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March 31, 1998
LIGAND PHARMACEUTICALS INC (LGND)
Annual Report (SEC form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report on Form 10-K may contain predictions, estimates and other forward-looking statements that involve a
number of risks and uncertainties, including those discussed in Item 1 above at "Risks and Uncertainties." While this outlook
represents management's current judgment on the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below. The Company undertakes no obligation to
release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after
the date hereof.
OVERVIEW
Since January 1989, the Company has devoted substantially all of its resources to its intracellular receptor ("IR") and Signal
Transducers and Activators of Transcription drug discovery and development programs. The Company has been unprofitable
since its inception and expects to incur substantial additional operating losses due to continued requirements for research and
development, preclinical testing, clinical trials, regulatory activities, establishment of manufacturing processes and sales and
marketing capabilities until the approval and commercialization of the Company's products generate sufficient revenues,
expected in 1999. The Company expects that losses will fluctuate from quarter to quarter as a result of differences in the timing
of expenses incurred and the revenues earned from collaborative arrangements. Some of these fluctuations may be significant.
As of December 31, 1997, the Company's accumulated deficit was approximately $277.7 million.
In May 1995, Glycomed Incorporated ("Glycomed") was merged into a wholly-owned subsidiary of the Company ("the
Merger"). Glycomed is a biopharmaceutical company conducting research and development of pharmaceuticals based on
biological activities of complex carbohydrates. The Merger was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was allocated to in-process technology and was
written off, resulting in a one time non-cash charge to results of operations of approximately $19.6 million. The results of
operations of Glycomed are included in the Company's consolidated results of operations from the date of the Merger.
In December 1994, the Company and Allergan, Inc. ("Allergan") formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT")
to continue the research and development activities previously conducted by the Allergan Ligand Joint Venture (the "Joint
Venture"). In June 1995, the Company and ALRT completed a public offering of 3,250,000 units (the "Units") with aggregate
proceeds of $32.5 million (the "ALRT Offering") and cash contributions by Allergan and the Company of $50.0 million and
$17.5 million, respectively, providing for net proceeds of $94.3 million for retinoid product research and development. Each
Unit consisted of one share of ALRT's callable common stock ("Callable Common Stock") and two warrants, each warrant
entitling the holder to purchase one share of the Common Stock of the Company. The Company's $17.5 million cash
contribution resulted in a one-time charge to operations. The Company also recorded a warrant subscription receivable and
corresponding increase in paid-in capital of $5.9 million pursuant to the ALRT Offering. From June 3, 1995, through
September 23, 1997 cash received from ALRT pursuant to Research and Development Agreement was prorated between
contract revenue and warrant subscription receivable based on their respective values. In September 1997, the Company and
Allergan exercised their respective options to purchase all of the Callable Common Stock (the "Stock Purchase Option") and
certain assets (the "Asset Purchase Option") of ALRT. The Company's exercise of the Stock Purchase Option required the
issuance of 3,166,567 shares of the Company's Common Stock along with cash payments totaling $25.0 million, to holders of
the Callable Common Stock in November 1997. Allergen's exercise of the Asset Purchase Option required a cash payment of
$8.9 million to ALRT in November 1997, which was used by the Company to pay a portion of the Stock Purchase Option.
The buyback of ALRT was accounted for using the purchase method of accounting. The excess of the purchase price over the
fair value of net assets acquired was allocated to in-process technology and written off, resulting in a one time noncash charge
to results of operations of $65.0 million.
In November 1997, the Company initiated a strategic alliance with Eli Lilly and Company ("Lilly") for the discovery and
development of products based upon Ligands' IR technology. The collaboration focuses on products with broad applications
across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular disease associated
with insulin resistance and obesity. The alliance provided a $31.2 million equity investment by Lilly in the Company, $7.2 million
of research revenue in 1997, an upfront non-refundable milestone payment of $12.5 million and could provide the Company
with up to $49 million in research funding over five years (the "Lilly Collaboration").
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ("1997"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
The Company had revenues of $51.7 million for 1997 compared to revenues of $36.8 million for 1996. The increase in
revenues is primarily due to the Lilly Collaboration revenues offset by decreased revenues from the research and development
collaboration with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation ("AHP"),
due to a one-time payment of $1.5 million in 1996, which expanded and amended the research and development agreement, as
well as a $1.3 million milestone payment received from Pfizer Inc. ("Pfizer") in 1996. Revenues in 1997 were derived from the
Company's research and development agreements with (i) Lilly of $19.7 million, (ii) ALRT of $19.0 million, (iii) AHP of $4.0
million, (iv) SmithKline Beecham Corporation ("SmithKline Beecham") of $3.2 million, (v) Sankyo Company, Ltd. ("Sankyo")
of $2.3 million, (vi) Abbott Laboratories ("Abbott") of $1.7 million, (vii) Glaxo-Wellcome plc ("Glaxo") of $1.3 million and
product sales of Ligand (Canada) in-licensed products of $418,000. Revenues for 1996 were derived from the Company's
research and development agreements with (i) ALRT of $18.6 million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million, (iv)
Abbott of $2.5 million, (v) SmithKline Beecham of $2.4 million, (vi) Glaxo of $2.1 million as well as from a milestone payment
received from Pfizer of $1.3 million, products sales of Ligand (Canada) in-licensed products of $207,000 and revenues from a
National Institutes of Health ("NIH") grant of $99,000.
For 1997, research and development expenses increased to $72.4 million from $59.5 million in 1996. These expenses
increased primarily due to expansion of the Company's clinical and development activities, as well as related additions of clinical
and development personnel. Selling, general and administrative expenses decreased to $10.1 million in 1997 from $10.2 million
in 1996. The decrease was primarily attributable to higher legal expenses incurred in 1996 related to the settlement of future
product rights litigation offset by additions to personnel in 1997 to support expanded clinical and development activities.
Interest income was $3.7 million for 1997 and 1996. Interest expense decreased slightly to $8.1 million for 1997, from $8.2
million in 1996, due to conversion of $7.5 million convertible notes from AHP to equity in 1997, offset by the addition of $2.5
million of convertible notes from SmithKline Beecham in 1997 and increases in capital lease obligations used to finance
equipment.
A one-time charge of $65.0 million was incurred in 1997 for the write off of in-process technology related to the exercise of the
Stock Purchase Option.
The Company has significant net operating loss carry forwards for federal and state income taxes. See Note 13 to
Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1996 ("1996"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 ("1995")
The Company had revenues of $36.8 million for 1996 compared to revenues of $24.5 million for 1995. The increase in
revenues is primarily due to increased collaborative research and development revenues from ALRT, milestone revenues from
Pfizer, increased revenues under an expanded and amended research and development agreement entered into in January 1996
(which began in September 1994) with AHP, and a full year effect of the collaborative research agreement with Sankyo (which
became effective the date of the Merger). Revenues in 1996 were derived from the Company's research and development
agreements with (i) ALRT of $18.6 million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million, (iv) Abbott of $2.5 million, (v)
SmithKline Beecham of $2.4 million, (vi) Glaxo of $2.1 million, as well as from milestone revenues from Pfizer of $1.3 million,
product sales of Ligand (Canada) in-licensed products of $207,000 and revenues from
an NIH grant of $99,000. Revenues in 1995 were derived from the Company's research and development agreements with (i)
ALRT of $12.0 million, (ii) AHP of $4.0 million, (iii) Abbott of $2.6 million, (iv) Glaxo of $2.1 million, (v) SmithKline Beecham
of $2.1 million, (vi) Sankyo of $1.7 million, and from product sales of Ligand (Canada) in-licensed products of $120,000.
For 1996, research and development expenses increased to $59.5 million from $41.6 million in 1995. These expenses
increased due to expansion of the Company's clinical and development activities, and expanded collaborative research
programs, related additions of clinical, development and research personnel and inclusion of the cost of Glycomed's operations
for a full year in 1996. Selling, general and administrative expenses increased to $10.2 million in 1996 from $8.2 million in
1995. The increase was primarily due to additions to personnel to support clinical, development and research programs, as well
as expanded sales and marketing activities. Interest income increased slightly to $3.7 million in 1996 from $3.6 million in 1995.
Increases in interest income were a result of the completion of a public offering of approximately $35.3 million in October
1996, and increased research revenues, offset by usage of cash to support expansion activities. Interest expense increased to
$8.2 million in 1996 from $5.4 million in 1995. The increase was primarily due to interest required under Glycomed's
Convertible Subordinated Debentures ("Debentures"), accretion of debt discount under the Debentures and capital lease
obligations used to finance equipment.
One-time charges of $19.6 million and $17.5 million were incurred in 1995 due to the Merger and ALRT offering, respectively.
The Company has significant net operating loss carry forwards for federal and state income taxes. See Note 13 to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private and public offerings of its equity securities, collaborative research
revenues, capital and operating lease transactions, issuance of convertible notes, investment income and product sales. From
inception through December 1997, the Company has raised $195.7 million from sales of equity securities: $78.2 million from
the Company's public offerings and an aggregate of $117.5 million from private placements and the exercise of options and
warrants.
In March 1997, July 1997 and again in December 1997 the Company converted $3.8 million, $2.5 million and $1.3 million
respectively, of the convertible notes outstanding to AHP into 374,626, 249,749 and 124,875 shares, respectively, of
Common Stock at a $10.01 conversion price, resulting in an outstanding balance of convertible notes to AHP of $3.8 million.
In February 1997, SmithKline Beecham provided a third installment equity investment of $2.5 million by purchasing 164,474
shares of Common Stock as a result of its election to expand the scope of research under its research agreement with the
Company. The final installment of $2.5 million was provided in October 1997 to the Company as a convertible note as a result
of SmithKline Beecham's election to extend the collaboration. The note is convertible into Common Stock at $13.56 per share
and is due October 2002 unless converted into Common Stock earlier. The interest rate on the note is payable semi-annually at
prime.
As of December 31, 1997, the Company had acquired an aggregate of $22.0 million in property, laboratory and office
equipment, and $4.7 million in tenant leasehold improvements, substantially all of which has been funded through capital lease
and equipment note obligations and which also includes laboratory and office equipment acquired in the Merger. In addition,
the Company leases its office and laboratory facilities under operating leases. In July 1994, the Company entered into a
long-term lease related to the construction of a new laboratory facility, which was completed and occupied in August 1995. In
March 1997, the Company entered into a long-term lease, related to a second build-to-suit facility and loaned the construction
partnership $3.7 million at an interest rate of 8.5% which will be paid back monthly over a 10-year period. In November 1997,
the Company closed its Glycomed facility in Alameda at the expiration of the leases and Glycomed's assets and programs were
integrated into Ligand's operations. At the end of 1997, one of the Company's main operating lease agreements for office and
research facilities expired, at which time the Company moved into its second build-to-suit facility. In February 1997, the
Company signed a master lease
agreement to finance future capital equipment up to $1.5 million, and in July 1997, the master lease agreement was extended to
December 1998 to include up to an additional $4.5 million. Each individual schedule under the extended master lease
agreement will be paid back monthly with interest over a five-year period. As of December 31, 1997, the Company had $3.6
million available to finance future capital equipment.
Working capital decreased to $62.4 million as of December 31, 1997, from $71.7 million at the end of 1996. The decrease in
working capital resulted from an increase in accrued liabilities relating to the increase in operating expenses, previously
described. Cash and cash equivalents, short-term investments and restricted cash increased to $86.3 million at December 31,
1997 from $84.2 million at December 31, 1996, due to increases in cash related to the Lilly Collaboration and the issuance of
convertible notes to SmithKline Beecham, offset by increases in operating expenses, as described above, and exercise of the
Stock Purchase Option. The Company primarily invests its cash in United States government and investment grade corporate
debt securities.
The Company believes that its available cash, cash equivalents, marketable securities and existing sources of funding will be
adequate to satisfy its anticipated capital requirements through 1999. The Company's future capital requirements will depend on
many factors, including the pace of scientific progress in 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 ability to establish additional collaborations, changes in the existing collaborations, the cost of manufacturing
scale-up and the effectiveness of the Company's commercialization activities.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a
result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such
"Year 2000" requirements. Certain of the Company's internal computer systems are not year 2000 compliant, and the
Company utilizes third-party equipment and software that may not be Year 2000 compliant. The Company has commenced
taking actions to correct or convert such internal systems and is in the early stages of conducting an audit of its third-party
suppliers as to the Year 2000 compliance of their systems. The Company does not believe that the cost of these actions will
have a material adverse affect on the Company's business, financial condition or operating results. However, there can be no
assurance that a failure of the Company's internal computer systems or of third-party equipment or software used by the
Company, or of systems maintained by the Company's suppliers, to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or operating results. In addition, there can be no assurance that adverse
changes in the purchasing patterns of the Company's potential customers as a result of Year 2000 issues affecting such
customers will not have a material adverse effect on the Company's business, financial condition or results of operations. These
expenditures may result in reduced funds available to purchase the Company's products which could have a material adverse
effect on the Company's business, operating results and financial condition.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company required by this item are set forth at the pages
indicated in Item 14 (a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable. |
