 30, 2006 compared to the prior year periods when Ligand and Organon shared equally
all AVINZA promotion expenses. As part of the AVINZA termination and return of rights agreement
entered into in January 2006, discussed under Overview above, we are now responsible for all
AVINZA advertising and promotion expenses. This increase was partially offset by lower selling
expenses due to a reduction in our AVINZA primary care sales force.
We expect selling, general and administrative expenses to continue to be higher through the
remainder of 2006 compared to the prior year due to the ongoing cost of compliance with the
Sarbanes-Oxley Act, legal and consultant expenses in connection with the SEC investigation and
strategic alternatives process and the expenses to be recognized in connection with the employee
retention agreements discussed under Recent Developments above. These increases are expected to
be partially offset by lower sales force expenses as a result of the reduction in our AVINZA
primary care sales force.
Co-promotion Expense and Co-promote Termination Charges
Co-promotion expense due Organon amounted to $11.8 million and $33.7 million, respectively,
for the three and nine months ended September 30, 2006 compared to $7.8 million and $22.5 million
for the same 2005 periods. As discussed under Overview above, in connection with the AVINZA
termination and return of co-promote rights agreement with Organon, we agreed to pay Organon 23% of
net AVINZA product sales through September 30, 2006 as compensation for promotion of the product
during the Transition Period. This compares to
co-promote expense in the prior year period which was based on 30% of net sales, as per the
original co-promotion agreement, determined using the sell-in method of revenue recognition.
Co-promotion expense for the three and nine months ended September 30, 2006 also includes $3.3
million and $10.0 million, respectively, which represents the pro-rata accrual of a $10.0 million
payment we agreed to make to Organon, provided that Organon achieves its required level of sales
calls during the Transition Period. This payment represents an approximation of the fair value of
the service element under the agreement during the Transition Period (when the provision to pay 23%
of AVINZA net sales is also considered) and, therefore, is recognized as an additional component of
co-promotion expense ratably over the Transition Period.
Co-promote termination charges recognized for the three and nine months ended September 30,
2006 were $3.6 million and $143.0 million, respectively. The expense for the nine months ended
September 30, 2006 includes a $37.8 million payment we agreed to make to Organon in October 2006
and the fair value of subsequent quarterly payments, estimated at approximately $95.2 million as of
January 1, 2006, that we will make to Organon based on net product sales of AVINZA, through
November 2017. The co-promote termination charge for the three and nine months ended September 30,
2006 also includes expense of approximately $3.6 million and $10.4 million, respectively, to
reflect the fair value of the liability as of September 30, 2006. Note that for the three month
periods ended March 31, 2006 and June 30, 2006, this adjustment was presented as a component of
interest expense. For the nine months ended September 30, 2006, such amounts previously reported
as interest expense were properly reclassified to co-promote termination charges in accordance
with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities.
In connection with the planned sale of AVINZA to King, as further discussed under Recent
Developments, King will assume responsibility for the $37.8 million paid to Organon in October
2006 and the royalty obligation to make payments to Organon based on AVINZA net product sales.
44
Interest Expense
Interest expense was $2.5 million and $7.9 million for the three and nine months ended
September 30, 2006, respectively, compared to $3.1 million and $9.2 million for the same 2005
periods. A comparison of interest expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Interest on 6% Convertible Subordinated Notes |
|
$ |
1,922 |
|
|
$ |
2,329 |
|
|
$ |
5,857 |
|
|
$ |
6,987 |
|
Other interest |
|
|
625 |
|
|
|
789 |
|
|
|
2,063 |
|
|
|
2,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,547 |
|
|
$ |
3,118 |
|
|
$ |
7,920 |
|
|
$ |
9,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The lower interest expense on the 6% Convertible Subordinated Notes is due to the conversion
of a portion of such notes during the six months ended June 30, 2006 as discussed further under
Recent Developments. There were no conversions during the three months ended September 30, 2006.
In connection with the planned sale of AVINZA to King, we are required to redeem or convert to
common stock the outstanding 6% convertible subordinated notes, which is expected to occur on or
before November 29, 2006. Accordingly, we expect interest expense on the notes to be lower in the
fourth quarter of 2006 compared to prior period quarters. If the notes are redeemed, however, we
will record a charge related to the premium to be paid upon redemption of approximately $1.5
million.
Discontinued Operations
Income from discontinued operations was $1.2 million and $3.4 million for the three and nine
months ended September 30, 2006, respectively, compared to $1.0 million for the three months ended
September 30, 2005 and a loss from discontinued operations of $5.9 million for the nine months
ended September 30, 2005. The following
table summarizes results from discontinued operations for the three and nine months ended
September 30, 2006 and 2005 included in the condensed consolidated statements of operations (in
thousands):
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
Product sales |
|
$ |
13,292 |
|
|
$ |
12,676 |
|
|
$ |
42,457 |
|
|
$ |
39,997 |
|
Collaborative research and development
and other revenues |
|
|
75 |
|
|
|
77 |
|
|
|
188 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
13,367 |
|
|
|
12,753 |
|
|
|
42,645 |
|
|
|
40,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
3,410 |
|
|
|
3,385 |
|
|
|
12,448 |
|
|
|
13,552 |
|
Research and development |
|
|
4,166 |
|
|
|
4,991 |
|
|
|
11,734 |
|
|
|
18,383 |
|
Selling, general and administrative |
|
|
3,722 |
|
|
|
3,303 |
|
|
|
12,688 |
|
|
|
14,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
11,298 |
|
|
|
11,679 |
|
|
|
36,870 |
|
|
|
45,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,069 |
|
|
|
1,074 |
|
|
|
5,775 |
|
|
|
(5,724 |
) |
Interest expense |
|
|
(1 |
) |
|
|
(54 |
) |
|
|
(51 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,068 |
|
|
|
1,020 |
|
|
|
5,724 |
|
|
|
(5,806 |
) |
Income tax expense |
|
|
(845 |
) |
|
|
(17 |
) |
|
|
(2,342 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,223 |
|
|
$ |
1,003 |
|
|
$ |
3,382 |
|
|
$ |
(5,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales were $13.3 million and $42.5 million for the three and nine months ended
September 30, 2006 compared to $12.7 million and $40.0 million, respectively, for the same 2005
periods. The increase in product sales for each period is primarily due to increases in sales of
Targretin capsules from increased demand and the effect of prices increases. These increases are
partially offset by lower net product sales of ONTAK due to lower demand.
Total operating costs and expenses were $11.3 million and $36.9 million for the three and nine
months ended September 30, 2006 compared to $11.7 million and $46.0 million, respectively, for the
same 2005 periods. These decreases are primarily due to decreased research expenses across several
Oncology research programs, decreased development expenses for existing Oncology product support
(primarily a reduced level of spending on Phase III clinical trials for Targretin capsules in
non-small cell lung cancer (NSCLC)), and lower promotion expenses for the Oncology products
compared to the prior year periods.
The net loss from discontinued operations for the nine months ended September 30, 2005
reflects the significant development costs incurred on the NSCLC trials for Targretin capsules
which concluded in early 2005.
Liquidity and Capital Resources
We have financed our operations through private and public offerings of our equity securities,
collaborative research and development and other revenues, issuance of convertible notes, product
sales, capital and operating lease transactions, accounts receivable factoring and equipment
financing arrangements, and investment income.
Working capital was a deficit of $161.9 million at September 30, 2006 compared to a deficit of
$102.2 million at December 31, 2005. Cash, cash equivalents, short-term investments and restricted
investments totaled
$33.7 million at September 30, 2006 compared to $88.8 million at December 31, 2005. We
primarily invest our cash in United States government and investment grade corporate debt
securities. Restricted investments consist of certificates of deposit held with a financial
institution as collateral under equipment financing and third-party service provider arrangements.
46
Operating Activities
Operating activities used cash of $54.5 million for the nine months ended September 30, 2006
compared to $3.7 million for the same 2005 period. The use of cash for the nine months ended
September 30, 2006 reflects a higher net loss including the effect of a higher adjustment for
non-cash operating expenses for the 2006 period. Non-cash operating expense for the nine months
ended September 30, 2006 includes the recognition of $4.0 million of stock-based compensation
expense in connection with the adoption of SFAS123(R) and option grants to non-employees. The
higher use of cash for the 2006 period is further impacted by changes in operating assets and
liabilities due to decreases in deferred revenues, net of $50.5 million and accounts payable and
accrued liabilities of $5.8 million and an increase in inventories, net of $0.5 million, partially
offset by decreases in accounts receivable, net of $13.9 million and other current assets of $2.0
million. The decrease in deferred revenue and accounts receivable are primarily due to lower
shipments of Avinza during the three months ended September 30, 2006. The AVINZA Purchase Agreement
with King provides for a reduction in the purchase price to the extent that product inventories in
the wholesale and retail distribution channels are in excess of specified amounts. Accordingly, we
reduced shipments of AVINZA in the month of September 2006. We expect that shipments of AVINZA in
the fourth quarter of 2006 will likewise be lower until the targeted inventory levels are achieved.
As further discussed below, the reconciliation of net loss to net cash used in operating
activities for the nine months ended September 30, 2006 compared to the prior year period also
reflects the accrual of the AVINZA co-promote termination liability due Organon of $143.0 million
in connection with the termination and return of rights agreement entered into in January 2006. In
consideration of the early termination and return of rights under the terms of the agreement, we
agreed to pay Organon $37.8 million on or before October 15, 2006. We will further pay Organon
$10.0 million on or before January 15, 2007, provided that Organon has made its minimum required
level of sales calls. Under certain conditions, including closing of the planned sale of AVINZA to
King, the $10.0 million cash payment will accelerate. In addition, after the termination, we
agreed to make quarterly payments to Organon equal to 6.5% of AVINZA net sales through December 31,
2012 and thereafter 6.0% through patent expiration, currently anticipated to be November 2017. In
connection with the planned AVINZA purchase by King, King will assume our outstanding obligations
to Organon including reimbursing us for the $37.8 million paid to Organon in October 2006.
For the same 2005 period, use of operating cash was impacted by the changes in operating
assets and liabilities primarily due to decreases in accounts receivable, net of $6.5 million and
other current assets of $5.0 million and increases in deferred revenue, net of $5.5 million and
accounts payable and accrued liabilities of $2.3 million, partially offset by an increase in
inventories, net of $3.1 million.
The use of cash from operating activities of $54.5 million for the nine months ended September
30, 2006 includes $4.5 million used in discontinued operations. The use of cash from operating
activities of $3.7 million for the nine months ended September 30, 2005 includes $3.8 million used
in discontinued operations.
Investing Activities
Investing activities used cash of $2.9 million for the nine months ended September 30, 2006
compared to the use of cash of $38.8 million for the same 2005 period. The use of cash for the
nine months ended September 30, 2006 primarily reflects purchases of property and equipment of $1.6
million and purchases of short-term investments of $18.3 million, partially offset by proceeds from
the sale of short-term investments of $17.0 million. The use of cash for the nine months ended
September 30, 2005 reflects a $33.0 million payment for the buy-down of ONTAK royalty payments in
connection with the amended royalty agreement entered into in November 2004 between the Company and
Lilly, $3.5 million of net purchases of short-term investments, $1.8 million of purchases of
property and equipment, and a $0.6 million capitalized payment to The Salk Institute for the
exercise of an option to buy out royalty payments due on future sales of lasofoxifene for a second
indication.
The use of cash from investing activities of $2.9 million for the nine months ended September
30, 2006 includes $0.1 million used in discontinued operations. The use of cash from investing
activities of $38.8 million for the nine months ended September 30, 2005 includes $33.0 million
used in discontinued operations for the buy-down of the ONTAK royalty payments.
47
Financing Activities
Financing activities provided cash of $0.6 million for the nine months ended September 30,
2006 compared to the use of cash of $0.2 million for the same 2005 period. Cash provided by
financing activities for the nine months ended September 30, 2006 includes proceeds from the
issuance of common stock of $2.0 million (primarily from the exercise of employee stock options)
partially offset by net payments under equipment financing arrangements of $1.0 million and the
repayment of long-term debt of $0.3 million. Cash used in financing activities for the nine months
ended September 30, 2005 includes net payments under equipment financing arrangements of $0.8
million and the repayment of long-term debt of $0.2 million, partially offset by proceeds from the
exercise of employee stock options of $0.9 million. None of the changes in cash from financing
activities for the nine months ended September 30, 2006 and 2005 pertain to discontinued
operations.
Certain of our property and equipment is pledged as collateral under various equipment
financing arrangements. As of September 30, 2006, $4.9 million was outstanding under such
arrangements with $2.2 million classified as current. Our equipment financing arrangements have
terms of 3 to 4 years with interest ranging from 7.35% to 10.11%.
On October 25, 2006, we, along with our wholly-owned subsidiary Nexus entered into an
agreement with Slough for the sale of the Companys real property located in San Diego, California.
In connection with the sale transaction, on November 6, 2006, we paid off the existing mortgage on
the building of approximately $11.6 million. The early payment triggered a prepayment penalty of
approximately $0.4 million. The sale transaction subsequently closed on November 9, 2006.
On October 30, 2006, we gave notice of redemption to the noteholders of our 6% convertible
subordinated notes due November 2007. The redemption date of the notes has been set for November
29, 2006. The noteholders may elect to convert the 6% notes, on or before November 29, 2006, into
shares of our common stock at a conversion rate of 161.9905 shares per $1,000 principal amount of
the notes (approximately $6.17 per share). Based on our current stock price, we expect that the
majority of the notes will convert into shares of Ligand common stock in lieu of cash. The $128.2
million of principal amount of the notes outstanding may be converted into approximately 20.8
million shares of common stock. We will pay the holders of those notes that are not converted into
shares a redemption price equal to 101.2% of the outstanding principal amount plus accrued and
unpaid interest.
We believe our available cash, cash equivalents, short-term investments and existing sources
of funding will be sufficient to satisfy our anticipated operating and capital requirements through
at least the next 12 months. Our future operating and capital requirements will depend on many
factors, including: the effectiveness of our commercial activities during the transition period of
our contract sales agreement with King, which was initiated on October 1, 2006; the pace of
scientific progress in our research and development programs; the magnitude of these programs; the
scope and results of preclinical testing and clinical trials; the time and costs involved in
obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims; competing technological and market developments; the efforts of our
collaborators; and the cost of production. We will also consider additional equipment financing
arrangements similar to arrangements currently in place.
Pursuant to the Oncology Purchase Agreement, at closing on October 25, 2006, we received
approximately $205.0 million in cash of which $20.0 million was funded into an escrow account to
support any indemnification claims made by Eisai following the closing of the sale. In addition,
and as a condition of the $37.8 million loan received from King, $38.6 million of the funds
received from Eisai was deposited into a restricted account to be used to repay the loan plus
interest, due January 1, 2007.
Pursuant to the AVINZA Purchase Agreement, at Closing, we expect to receive a cash payment of
approximately $265.0 million, subject to adjustment based on certain closing conditions. Of the
amount received, $15.0 million will be funded into an escrow account to support any indemnification
claims made by King.
We have announced that the Board of Directors is considering an extraordinary dividend of a
substantial portion of the net proceeds from our product line asset sales. However, other than
this extraordinary dividend, we do not anticipate paying cash dividends on any of our securities in
the foreseeable future.
48
Leases and Off-Balance Sheet Arrangements
We lease certain of our office and research facilities under operating lease arrangements with
varying terms through July 2015. The agreements provide for increases in annual rents based on
changes in the Consumer Price Index or fixed percentage increases ranging from 3% to 7%.
In connection with our sale of real property discussed above, we entered into an agreement
with Slough to leaseback the building for a period of 15 years. Under the terms of the lease, we
will pay a basic annual rent of $3.0 million (subject to an annual fixed percentage increase, as
set forth in the agreement), plus a 1% annual management fee, property taxes and other normal and
necessary expenses associated with the lease such as utilities, repairs and maintenance, etc. We
will have the right to extend the lease for two five-year terms and will have the first right of
refusal to lease, at market rates, any facilities built on the sold lots.
As of September 30, 2006, we are not involved in any off-balance sheet arrangements.
Contractual Obligations
As of September 30, 2006, future minimum payments due under our contractual obligations are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
After 5 years |
|
Capital lease obligations (1) |
|
$ |
5,394 |
|
|
$ |
2,483 |
|
|
$ |
2,732 |
|
|
$ |
179 |
|
|
$ |
¾ |
|
Operating lease obligations (11) |
|
|
19,159 |
|
|
|
2,888 |
|
|
|
4,163 |
|
|
|
3,919 |
|
|
|
8,189 |
|
Loan payable to bank (2)(8) |
|
|
13,107 |
|
|
|
1,191 |
|
|
|
11,916 |
|
|
|
¾ |
|
|
|
¾ |
|
6% Convertible Subordinated Notes (3)(9) |
|
|
137,035 |
|
|
|
7,689 |
|
|
|
129,346 |
|
|
|
¾ |
|
|
|
¾ |
|
Organon termination liability (4)(5)(10) |
|
|
271,371 |
|
|
|
48,833 |
|
|
|
30,304 |
|
|
|
41,518 |
|
|
|
150,716 |
|
Other liabilities (6)(11) |
|
|
538 |
|
|
|
106 |
|
|
|
211 |
|
|
|
211 |
|
|
|
10 |
|
Retention bonus obligation (7)(11) |
|
|
2,979 |
|
|
|
2,979 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Distribution service agreements (11) |
|
|
10,003 |
|
|
|
10,003 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Consulting agreements (11) |
|
|
1,086 |
|
|
|
1,086 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Manufacturing agreements (11) |
|
|
8,351 |
|
|
|
8,351 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
469,023 |
|
|
$ |
85,609 |
|
|
$ |
178,672 |
|
|
$ |
45,827 |
|
|
$ |
158,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
Includes interest payments as follows |
|
$ |
546 |
|
|
$ |
333 |
|
|
$ |
206 |
|
|
$ |
7 |
|
|
$ |
|
|
(2 |
) |
|
|
Includes interest payments as follows |
|
|
1,523 |
|
|
|
828 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
Includes interest payments as follows |
|
|
8,885 |
|
|
|
7,689 |
|
|
|
1,196 |
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
Includes estimated accretion
adjustment to fair value as follows |
|
|
128,392 |
|
|
|
1,111 |
|
|
|
8,110 |
|
|
|
18,272 |
|
|
|
100,899 |
|
|
|
|
(5) |
|
Includes $37,750 paid to Organon in October 2006. |
|
(6) |
|
Includes a liability under a royalty financing agreement. |
|
(7) |
|
See Recent Developments Employee Retention and Severance Agreements. |
|
(8) |
|
Does not include impact of repayment of mortgage note on November 6, 2006 in connection with
sale and leaseback of premises as discussed in Recent Developments Sale and Leaseback of
Premises. |
|
(9) |
|
Does not include impact of conversion of notes as discussed in Recent Developments
Conversion/Redemption of 6% Convertible Subordinated Notes. |
|
(10) |
|
Does not include loan received from, or liabilities assumed by King in connection with AVINZA
sale as discussed in Recent Developments Sale of AVINZA Product. |
|
(11) |
|
Included in the table above are obligations related to discontinued operations totaling
approximately $9.3 million, comprised of distribution service agreements of $3.6 million,
consulting agreements of $0.5 million, manufacturing agreements of $3.0 million, auto leases
of $1.5 million, other liabilities of $0.5 million and retention bonus obligation of $0.2
million. |
49
As of September 30, 2006, we have net open purchase orders (defined as total open purchase
orders at quarter end less any accruals or invoices charged to or amounts paid against such
purchase orders) totaling approximately $15.0 million. For the 12 months ended December 31, 2006,
we plan to spend approximately $2.4 million on capital expenditures.
In January 2006, we signed an agreement with Organon that terminated the AVINZA co-promotion
agreement between the two companies and returned AVINZA co-promotion rights to Ligand. In
connection with this agreement, Organon was paid $37.8 million in October 2006. We are obligated
to pay Organon an additional $10.0 million on or before January 15, 2007, provided that Organon has
made its minimum required level of sales calls. After termination, we will make quarterly royalty
payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6.0%
through patent expiration, currently anticipated to be November 2017. In connection with the
planned AVINZA purchase by King, King will assume our outstanding obligations to Organon including
reimbursing us for the $37.8 million paid to Organon in October 2006.
In connection with the AVINZA sale transaction discussed under Overview, King committed to
loan us, at our option, $37.8 million (the Loan) to be used to pay our co-promote termination
obligation to Organon due in October 2006. This loan was drawn, and the $37.8 million co-promote
liability settled in October 2006. Amounts due under the loan are subject to certain market terms,
including a 9.5% interest rate and a security interest in the Companys assets other than those
related to AVINZA. In addition, and as a condition of the $37.8 million loan received from King,
$38.6 million of the funds received from Eisai was deposited into a restricted account to be used
to repay the loan to King, plus interest, due January 1, 2007. If the transaction with King closes
as contemplated by the AVINZA Purchase Agreement, the interest will be forgiven and the principal
will be credited against the purchase price.
In March 2006, we entered into letter agreements with approximately 67 of our key employees,
including a number of our executive officers. In September 2006, we entered into letter agreements
with ten additional key employees and modified existing agreements with two employees. These
letter agreements provide for certain retention or stay bonus payments to be paid in cash under
specified circumstances as an additional incentive to remain employed in good standing with the
Company. The Compensation Committee of the Board of Directors has approved the Companys entry
into these Agreements. The retention or stay bonus payments generally vest at the end of 2006 and
total payments to employees of approximately $3.0 million would be made in January 2007 if all
participants qualify for the payments. In accordance with SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, the cost of the plan is ratably accrued over the term
of the agreements. For the three and nine months ended September 30, 2006, we recognized
approximately $1.0 million and $2.1 million, respectively, of expense under the plan. As an
additional retention incentive, certain employees were also granted stock options totaling
approximately 122,000 shares at an exercise price of $11.90 per share.
In May 2006, Ligand and Cardinal Health PTS, LLC (Cardinal) entered into the First Amendment
to the Manufacturing and Packaging Agreement for the manufacturing of AVINZA. The amendment
principally adjusted certain contract dates, near-term minimum commitments and contract prices.
Under the terms of the amended agreement, we committed to minimum annual purchases ranging from
$0.8 million to $1.2 million for 2006; $2.2 million to $3.3 million for 2007; and $2.4 million to
$3.6 million for 2008 through 2010.
On June 29, 2006, we announced that we reached agreement to settle the securities class action
litigation filed in the United States District Court for the Southern District of California
against us and certain of our directors and officers. In addition, we also reached agreement to
settle the shareholder derivative actions filed on behalf of the Company in the Superior Court of
California and the United States District Court for the Southern District of California.
The settlements resolve all claims by the parties, including those asserted against Ligand and
the individual defendants in these cases. Under the agreements, we agreed to pay a total of $12.2
million in cash in full settlement of all claims. $12.0 million of the settlement amount and a
portion of our total legal expenses was funded by our Directors and Officers Liability insurance
carrier while the remainder of the legal fees incurred ($1.4 million for the three months ended
June 30, 2006) was paid by us. Of the $12.2 million settlement liability, $4.0 million was paid in
50
October 2006 to us directly from the insurance carrier and then disbursed to the claimants
attorneys, while $8.0 million will be paid by the insurance carrier directly to an independent
escrow agent responsible for disbursing the funds to the class action suit claimants. In July
2006, our insurance carrier funded the escrow account with the $8.0 million to be disbursed to the
claimants. Under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, funding of the escrow account represents the extinguishment of our
liability to the claimants. Accordingly, we derecognized the $8.0 million receivable and accrued
liability in our consolidated financial statements as of September 30, 2006.
As part of the settlement of the state derivative action, we have agreed to adopt certain
corporate governance enhancements including the formalization of certain Board practices and
responsibilities, a Board self-evaluation process, Board and Board Committee term limits (with
gradual phase-in) and one-time enhanced independence requirements for a single director to succeed
the current shareholder representatives on the Board. Neither we nor any of our current or former
directors and officers have made any admission of liability or wrongdoing. On October 12, 2006,
the Superior Court of California approved the settlement of the state derivative actions and
entered final judgment of dismissal. The United States District Court has preliminarily
approved the settlement of the Federal class action, however, that settlement and the settlement of
the Federal derivative actions are all subject to final approval and orders of the court. The
related investigation by the Securities and Exchange Commission is ongoing and is not affected by
the settlements discussed above.
On July 31, 2006, we entered into a separation agreement with David Robinson providing for Mr.
Robinsons resignation as Chairman, President, and Chief Executive Officer of the Company. Under
the separation agreement, Mr. Robinson will receive his base salary and certain benefits for 24
months, payable in five equal monthly installments beginning August 1, 2006 and ending December 1,
2006. In addition, the agreement provides for the immediate vesting of Mr. Robinsons unvested
stock options and an extension of the exercise period of his options to January 15, 2007. In
connection with the resignation, we recognized expense of approximately $1.9 million in our third
quarter 2006 financial statements, comprised of cash payments of $1.4 million and stock-based
compensation of $0.5 million associated with the modification of the vesting and exercise period of
the stock options.
On August 1, 2006, we announced that current director Henry F. Blissenbach had been named
Chairman and interim Chief Executive Officer. We have agreed to pay Dr. Blissenbach $40,000 per
month, commencing August 1, 2006, subject to cancellation by either party on thirty days notice,
for his services as Chairman and interim Chief Executive Officer. In addition, Dr. Blissenbach
will be eligible to receive incentive compensation of up to 50% of his base salary, but not more
than $100,000, based upon his performance of certain objectives incorporated within the employment
agreement which the Company and Dr. Blissenbach have entered into. Also, Dr. Blissenbach received
a stock option grant to purchase 150,000 shares of our common stock at an exercise price of $9.20
per share. These stock options will vest 50% at the end of six months and the remaining 50% will
vest at the end of one year, except that all of these stock options will vest upon the appointment
of a new chief executive officer. Finally, we will reimburse Dr. Blissenbach for all reasonable
expenses incurred in discharging his duties as interim Chief Executive Officer, including, but not
limited to commuting costs to San Diego and living and related costs during the time he spends in
San Diego.
Critical Accounting Policies
Certain of our accounting policies require the application of management judgment in making
estimates and assumptions that affect the amounts reported in the consolidated financial statements
and disclosures made in the accompanying notes. Those estimates and assumptions are based on
historical experience and various other factors deemed to be applicable and reasonable under the
circumstances. The use of judgment in determining such estimates and assumptions is by nature,
subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates
made. Management believes that the only material changes during the nine months ended September
30, 2006 to the critical accounting policies reported in the Managements Discussion and Analysis
section of our 2005 Annual Report are related to 1) our accounting for the termination and return
of the AVINZA co-promotion rights entered into with Organon in January 2006 and 2) our accounting
for stock-based compensation.
51
Co-Promote Termination Accounting
As part of the agreement, we agreed to pay Organon $37.8 million on or before October 15,
2006, and after the termination, we will make quarterly payments to Organon equal to 6.5% of AVINZA
net sales through December 31, 2012 and thereafter 6% through patent expiration, currently
anticipated to be November 2017. The unconditional payment of $37.8 million to Organon and the
estimated fair value of the amounts to be paid to Organon after the termination ($105.2 million as
of September 30, 2006), based on the net sales of the product (currently anticipated to be paid
quarterly through November 2017) were recognized as liabilities and expensed as costs of the
termination as of the effective date of the agreement, January 2006.
Although the quarterly payments to Organon will be based on net reported AVINZA product sales,
such payments will not result in current period expense in the period upon which the payment is
based, but instead will be charged against the co-promote termination liability. Any changes to our
estimates of future net AVINZA
product sales, however, will result in a change to the liability which will be recognized as
an increase or decrease to co-promote termination charges in the period such changes are
identified. We also recognize additional co-promote termination charges each period to reflect the
fair value of the termination liability. On a quarterly basis, management reviews the carrying
value of the co-promote termination liability. Due to assumptions and judgments inherent in
determining the estimates of future net AVINZA sales through November 2017, the actual amount of
net AVINZA sales used to determine the current fair value of our co-promote termination liability
may be materially different from our current estimates. In addition, because of the inherent
difficulties of predicting possible changes to the estimates and assumptions used to determine the
estimate of future AVINZA product sales, we are unable to quantify an estimate of the reasonably
likely effect of any such changes on our results of operations or financial position.
Stock-Based Compensation
Effective January 1, 2006, our accounting policy related to stock option accounting changed
upon our adoption of SFAS No. 123(R), Share-Based Payment. SFAS 123(R) requires us to expense the
fair value of employee stock options and other forms of stock-based compensation. Under the fair
value recognition provisions of SFAS 123(R), stock-based compensation cost is estimated at the
grant date based on the value of the award and is recognized as expense ratably over the service
period of the award. Determining the appropriate fair value model and calculating the fair value of
stock-based awards requires judgment, including estimating stock price volatility, the risk-free
interest rate, forfeiture rates and the expected life of the equity instrument. Expected
volatility utilized in the model is based on the historical volatility of the Companys stock price
and other factors. The risk-free interest rate is derived from the U.S. Treasury yield in effect
at the time of the grant. The model incorporates forfeiture assumptions based on an analysis of
historical data. The expected life of the 2006 grants is derived in accordance with the safe
harbor expected term assumptions under SAB No. 107. For the three and nine months ended September
30, 2006, we recorded $2.0 million and $4.0 million, respectively, of stock-based compensation for
awards granted to employees and non-employee directors.
Prior to January 1, 2006, we accounted for options granted to employees in accordance with APB
No. 25, Accounting for Stock Issued to Employees, and related interpretations and followed the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. Therefore,
prior to the first quarter of 2006, we did not record any compensation cost related to stock-based
awards, as all options granted prior to 2006 had an exercise price equal to the market value of the
underlying common stock on the date of grant. Periods prior to our first quarter of 2006 were not
restated to reflect the fair value method of expensing stock options. The impact of expensing
stock awards on our earnings may be significant and is further described in Note 1 to the notes to
the unaudited condensed consolidated financial statements.
52
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2006, our investment portfolio included fixed-income securities of $22.8
million. These securities are subject to interest rate risk and will decline in value if interest
rates increase. However, due to the short duration of our investment portfolio, an immediate 10%
change in interest rates would have no material impact on our financial condition, results of
operations or cash flows. At September 30, 2006, we also have certain equipment financing
arrangements with variable rates of interest. Due to the relative insignificance of such
arrangements, however, an immediate 10% change in interest rates would have no material impact on
our financial condition, results of operations, or cash flows. Declines in interest rates over
time will, however, reduce our interest income, while increases in interest rates over time will
increase our interest expense.
We do not have a significant level of transactions denominated in currencies other than U.S.
dollars and as a result we have limited foreign currency exchange rate risk. The effect of an
immediate 10% change in foreign exchange rates would have no material impact on our financial
condition, results of operations or cash flows.
53
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
The Company is required to maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to management, including the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as appropriate, to allow
timely decisions regarding required disclosure.
In connection with the preparation of the Form 10-Q for the period ended September 30, 2006,
management, under the supervision of the CEO and CFO, conducted an evaluation of disclosure
controls and procedures. Based on that evaluation, the CEO and CFO concluded that the Companys
disclosure controls and procedures were not effective as of September 30, 2006 as they cannot
assert the effective remediation of certain material weaknesses described in the Companys
management report on internal control over financial reporting included in Item 9A to its Annual
Report on Form 10-K for the year ended December 31, 2005, as filed on March 31, 2006 and described
below. As of September 30, 2006, certain of the material weaknesses identified in the 2005 Form
10-K have not been fully remediated. Additionally, since the material weaknesses described below
have not been fully remediated, the CEO and CFO conclude that the Companys disclosure controls and
procedures are not effective at a reasonable assurance level as of the end of the fiscal quarter
and as of the filing date of the Form 10-Q.
As of September 30, 2006, management identified the continued existence of the following
material weaknesses, which were identified in our 2005 Annual Report, in connection with its
assessment of the effectiveness of the Companys internal control over financial reporting.
Although changes have been implemented to our internal controls over financial reporting to address
certain of these matters, as further discussed in Item (b) below, management has not completed
their own assessment of these control deficiencies and their impact on our internal control over
financial reporting.
|
|
|
Spreadsheet Controls. In connection with the change in the Companys revenue recognition
for product sales from the sell-in method to the sell-through method, the use of
spreadsheets has become a pervasive and integral part of the Companys financial
accounting, quarter-end close, and financial reporting processes. The Company did not have
effective end user general controls over the access, change management and validation of
spreadsheets used in its financial processes, nor did the Company have formal policies and
procedures in place relating to the use of spreadsheets. As more fully discussed below,
management has commenced the implementation of policies and procedures relating to
spreadsheet management which are designed to ensure that adequate control activities exist
surrounding significant spreadsheets. These policies and procedures, which include
controls relating to data integrity, version control, and restricted access to such
spreadsheets, were implemented and are considered to be operating effectively for the
Companys key revenue recognition spreadsheets as of September 30, 2006. These policies
and procedures were not fully implemented for all other key (non-revenue recognition)
spreadsheets until the third quarter of 2006 which precluded managements ability to test,
assess, and conclude as to the effectiveness of such remediated internal controls for a
reasonable period of time prior to September 30, 2006. Considering the significant
reliance on spreadsheets in the current period and given that management is not able to
conclude as to the operating effectiveness of all key spreadsheet controls, the continuing
deficiencies discussed above surrounding the use of spreadsheets have been assessed to be a
material weakness as of September 30, 2006. |
|
|
|
|
Segregation of Duties. Management identified certain members of the Companys
accounting and finance department who had accounting system access rights that are
incompatible with the current roles and duties of such individuals. This control
deficiency was identified as of December 31, 2004. However, when considered in conjunction
with the material weaknesses surrounding internal audit and monitoring controls discussed
herein, this control deficiency was elevated to a material weakness as of December 31,
2005. In the first, second, and third quarters of 2006, the Company terminated access
rights for those individuals who were determined to have system access incompatible with
their job functions. While management
believes the controls with respect to segregation of duties were appropriately designed and
effective at September 30, 2006, the timing of the implementation of the remediation efforts
and the Companys program to test, assess, |
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and conclude as to the effectiveness of such
remediation efforts resulted in managements inability to conclude that such controls were
operating effectively for a reasonable period of time prior to September 30, 2006. |
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Monitoring Controls. As a result of the demands placed on the Companys accounting and
finance department with respect to the Companys accounting restatement in 2005, management
did not properly maintain the Companys documentation of internal control over financial
reporting during 2005 to reflect changes in internal control over financial reporting and
as a result did not substantively commence the process to update such documentation and
complete its assessment until December 2005. Further, the restatement process which
occurred in 2005 resulted in the delayed performance of certain control procedures in the
period-end close process. Accordingly, management determined that this control deficiency
constituted a material weakness as of December 31, 2005. As discussed below, management
has implemented procedures to ensure more timely maintenance of internal control
documentation and execution of its monitoring controls over its internal controls over
financial reporting. However, such procedures were not fully implemented until the second
quarter 2006 which precluded managements ability to test, assess, and conclude as to the
effectiveness of such remediated internal controls for a reasonable period of time prior to
September 30, 2006. |
As of September 30, 2006, certain of the material weaknesses identified in the 2005 Form 10-K,
as listed below, have been assessed, as further discussed in Item (b) below, by management to be
fully remediated. BDO Seidman LLP, our independent registered public accountants, has not
performed any procedures to review our remediation efforts.
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Revenue Recognition. The Company previously reported that it did not have effective
controls and procedures to ensure that revenues were recognized in accordance with
generally accepted accounting principles. As further discussed below, the Company has
implemented new revenue recognition models and related internal controls to remediate this
weakness. Such remediation efforts, however, were not fully implemented until the fourth
quarter of 2005. Management believes the controls with respect to revenue recognition were
appropriately designed and effective at June 30, 2006 and
continued to be effective at September 30, 2006, as further discussed in Item (b)
below. |
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Record Keeping and Documentation. The Company previously reported that it did not have
adequate record keeping and documentation supporting the decisions made and the accounting
for complex transactions. As further discussed below, the Company has implemented new
procedures and controls to remediate this weakness. Such remediation efforts, however,
were not fully implemented until the fourth quarter of 2005. Management believes the
controls with respect to record keeping were appropriately designed and effective at June
30, 2006 and
continued to be effective at September 30, 2006, as further discussed in Item (b) below. |
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Lack of Sufficient Qualified Accounting Personnel. The Company previously reported that
it did not have adequate manpower in its accounting and finance department and lacked
sufficient qualified accounting personnel to identify and resolve complex accounting issues
in accordance with generally accepted accounting principles. As further discussed below,
the Company has appropriately designed the organization structure of its accounting and
finance department and staffed key positions to remediate this weakness. Such remediation
efforts, however, were not fully implemented until the second and
third quarters of 2006. Management
believes the controls, with respect to qualified accounting personnel, were appropriately
designed and effective at September 30, 2006, as further discussed in Item (b) below. |
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Financial Statement Close Procedures. The Company did not have adequate financial
reporting and close procedures. As further discussed below, the Company previously
reported that it has implemented new procedures and controls to remediate this weakness.
Such remediation efforts, however, were not fully implemented until the fourth quarter of
2005. Management believes the controls with respect to financial
statement close procedures were appropriately designed and effective at September 30, 2006,
as further discussed in Item (b) below. |
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Internal Audit. The Company previously reported that it did not maintain an independent
effective Internal Audit department. As further discussed below, in the second and third
quarters of 2006 the Company hired three internal audit personnel, including a Director of
Internal Audit, and received Audit Committee approval for its internal audit plan and the
internal audit charter. Effective the third quarter of 2006, the Companys internal audit
department was operating in accordance with the approved charter and began executing the
approved internal audit plan. Accordingly, management believes that controls with respect
to the existence of an independent, effective internal audit department are in place and
operating at September 30, 2006, as further discussed in Item (b) below. |
b) Remediation Steps to Address Material Weaknesses
Revenue Recognition
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During 2005, the Companys finance and accounting department, with the assistance of
outside expert consultants, developed accounting models to recognize sales of its domestic
products, except Panretin, under the sell-through revenue recognition method in accordance
with generally accepted accounting principles. In connection with the development of these
models, the Company also implemented a number of new and enhanced controls and procedures
to support the sell-through revenue recognition accounting models. These controls and
procedures include approximately 35 revenue models used in connection with the sell-through
revenue recognition method including related contra-revenue models and demand
reconciliations to support and assess the reasonableness of the data and estimates, which
includes information and estimates obtained from third-parties. |
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During the fourth quarter of 2005, the accounting and finance department completed the
implementation of procedures surrounding the month-end close process to ensure that the
information and estimates necessary for reporting product revenues under the sell-through
method to facilitate a timely period-end close were available. |
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A training program for employees and consultants involved in the revenue recognition
accounting has been developed and took place during the fourth quarter of 2005. In 2006,
additional training has been provided and updated as considered necessary. |
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The Company staffed the position of Senior Revenue Recognition Analyst in the second
quarter of 2006 and has implemented additional reviews over the revenue recognition area by
senior accounting and finance personnel. The Company has not filled the position of
Manager of Revenue Recognition. However, given the sale of the Companys revenue-producing
assets, filling this position is not a significant priority and management believes that
the measures identified above are sufficient to address the control considerations
surrounding revenue recognition. |
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Certain of the remediation efforts described above relating to the new revenue
recognition models and related controls were not implemented until the fourth quarter of
2005. Management believes the controls with respect to revenue recognition were
appropriately designed and effective since June 30, 2006. |
Record Keeping and Documentation
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The Company has implemented improved procedures for analyzing, reviewing, and
documenting the support for significant and complex transactions. Documentation for all
complex transactions is now maintained by the Corporate Controller. |
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The Companys accounting and finance and legal departments developed a formal internal
policy during the fourth quarter of 2005 entitled Documentation of Accounting Decisions,
regarding the preparation
and maintenance of contemporaneous documentation supporting accounting transactions and
contractual interpretations. The formal policy provides for enhanced communication between
the Companys finance and legal personnel.
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The remediation efforts described above were not implemented until the fourth quarter of
2005. Management believes the controls with respect to record keeping and documentation
were appropriately designed and effective since June 30, 2006. |
Lack of Sufficient Qualified Accounting Personnel
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The Companys previous Director of Internal Audit resigned effective December 2, 2005.
In December 2005, the Company retained a nationally recognized external consulting firm to
assist the Internal Audit department and oversee the Companys ongoing compliance effort
under Section 404 of the Sarbanes Oxley Act of 2002 until a permanent replacement for the
Companys Director of Internal Audit was hired. During the second quarter of 2006, the
Company hired a Director of Internal Audit, who is a certified public accountant and who
commenced employment in May 2006. |
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During 2005, the Company engaged expert accounting consultants to assist the Companys
accounting and finance department with a number of activities, including the management and
implementation of controls surrounding the Companys new sell-through revenue recognition
models, the administration of existing controls and procedures, preparation of the
Companys SEC filings and the documentation of complex accounting transactions. |
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During the second quarter of 2006, the Company hired additional senior accounting
personnel who are certified public accountants including, a Director of Corporate
Accounting, a Senior Accounting Manager, and a Director of Internal Audit, as discussed
above. The Company also staffed the position of Senior Revenue Recognition Analyst through
an internal transfer in the second quarter of 2006 and hired a senior internal auditor and
internal audit staff member in the third quarter of 2006. Additionally, the Company hired
a Director of Budget and Financial Analysis in August 2006 to replace the Senior Manager,
Budget and Financial Analysis who left the Company in June 2006. Lastly, other open
positions below the manager level have been sufficiently staffed with qualified consulting
personnel. |
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The remediation efforts described above were not implemented until the second and third
quarters of 2006. Management believes the controls with respect to qualified accounting
personnel were appropriately designed and effective at September 30, 2006. |
Financial Statement Close Procedures
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The Company has designed and implemented process improvements concerning the Companys
financial reporting and close procedures. A training session for all finance department
employees and consultants involved in the financial statement close process took place
during the fourth quarter of 2005. Additionally, an ongoing periodic training
update/program has been implemented to conduct training sessions on a regular quarterly
basis to provide training to its finance and accounting personnel and to review procedures
for timely and accurate preparation and management review of documentation and schedules to
support the Companys financial reporting and period-end close process. As discussed
above, the additional management personnel hired by the finance department will also help
ensure that all documentation necessary for the financial reporting and period-end close
procedures is properly prepared and reviewed. |
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The remediation efforts described above were not implemented until the fourth quarter of
2005 (and the remediation efforts described above in qualified accounting personnel was not
substantially completed until the second and third quarters of 2006). Management believes
the controls with respect to financial statement close procedures were appropriately
designed and effective at September 30, 2006. |
Internal Audit
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As discussed under the caption Lack of Sufficient Qualified Accounting Personnel above,
the Company hired a Director of Internal Audit, who commenced employment in the second
quarter of 2006 and hired a senior internal auditor and internal audit staff member in the
third quarter of 2006. Additionally, until the Director |
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of Internal Audit commenced
employment, the Company engaged a nationally recognized external consulting firm to perform
the functions of the Internal Audit department. |
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The internal audit charter and the internal audit plan for 2006 were approved by the
Companys Audit Committee during the third quarter of 2006. The Companys internal audit
department commenced execution of the approved internal audit plan during the third quarter
of 2006. |
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Based on the actions described above, management believes that controls related to the
existence of an independent, effective internal audit department are in place and operating
at September 30, 2006. |
Spreadsheet Controls
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Revenue Spreadsheet Controls. The Company has implemented new revenue recognition
models and related internal controls to remediate this weakness. Such remediation efforts,
however, were not fully implemented until the fourth quarter of 2005. Since June 30, 2006,
the Company believes that the controls surrounding the revenue spreadsheets were
appropriately designed and have been effective. |
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Non-Revenue Spreadsheet Controls. In the first, second, and third quarters of 2006,
management identified and categorized significant spreadsheets using qualitative measures
of financial risk and complexity. After being inventoried, the spreadsheets were subject
to standardized control activity testing, ensuring that any deficiencies in such
spreadsheets relating to security, change management, input validation, documentation, and
segregation of duties were addressed. Management has completed the implementation of
policies and procedures relating to spreadsheet management which are designed to ensure
that adequate control activities exist surrounding significant spreadsheets. These
policies and procedures, which include controls relating to data integrity, version
control, and restricted access to such spreadsheets were fully implemented in the third
quarter of 2006 and will be tested for operating effectiveness during the third and fourth
quarters of 2006. |
Segregation of Duties
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In the first, second, and third quarters of 2006, management identified those members of
the Companys accounting and finance department who had accounting system access rights
that were incompatible with the current roles and duties of such individuals and
subsequently terminated the access rights for those individuals. On a quarterly basis,
commencing with the first quarter of 2006, management monitors the accounting system access
rights of those employees with access to the accounting software systems to identify any
grants of incompatible user access rights or any user access rights resulting from
subsequent changes or modifications to the Companys internal control structure. |
Monitoring Controls
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As discussed under the caption Internal Audit above, the Company hired a Director of
Internal Audit, who commenced employment in the second quarter of 2006. Additionally,
prior to the Director of Internal Audit commencing employment, the Company engaged and
continues to use a nationally recognized external consulting firm to assist with internal
audit services. As part of this service, these consultants are responsible for assisting
management with updating and maintaining the Companys documentation of internal control
over financial reporting. The consultants are also assisting with the testing of such
internal controls and in monitoring the progress of any ongoing and newly identified
remediation efforts to help ensure the timely completion of the Companys 2006 monitoring
program. |
Independent Registered Public Accountants
BDO Seidman LLP, our independent registered public accountants, has not performed any
procedures to review our remediation efforts.
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c) Changes in Internal Control Over Financial Reporting
Except for the changes in connection with the remediation efforts performed in regard to the
material weaknesses described above, there were no changes in the Companys internal control over
financial reporting that occurred during the quarter ended September 30, 2006 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Litigation
Since August 2004, the Company has been involved in several securities class action and
shareholder derivative actions which followed announcements by the Company in 2004 and the
subsequent restatement of its financial results in 2005. In June 2006, we announced that these
lawsuits had been settled, subject to certain conditions such as court approval.
Background
Beginning in August 2004, several purported class action stockholder lawsuits were filed in
the United States District Court for the Southern District of California against the Company and
certain of its directors and officers. The actions were brought on behalf of purchasers of the
Companys common stock during several time periods, the longest of which runs from July 28, 2003
through August 2, 2004. The complaints generally allege that the Company violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission by making false and misleading statements, or concealing information about the Companys
business, forecasts and financial performance, in particular statements and information related to
drug development issues and AVINZA inventory levels. These lawsuits have been consolidated and
lead plaintiffs appointed. A consolidated complaint was filed by the plaintiffs in March 2005. On
September 27, 2005, the court granted the Companys motion to dismiss the consolidated complaint,
with leave for plaintiffs to file an amended complaint within 30 days. In December 2005, the
plaintiffs filed a second amended complaint again alleging claims under Section 10(b) and 20(a) of
the Securities Exchange Act against the Company, David Robinson and Paul Maier. The amended
complaint asserts an expanded Class Period of March 19, 2001 through May 20, 2005 and includes
allegations arising from the Companys announcement on May 20, 2005 that it would restate certain
financial results. Defendants filed their motion to dismiss plaintiffs second amended complaint
in January 2006.
Beginning on or about August 13, 2004, several derivative actions were filed on behalf of the
Company by individual stockholders in the Superior Court of California. The complaints name the
Companys directors and certain of its officers as defendants and name the Company as a nominal
defendant. The complaints are based on the same facts and circumstances as the purported class
actions discussed in the previous paragraph and generally allege breach of fiduciary duties, abuse
of control, waste and mismanagement, insider trading and unjust enrichment. These actions were in
the discovery phase.
In October 2005, a shareholder derivative action was filed on behalf of the Company in the
United States District Court for the Southern District of California. The complaint names the
Companys directors and certain of its officers as defendants and the Company as a nominal
defendant. The action was brought by an individual stockholder. The complaint generally alleges
that the defendants falsified Ligands publicly reported financial results throughout 2002 and 2003
and the first three quarters of 2004 by improperly recognizing revenue on product sales. The
complaint generally alleges breach of fiduciary duty by all defendants and requests disgorgement,
e.g., under Section 304 of the Sarbanes-Oxley Act of 2002. In January 2006, the defendants filed a
motion to dismiss plaintiffs verified shareholder derivative complaint. Plaintiffs opposition
was filed in February 2006.
The Settlement Agreements
In June 2006, the Company entered into agreements to resolve all claims by the parties in each
of these matters, including those asserted against the Company and the individual defendants in
these cases. Under the agreements, the Company agreed to pay a total of $12.2 million in cash for a
release and in full settlement of all claims. $12.0 million of the settlement amount and a portion
of our total legal expenses was funded by our Directors and Officers Liability insurance carrier
while the remainder of the legal fees incurred ($1.4 million for the three months ended June 30,
2006) was paid by us. Of the $12.2 million settlement liability, $4.0 million was paid in October
2006 to us directly from the insurance carrier and then disbursed to the claimants attorneys,
while $8.0 million will be paid by the insurance carrier directly to an independent escrow agent
responsible for
disbursing the funds to the class action suit claimants. In July 2006, our insurance carrier
funded the escrow account with the $8.0 million to be disbursed to the claimants. Under SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
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Extinguishments of Liabilities,
funding of the escrow account represents the extinguishment of our liability to the claimants.
Accordingly, we derecognized the $8.0 million receivable and accrued liability in our consolidated
financial statements as of September 30, 2006. As part of the settlement of the state derivative
action, we have agreed to adopt certain corporate governance enhancements including the
formalization of certain Board practices and responsibilities, a Board self-evaluation process,
Board and Board Committee term limits (with gradual phase-in) and one-time enhanced independent
requirements for a single director to succeed the current shareholder representatives on the Board.
Neither we nor any of our current or former directors and officers have made any admission of
liability or wrongdoing. On October 12, 2006, the Superior Court of California approved the
settlement of the state derivative actions and entered final judgment of dismissal. The United
States District Court has preliminarily approved the settlement of the Federal class action,
however, that settlement and the settlement of the Federal derivative actions are all subject to
final approval and orders of the court.
SEC Investigation and Other Matters
In connection with the restatement of the Companys consolidated financial statements, the SEC
instituted a formal investigation concerning the consolidated financial statements. These matters
were previously the subject of an informal SEC inquiry. Ligand has been cooperating fully with the
SEC and will continue to do so in order to bring the investigation to a conclusion as promptly as
possible.
The Companys subsidiary, Seragen, Inc. and Ligand, were named parties to Sergio M. Oliver, et
al. v. Boston University, et al., a putative shareholder class action filed on December 17, 1998 in
the Court of Chancery in the State of Delaware in and for New Castle County, C.A. No. 16570NC, by
Sergio M. Oliver and others against Boston University and others, including Seragen, its subsidiary
Seragen Technology, Inc. and former officers and directors of Seragen. The complaint, as amended,
alleged that Ligand aided and abetted purported breaches of fiduciary duty by the Seragen related
defendants in connection with the acquisition of Seragen by Ligand and made certain
misrepresentations in related proxy materials and seeks compensatory and punitive damages of an
unspecified amount. On July 25, 2000, the Delaware Chancery Court granted in part and denied in
part defendants motions to dismiss. Seragen, Ligand, Seragen Technology, Inc. and the Companys
acquisition subsidiary, Knight Acquisition Corporation, were dismissed from the action. Claims of
breach of fiduciary duty remain against the remaining defendants, including the former officers and
directors of Seragen. The court certified a class consisting of shareholders as of the date of the
acquisition and on the date of the proxy sent to ratify an earlier business unit sale by Seragen.
On January 20, 2005, the Delaware Chancery Court granted in part and denied in part the defendants
motion for summary judgment. Prior to trial, several of the Seragen director-defendants reached a
settlement with the plaintiffs. The trial in this action then went forward as to the remaining
defendants and concluded on February 18, 2005. On April 14, 2006, the court issued a memorandum
opinion finding for the plaintiffs and against Boston University and individual directors
affiliated with Boston University on certain claims. The opinion awards damages on these claims in
the amount of approximately $4.8 million plus interest. Judgment, however, has not been entered
and the matter is subject to appeal. While Ligand and its subsidiary Seragen have been dismissed
from the action, such dismissal is also subject to appeal and Ligand and Seragen may have possible
indemnification obligations with respect to certain defendants. As of September 30, 2006, the
Company has not accrued an indemnification obligation based on its assessment that the Companys
responsibility for any such obligation is not probable or estimable.
In addition, the Company is subject to various lawsuits and claims with respect to matters
arising out of the normal course of business. Due to the uncertainty of the ultimate outcome of
these matters, the impact on future financial results is not subject to reasonable estimates.
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ITEM 1A. RISK FACTORS
The following is a summary description of some of the many risks we face in our business
including, any risk factors as to which there may have been a material change from those set forth
in our Annual Report on Form 10-K for the year ended December 31, 2005. You should carefully review
these risks in evaluating our business, including the businesses of our subsidiaries. You should
also consider the other information described in this report.
Risks Related To Us and Our Business.
Failure to timely complete our AVINZA product line sale or to successfully restructure our business
could have adverse consequences for the Company.
We have announced agreements to sell both of our commercial product lines and our real estate
assets. These agreements contemplate that we will complete those asset sales and in return receive
substantial cash consideration by the end of the 2006 calendar year. We completed the oncology
asset sale in October 2006 and the real estate asset sale in November 2006, but have not completed
the pending AVINZA product line sale, which is the largest of the three. The AVINZA asset sale
agreement contains a number of conditions to closing, including stockholder approval of the sale,
and a number of other legal and operational requirements. Failure to timely satisfy these
conditions, among other causes, could delay or prevent the closing of the transaction. For
example, in order to obtain the required stockholder approval, we prepared and filed with the SEC a
proxy statement, which may be reviewed by the SEC and subject to comments and revisions prior to
mailing the proxy materials and scheduling the stockholder meeting. If we are unable to complete
this process and close the transaction by December 31, 2006, neither King nor Ligand would be
required to complete the transaction. Failure for any reason to complete the transaction could,
e.g., prevent or delay the receipt of cash we need to run our business, cause us to have to use
substantial cash to repay a loan from the purchaser of AVINZA, cause confusion and dissatisfaction
among customers, suppliers and stockholders, subject us to legal action and harm our business in a
number of other ways. In addition, any such delay or failure could depress our stock price.
In connection with these asset sales we are also planning a restructuring of our remaining
businesses, principally our research and development. If we are unable to successfully and timely
complete this restructuring, our remaining assets could lose value, we may not be able to retain
key employees, we may not have sufficient resources to successfully manage those assets or our
business, and we may not be able to perform our obligations under various contracts and
commitments. Any of these could have substantial negative impacts on our business and our stock
price.
The restatement of our consolidated financial statements has had a material adverse impact on us,
including increased costs and the increased possibility of legal or administrative proceedings.
We determined that our consolidated financial statements for the years ended December 31, 2002
and 2003, and for the first three quarters of 2004, as described in more detail in our 2004 10-K,
should be restated. As a result of these events, we have become subject to a number of additional
risks and uncertainties, including:
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We incurred substantial unanticipated costs for accounting and
legal fees in 2005 in connection with the restatement. Although
the restatement is complete, we expect to continue to incur
unanticipated accounting and legal costs as noted below. |
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We were named in a number of lawsuits that began in August 2004
and an additional lawsuit filed in October 2005 claiming to be
class actions and shareholder derivative actions. While we have
agreed to settle this litigation, the settlements are subject to
court approval. If not approved we could face substantial
additional legal fees or judgments in excess of our insurance
policy limits and management distraction. |
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The SEC has instituted a formal investigation of the Companys
consolidated financial statements. This investigation will likely
divert more of our managements time and attention and cause us to
incur substantial
costs. Such investigations can also lead to fines or injunctions or orders with respect to
future activities, as well as further substantial costs and diversion of management time and
attention. |
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Material weaknesses or deficiencies in our internal control over financial reporting could harm
stockholder and business confidence on our financial reporting, our ability to obtain financing and
other aspects of our business.
Maintaining an effective system of internal control over financial reporting is necessary for
us to provide reliable financial reports. As disclosed in the Companys 2005 Annual Report on Form
10-K, managements assessment of the Companys internal control over financial reporting identified
material weaknesses in the Companys internal controls surrounding (i) the accounting for revenue
recognition; (ii) record keeping and documentation; (iii) accounting personnel; (iv) financial
statement close procedures; (v) the inability of the Company to maintain an effective independent
Internal Audit Department; (vi) the existence of ineffective spreadsheet controls used in
connection with the Companys financial processes, including review, testing, access and integrity
controls; (vii) the existence of accounting system access rights granted to certain members of the
Companys accounting and finance department that are incompatible with the current roles and duties
of such individuals (i.e., segregation of duties); and (viii) the inability of management to
properly maintain the Companys documentation of the internal control over financial reporting
during 2005 or to substantively commence the process to update such documentation and assessment
until December 2005. We have not fully remediated these material weaknesses and as a result,
management continues to conclude that we did not maintain effective internal control over financial
reporting as of September 30, 2006.
Because we have concluded that our internal control over financial reporting is not effective
as of September 30, 2006 and our independent registered public accounting firm issued a disclaimer
opinion on the effectiveness of our internal controls as of December 31, 2005 due to our inability
to make a timely assessment of the effectiveness of our internal controls, and to the extent we
identify future weaknesses or deficiencies, there could be material misstatements in our
consolidated financial statements and we could fail to meet our financial reporting obligations.
As a result, we could be delisted from the NASDAQ Global Market, our ability to obtain additional
financing, or obtain additional financing on favorable terms, could be materially and adversely
affected, each of which, in turn, could materially and adversely affect our business, our strategic
alternatives, our financial condition and the market value of our securities. In addition,
perceptions of us could also be adversely affected among customers, lenders, investors, securities
analysts and others. Current material weaknesses or any future weaknesses or deficiencies could
also hurt confidence in our business and consolidated financial statements and our ability to do
business with these groups.
Our revenue recognition policy has changed to the sell-through method which is currently not used
by most companies in the pharmaceutical industry which will make it more difficult to compare our
results to the results of our competitors.
Because our revenue recognition policy has changed to the sell-through method which reflects
products sold through the distribution channel, we do not recognize revenue for the domestic
product shipments of AVINZA, and prior to the sale of our oncology products to Eisai, Inc. in
October 2006, for ONTAK, Targretin capsules and Targretin gel. Under our previous method of
accounting, product sales were recognized at time of shipment.
Under the sell-through revenue recognition method, future product sales and gross margins may
be affected by the timing of certain gross to net sales adjustments including the cost of certain
services provided by wholesalers under distribution service agreements, and the impact of price
increases. Cost of products sold and therefore gross margins for our products may also be further
impacted by changes in the timing of revenue recognition. Additionally, our revenue recognition
models incorporate a significant amount of third party data from our wholesalers and IMS. Such
data is subject to estimates and as such, any changes or corrections to these estimates identified
in later periods, such as changes or corrections occurring as a result of natural disasters or
other disruptions could affect the revenue that we report in future periods.
As a result of our change in revenue recognition policy and the fact that the sell-through
method is not widely used by our competitors, it may be difficult for potential and current
stockholders to assess our financial results and compare these results to others in our industry.
This may have an adverse effect on our stock price.
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Our new revenue recognition models under the sell-through method are extremely complex and depend
upon the accuracy and consistency of third party data as well as dependence upon key finance and
accounting personnel to maintain and implement the controls surrounding such models.
We have developed revenue recognition models under the sell-through method that are unique to
the Companys business and therefore are highly complex and not widely used in the pharmaceutical
industry. The revenue recognition models incorporate a significant amount of third party data from
our wholesalers and IMS. To effectively maintain the revenue recognition models, we depend to a
considerable degree upon the timely and accurate reporting to us of such data from these third
parties and our key accounting and finance personnel to accurately interpolate such data into the
models. If the third party data is not calculated on a consistent basis and reported to us on an
accurate or timely basis or we lose any of our key accounting and finance personnel, the accuracy
of our consolidated financial statements could be materially affected. This could cause future
delays in our earnings announcements, regulatory filings with the SEC, and potential delisting from
the NASDAQ Global Market.
Changes in the estimated liability recognized under the termination and return of rights
transaction with Organon could be material in future periods and potentially result in adjustments
to our consolidated statements of operations that are inconsistent with the underlying trend in
AVINZA product sales.
As previously disclosed, on January 17, 2006, we signed an agreement with Organon that
terminated the AVINZA co-promotion agreement between the two companies and returned AVINZA rights
to Ligand. However, the parties agreed to continue to cooperate during a transition period that
ended September 30, 2006 (the Transition Period) to promote the product.
In consideration of the early termination and return of rights under the terms of the
agreement, Ligand agreed to pay Organon $37.8 million on or before October 15, 2006. We will
further pay Organon $10.0 million on or before January 15, 2007, provided that Organon has made its
minimum required level of sales calls. In addition, after the termination, we will make quarterly
payments to Organon equal to 6.5% of AVINZA net sales through December 31, 2012 and thereafter 6%
through patent expiration, currently anticipated to be November 2017.
The unconditional payment of $37.8 million to Organon and the estimated fair value of the
amounts to be paid to Organon after the termination ($105.2 million as of September 30, 2006),
based on the net sales of the product (currently anticipated to be paid quarterly through November
2017) were recognized as liabilities and expensed as costs of the termination as of the effective
date of the agreement, January 2006. Additionally, the conditional payment of $10.0 million, which
represents the approximation of the fair value of that service element of the agreement, is being
recognized ratably as additional co-promotion expense over the Transition Period.
Although the quarterly payments to Organon will be based on net reported AVINZA product sales,
such payments will not result in current period expense in the period upon which the payment is
based, but instead will be charged against the co-promote termination liability. The accretion to
the current fair value for each reporting period will, however, be recognized as additional
co-promote termination charges for that period at a rate of 15%, the discount rate used to
initially value this component of the termination liability. Additionally, any changes to our
estimates of future net AVINZA product sales (including for events, circumstances, changes in
trends, and/or strategic decisions taken with respect to the product) will be recognized as an
increase or decrease to co-promote termination charges in the period such changes are identified.
Any such changes could be material and potentially result in adjustments to our consolidated
statements of operations that are inconsistent with the underlying trend in AVINZA product sales.
Our single marketed product and our dependence on partners and other third parties mean our
results are vulnerable to setbacks with respect to any one product.
We currently only market one product, AVINZA, and we have only a handful of other partnered
products that have made significant progress through development. Because these numbers are small,
especially the single marketed product, any significant setback with respect to any one of them
could significantly impair our operating results and/or reduce the market price for our securities.
Setbacks could include problems with shipping, distribution, manufacturing, product safety,
marketing, government licenses and approvals, intellectual property rights and physician or patient
acceptance of the product, as well as higher than expected total rebates, returns or discounts.
64
In particular, AVINZA now accounts for all of our product revenues. Thus, any setback with
respect to AVINZA could significantly impact our financial results and our stock price. AVINZA was
licensed from Elan Corporation which was previously its sole manufacturer. We have contracted with
Cardinal to provide additional manufacturing capacity and we began to receive product from them in
the second quarter of 2006. However, we expect Elan will continue to be a significant supplier
over the next several years. Any problems with Elans or Cardinals manufacturing operations or
capacity could reduce sales of AVINZA, as could any licensing or other contract disputes with these
suppliers.
Similarly, King, our contract sales partner, executes a large part of the marketing and sales
efforts for AVINZA and those efforts may be affected by our partners organization, operations,
activities and events both related and unrelated to AVINZA. Historically, our sales efforts
including our own or our prior partners, have encountered and continue to encounter a number of
difficulties, uncertainties and challenges, including sales force reorganizations and lower than
expected sales call and prescription volumes, which have hurt and could continue to hurt AVINZA
sales growth. The negative impact on the products sales growth in turn has caused and may
continue to cause our revenues and earnings to be disappointing. Any failure to fully optimize
this new contract sales arrangement and the AVINZA brand, by either partner, could also cause
AVINZA sales and our financial results to be disappointing and hurt our stock price. Any disputes
with our contract sales partner could harm the promotion and sales of AVINZA and could result in
substantial costs to us. In addition, the prior co-promotion arrangement ended in September 2006.
Failure to successfully transition our prior partners efforts and functions back to Ligand and/or
our new contract sales partner could adversely affect the sales of the product.
AVINZA is a relatively new product and therefore the predictability of its commercial results
is relatively low. Higher than expected discounts (especially PBM/GPO rebates and Medicaid
rebates, which can be substantial), returns and chargebacks and/or slower than expected market
penetration could reduce sales. Other setbacks that AVINZA could face in the sustained-release
opioid market include product safety and abuse issues, regulatory action, intellectual property
disputes and the inability to obtain sufficient quotas of morphine from the Drug Enforcement Agency
(DEA) to support our production requirements.
In particular, with respect to regulatory action and product safety issues, the FDA recently
requested that we expand the warnings on the AVINZA label to alert doctors and patients to the
dangers of using AVINZA with alcohol. We have made changes to the label, after consultation and
agreement with the FDA. The FDA also requested clinical studies to investigate the risks
associated with taking AVINZA with alcohol. We have submitted protocols to the FDA and are
awaiting their comments on these protocol designs. These additional warnings, studies and any
further regulatory action could have significant adverse affects on AVINZA sales.
Our product development and commercialization involve a number of uncertainties, and we may never
generate sufficient revenues from the sale of products to become profitable.
We were founded in 1987. We have incurred significant losses since our inception. At
September 30, 2006, our accumulated deficit was approximately $1.0 billion. We began receiving
revenues from the sale of pharmaceutical products in 1999. To consistently be profitable, we must
successfully develop, clinically test, market and sell our products. Even if we consistently
achieve profitability, we cannot predict the level of that profitability or whether we will be able
to sustain profitability. We expect that our operating results will fluctuate
from period to period as a result of differences in when we incur expenses and receive
revenues from product sales, collaborative arrangements and other sources. Some of these
fluctuations may be significant.
Most of our products in development will require extensive additional development, including
preclinical testing and human studies, as well as regulatory approvals, before we can market them.
We cannot predict if or when any of the products we are developing or those being developed with
our partners will be approved for marketing. For example, lasofoxifene (Oporia), a partner product
being developed by Pfizer recently received a non-approvable decision from the FDA and trials of
our previously marketed product Targretin failed to meet endpoints in Phase III trials in which we
were studying its use in non small cell lung cancer. There are many reasons that we or our
collaborative partners may fail in our efforts to develop our other potential products, including
the possibility that:
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preclinical testing or human studies may show that our potential products are
ineffective or cause harmful side effects; |
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the products may fail to receive necessary regulatory approvals from the FDA or foreign
authorities in a timely manner, or at all; |
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the products, if approved, may not be produced in commercial quantities or at reasonable costs; |
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the products, once approved, may not achieve commercial acceptance; |
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regulatory or governmental authorities may apply restrictions to our products, which
could adversely affect their commercial success; or |
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the proprietary rights of other parties may prevent us or our partners from marketing
the products. |
Any product development failures for these or other reasons, whether with our products or our
partners products, may reduce our expected revenues, profits, and stock price.
Third-party reimbursement and health care reform policies may reduce our future sales.
Sales of prescription drugs depend significantly on access to the formularies, or lists of
approved prescription drugs, of third-party payers such as government and private insurance plans,
as well as the availability of reimbursement to the consumer from these third party payers. These
third party payers frequently require drug companies to provide predetermined discounts from list
prices, and they are increasingly challenging the prices charged for medical products and services.
Our current and potential products may not be considered cost-effective, may not be added to
formularies and reimbursement to the consumer may not be available or sufficient to allow us to
sell our products on a competitive basis. For example, we have current and recurring discussions
with insurers regarding formulary access, discounts and reimbursement rates for our drugs,
including AVINZA. We may not be able to negotiate favorable reimbursement rates and formulary
status for our products or may have to pay significant discounts to obtain favorable rates and
access.
In addition, the efforts of governments and third-party payers to contain or reduce the cost
of health care will continue to affect the business and financial condition of drug companies such
as us. A number of legislative and regulatory proposals to change the health care system have been
discussed in recent years, including price caps and controls for pharmaceuticals. These proposals
could reduce and/or cap the prices for our products or reduce government reimbursement rates for
products. In addition, an increasing emphasis on managed care in the United States has and will
continue to increase pressure on drug pricing. We cannot predict whether legislative or regulatory
proposals will be adopted or what effect those proposals or managed care efforts may have on our
business. The announcement and/or adoption of such proposals or efforts could adversely affect our
profit margins and business.
Our revenues are dependent on maintaining an effective marketing and sales capability in the United
States which is expensive and time-consuming and may increase our operating losses.
Maintaining an effective sales force to market and sell products is difficult, expensive and
time-consuming. We have a US sales force of approximately 97 people as of October 26, 2006. We
also rely on third-party distributors to distribute our products. The distributors are responsible
for providing many support services, including customer service, order entry, shipping and billing
and customer reimbursement assistance. Our reliance on these third parties means our results may
suffer if any of them are unsuccessful or fail to perform as expected. We may not be able to
continue to expand our sales and marketing capabilities sufficiently to successfully commercialize
our products in the territories where they receive marketing approval. With respect to our
contract sales or licensing arrangements, for example our contract sales agreement for AVINZA, any
revenues we receive will depend substantially on the marketing and sales efforts of others, which
may or may not be successful.
66
The cash flows from our product shipments may significantly fluctuate each period based on the
nature of our products.
The purchasing and stocking patterns of our wholesaler customers for our AVINZA products are
influenced by a number of factors that vary from wholesaler to wholesaler and even between
individual distribution centers, including but not limited to overall level of demand, periodic
promotions, required minimum shipping quantities and wholesaler competitive initiatives. Although
we have distribution services contracts in place to maintain stable inventories at our major
wholesalers, if any of them were to substantially reduce the inventory they carry in a given
period, e.g. due to circumstances beyond their reasonable control, or contract termination or
expiration, our shipments and cash flow for that period could be substantially lower than
historical levels.
We have entered into fee-for-service or distributor services agreements with the majority of
our wholesaler customers. Under these agreements, in exchange for a set fee, the wholesalers have
agreed to provide us with certain services. The agreements typically have a one-year initial term
and are renewable.
Our drug development programs will require substantial additional future funding which could hurt
our operational and financial condition.
Our drug development programs require substantial additional capital to successfully complete
them, arising from costs to:
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conduct research, preclinical testing and human studies; |
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establish pilot scale and commercial scale manufacturing processes and facilities; and |
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establish and develop quality control, regulatory, marketing, sales and administrative
capabilities to support these programs. |
Our future operating and capital needs will depend on many factors, including:
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the pace of scientific progress in our research and development programs and the
magnitude of these programs; |
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the scope and results of preclinical testing and human studies; |
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the time and costs involved in obtaining regulatory approvals; |
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the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; |
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competing technological and market developments; |
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our ability to establish additional collaborations; |
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changes in our existing collaborations; |
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the cost of manufacturing scale-up; and |
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the effectiveness of our commercialization activities. |
We currently estimate our research and development expenditures over the next 3 years to range
between $90 million and $150 million. However, we base our outlook regarding the need for funds on
many uncertain variables. Such uncertainties include regulatory approvals, the timing of events
outside our direct control such as product launches by partners and the success of such product
launches, negotiations with potential strategic partners, possible sale of assets or other
transactions resulting from our strategic alternatives evaluation process which is ongoing, and
other factors. Any of these uncertain events can significantly change our cash requirements as
they determine such one-time events as the receipt of major milestones and other payments.
While we expect to fund our research and development activities from cash generated from
internal operations to the extent possible, if we are unable to do so we may need to complete
additional equity or debt financings or seek other external means of financing. If additional
funds are required to support our operations and we are unable to obtain them on terms favorable to
us, we may be required to cease or reduce further development or commercialization of our products,
to sell some or all of our technology or assets or to merge with another entity.
67
We may require additional money to run our business and may be required to raise this money on
terms which are not favorable or which reduce our stock price.
We have incurred losses since our inception and may not generate positive cash flow to fund
our operations for one or more years. As a result, we may need to complete additional equity or
debt financings to fund our operations. Our inability to obtain additional financing could
adversely affect our business. Financings may not be available at all or on favorable terms. In
addition, these financings, if completed, still may not meet our capital needs and could result in
substantial dilution to our stockholders. For instance, in April 2002 and September 2003 we issued
an aggregate of 7.7 million shares of our common stock in private placement offerings. In
addition, in November 2002 we issued in a private placement $155.3 million in aggregate principal
amount of our 6% convertible subordinated notes due 2007, that were convertible into 25,149,025
shares of our common stock. Approximately $125.15 million of principal amount of those notes
remain outstanding and could be converted into approximately 20.8 million common shares. We
announced the redemption of the notes in October 2006 and if noteholders do not convert into common
stock, we would have to pay those noteholders cash equal to 101.2% of the principal amount of their
notes.
If adequate funds are not available, we may be required to delay, reduce the scope of or
eliminate one or more of our research or drug development programs, or our marketing and sales
initiatives. Alternatively, we may be forced to attempt to continue development by entering into
arrangements with collaborative partners or others that require us to relinquish some or all of our
rights to technologies or drug candidates that we would not otherwise relinquish.
Our products face significant regulatory hurdles prior to marketing which could delay or prevent
sales.
Before we obtain the approvals necessary to sell any of our potential products, we must show
through preclinical studies and human testing that each product is safe and effective. We and our
partners have a number of products moving toward or currently in clinical trials, including
lasofoxifene for which Pfizer announced receipt of non-approval letters from the FDA, and two
products in Phase III trials by one of our partners involving bazedoxifene. Failure to show any
products safety and effectiveness would delay or prevent regulatory approval of the product and
could adversely affect our business. The clinical trials process is complex and uncertain. The
results of preclinical studies and initial clinical trials may not necessarily predict the results
from later large-scale clinical trials. In addition, clinical trials may not demonstrate a
products safety and effectiveness to the satisfaction of the regulatory authorities. A number of
companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory
approvals, despite promising results in earlier trials. The FDA may also require additional
clinical trials after regulatory approvals are received, which could be expensive and
time-consuming, and failure to successfully conduct those trials could jeopardize continued
commercialization.
The rate at which we complete our clinical trials depends on many factors, including our
ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient
enrollment is a function of many factors, including the size of the patient population, the
proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in
patient enrollment for our other trials may result in increased costs and longer
development times. In addition, our collaborative partners have rights to control product
development and clinical programs for products developed under the collaborations. As a result,
these collaborators may conduct these programs more slowly or in a different manner than we had
expected. Even if clinical trials are completed, we or our collaborative partners still may not
apply for FDA approval in a timely manner or the FDA still may not grant approval.
We face substantial competition which may limit our revenues.
Some of the drugs that we are developing and marketing will compete with existing treatments.
In addition, several companies are developing new drugs that target the same diseases that we are
targeting and are taking IR-related approaches to drug development. Products that compete with
AVINZA include Purdue Pharma L.P.s OxyContin and MS Contin, Janssen Pharmaceutica L.P.s
Duragesic, aai Pharmas Oramorph SR, Alpharmas Kadian, and generic sustained release morphine
sulfate, oxycodone and fentanyl. New generic, A/B substitutable or other competitive products may
also come to market and compete with our products, reducing our market share and revenues. Many of
our existing or potential competitors, particularly large drug companies, have greater financial,
technical and human resources than we do and may be better equipped to develop, manufacture and
market products. Many of these companies also have extensive experience in preclinical testing and
human clinical trials, obtaining
68
FDA and other regulatory approvals and manufacturing and marketing
pharmaceutical products. In addition, academic institutions, governmental agencies and other
public and private research organizations are developing products that may compete with the
products we are developing. These institutions are becoming more aware of the commercial value of
their findings and are seeking patent protection and licensing arrangements to collect payments for
the use of their technologies. These institutions also may market competitive products on their
own or through joint ventures and will compete with us in recruiting highly qualified scientific
personnel.
We rely heavily on collaborative relationships and termination of any of these programs could
reduce the financial resources available to us, including research funding and milestone payments.
Our strategy for developing and commercializing many of our potential products, including
products aimed at larger markets, includes entering into collaborations with corporate partners,
licensors, licensees and others. These collaborations provide us with funding and research and
development resources for potential products for the treatment or control of metabolic diseases,
hematopoiesis, womens health disorders, inflammation, cardiovascular disease, cancer and skin
disease, and osteoporosis. These agreements also give our collaborative partners significant
discretion when deciding whether or not to pursue any development program. Our collaborations may
not continue or be successful.
In addition, our collaborators may develop drugs, either alone or with others, that compete
with the types of drugs they currently are developing with us. This would result in less support
and increased competition for our programs. If products are approved for marketing under our
collaborative programs, any revenues we receive will depend on the manufacturing, marketing and
sales efforts of our collaborators, who generally retain commercialization rights under the
collaborative agreements. Our current collaborators also generally have the right to terminate
their collaborations under specified circumstances. If any of our collaborative partners breach or
terminate their agreements with us or otherwise fail to conduct their collaborative activities
successfully, our product development under these agreements will be delayed or terminated.
We may have disputes in the future with our collaborators, including disputes concerning which
of us owns the rights to any technology developed. For instance, we were involved in litigation
with Pfizer, which we settled in April 1996, concerning our right to milestones and royalties based
on the development and commercialization of droloxifene. These and other possible disagreements
between us and our collaborators could delay our ability and the ability of our collaborators to
achieve milestones or our receipt of other payments. In addition, any disagreements could delay,
interrupt or terminate the collaborative research, development and commercialization of certain
potential products, or could result in litigation or arbitration. The occurrence of any of these
problems could be time-consuming and expensive and could adversely affect our business.
Challenges to or failure to secure patents and other proprietary rights may significantly hurt our
business.
Our success will depend on our ability and the ability of our licensors to obtain and maintain
patents and proprietary rights for our potential products and to avoid infringing the proprietary
rights of others, both in the United States and in foreign countries. Patents may not be issued
from any of these applications currently on file, or, if issued, may not provide sufficient
protection. In addition, disputes with licensors under our license agreements may arise which could
result in additional financial liability or loss of important technology and potential products and
related revenue, if any.
Our patent position, like that of many pharmaceutical companies, is uncertain and involves
complex legal and technical questions for which important legal principles are unresolved. We may
not develop or obtain rights to products or processes that are patentable. Even if we do obtain
patents, they may not adequately protect the technology we own or have licensed. In addition,
others may challenge, seek to invalidate, infringe or circumvent any patents we own or license, and
rights we receive under those patents may not provide competitive advantages to us. Further, the
manufacture, use or sale of our products may infringe the patent rights of others.
Several drug companies and research and academic institutions have developed technologies,
filed patent applications or received patents for technologies that may be related to our business.
Others have filed patent applications and received patents that conflict with patents or patent
applications we have licensed for our use, either
69
by claiming the same methods or compounds or by
claiming methods or compounds that could dominate those licensed to us. In addition, we may not be
aware of all patents or patent applications that may impact our ability to make, use or sell any of
our potential products. For example, US patent applications may be kept confidential while pending
in the Patent and Trademark Office and patent applications filed in foreign countries are often
first published six months or more after filing. Any conflicts resulting from the patent rights of
others could significantly reduce the coverage of our patents and limit our ability to obtain
meaningful patent protection. While we routinely receive communications or have conversations with
the owners of other patents, none of these third parties have directly threatened an action or
claim against us. If other companies obtain patents with conflicting claims, we may be required to
obtain licenses to those patents or to develop or obtain alternative technology. We may not be
able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such
licenses could delay or prevent us from pursuing the development or commercialization of our
potential products.
We have had and will continue to have discussions with our current and potential collaborators
regarding the scope and validity of our patents and other proprietary rights. If a collaborator or
other party successfully establishes that our patent rights are invalid, we may not be able to
continue our existing collaborations beyond their expiration. Any determination that our patent
rights are invalid also could encourage our collaborators to terminate their agreements where
contractually permitted. Such a determination could also adversely affect our ability to enter
into new collaborations.
We may also need to initiate litigation, which could be time-consuming and expensive, to
enforce our proprietary rights or to determine the scope and validity of others rights. If
litigation results, a court may find our patents or those of our licensors invalid or may find that
we have infringed on a competitors rights. If any of our competitors have filed patent
applications in the United States which claim technology we also have invented, the Patent and
Trademark Office may require us to participate in expensive interference proceedings to determine
who has the right to a patent for the technology.
We also rely on unpatented trade secrets and know-how to protect and maintain our competitive
position. We require our employees, consultants, collaborators and others to sign confidentiality
agreements when they begin their relationship with us. These agreements may be breached, and we
may not have adequate remedies for any breach. In addition, our competitors may independently
discover our trade secrets.
Reliance on third-party manufacturers to supply our products risks supply interruption or
contamination and difficulty controlling costs.
We currently have no manufacturing facilities, and we rely on others for clinical or
commercial production of our marketed and potential products. In addition, some raw materials
necessary for the commercial manufacturing of AVINZA are custom and can be obtained only from our
manufacturers, Elan and Cardinal.
To be successful, we will need to ensure continuity of the manufacture of AVINZA, either
directly or through others, in commercial quantities, in compliance with regulatory requirements at
acceptable cost and in sufficient quantities to meet product growth demands. Any extended or
unplanned manufacturing shutdowns, shortfalls or delays could be expensive and could result in
inventory and product shortages. If we are unable to reliably manufacture our products our
revenues could be adversely affected.
In addition, if we are unable to supply products in development, our ability to conduct
preclinical testing and human clinical trials will be adversely affected. This in turn could also
delay our submission of products for regulatory approval and our initiation of new development
programs. In addition, although other companies have manufactured drugs acting through IRs on a
commercial scale, we may not be able to translate our core technologies or other technologies into
drugs that can be manufactured at costs or in quantities to make marketable products.
The manufacturing process also may be susceptible to contamination, which could cause the
affected manufacturing facility to close until the contamination is identified and fixed. In
addition, problems with equipment failure or operator error also could cause delays in filling our
customers orders.
70
Our business exposes us to product liability risks or our products may need to be recalled, and we
may not have sufficient insurance to cover any claims.
Our business exposes us to potential product liability risks. Our products also may need to
be recalled to address regulatory issues. A successful product liability claim or series of claims
brought against us could result in payment of significant amounts of money and divert managements
attention from running the business. Some of the compounds we are investigating may be harmful to
humans. For example, retinoids as a class are known to contain compounds which can cause birth
defects. We may not be able to maintain our insurance on acceptable terms, or our insurance may
not provide adequate protection in the case of a product liability claim. To the extent that
product liability insurance, if available, does not cover potential claims, we will be required to
self-insure the risks associated with such claims. We believe that we carry reasonably adequate
insurance for product liability claims.
We use hazardous materials which requires us to incur substantial costs to comply with
environmental regulations.
In connection with our research and development activities, we handle hazardous materials,
chemicals and various radioactive compounds. To properly dispose of these hazardous materials in
compliance with environmental regulations, we are required to contract with third parties at
substantial cost to us. Our annual cost of compliance with these regulations is approximately $0.7
million. We cannot completely eliminate the risk of accidental contamination or injury from the
handling and disposing of hazardous materials, whether by us or by our third-party contractors. In
the event of any accident, we could be held liable for any damages that result, which could be
significant. We believe that we carry reasonably adequate insurance for toxic tort claims.
Future sales of our securities may depress the price of our securities.
Sales of substantial amounts of our securities in the public market could seriously harm
prevailing market prices for our securities. These sales might make it difficult or impossible for
us to sell additional securities when we need to raise capital.
You may not receive a return on your securities other than through the sale of your securities.
We have not paid any cash dividends on our common stock to date. In general, we intend to
retain any earnings to support the expansion of our business. We have announced that the Board of
Directors is considering an extraordinary dividend of a substantial portion of the net proceeds
from our product line asset sales. However, other than this extraordinary dividend, we do not
anticipate paying cash dividends on any of our securities in the foreseeable future. Thus any
returns you receive will be highly dependent on increases in the market price for our securities,
if any. The price for our common stock has been highly volatile and may decrease.
Our shareholder rights plan and charter documents may hinder or prevent change of control
transactions.
Our shareholder rights plan and provisions contained in our certificate of incorporation and
bylaws may discourage transactions involving an actual or potential change in our ownership. In
addition, our Board of Directors may issue shares of preferred stock without any further action by
you. Such issuances may have the effect of delaying or preventing a change in our ownership. If
changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our
current Board of Directors to be removed and replaced, even if you or our other stockholders
believe that such actions are in the best interests of us and our stockholders.
71
ITEM 6. EXHIBITS
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Exhibit Number |
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Description |
3.1 (1)
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Amended and Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.2). |
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3.2 (1)
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Bylaws of the Company, as amended. (Filed as Exhibit 3.3). |
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3.3 (2)
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Amended Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock of the Company. |
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3.5 (3)
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Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the
Company dated June 14, 2000. |
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3.6 (4)
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Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the
Company dated September 30, 2004. |
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3.7 (5)
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Amendment to the Bylaws dated November 13, 2005 (Filed as Exhibit 3.1). |
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4.1 (6)
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Specimen stock certificate for shares of Common Stock of the Company. |
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4.2 (18)
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2006 Preferred Shares Rights Agreement, dated as of October 13, 2006, by and between the
Company and Mellon Investor Services, LLC (Filed as Exhibit 4.1). |
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4.3 (11)
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Indenture dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P. Morgan
Trust Company, National Association, as trustee, with respect to the 6% convertible
subordinated notes due 2007. (Filed as Exhibit 4.3). |
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4.4 (11)
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Form of 6% Convertible Subordinated Note due 2007. (Filed as Exhibit 4.4). |
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4.5 (11)
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Pledge Agreement dated November 26, 2002, between Ligand Pharmaceuticals Incorporated and J.P.
Morgan Trust Company, National Association. (Filed as Exhibit 4.5). |
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4.6 (11)
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Control Agreement dated November 26, 2002, among Ligand Pharmaceuticals Incorporated, J.P.
Morgan Trust Company, National Association and JP Morgan Chase Bank. (Filed as Exhibit 4.6). |
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10.294 (13)
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Purchase Agreement, by and between Ligand
Pharmaceuticals Incorporated, King
Pharmaceuticals, Inc. and King
Pharmaceuticals Research and Development,
Inc., dated as of September 6, 2006. (Filed
as Exhibit 2.1) |
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10.295 (14)
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Contract Sales Force Agreement, by and
between Ligand Pharmaceuticals Incorporated
and King Pharmaceuticals, Inc. dated as of
September 6, 2006. (Filed as Exhibit 10.1) |
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10.296 (15)
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Purchase Agreement, by and among Ligand
Pharmaceuticals Incorporated, Seragen, Inc.,
Eisai Inc. and Eisai Co., Ltd., dated as of
September 7, 2006. (Filed as Exhibit 2.1) |
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10.297 (16)
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Separation Agreement dated as of July 31,
2006 by and between the Company and David E.
Robinson. (Filed as Exhibit 10.1) |
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10.298
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Offer letter/employment agreement by and
between the Company and Henry F.
Blissenbach, dated as of August 1, 2006. |
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10.299 (17)
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Form of Letter Agreement (Change of Control
Severance Agreement) by and between the
Company and certain officers dated as of
August 25, 2006. (Filed as Exhibit 10.1) |
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|
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10.300 (17)
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Form of Letter Agreement (Ordinary Severance
Agreement) by and between the Company and
certain officers dated as of August 25,
2006. (Filed as Exhibit 10.2) |
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31.1
|
|
Certification by Principal Executive
Officer, Pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
72
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|
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Exhibit Number |
|
Description |
31.2
|
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Certification by Principal Financial
Officer, Pursuant to Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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|
|
32.1
|
|
Certification by Principal Executive
Officer, Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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|
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32.2
|
|
Certification by Principal Financial
Officer, Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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|
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(1) |
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This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Companys Registration Statement on Form S-4 (No. 333-58823)
filed on July 9, 1998. |
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(2) |
|
This exhibit was previously filed as part of and is hereby incorporated by reference to same
numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the period ended
March 31, 1999. |
|
(3) |
|
This exhibit was previously filed as part of, and are hereby incorporated by reference to the
same numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2000. |
|
(4) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
same numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the period
ended September 30, 2004. |
|
(5) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
number exhibit filed with the Companys current report on Form 8-K filed on November 14, 2005. |
|
(6) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
same numbered exhibit filed with the Companys Registration Statement on Form S-1 (No.
33-47257) filed on April 16, 1992 as amended. |
|
(7) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Companys Registration Statement on Form S-3 (No. 333-12603)
filed on September 25, 1996, as amended. |
|
(8) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Registration Statement on Form 8-A/A Amendment No. 1 (No.
0-20720) filed on November 10, 1998. |
|
(9) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Registration Statement on Form 8-A/A Amendment No. 2 (No.
0-20720) filed on December 24, 1998. |
|
(10) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
same numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the period
ended September 30, 2002. |
|
(11) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Companys Registration Statement on Form S-3 (No. 333-102483)
filed on January 13, 2003, as amended. |
|
(12) |
|
This exhibit was previously filed as part of, and is hereby incorporated by reference to the
numbered exhibit filed with the Companys Form 8-A 12G/A, filed on April 6, 2004. |
|
(13) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on September 11,
2006. |
|
(14) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on September 12,
2006. |
73
|
|
|
(15) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on September 11,
2006. |
|
(16) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on August 4, 2006. |
|
(17) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on August 30, 2006. |
|
(18) |
|
This exhibit was previously filed as part of, and is being incorporated by reference to the
numbered exhibit filed with the Companys current report on Form 8-K filed on October 27,
2006. |
74
LIGAND PHARMACEUTICALS INCORPORATED
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.
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Date: November 14, 2006 |
By: |
/s/ Paul V. Maier
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Paul V. Maier |
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|
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Senior Vice President, Chief Financial Officer |
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75