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Biotech / Medical : Ligand (LGND) Breakout! -- Ignore unavailable to you. Want to Upgrade?

To: Andrew H who wrote (9951)	10/22/1997 1:34:00 AM
From: jay silberman	Read Replies (1) \| Respond to of 32384

MORE FROM LEHMAN BROS: Headline: Ligand Pharmaceuticals: Reports Large Strategic Alliance with Eli Lilly Author: CA Butler,PhD/E.Ende,MD(212)526-4410 Company: LGND Industry: BIOTEC Ticker : LGND Rank(Prev): 1-Buy Rank(Curr): 1-Buy Price : $16 1/16 52wk Range: $18-9.13 Price Target: $ 24 Today's Date : 10/20/97 Fiscal Year : DEC ------------------------------------------------------------------------------ EPS 1996 1997 1998 1999 QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: -0.25A -0.32A -0.32A -0.32E -0.32E - -E - -E 2nd: -0.36A -0.32A -0.32A -0.33E -0.33E - -E - -E 3rd: -0.30A -0.31E -0.31E -0.25E -0.25E - -E - -E 4th: -0.38A -0.32E -0.32E -0.15E -0.15E - -E - -E ------------------------------------------------------------------------------ Year:$ -1.30A $ -1.27E $ -1.27E $ -1.05E $ -1.05E $ - -E $ - -E Street Est.: $ -1.24E $ -1.26E $ -0.88E $ -0.87E $ - -E $ - -E ------------------------------------------------------------------------------ Price (As of 10/20): $16 1/16 Revenue (1997): 41 Mil. Return On Equity (97): N/A Proj. 5yr EPS Grth: N/A Shares Outstanding: 32.5 Mil. Dividend Yield: N/A Mkt Capitalization: 522 Mil. P/E 1997; 1998 : N/M; N/M Current Book Value: $0.71 Convertible: None Debt-to-Capital: 18% Disclosure(s): C ------------------------------------------------------------------------------ * Lilly and Ligand engage in a strategic alliance covering Ligand's technology associated with Retinoid X Receptors (RXR), which are new targets for diabetes. * The transaction covers an equity investment in Ligand common stock, milestones, research payments, and royalties by Lilly in excess of $175 million * Ligand is able to maintain a relatively low burn rate, yet an operationally aggressive research and development program. Lilly, on the other hand, is able to replace the gap in 2002 when Prozac comes off-patent. * While this alliance was expected, the detail, breadth, and financial leverage exceed our expectations. We have increased our price target to $24 from $20 and continue to rate Ligand a BUY 1. ------------------------------------------------------------------------------ SUMMARY Lilly and Ligand have engaged in a strong research and development agreement which could conservatively exceed $175 million. The agreement covers Ligand's programs primarily in diabetes research, but is extended to cover early stage research programs in cardiovascular diseases, and metabolic disorders. Programs Ligand programs tagged in this alliance include one clinical program (in the clinic in Europe), Targretin (1069), 2 advanced preclinical programs (1268 and 1324), and three research programs (directed against hepatic nuclear factor 4 receptor, the obesity gene promoter and peroxisome proliferator activated receptor (PPAR). Terms Ligand will receive this quarter $37.5 million for the sale of equity to Lilly at a price 20 percent above the trailing 20 days (or $17.23 per share which will be recorded in the fourth quarter financial statements as a "gain in the sale of equity in excess over market" of $6.125 million) and $12.5 million in upfront payments. Additionally, there are $49 million in research payments which will be paid to Ligand over the next 5 years (and could be extended for three additional years at an option or amount for which we are unclear). The equity to Lilly has a one-year lock-up period and the amount that can be sold in future years, if desirable, is limited. These monies will amount toslightly less than $10 million per year. This part of the agreement is guaranteed. Approximately $75 million will be paid as milestones over the next eight years. Roughly $10 million of the $75 million is related to Targretin beginning a clinical trial in the US This trial is expected to begin next year. The probability the trial does not begin is relatively low as the product is currently in the clinic in Europe. Moreover milestone payments should also be paid next year as the programs 1268 and 1324 move into the clinic late next year as well. Thus, we expect at least an additional $20 million in milestone payments to paid next year. Approximately $45-$50 million in milestones are related to the three later stage programs (1069,1268, and 1324). It is anticipated that each program will have a 4 year clinical period, thus we will not see those drugs in the market in the US until 2002/2003. For Lilly this is quite strategic as they are proactively addressing a revenue gap as Prozac, their multi-billion dollar anti-depressant, goes off-patent. Royalties on the future sales of one of the more advanced compounds (1069,1268, and 1324) are estimated to be 15 percent and on the less advanced compounds at roughly 7 percent. A further component to the transaction is quite interesting. Ligand has an option to take a product from Lilly (which will likely seek FDA approval next year) and sell it themselves. The option express within 90 days following the close of this transaction. It is our sense from speaking with senior management at Ligand that they are leaning toward exercising this option. We are unclear of the product, but know it would fit into an area of specific focus for Ligand. In this option (if elected by Ligand), Ligand will have North American and European rights to market the product and Lilly will manufacture it. If elected, Ligand will give Lilly $10 million in stock at the market price at the time of exercise plus between $5-$10 million in additional equity subject to the selling price Ligand determines for the product. (The higher Ligand sells the product the greater the transfer margin for Lilly, which is fixed, and the less equity Ligand will need to sell back to Lilly.). If Ligand exercises the option they will book $30 million in their financial statements for "consideration received". Should Ligand not exercise the option, they may "put" $20 million in equity to Lilly at a 20 percent premium to the price of the stock at that time and will be able to receive another 150 basis points in royalty on the sale of Targretin (raising the royalty rate from 15 percent to 16.5 percent. CONCLUSION Other programs in the RXR technology are also included, but the magnitude and dollars to Ligand are less clear. This transaction, nevertheless, is in our judgment very strong for both parties. For Lilly the deal strengthens their presence in diabetes and other metabolic disorders and gives them additional large revenue-generating opportunities in 2002 and beyond. For Ligand it gives them development funds for the RXR technology, which was recently purchased from the Allergan-Ligand joint venture (ALRT), minimizes their burn, and potentially allows them to begin marketing their first drug in the US and Europe themselves. It is Ligand's stated goal to move into positive earnings in 1999. With transactions like this, that goal should be achievable. Over the next 12 months, we anticipate numerous additional clinical, regulatory, and strategic news events that should include: an NDA filing for topical Panretin in KS, the delineation of further NDA target indications from the oral Panretin program and ALRT1550 Phase IIb trials to begin. In conclusion, we view the current stock price as attractive and we have increased our price target to $24 from $20. In addition, we reiterate our 1- Buy rating. BUSINESS DESCRIPTION: Ligand Pharmaceuticals is a molecularly-based drug discovery and development company. It is primarily focused on the development of drugs that regulate intracellular receptors (IRS). ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-Anemployee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.]