Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v2.4.0.6
Business Combinations
6 Months Ended
Jun. 30, 2012
Business Combinations [Abstract]  
Business Combinations

2. Business Combinations

On January 24, 2011, the Company acquired CyDex Pharmaceuticals, Inc., a specialty pharmaceutical company developing products and licensing its Captisol® technology. Captisol is currently incorporated in six FDA-approved medications and marketed by three of CyDex’s licensees: Pfizer, Bristol-Myers Squibb, Onyx Pharmaceuticals, Inc., and Baxter International. In addition, CyDex is supporting drug development efforts with more than 40 companies worldwide.

Under the terms of the agreement, the Company paid $32.0 million to the CyDex shareholders and issued a series of Contingent Value Rights recorded at an initial fair value of $19.2 million. The initial fair value of the liability was determined using a discounted cash flow analysis incorporating the estimated future cash flows from potential milestones and revenue sharing. These cash flows were then discounted to present value using a discount rate of 21.6%. The liability will be periodically assessed based on events and circumstances related to the underlying milestones, and the change in fair value will be recorded in the Company’s consolidated statements of operations. The carrying amount of the liability may fluctuate significantly and actual amounts paid under the CVR agreements may be materially different than the carrying amount of the liability. The fair value of the liability at June 30, 2012 was $13.7 million.

The Company paid the CyDex shareholders $4.3 million in January 2012, $3.5 million in July 2012 and may be required to pay up to an additional $6.0 million upon achievement of certain milestones. In addition, the Company will pay CyDex shareholders, for each respective year from 2011 through 2016, 20% of all CyDex-related revenue, but only to the extent that and beginning only when CyDex-related revenue for such year exceeds $15.0 million; plus an additional 10% of all CyDex-related revenue recognized during such year, but only to the extent that and beginning only when aggregate CyDex-related revenue for such year exceeds $35.0 million. The Company paid $0.3 million to the CyDex shareholders in March 2012 for 20% of all 2011 CyDex-related revenue in excess of $15 million.

Ligand is required by the CyDex Contingent Value Rights Agreement (“CVR”) to dedicate at least five experienced full-time employee equivalents per year to the acquired business and to invest at least $1.5 million per year, inclusive of such employee expenses, in the acquired business, through 2015. As of June 30, 2012, the Company estimates it has exceeded this amount.

Had the merger with CyDex been completed as of the beginning of 2011, the Company’s pro forma results for the six months ended June 30, 2011 would have been as follows:

 

         
(in thousands, except per share data)   2011  

Revenue

  $ 11,548  

Operating loss

    (2,300

Net income

    8,974  

Basic and diluted earnings per share:

       

Continuing operations

  $ 0.46  

Discontinued operations

  $ 0.00  

Net income

  $ 0.46  

Basic and diluted weighted average shares

    19,623  

The primary adjustments relate to interest expense on long-term debt, the loss of interest income due to the timing of transaction related payments and amortization of intangible assets. The above pro forma information was determined based on historical results adjusted for the purchase price allocation and estimated related changes in income associated with the merger of CyDex.