UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR
[ ] 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)
DELAWARE 77-0160744
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10275 SCIENCE CENTER DRIVE 92121-1117
SAN DIEGO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 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 [X] No [ ]
As of July 31, 1999 the registrant had 47,365,453 shares of common stock
outstanding.
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS
COVER PAGE ......................................................................... 1
TABLE OF CONTENTS .................................................................. 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ........ 3
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and 1998 ..................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30,
1999 and 1998 .............................................................. 5
Notes to Consolidated Financial Statements ................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .......... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................... *
ITEM 2. Changes in Securities and Use of Proceeds ........................... 21
ITEM 3. Defaults upon Senior Securities ..................................... *
ITEM 4. Submission of Matters to a Vote of Security Holders ................. 21
ITEM 5. Other Information ................................................... *
ITEM 6. Exhibits and Reports on Form 8-K .................................... 21
SIGNATURE .......................................................................... 23
* No information provided due to inapplicability of item.
2
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,386 $ 32,801
Short-term investments 25,257 37,166
Accounts receivable, net 2,898 830
Inventories 6,458 6,166
Other current assets 1,169 1,030
--------- ---------
Total current assets 44,168 77,993
Restricted short-term investments 2,286 2,554
Property and equipment, net 22,525 23,722
Acquired technology, net 39,640 40,312
Notes receivable from officers and employees 456 544
Other assets 14,223 10,895
--------- ---------
$ 123,298 $ 156,020
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 7,601 $ 12,363
Accrued liabilities 6,524 7,216
Deferred revenue 3,159 4,115
Current portion of equipment financing obligations 3,532 3,201
--------- ---------
Total current liabilities 20,816 26,895
--------- ---------
Long-term equipment financing obligations 7,562 8,165
--------- ---------
Accrued acquisition obligation 40,000 50,000
--------- ---------
Convertible note 2,500 2,500
--------- ---------
Convertible subordinated debentures 40,639 39,302
--------- ---------
Zero coupon convertible notes 42,053 40,520
--------- ---------
Stockholders' deficit:
Convertible preferred stock, $.001 par value; 5,000,000
shares authorized; none issued -- --
Common stock, $.001 par value; 80,000,000 shares
authorized; 47,314,576 shares and 45,690,067 shares issued
at June 30, 1999 and December 31, 1998, respectively 47 46
Paid-in capital 401,663 384,715
Deferred warrant expense (2,214) --
Adjustment for unrealized losses on available-for-sale securities (575) (482)
Accumulated deficit (429,182) (395,630)
--------- ---------
(30,261) (11,351)
Less treasury stock, at cost (1,114 shares
at June 30, 1999 and December 31, 1998) (11) (11)
--------- ---------
Total stockholders' deficit (30,272) (11,362)
--------- ---------
$ 123,298 $ 156,020
========= =========
See accompanying notes.
3
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Product sales $ 1,931 $ 87 $ 6,297 $ 179
Contract manufacturing sales 931 -- 1,227 --
Collaborative research and development,
and other milestone revenues 5,559 4,300 11,178 9,273
-------- -------- -------- --------
Total revenues 8,421 4,387 18,702 9,452
-------- -------- -------- --------
Costs and expenses:
Cost of products and services sold 2,432 30 5,014 204
Research and development 14,612 17,302 29,082 32,033
Selling, general and administrative 8,167 3,330 14,042 6,100
-------- -------- -------- --------
Total costs and expenses 25,211 20,662 48,138 38,337
-------- -------- -------- --------
Loss from operations (16,790) (16,275) (29,436) (28,885)
Interest income 525 838 1,275 1,882
Interest expense (2,728) (1,973) (5,391) (3,948)
-------- -------- -------- --------
Net loss
$(18,993) $(17,410) $(33,552) $(30,951)
======== ======== ======== ========
Basic and diluted net loss per share $ (.40) $ (.45) $ (.73) $ (.80)
======== ======== ======== ========
Shares used in computing net loss per share 47,033 38,849 46,129 38,708
======== ======== ======== ========
See accompanying notes.
4
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net loss $(33,552) $(30,951)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,521 2,154
Amortization of notes receivable from officers and employees 88 99
Accretion of debt discount and interest 2,871 1,337
Change in operating assets and liabilities:
Accounts receivable (2,068) --
Inventories (292) --
Other current assets (139) (2,314)
Accounts payable and accrued liabilities (5,454) (3,772)
Deferred revenue (956) 1,675
-------- --------
Net cash used in operating activities (35,981) (31,772)
-------- --------
INVESTING ACTIVITIES
Purchase of short-term investments (15,521) (25,514)
Proceeds from short-term investments 27,337 24,406
Increase in notes receivable from officers and employees -- (117)
Increase in other assets (4,114) (7,305)
Decrease in other assets 647 1,130
Purchase of property and equipment (1,513) (2,817)
-------- --------
Net cash (used in) provided by investing activities 6,836 (10,217)
-------- --------
FINANCING ACTIVITIES
Principal payments on equipment financing obligations (1,593) (1,517)
Proceeds from equipment financing arrangements 1,319 1,486
Net change in restricted short-term investment 268 248
Net proceeds from sale of common stock 4,736 5,133
-------- --------
Net cash provided by financing activities 4,730 5,350
-------- --------
Net decrease in cash and cash equivalents (24,415) (36,639)
Cash and cash equivalents at beginning of period 32,801 62,252
-------- --------
Cash and cash equivalents at end of period $ 8,386 $ 25,613
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,509 $ 2,611
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of accrued acquisition obligation to common stock $ 10,000 --
Warrants due X-Ceptor investors $ 2,214 --
Conversion of note to common stock -- $ 3,750
See accompanying notes.
5
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. BASIS OF PRESENTATION
The consolidated financial statements of Ligand Pharmaceuticals Incorporated
("Ligand") for the three and six months ended June 30, 1999 and 1998 are
unaudited. These financial statements reflect all adjustments, consisting of
only normal recurring adjustments which, in the opinion of management, are
necessary to fairly present the consolidated financial position as of June 30,
1999 and the consolidated results of operations for the three and six months
ended June 30, 1999 and 1998. The results of operations for the period ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the year ending December 31, 1999. For more complete financial information,
these financial statements, and the notes thereto, should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1998 included in the Ligand Pharmaceuticals Incorporated Form 10-K filed
with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the consolidated financial statements.
Actual results could differ from those estimates.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that all components of comprehensive income, including net
income or loss, be reported in the financial statements in the period in which
they are recognized. SFAS No. 130 requires the change in net unrealized gains
(losses) on available-for-sale securities to be included in comprehensive
income. As adjusted for this item, comprehensive net loss for the three and six
month periods ended June 30, 1999 and 1998 is as follows ($,000):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Comprehensive net loss $(19,059) $(17,214) $(33,645) $(29,497)
======== ======== ======== ========
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Basic and diluted net loss per share amounts are equivalent
for the periods presented as the inclusion of common stock equivalents in the
number of shares used for the diluted computation would be anti-dilutive.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in-first-out method. Inventories consist of the following
($,000):
June 30, December 31,
1999 1998
--------------------------
Raw materials $1,302 $2,382
Work-in-process 4,005 3,634
Finished goods 1,151 150
------ ------
$6,458 $6,166
====== ======
The products Panretin(R) and ONTAK(R) received approval for marketing by the
U.S. Food and Drug Administration
6
("FDA") in early February 1999. Ligand uses third-party manufacturers for all
manufacturing related to the production of Panretin commercial inventory. ONTAK
commercial inventory is produced at the manufacturing facility of Marathon
Biopharmaceuticals, Incorporated, a wholly-owned subsidiary of our subsidiary
Seragen, Inc. ("Seragen"), the assets of which were acquired in January 1999.
Inventory also includes Targretin(R), for which a New Drug Application ("NDA")
was filed by Ligand in June 1999. In preparation for the approval by the FDA, if
received, Ligand has manufactured commercial quantities of Targretin of
approximately $1.4 million of work-in-process inventory as of June 30, 1999. If
the FDA does not approve the NDA, and Targretin is not approved for commercial
sale, any capitalized costs related to Targretin will be expensed.
5. INVESTMENT IN X-CEPTOR
Effective June 30, 1999, Ligand became a minority equity investor in a new
private corporation, X-Ceptor Therapeutics, Inc. ("X-Ceptor"), whose mission is
to conduct research in and identify therapeutic products from the field of
orphan nuclear receptors. To date, Ligand has invested $2.775 million in
X-Ceptor through the acquisition of Series B Convertible Preferred Stock
("Series B Stock"). Ligand has also granted to X-Ceptor an exclusive license to
use the Ligand orphan nuclear receptors technology that is not currently
committed to other partnership programs and a nonexclusive license to use
Ligand's enabling proprietary process technology as it relates to drug discovery
using orphan nuclear receptors. X-Ceptor reimbursed Ligand for prior research
and development expenses incurred related to the orphan nuclear receptors
technology with a payment of $2.0 million with $1.711 million recognized as
revenue in June 1999.
A second acquisition of Series B Stock is planned in the third quarter of
1999. At the closing of the second Series B Stock financing, Ligand will invest
up to an additional $2.225 million and issue warrants exercisable into an
aggregate of up to 950,000 shares of Ligand common stock to X-Ceptor investors
and founders, based upon a cumulative investment of up to $20.0 million from all
investors in X-Ceptor other than Ligand. The exercise price of these warrants is
set at $13.80, a 30% premium to the average of the closing price of Ligand
common stock for the 20 trading days immediately prior to the initial
investment. The warrants will expire five years from the date of issuance.
Warrants exercisable into 527,250 of the 950,000 shares of Ligand common
stock were due the X-Ceptor investors and founders effective June 30, 1999.
These warrants were valued at $2.214 million using the Black-Scholes valuation
model and the following assumptions: risk free interest rate of 5.9%, volatility
of 63.5%, expected life of 5 years, and no dividend yield. The value of the
527,250 warrants at June 30, 1999 was recorded as a component of stockholders'
deficit and will be amortized to operating expense over a three-year period.
Ligand has the option to purchase all of the capital stock of X-Ceptor.
Under this option, Ligand will have the right but not the obligation to acquire
all, but not less than all, of the outstanding X-Ceptor stock at June 30, 2002
or upon the cash balance of X-Ceptor falling below a pre-determined amount. Upon
certain conditions, Ligand may extend the option by 12 months by providing
additional funding of $5.0 million. The option price, payable pro-rata based on
total cumulative non-Ligand funding, is up to $61.4 million at June 30, 2002 (or
earlier, in certain circumstances) or up to $79.8 million upon extension. The
option price may be paid in cash or shares of Ligand common stock, or any
combination of the two, at Ligand's sole discretion.
To accomplish its research and development goals, X-Ceptor may enter into
corporate partnerships, which must contain provisions allowing for the transfer
of rights to Ligand in the event of an exercise of the Ligand option. In
addition, Ligand will not perform any research and development activities on
behalf of X-Ceptor.
6. WARRANTS
In May 1999, Ligand received net proceeds of approximately $3.5 million from
an investor who elected to exercise warrants to purchase 625,000 shares of
Ligand common stock.
See Note 5 regarding warrants related to the X-Ceptor investment.
7. SUBSEQUENT EVENTS
ZERO COUPON CONVERTIBLE NOTES - In July 1999, Ligand issued an additional
$40.0 million of Zero Coupon Convertible Notes ("Notes") under the terms of the
strategic alliance entered into in September 1998 with Elan Corporation, plc
("Elan"), and its Elan International Services, Ltd. ("EIS") subsidiary (the
"Elan Agreement"). The Notes issued in this
7
transaction are due in November 2008, accrue interest at 8.00% per annum,
compounding semi-annually, are convertible at $14.00 per share and are callable
at accreted value beginning in November 2001.
Under the Elan Agreement, Ligand may use the proceeds of the issuance to
satisfy up to $40.0 million of contingent merger obligations incurred in
connection with the acquisition of Seragen and the purchase of the assets of
Marathon Biopharmaceuticals LLC ("Marathon"). See Accrued Acquisition Obligation
below.
Of the $130.0 million of financing originally available under the Elan
Agreement, Elan and its affiliates have invested $20.0 million in the form of
Ligand common stock and $80.0 million in the form of Notes, including the $40.0
million Notes described above.
All of the Notes purchased to date are convertible into Ligand common stock
at $14.00 per share. Assuming conversion of all of the Notes issued to date,
Elan and its affiliates would beneficially own approximately 13.0% of Ligand's
fully diluted shares outstanding.
In addition, in August 1999 Ligand and Elan and its affiliates agreed to
amend the existing Elan Agreement to provide that the remaining takedown of up
to $30 million in zero coupon convertible notes may be utilized for general
corporate purposes. Pursuant to this agreement, Ligand will issue on or before
August 31, 1999, $20 million of zero coupon convertible notes with terms similar
but not identical to the Notes previously issued to Elan and its affiliates.
ACCRUED ACQUISITION OBLIGATION - In August 1999, Ligand made a cash payment
of $37.1 million to Seragen and Marathon stakeholders related to the $40.0
million contingent merger obligations incurred in connection with the
acquisition of Seragen and the purchase of the assets of Marathon, which were
accrued in August 1998. According to the terms of both acquisition agreements,
the payments were due on August 5, 1999, six months after receipt of final
approval of ONTAK by the FDA. Pending resolution of final contingencies and in
accordance with the terms of the Seragen acquisition agreement, Ligand has
withheld $2.9 million from payments to certain Seragen preferred shareholders
and creditors.
8
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed below at "Risks and Uncertainties." This outlook
represents our current judgment on the future direction of our business. Such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. 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.
Panretin(R) and Targretin(R) are registered trademarks of Ligand
Pharmaceuticals Incorporated, and ONTAK(R) is a registered trademark of Seragen,
Inc., our wholly-owned subsidiary.
OVERVIEW
Since January 1989, we have devoted substantially all of our resources to our
intracellular receptor, also known as IR, and signal transducers and activators
of transcription, also known as STATs, drug discovery and development programs.
We have been unprofitable since our inception. We expect to incur substantial
additional operating losses until the commercialization of our products, begun
in the first quarter of 1999, generates sufficient revenues to cover our
expenses. We expect that our operating results will fluctuate from quarter to
quarter as a result of differences in the timing of expenses incurred and
revenues earned from collaborative arrangements and product sales. Some of these
fluctuations may be significant. As of June 30, 1999, our accumulated deficit
was $429.2 million.
In January 1999, we formed Ligand Pharmaceuticals International, Inc. as our
wholly-owned subsidiary to develop a global pharmaceutical business.
In January 1999, we consummated the purchase of the assets of Marathon
Biopharmaceuticals LLC. The purchase of the assets was completed under an
agreement between us, Marathon and other subsidiaries of Boston University dated
May 11, 1998. The purchase price consisted of a $5.0 million payment in January
1999 through the issuance of 402,820 shares of our common stock, valued at
$12.41 per share, and a $3.0 million contingent cash payment in August 1999.
In February 1999, the FDA granted us marketing approval for our first two
products, Panretin gel for the treatment of cutaneous lesions of patients with
AIDS-related Kaposi's sarcoma, also know as KS, and ONTAK for the treatment of
patients with persistent or recurrent cutaneous T-cell lymphoma, also known as
CTCL, whose malignant cells express the CD25 component of the IL-2 receptor.
In February 1999, we submitted a Marketing Authorization Application with the
European Agency for the Evaluation of Medicinal Products for Panretin gel for
the treatment of cutaneous lesions of patients with AIDS-related KS.
In February 1999, Eli Lilly and Company decided to discontinue the
development efforts for three first generation compounds in the Retinoid X
Receptor, or RXR, program in diabetes. Instead, we have agreed to focus our
efforts on the second-generation program for RXR modulators, which has compounds
with improved therapeutic indices relative to the three first-generation
compounds, and on the program co-agonists of the PPAR receptor.
In March 1999, we issued to Lilly 434,546 shares of the our common stock as
payment of a $5.0 million milestone due to Lilly under an agreement with us and
Seragen, Inc. covering rights to ONTAK.
In March 1999, we signed marketing and distribution agreements with Ferrer
Internacional, S.A. to exclusively market and distribute when approved, in
Spain, Portugal, Greece, and Central and South America our five near-term
oncology products: ONTAK, Panretin gel, Panretin capsules, Targretin gel and
Targretin capsules.
In June 1999, we were granted a Notice of Compliance for Panretin gel from
the Health Protection Branch of Canada. Panretin gel will be marketed and sold
throughout our wholly-owned Canadian subsidiary once we have finalized labeling
and gained appropriate pricing and formulary approvals in Canada.
In June 1999, we submitted a new drug application to the FDA seeking
marketing clearance for Targretin capsules. The
9
indication sought is for once daily oral administration of Targretin capsules
for the treatment of patients with early stage CTCL who have not tolerated other
therapies, patients with refractory or persistent early stage CTCL, and patients
with refractory advanced stage CTCL. We received approval from the FDA to file
the Targretin capsules application under orphan drug designation for this
indication and in August 1999 received priority review status for this new drug
application filing. As a result of the Targretin capsules application being
granted priority review status, the FDA is expected to respond to the
application within six months of submission.
In June 1999, we became a minority equity investor in a new private
corporation, X-Ceptor Therapeutics, Inc., whose mission is to conduct research
in and identify therapeutic products from the field of orphan nuclear receptors.
For additional details, please see note 5 of the notes to consolidated financial
statements.
In July 1999, we issued an additional $40.0 million of zero coupon
convertible notes under the terms of our strategic alliance with Elan
Corporation, plc and in August 1999 agreed to amend the underlying financing
arrangement to provide for the use of the $30.0 million of additional financing
available under the arrangement for general corporate purposes. For additional
details, please see note 7 of the notes to the consolidated financial
statements.
In August 1999, we made a cash payment of $37.1 million related to our
contingent merger obligations to Seragen and Marathon stakeholders. For
additional details, please see Note 7 of the notes to consolidated financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999, AS COMPARED WITH THREE MONTHS ENDED JUNE 30,
1998
Total revenues for 1999 were $8.4 million, an increase of $4.0 million as
compared to 1998. Loss from operations for 1999 was $16.8 million, an increase
of $500,000 as compared to 1998. Net loss for 1999 was $18.9 million or $(.40)
per share, an increase of $1.5 million from the 1998 net loss of $17.4 million
or $(.45) per share. The principal factors causing these changes are discussed
below.
Product sales for 1999 were $1.9 million, as compared to $87,000 in 1998. The
increase is primarily due to revenues of $109,000 from sales of Panretin gel and
$1.7 million from sales of ONTAK, approved by the FDA in February 1999.
Contract manufacturing sales for 1999 were $931,000 as compared to $0 in
1998. These sales were generated under contract manufacturing agreements
performed at the Marathon Biopharmaceuticals facility acquired in January 1999.
Collaborative research and development and other milestone revenues for 1999
were $5.6 million, an increase of $1.3 million, over 1998. The increase was
primarily due to $1.7 million recognized in June 1999 related to one-time
payments received from X-Ceptor, partially offset by additional payments of
$475,000 received from American Home Products Corporation in 1998. The
quarter-to-quarter comparison of collaborative research and development and
other milestone revenues is as follows ($,000):
Three Months Ended
June 30,
1999 1998
------ ------
Eli Lilly and Company $2,696 $2,500
X-Ceptor Therapeutics 1,711 --
SmithKline Beecham, plc 852 1,025
Abbott Laboratories 300 300
American Home Products -- 475
------ ------
$5,559 $4,300
====== ======
Cost of products and services sold increased from $30,000 in 1998 to $2.4
million in 1999. The increase is due to manufacturing costs and royalty expenses
of $700,000 associated with our new products as well as contract manufacturing
costs of $1.7 million incurred at the Marathon Biopharmaceuticals facility
acquired in January 1999.
Research and development expenses were $14.6 million in 1999, compared to
$17.3 million in 1998. The decrease was primarily due to the stage of clinical
trials on potential products in 1999 as compared to 1998 and the completion of
the research portion of the American Home Products collaboration in September
1998. Selling, general and administrative
10
expenses were $8.2 million in 1999, up from $3.3 million in 1998. The increase
was due primarily to increased costs associated with the expansion of our sales
and marketing activities related to the launch of our new products.
Interest income declined from $838,000 in 1998 to $525,000 in 1999,
reflecting lower cash balances following the use of cash to fund development and
clinical programs and to support commercialization activities as well as lower
interest rates on the available cash balances.
Interest expense in 1999 was $2.7 million, an increase of $755,000 over 1998.
The increase is due to the accretion related to the $40.0 million in issue price
of zero coupon convertible notes issued in September 1998 to entities affiliated
with Elan Corporation, plc.
We have significant net operating loss carry forwards for federal and state
income taxes which are available subject to Internal Revenue Code Sections 382
and 383 carryforward limitations.
SIX MONTHS ENDED JUNE 30, 1999, AS COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Total revenues for 1999 were $18.7 million, an increase of $9.3 million as
compared to 1998. Loss from operations for 1999 was $29.4 million, an increase
of $500,000 as compared to 1998. Net loss for 1999 was $33.5 million or $(.73)
per share, an increase of $2.6 million from the 1998 net loss of $30.9 million
or $(.80) per share. The principal factors causing these changes are discussed
below.
Product sales for 1999 were $6.3 million, as compared to $179,000 in 1998.
The increase is primarily due to revenues of $3.8 million from sales of Panretin
gel and $2.2 million from sales of ONTAK, approved by the FDA in February 1999.
Contract manufacturing sales for 1999 were $1.2 million as compared to $0 in
1998. These sales were generated under contract manufacturing agreements
performed at the Marathon Biopharmaceuticals facility acquired in January 1999.
Collaborative research and development and other milestone revenues for 1999
were $11.2 million, an increase of $1.9 million, over 1998. The increase was
primarily due to an initial payment of $1.5 million received from Ferrer in
connection with the marketing and distribution agreements entered into in March
1999 and $1.7 million recognized in June 1999 related to one-time payments
received from X-Ceptor, partially offset by (a) a one-time payment of $686,000
received from Cytel Corporation in 1998, and (b) additional payments of $1.0
million received from American Home Products in 1998. The quarter-to-quarter
comparison of collaborative research and development and other milestone
revenues is as follows ($,000):
Six Months Ended
June 30,
1999 1998
------- -------
Eli Lilly and Company $ 5,405 $ 5,000
X-Ceptor Therapeutics 1,711 --
Ferrer Internacional S.A 1,500 --
SmithKline Beecham, plc 1,787 1,807
Abbott Laboratories 600 600
American Home Products 175 1,180
Cytel Corporation -- 686
------- -------
$11,178 $ 9,273
======= =======
Cost of products and services sold increased from $204,000 in 1998 to $5.0
million in 1999. The increase is due to manufacturing costs and royalty expenses
of $2.0 million associated with our new products as well as contract
manufacturing costs of $3.0 million incurred at the Marathon Biopharmaceuticals
facility acquired in January 1999.
Research and development expenses were $29.1 million in 1999, compared to
$32.0 million in 1998. The decrease was primarily due to the stage of clinical
trials on potential products in 1999 as compared to 1998 and the completion of
the research portion of the American Home Products collaboration in September
1998. Selling, general and administrative expenses were $14.0 million in 1999,
up from $6.1 million in 1998. The increase was due primarily to increased costs
associated with the expansion of our sales and marketing activities related to
the launch of our new products.
11
Interest income declined from $1.9 million in 1998 to $1.3 million in 1999,
reflecting lower cash balances following the use of cash to fund development and
clinical programs and to support commercialization activities as well as lower
interest rates on the available cash balances.
Interest expense in 1999 was $5.4 million, an increase of $1.5 million over
1998. The increase is due to the accretion related to the $40.0 million in issue
price of zero coupon convertible notes issued in September 1998 to entities
affiliated with Elan Corporation, plc.
We have significant net operating loss carry forwards for federal and state
income taxes which are available subject to Internal Revenue Code Sections 382
and 383 carryforward limitations.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through private and public offerings of our
equity securities, collaborative research revenues, issuance of convertible
notes, capital and operating lease transactions, investment income and product
sales. From inception through June 30, 1999, we have raised cash proceeds of
$239.1 million from sales of equity securities: $160.9 million from private
placements and the exercise of options and warrants and $78.2 million from
public offerings.
As of June 30, 1999, we had acquired a total of $43.0 million in property,
laboratory and office equipment, and tenant leasehold improvements. Of this
total, $7.6 million was recorded in the August 1998 merger with Seragen, while
substantially all of the balance has been funded through capital lease and other
equipment financing arrangements. We lease our office and laboratory facilities
under an operating lease arrangement. Our current facility was occupied in
December 1997. We have entered into equipment financing arrangements to finance
future capital equipment purchases with $1.2 million in financing available
through April 30, 2000 and an additional $2.0 million available through June 30,
2000.
Working capital decreased to $23.4 million as of June 30, 1999, from $51.1
million at the end of 1998. The decrease in working capital resulted from
decreases in cash and cash equivalents of $24.4 million and short-term
investments of $11.9 million used to finance operating activities offset in part
by (a) an increase in accounts receivable of $2.1 million related to the sale of
the recently introduced products, (b) a decrease in accounts payable of $4.8
million due to a reduction in research and development activities, and (c) lower
deferred revenues of $1.0 million due to the timing of completion of
collaboration agreements.
For the same reasons, cash and cash equivalents, short-term investments and
restricted short-term investments decreased to $35.9 million at June 30, 1999
from $72.5 million at December 31, 1998. We primarily invest our cash in United
States government and investment grade corporate debt securities.
A $37.1 million cash payment was made in August 1999 comprised of the $3.0
million for Marathon and the remainder for the obligation resulting from the
1998 merger with Seragen. For additional details on these payments, please see
note 7 of the notes to consolidated financial statements.
In July 1999, we issued an additional $40.0 million of zero coupon
convertible notes under the terms of our strategic alliance with Elan
Corporation, plc. We used $37.1 million of these proceeds for the payments to
Marathon and Seragen stakeholders described above. In addition, in August 1999,
we and Elan Corporation, plc agreed to amend the existing finance arrangement
to provide that the $30.0 million of additional financing available under the
arrangement may be used for general corporate purposes. Under this amended
arrangement, we will issue $20.0 million of zero coupon convertible notes on or
before August 31, 1999. For additional details, please see Note 7 of the notes
to consolidated financial statements.
We believe our available cash, cash equivalents, short-term investments and
existing sources of funding will be adequate to satisfy our anticipated
operating and capital requirements through 1999. Our future operating and
capital requirements will depend on many factors, including: the effectiveness
of our commercialization activities; 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 ability to establish additional
collaborations or changes in existing collaborations, and; the cost of
manufacturing scale-up.
YEAR 2000 COMPLIANCE
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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 year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded computer chip technology, including building controls, security
systems or laboratory equipment. It may also impact the ability to obtain
products or services if the provider encounters and fails to resolve year 2000
related problems.
We have established an active program to identify and resolve year 2000
related issues. This program includes the review and assessment of our
information technology and non-information technology systems, as well as third
parties with whom we have a material relationship. This program consists of four
phases: inventory, risk assessment, problem validation and problem resolution.
The inventory phase identified potential risks we face. They include among
others: computer software, computer hardware, telecommunications systems,
laboratory equipment, and facilities systems, such as security, environment
control and alarm; service providers such as contract research organizations,
consultants and product distributors, and; other third parties. The risk
assessment phase categorizes and prioritizes each risk by its potential impact.
The problem validation phase tests each potential risk, according to priority,
to determine if an action risk exists. In the case of critical third parties,
this step will include a review of their year 2000 plans and activities. The
problem resolution phase will, for each validated risk, determine the
method/strategy for alleviating the risk. It may include anything from
replacement of hardware or software to process modification to selection of
alternative vendors. This step also includes the development of contingency
plans.
We initiated this program in 1998. The inventory and risk assessment phases
were completed in 1998 while the problem validation phase was completed in the
second calendar quarter of 1999. Follow-up reviews of the progress being made by
critical third parties will continue. Contingency plans are being developed and
revised based upon additional information from the follow-up vendor reviews. We
also expect to have those plans completed by the end of the third quarter of
1999.
To date, we have determined that some of our internal information technology
and non-information technology systems are not year 2000 compliant. We are
actively correcting problems as we identify them. These corrections include the
replacement of hardware and software systems, the identification of alternative
service providers and the creation of contingency plans. We currently estimate
that the cost of identified problems will be approximately $100,000 for hardware
and software upgrades or modifications. In addition, we estimate that we will
incur approximately $400,000 of internal personnel costs to complete the
remaining phases of the project. We do not believe that the cost of these
actions will have a material adverse affect on our business. We expect that we
will be able to resolve any problems we identify in the remaining phases of the
project as part of normal operating expenses.
Any failure of our internal computer systems or of third-party equipment or
software we use, or of systems maintained by our suppliers, to be year 2000
compliant may adversely effect our business. In addition, adverse changes in the
purchasing patterns of our potential customers as a result of year 2000 issues
affecting them may adversely effect our business. These expenditures by
potential customers may result in reduced funds available to purchase our
products, which could adversely effect our business.
RISKS AND UNCERTAINTIES
The following is a summary description of some of the many risks we face in
our business. You should carefully review these risks in evaluating our business
and the businesses of our subsidiaries. You should also consider the other
information described in this report.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION INVOLVES A NUMBER OF UNCERTAINTIES
AND WE MAY NEVER GENERATE REVENUES FROM THE SALE OF PRODUCTS SUFFICIENT TO
BECOME PROFITABLE.
We were founded in 1987. We have incurred significant losses since our
inception. At June 30, 1999, our accumulated deficit was $429.2 million. To
date, we have received the majority of our revenues from our collaborative
arrangements. We expect to incur additional losses as we continue our research
and development, testing and regulatory activities and as we continue to build
manufacturing and sales and marketing capabilities. To become 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 when we incur expenses and receive revenues from product sales,
collaborative arrangements and other sources. Some of these fluctuations may be
significant.
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Most of our products will require extensive additional development, including
preclinical testing and human studies, as well as regulatory approvals, before
we can market them. We do not expect that any products resulting from our
product development efforts or the efforts of our collaborative partners other
than those for which marketing approval has been received will be available for
sale until the end of the 1999 calendar year at the earliest, if at all. There
are many reasons that we may fail in our efforts to develop our other potential
products, including the possibility that:
- we may discover during preclinical testing or human studies that they are
ineffective or cause harmful side effects,
- the products may fail to receive necessary regulatory approvals from the
FDA or other foreign authorities in a timely manner or at all,
- we may fail to produce the products, if approved, in commercial quantities
or at reasonable costs, or
- the proprietary rights of other parties may prevent us from marketing the
products.
WE NEED TO BUILD MARKETING AND SALES FORCES IN THE UNITED STATES AND EUROPE
WHICH WILL BE AN EXPENSIVE AND TIME-CONSUMING PROCESS.
Developing the sales force to market and sell products is a difficult,
expensive and time-consuming process. We recently developed a sales force for
the U.S. market and will, at least initially, rely on another company to
distribute our products. The distributor will be responsible for providing many
marketing support services, including customer service, order entry, shipping
and billing, and customer reimbursement assistance. In addition, in Canada we
are the sole marketer of two cancer products other companies have developed. We
may not be able to continue to establish and maintain the necessary sales and
marketing capabilities. To the extent we enter into co-promotion or other
licensing arrangements, any revenues we receive will depend on the marketing
efforts of others, which may or may not be successful. Our failure to establish
an effective sales force, either directly or through others, could adversely
affect our business.
SOME OF OUR KEY TECHNOLOGIES HAVE NOT BEEN USED TO PRODUCE MARKETED PRODUCTS AND
MAY NOT BE CAPABLE OF PRODUCING SUCH PRODUCTS.
To date, we have dedicated most of our resources to the research and
development of potential drugs based upon our expertise in our IR and STATs
technologies. Even though certain marketed drugs act through IRs, some aspects
of our IR technologies have not been used to produce marketed products. In
addition, we are not aware of any drugs that have been developed and
successfully commercialized that interact directly with STATs. Much remains to
be learned about the location and function of IRs and STATs. If we are unable to
apply our IR and STAT technologies to the development of our potential products,
our business could be adversely affected.
OUR DRUG DEVELOPMENT PROGRAMS WILL REQUIRE SUBSTANTIAL ADDITIONAL FUTURE CAPITAL
AND WE MAY NEED MORE CAPITAL.
Our drug development programs require substantial additional capital, arising
from costs to:
- conduct research, preclinical testing and human studies,
- establish pilot scale and commercial scale manufacturing processes and
facilities, and
- establish and develop quality control, regulatory, marketing, sales and
administrative capabilities.
Our future operating and capital needs will depend on many factors,
including:
- the pace of scientific progress in our research and development programs
and the magnitude of these programs,
- the scope and results of preclinical testing and human studies,
- the time and costs involved in obtaining regulatory approvals,
- the time and costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims,
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- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in our existing collaborations,
- the cost of manufacturing scale-up, and
- the effectiveness of our commercialization activities.
OUR PRODUCTS MUST CLEAR SIGNIFICANT REGULATORY HURDLES PRIOR TO MARKETING.
Before we obtain the approvals necessary to sell any of our potential
products, we must show through preclinical studies and clinical trials that each
product is safe and effective. Our failure to show any product's 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 product's 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 post approval, 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 clinical supplies 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 may result in
increased costs and longer development times. In addition, some of 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 MAY NOT BE ABLE TO PAY AMOUNTS DUE ON OUR OUTSTANDING INDEBTEDNESS.
We and our subsidiaries may not have sufficient cash to make required
payments due under our existing debt. Our subsidiary, Glycomed, is obligated to
make payments under certain debentures in the total principal amount of $50.0
million. The debentures bear interest at a rate of 7 1/2% per annum and are due
in 2003. Glycomed may not have the funds necessary to pay the interest on and
the principal of these debentures when due. If Glycomed does not have adequate
funds, it will be forced to refinance the debentures and may not be successful
in doing so. In addition, in October 1997, we issued a $2.5 million convertible
note to SmithKline Beecham Corporation and in November 1998 and July 1999, we
issued zero coupon convertible notes with a total issue price of $80.0 million
to Elan. Glycomed's failure to make payments when due under its debentures would
cause us to default under these notes or other notes we may issue to Elan.
WE MAY REQUIRE ADDITIONAL STOCK OR DEBT FINANCINGS TO FUND OUR OPERATIONS WHICH
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We have incurred losses since our inception and do not expect to generate
positive cash flow to fund our operations for the 1999 calendar year and perhaps
for one or more subsequent years. As a result, we may need to complete
additional equity or debt financings in the near future to fund our operations.
These financings may not be available on acceptable 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, the notes we issued
to Elan are convertible into common stock at the option of Elan, subject to some
limitations. In addition, we may issue additional notes to Elan with up to a
total issue price of $30.0 million, which also would be convertible into common
stock. If adequate funds are not available, we may be required to delay, reduce
the scope of or eliminate one or more of our drug development programs.
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 certain technologies or drug candidates
that we would not otherwise relinquish. Our inability to obtain additional
financing or to satisfy our obligations or the obligations of our subsidiaries
under outstanding indebtedness could adversely affect our business.
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WE FACE SUBSTANTIAL COMPETITION.
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
and STAT-related approaches to drug development. Many of our existing or
potential competitors, particularly large drug companies, have greater
financial, technical and human resources than us 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
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. Any of these
companies, academic institutions, government agencies or research organizations
may develop and introduce products and processes that compete with or are better
than ours. As a result, our products may become noncompetitive or obsolete.
OUR SUCCESS WILL DEPEND ON THIRD-PARTY REIMBURSEMENT AND MAY BE IMPACTED BY
HEALTH CARE REFORM.
The efforts of governments and third party payors to contain or reduce the
cost of health care will continue to affect the business and financial condition
of drug companies. A number of legislative and regulatory proposals to change
the health care system have been discussed in recent years. 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.
Sales of prescription drugs depend significantly on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. These third party payors 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 and
reimbursement to the consumer may not be available or sufficient to allow us to
sell our products on a competitive basis.
WE RELY HEAVILY ON COLLABORATIVE RELATIONSHIPS AND TERMINATION OF ANY OF THESE
PROGRAMS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our strategy for developing and commercializing many of our potential
products includes entering into collaborations with corporate partners,
licensors, licensees and others. To date, we have entered into collaborations
with Eli Lilly and Company, SmithKline Beecham Corporation, American Home
Products, Abbott Laboratories, Sankyo Company Ltd., Glaxo-Wellcome plc,
Allergan, Inc. and Pfizer Inc. These collaborations provide us with funding and
research and development resources for potential products for the treatment or
control of metabolic diseases, hematopoiesis, women's 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. We cannot be
certain that our collaborations will 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 certain
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. The delay or termination of any of the collaborations could
adversely affect our business.
We may have disputes in the future with our collaborators, including disputes
concerning who 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
16
arbitration. The occurrence of any of these problems could be time-consuming and
expensive and could adversely affect our business.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN AND MAINTAIN OUR PATENTS AND OTHER
PROPRIETARY RIGHTS.
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, if we breach our licenses, we may lose rights to
important technology and potential products.
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 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, United States patent applications are 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. 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 license 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, which
would adversely affect our business.
We have had and will continue to have discussions with our current and
potential collaborators regarding the scope and validity of our patent 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
competitor's 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 have learned that Hoffman LaRoche, Inc. has received a United States
patent and has made patent filings in foreign countries that relate to our
Panretin capsules and gel products. We filed a patent application with an
earlier filing date than Hoffman LaRoche's patent, which we believe is broader
than, but overlaps in part with, Hoffman LaRoche's patent. We currently are
investigating the scope and validity of Hoffman LaRoche's patent to determine
its impact upon our products. The Patent and Trademark Office has informed us
that the overlapping claims are patentable to us and has initiated a proceeding
to determine whether we or Hoffman LaRoche are entitled to a patent. We may not
receive a favorable outcome in the proceeding. In addition, the proceeding may
delay the Patent and Trademark Office's decision regarding our earlier
application. If we do not prevail, the Hoffman LaRoche patent might block our
use of Panretin(R) capsules and gel in certain cancers.
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. Any of these actions might adversely affect our business.
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WE CURRENTLY HAVE LIMITED MANUFACTURING CAPABILITY AND WILL RELY ON THIRD-PARTY
MANUFACTURERS.
We currently have no manufacturing facilities outside of Marathon's facility
and rely on Marathon and others for clinical or commercial production of our
potential products. To be successful, we will need to manufacture our products,
either directly or through others, in commercial quantities, in compliance with
regulatory requirements and at acceptable cost. If we are unable to develop our
own facilities or contract with others for manufacturing services, our ability
to conduct preclinical testing and human clinical trials will be adversely
affected. This in turn could 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 and STATs on a
commercial scale, we may not be able to do so at costs or in quantities to make
marketable products. Any of these events would adversely affect our business.
Our 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. Any extended and unplanned manufacturing
shutdowns could be expensive and could result in inventory and product
shortages.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY RISKS AND WE MAY NOT HAVE
SUFFICIENT INSURANCE TO COVER ANY CLAIMS.
Our business exposes us to potential product liability risks. A successful
product liability claim or series of claims brought against us could adversely
affect our 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 have arranged to increase our product
liability insurance coverage in connection with the planned launch of two of our
potential products; however, 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. We expect to purchase additional insurance
when more of our products progress to a later stage of development and if we
license any rights to use later-stage products in the future. 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 ARE DEPENDENT ON OUR KEY EMPLOYEES, THE LOSS OF WHOSE SERVICES COULD
ADVERSELY AFFECT US.
We depend on our key scientific and management staff, the loss of whose
services could adversely affect our business. Furthermore, we are currently
experiencing a period of rapid growth, which requires us to hire many new
scientific, management and operational personnel. Accordingly, recruiting and
retaining qualified management, operations and scientific personnel to perform
research and development work also is critical to our success. Although we
believe we will successfully attract and retain the necessary personnel, we may
not be able to attract and retain such personnel on acceptable terms given the
competition among numerous drug companies, universities and other research
institutions for such personnel.
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. We cannot
completely eliminate the risk of accidental contamination or injury from the
handling and disposing of hazardous materials. In the event of any accident, we
could be held liable for any damages that result, which could be significant. In
addition, we may incur substantial costs to comply with environmental
regulations. Any of these events could adversely affect our business.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY VOLATILITY IN THE MARKETS.
The market prices and trading volumes for our securities, and the securities
of emerging companies like us, have historically been highly volatile and have
experienced significant fluctuations unrelated to operating performance. Future
announcements concerning us or our competitors may impact the market price of
our common stock. These announcements might include:
- the results of research or development testing,
- technological innovations,
- new commercial products,
- government regulation,
- receipt of regulatory approvals by competitors,
18
- our failure to receive regulatory approvals,
- developments concerning proprietary rights, or
- litigation or public concern about the safety of the products.
YOU MAY NOT RECEIVE A RETURN ON YOUR SHARES OTHER THAN THROUGH THE SALE OF YOUR
SHARES OF COMMON STOCK.
We have not paid any cash dividends on our common stock to date, and we do
not anticipate paying cash dividends in the foreseeable future. Accordingly,
other than through a sale of your shares, you may not receive a return.
OUR CHARTER DOCUMENTS AND SHAREHOLDER RIGHTS PLAN MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO YOU.
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, including transactions in which you might
otherwise receive a premium for your shares over then-current market prices.
These provisions also may limit your ability to approve transactions that you
deem to be in your best interests. 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.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED AND WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
For a discussion of the risks associated with our year 2000 readiness, please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
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PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At June 30, 1999, our investment portfolio includes fixed-income securities
of $21.2 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.
We generally conduct business, including sales to foreign customers, in U.S.
dollars and as a result we have very limited foreign currency exchange rate
risk. The effect of an immediate 10% change in foreign exchange rates would not
have a material impact on our financial condition, results of operations or cash
flows.
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PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 8, 1999, we issued to Eli Lilly and Company 434,546 shares of our
common stock as payment of a $5.0 million milestone due to Lilly under an
agreement with us and Seragen, Inc. covering rights to ONTAK. The shares were
issued to a single entity, Lilly, under an exemption from registration under
Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on May 20, 1999. The following
elections and proposals were approved at the Annual Meeting:
VOTES VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTAINING NONVOTE
----------- ----------- ----------- ----------- -----------
1. Election of a Board of Directors.
The total number of votes cast
for, or withheld for each nominee
was as follows:
Henry F. Blissenbach 41,064,145 -- 234,539 -- --
Alexander D. Cross, Ph.D. 41,116,038 -- 182,646 -- --
John Groom 41,096,472 -- 202,212 -- --
Irving S. Johnson, Ph.D. 41,060,471 -- 238,213 -- --
Carl C. Peck 41,069,751 -- 228,933 -- --
David E. Robinson 41,002,091 -- 296,593 -- --
Michael A. Rocca 41,060,108 -- 238,576 -- --
2. Amendment of 1992 Stock 35,530,077 5,634,069 -- 134,538 --
Option/ Stock Issuance Plan to
increase the authorized number
of shares of Common Stock from
8,088,457 to 9,073,457.
3. Amendment of the 1992 39,251,966 1,944,238 -- 102,480 --
Employee Stock Purchase Plan,
to increase the authorized
number of shares of Common
Stock available for issuance
under such plan from 260,000 to
355,000.
4. Ratification of the 41,115,069 70,542 -- 66,528 46,545
appointment of Ernst & Young
LLP as the independent auditors
for the fiscal year ending
December 31, 1999.
ITEM 6 (A) EXHIBITS
Exhibit 3.1 (1) Amended and Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.2).
Exhibit 3.2 (1) Bylaws of the Company, as amended (filed as Exhibit 3.3).
Exhibit 3.3 (4) Amended Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred Stock of
Ligand Pharmaceuticals Incorporated.
Exhibit 10.1 (2) Amendment, dated as of November 9, 1998, between Ligand
Pharmaceuticals Incorporated and
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ChaseMellon Shareholder Services, L.L.C., as Rights Agent
(Exhibit 99.1).
Exhibit 10.2 (3) Form of Second Amendment to the Preferred Share Rights
Agreement and Certificate of Compliance with Section 27
thereof (Exhibit 1).
Exhibit 10.3 (4) Distributorship Agreement between Ferrer Internacional S.A.,
Ligand Pharmaceuticals, Incorporated, and Seragen, Inc.
dated March 26, 1999.
Exhibit 10.4 (4) Distributorship Agreement between Ferrer Internacional S.A.,
Ligand Pharmaceuticals, Incorporated, and Seragen, Inc.
dated March 26, 1999.
Exhibit 27.1 Financial Data Schedule
(1) 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 S-4 (No. 333-58823) filed on July 9, 1998.
(2) 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.
(3) 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.
(4) This exhibit was previously filed as part of, and is hereby incorporated
by reference to the numbered exhibit filed with, the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 filed on May 14, 1999.
ITEM 6 (B) REPORTS ON FORMS 8-K
No reports on Form 8-K were filed during the quarter ended on June 30,
1999.
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LIGAND PHARMACEUTICALS INCORPORATED
June 30, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ligand Pharmaceuticals Incorporated
Date: August 16, 1999 By /s/ Paul V. Maier
------------------------ ---------------------------------
Paul V. Maier
Senior Vice President and Chief
Financial Officer
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