EXHIBIT 10.233 SECOND AMENDMENT TO AGREEMENT This Second AmendmentUNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
Mark One
[X] Quarterly Report Pursuant to
Agreement, effective May 24, 1996, is by and between AMERICAN HOME PRODUCTS CORPORATION ("AHP"), a Delaware corporation, as represented by its Wyeth-Ayerst Research Division, having its principal placeSection 13 or 15(D) ofbusiness at 533 East Lancaster Pike, St. Davids, Pennsylvania andthe
Securities Exchange Act of 1934For the quarterly period ended June 30, 2001 or
[ ] Transition Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934For the Transition Period From ___ to ___. Commission file number 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
("Ligand"), a Delaware corporation having
(Exact Name of Registrant as Specified in itsprincipal placeCharter)Delaware
(State or Other Jurisdiciton ofbusiness at 9393 TowneIncorporation or Organization)77-0160744
(I. R. S. Employer Identification No.)10275 Science Center Drive San Diego,
California. WHEREAS, AHPCA
(Address of Principal Executive Offices)92121-1117
(Zip Code)Registrant's Telephone Number, Including Area Code: (858) 550-7500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2001, the registrant had 59,708,429 shares of common stock outstanding.
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTSCOVER PAGE.................................................................1 TABLE OF CONTENTS..........................................................2 PART I. FINANCIAL INFORMATION - ----------------------------- ITEM 1. Financial Statements Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000......3Consolidated Statements of Operations for the three months ended June 30, 2001 (unaudited) and 2000 (unaudited).............................4Consolidated Statements of Cash Flows for the three months ended June 30, 2001 (unaudited) and 2000 (unaudited).............................5Notes to Consolidated Financial Statements (unaudited).....................6ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................9ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........18 PART II. OTHER INFORMATION - -------------------------- ITEM 1. Legal Proceedings..................................................* ITEM 2. Changes in Securities and Use of Proceeds.... .....................* ITEM 3. Defaults upon Senior Securities....................................* ITEM 4. Submission of Matters to a Vote of Security Holders...............19 ITEM 5. Other Information..................................................* ITEM 6. Exhibits and Reports on Form 8-K..................................20SIGNATURE.................................................................21*No information provided due to inapplicability of item.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSLIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)ASSETS June 30, December 31, 2001 2000 ------------ ----------- (Unaudited) Current assets: Cash and cash equivalents................. $ 28,600 $ 9,224 Short-term investments.................... 16,959 14,439 Funds receivable from Elan ............... -- 10,000 Accounts receivable, net ................. 5,163 2,824 Inventories............................... 4,519 5,651 Other current assets...................... 2,340 2,511 ---------- ---------- Total current assets.............. 57,581 44,649 Restricted investments...................... 2,733 1,434 Property and equipment, net................. 10,439 10,972 Acquired technology, net ................... 39,402 40,924 Other assets................................ 14,545 15,443 ---------- ---------- $ 124,700 $ 113,422 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................... $ 4,111 $ 3,827 Accrued liabilities....................... 9,110 12,675 Current portion of deferred revenue........................ 9,545 8,435 Current portion of equipment financing obligations .................. 2,689 3,478 ---------- ---------- Total current liabilities......... 25,455 28,415 Long-term portion of deferred revenue ...... 7,016 5,727 Long-term portion of equipment financing obligations ................... 3,705 4,788 Convertible subordinated debentures......... 45,988 44,651 Accrued acquisition obligation.............. 2,700 2,700 Convertible note............................ 2,500 2,500 Zero coupon convertible senior notes........ 82,964 79,766 ---------- ---------- Total liabilities................. 170,328 168,547 ---------- ---------- Commitments (Note 6) Stockholders' deficit: Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued................ -- -- Common stock, $0.001 par value; 130,000,000 shares authorized; 59,576,830 shares and 56,823,716 shares issued at June 30, 2001 and December 31, 2000, respectively......... 60 57 Additional paid-in capital................ 521,466 490,484 Deferred warrant expense ................. (1,384) (2,076) Accumulated other comprehensive income ... 62 46 Accumulated deficit....................... (564,921) (542,725) ----------- ---------- (44,717) (54,214) Treasury stock, at cost; 73,842 shares.... (911) (911) ----------- ---------- Total stockholders' deficit ...... (45,628) (55,125) ----------- ---------- $ 124,700 $ 113,422 =========== ==========See accompaning notes.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---------- --------- --------- --------- (As restated- (As restated- Revenues: see note 1) see note 1) Product sales................. $ 10,002 $ 4,893 $ 18,609 $ 9,756 Collaborative research and development and other revenues ............. 7,487 4,977 15,915 10,930 ---------- --------- --------- --------- Total revenues........... 17,489 9,870 34,524 20,686 ---------- --------- --------- --------- Operating costs and expenses: Cost of products sold ........ 3,077 2,010 5,916 4,090 Research and development...... 13,191 12,766 25,596 25,264 Selling, general and administrative.............. 8,886 9,572 19,043 17,364 ---------- --------- --------- --------- Total operating costs and expenses..... 25,154 24,348 50,555 46,718 ---------- --------- --------- --------- Loss from operations.......... (7,665) (14,478) (16,031) (26,032) ---------- --------- --------- --------- Other income (expense): Interest income........... 551 686 1,282 1,427 Interest expense.......... (3,449) (3,204) (6,894) (6,664) Debt conversion expense .. -- -- -- (2,025) Other, net................ (52) (364) (553) 126 ---------- --------- --------- --------- Total other income (expense) .... (2,950) (2,882) (6,165) (7,136) ---------- --------- --------- --------- Loss before cumulative effect of a change in accounting principle ....... (10,615) (17,360) (22,196) (33,168) Cumulative effect on prior years (to December 31, 1999) of changing method of revenue recognition ........ -- -- -- (13,099) ---------- --------- --------- --------- Net loss...................... $ (10,615) $(17,360) $(22,196) $(46,267) ========== ========= ========= ========= Basic and diluted per share amounts: Loss before cumulative effect of a change in accounting principle ... $ (0.18) $ (0.31) $ (0.38) $ (0.61) Cumulative effect on prior years (to December 31, 1999) of changing method of revenue recognition .... -- -- -- (0.24) ---------- --------- --------- --------- Net loss..................... $ (0.18) $ (0.31) $ (0.38) $ (0.85) ========== ========= ========= ========= Weighted average number of common shares .......... 59,380 55,600 59,119 54,701 ========== ========= ========= =========See accompaning notes.
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)Six Months Ended June 30, 2001 2000 ----------- ----------- (As restated- see note 1) OPERATING ACTIVITIES Net loss........................................ $ (22,196) $ (46,267) Adjustments to reconcile net loss to net cash used in operating activities: Accretion of debt discount and interest..................... 4,536 4,191 Depreciation and amortization of property and equipment................. 1,873 2,044 Equity in loss of affiliate................. 620 807 Amortization of acquired technology ........ 1,659 1,659 Debt conversion expense..................... -- 2,025 Other....................................... 947 (167) Changes in operating assets and liabilities net of effects from sale of manufacturing assets: Accounts receivable ........................ (2,339) (503) Inventories................................. 1,132 276 Other current assets ....................... 171 715 Accounts payable and accrued liabilities.... 1,719 (1,375) Deferred revenue............................ 2,399 14,917 ----------- ----------- Net cash used in operating activities..... (9,479) (21,678) ----------- ----------- INVESTING ACTIVITIES Purchases of short-term investments............. (10,739) (10,330) Proceeds from sale of short-term investments.... 8,276 4,301 Purchases of property and equipment............. (1,340) (855) Payments on accrued acquisition obligation ..... -- (200) Decrease in other assets........................ 143 20 Net proceeds from sale of manufacturing assets.. -- 9,676 Proceeds from sale of investment security ..... -- 1,119 ----------- ----------- Net cash provided by (used in) investing activities..................... (3,660) 3,731 ----------- ----------- FINANCING ACTIVITIES Principal payments on equipment financing obligations......................... (2,244) (2,016) Proceeds from equipment financing arrangements ................................. 372 1,078 (Increase)/decrease in restricted investments... (1,299) 287 Net proceeds from issuance of zero coupon convertible senior notes...................... 10,000 -- Net proceeds from issuance of common stock...... 25,686 11,852 ----------- ----------- Net cash provided by financing activities.. 32,515 11,201 ----------- ----------- Net increase/(decrease) in cash and cash equivalents.............................. 19,376 (6,746) Cash and cash equivalents at beginning of period..................................... 9,224 29,903 ----------- ----------- Cash and cash equivalents at end of period...... $ 28,600 $ 23,157 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid................................... $ 2,341 $ 2,424 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Conversion of zero coupon convertible senior notes to common stock......................... $ -- $ 21,022 Issuance of common stock for acquired technology ................................... 5,000 4,000 Issuance of common stock for debt conversion incentive ......................... -- 2,025 Accrual of ONTAK obligation for acquired technology .......................... -- 5,000See accompaning notes.
LIGAND PHARMACEUTICALS INCORPORATED
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements of Ligand Pharmaceuticals Incorporated (“Ligand” or the “Company”) for the three and six months ended June 30, 2001 and 2000 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, 2001 and the consolidated results of operations for the three and six months ended June 30, 2001 and 2000. The results of operations for the period ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 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, 2000 included in the Company’s Annual Report on Form 10-K and the unaudited consolidated financial statements for the three months ended March 31, 2001 included in the Company's Quarterly Report on Form 10-Q filed with the SEC.
Principles of Consolidation.The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Use of Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Revenue Recognition. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition in Financial Statements. SAB No. 101 provides guidance in applying accounting principles generally accepted in the United States to revenue recognition in financial statements, including the recognition of non-refundable up-front fees received in conjunction with contractual arrangements that have multiple performance elements and require continuing involvement. SAB No. 101 requires that such fees be recognized as products are delivered or services are performed that represent the culmination of a separate earnings process.
The Company received non-refundable up-front fees of $18.8 million in 1997, $2.3 million in 1999, and $4.3 million in 2000. The Company initially recognized those payments as revenue upon receipt, as the fees were non-refundable and the Company had transferred technology or product rights at contract inception or incurred costs in excess of the up-front fees prior to initiation of each arrangement. However, under the provisions of SAB No. 101, non-refundable up-front fees must be deferred upon receipt and recognized as products are delivered or services are performed during the term of the arrangement. The Company implemented SAB No. 101 in the fourth quarter of 2000 as a change in accounting principle, retroactive to January 1, 2000, by deferring and recognizing these up-front payments over the term designated in the arrangement. The cumulative effect of this change to December 31, 1999, which was recorded in 2000, was $13.1 million or $0.24 per share. However, the effect on the six and three months ended June 30, 2000 and March 31, 2000 reduced revenue and increased loss before cumulative effect of change in accounting principle by $901,000 or $0.01 per share and $853,000 or $0.02 per share, respectively, compared to the results previously reported for the prior year quarters which have been restated accordingly.
New Accounting Pronouncements.In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, “Business Combinations”. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles. SFAS 142 is effective for fiscal years beginning after December 31, 2001. The Company has not determined the impact, if any, that this statement will have on its financial statements.
Net Loss Per Share. Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods presented as the inclusion of common stock equivalents in the number of shares used for the diluted computation would be anti-dilutive.
Reclassification. Certain prior year amounts have been reclassified to conform to the current year presentation.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in-first-out method. Inventories consist of the following ($,000):
June 30, December 31, 2001 2000 ---------------- -------------- Raw materials $ 493 $ 498 Work-in-process 2,563 4,276 Finished goods 1,463 877 --------------- -------------- $ 4,519 $ 5,651 =============== ==============Other Assets.Other assets consist of the following ($,000):
June 30, December 31, 2001 2000 ---------------- -------------- Technology license $ 4,000 $ 4,000 Prepaid royalty buyout, net 3,536 3,672 Deferred rent 3,318 3,373 Investment in X-Ceptor 2,758 3,378 Other 933 1,020 ---------------- -------------- $ 14,545 $ 15,443 ================ ==============Accrued Liabilities. Accrued liabilities consist of the following ($,000):
June 30, December 31, 2001 2000 ---------------- -------------- Royalties $ 2,688 $ 1,122 Compensation 2,496 2,412 Interest 1,971 1,985 ONTAK obligation (Note 4) -- 5,000 Other 1,955 2,156 ---------------- -------------- $ 9,110 $ 12,675 ================ ==============Comprehensive Loss.Comprehensive loss represents net loss adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale securities less reclassification adjustments for realized gains or losses included in net loss, as well as foreign currency translation adjustments. The accumulated unrealized gains or losses are reported as accumulated other comprehensive loss as a separate component of stockholders’ deficit. Comprehensive loss for the three and six month periods ended June 30, 2001 and 2000 is as follows ($,000):
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 --------- --------- --------- --------- (As restated- (As restated- see note 1) see note 1) Comprehensive loss $(10,634) $(17,315) $(22,180) $(46,213) ========= ========= ========= =========2. Zero Coupon Convertible Senior Notes
On December 29, 2000, the Company issued the final $10 million of zero coupon convertible senior notes to an entity affiliated with Elan Corporation, plc (“Elan”) provided for under a September 1998 agreement, as amended. These notes are convertible into common stock at $14.16 per share. The proceeds were received on January 2, 2001.
3. Distribution Agreement
In February 2001, the Company and Elan entered into a
Research, Developmentdistribution agreement providing for the distribution of certain of the Company’s products in various European andLicense Agreement effective September 2, 1994 (the "Agreement"other international territories for a term of 10 years. The Company received a payment at contract inception and additional payments related to subsequent product marketing authorization submission and approval. Additional payments may be received as other product registrations are submitted and approved in specified territories.4. Arrangement with Lilly
In connection with an agreement between the Company's wholly owned subsidiary, Seragen, Inc. (“Seragen”) and Eli Lilly and Company (“Lilly”) under which
AHP sponsorsLilly assigned to Seragen its sales and marketing rights to ONTAK, Lilly received a $5 million milestone payment from the Company in March 2001 following the achievement of cumulative net sales of ONTAK reaching $20 million in October 2000. The Company issued 412,504 shares of its common stock to Lilly as payment for this $5 million milestone.5. Research and Development Collaborations
In June 2001, the Company and TAP Pharmaceutical Products Inc. (“TAP”) entered into a research
atand collaboration agreement to focus on the discovery and development of selective androgen receptor modulators (“SARMs”). SARMs contribute to the prevention and treatment of certain diseases, including hypogonadism, male and female sexual dysfunction, male and female osteoporosis, frailty, and male hormone replacement therapy.Under the terms of the collaboration, Ligand will receive funding during the research phase of the agreement and potentially milestone and royalty payments if the collaboration is successful. TAP was also granted exclusive worldwide rights to manufacture and sell any products resulting from the collaboration in TAP’s field. During the quarter, the Company received $3.5 million upon the delivery of a Ligand manufactured drug substance (LGD2226) to be further developed by TAP. The $3.5 million payment will be recognized as revenue over the initial collaboration period.
In June 2001, Bristol-Myers Squibb informed Ligand that it was terminating its mineralocorticoid receptor research and development collaboration with the
goalCompany. Under the terms ofdiscovering and/the agreement, Ligand will receive $1.1 million in termination related payments.6. Commitments
In November 1998, the Company and Elan entered into a Development, License and Supply Agreement related to Elan’s product Morphelan™. For the rights to Morphelan™ the Company paid Elan certain license fees in 1998 and milestone payments due upon the occurrence of certain events in 1999 and 2000. Elan could receive up to $5 million in cash, or
designing small molecule compounds which actsubject to certain conditions, in the Company’s common stock or notes upon approval of Morphelan for marketing by the FDA. Elan submitted a NDA for Morphelan to the FDA in May 2000. The Company is also committed to spend not less than $7 million through May 2003 to undertake additional clinical activities related to theestrogencommercialization of Morphelan™. In the event the Company does not spend this amount, any shortfall would be paid to Elan.7. Stockholders’ Equity
In January 2001, the Company raised net proceeds of approximately $22.4 million in a private placement of 2 million shares of its common stock.
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
progesterone receptorsother forward-looking statements that involve a number of risks and uncertainties, including those discussed at “Risks and Uncertainties” below. 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® and Targretin® are registered trademarks of Ligand, and ONTAK® is a registered trademark of Seragen, Inc., our wholly owned subsidiary.
Overview
We develop
pharmaceuticaland market drugs that address critical unmet medical needs of patients in the areas of cancer, men’s and women’s health and skin diseases, as well as osteoporosis, metabolic, cardiovascular and inflammatory diseases. Our drug discovery and development programs are based on our proprietary gene transcription technology, primarily related to Intracellular Receptors, also known as IRs, and Signal Transducers and Activators of Transcription, also known as STATs.In 1999, we received marketing approval in the United States for Panretin gel, for the treatment of Kaposi's sarcoma in AIDS patients, ONTAK, for the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma or CTCL, and Targretin capsules, for the treatment of CTCL in patients who are refractory to at least one prior systemic therapy. In June 2000, Targretin gel was granted marketing approval in the United States for the treatment of patients with early stage CTCL. In addition, in May 2000, our strategic partner Elan submitted a new drug application ("NDA") for its product Morphelan for pain management in cancer and HIV patients. The FDA has issued an approvable letter for the NDA for Morphelan and Elan has submitted a response to the FDA's questions in the letter. We have the exclusive marketing rights to Morphelan in the United States and Canada. In Europe, we were granted a marketing authorization for Panretin gel in October 2000 and for Targretin capsules in March 2001, and have a marketing authorization application under review for Targretin gel. We expect to launch Panretin gel and Targretin capsules in Europe in 2001 after pricing has been approved.
We are also currently involved in the research phase of research and development collaborations with Eli Lilly and Company, GlaxoSmithKline, Organon Company and TAP Pharmaceutical Products Inc. (TAP). Collaborations in the development phase are being pursued by American Home Products, Abbott Laboratories, Glaxo-Wellcome plc, and Allergan, Inc. We receive funding during the research phase of the arrangements and milestone and royalty payments as products are developed and marketed by our corporate partners. In addition, in connection with some of these collaborations, we received non-refundable up-front payments.
We have been unprofitable since our inception. We expect to incur substantial additional operating losses until the commercialization of our products generates sufficient revenues to cover our expenses. We expect that our operating results will fluctuate from
such compounds; WHEREAS, AHPquarter to quarter as a result of differences in the timing of expenses incurred andLigand have previously amendedrevenues earned from product sales and collaborative research and development arrangements. Some of these fluctuations may be significant.Results of Operations
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000
Total revenues for the
Agreementsecond quarter ended June 30, 2001 were $17.5 million, an increase of $7.6 million or 77% over the same period last year. Net loss for the second quarter of 2001 was $10.6 million or $.18 per share, a decrease of $6.8 million compared to net loss of $17.4 million or $.31 per share for the prior year period. Results for 2000 reflect the implementation of SAB No. 101 effective January 1, 2000. For additional details, see note 1 of the notes to consolidated financial statements.Product sales for the second quarter of 2001 were $10.0 million compared to $4.9 million for the second quarter of 2000 driven by a 175% increase in sales of Targretin capsules from $1.2 million in 2000 to $3.3 million in 2001 and a 61% increase in sales of ONTAK to $5.0 million in 2001. Additionally, sales of Targretin gel and Panretin gel amounted to $1.7 million in 2001 compared to $0.6 million in 2000. Targretin gel received approval for marketing in the U.S. in June 2000.
Sales of Targretin capsules and ONTAK continue to benefit from a fully dedicated oncology sales force. Products sold for use in post-marketing clinical trials, price increases and the success of the dermatology sales force put in place in the first
Amendment (the "First Amendment") effective January 16, 1996, in order to give effect to mutually agreed upon modificationsquarter have also contributed to thedefinitionincrease in 2001 sales.Collaborative research and development and other revenues were $7.5 million for the three months ended June 30, 2001, an increase of
Exhibit Compounds$2.5 million, or 50%, over the prior year period. In June 2001, Bristol-Myers Squibb informed us that they were terminating the mineralocorticoid receptor research and collaboration agreement. Revenue for the second quarter of 2001 includes $1.0 million of previously deferred up-front fees and $1.1 million in payments due from Bristol-Myers Squibb in connection with the termination of the research and collaboration agreement.Cost of products sold increased from $2.0 million in 2000 to $3.1 million in 2001 in connection with the growth in product sales.
Research and development expenses of $13.2 million for the quarter ended June 30, 2001 compare to $12.8 million for the prior year quarter reflecting increased spending in studies related to the
nature, termsuse of our products in potential new indications, partially offset by reduced registration activities.Selling, general and
conditionsadministrative expenses decreased 7% from $9.6 million in the second quarter of 2000 to $8.9 million in the second quarter of 2001. The decrease reflects significant advertising and promotion expenses in the prior year quarter associated with the launch of Targretin capsules in early 2000, partially offset by higher costs associated with an increased sales force and post-marketing clinical studies.We have federal, state, and foreign income tax net operating loss carryforwards and federal and state research tax credit carryforwards which are available within the limitation set forth in Internal Revenue Code sections 382 and 383.
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Total revenues for the six months ended June 30, 2001 were $34.5 million, an increase of $13.8 million or 67% from the same period in 2000. Net loss for the first half of 2001 was $22.2 million or $.38 per share compared to a net loss of $46.3 million or $.85 per share in 2000 including the cumulative effect of the
provisionschange in accounting principle ofArticle$13.1 million related to the 2000 implementation of SAB 101. Excluding the impact of the cumulative effect of the change, the net loss for 2001 decreased $11.0 million compared to 2000 net loss of $33.2 million or $.61 per share. For additional details, see note 1 of the notes to consolidated financial statements.Product sales for the first half of 2001 were $18.6 million compared to $9.8 million in 2000. Sales of Targretin capsules increased from $2.0 million in 2000 to $5.7 million in 2001 while sales of ONTAK increased 44% to $9.8 million. Sales of Targretin gel and Panretin gel increased $2.4 million from $.7 million in 2000 to $3.1 million in 2001.
Collaborative research and development and other revenues increased from $10.9 million in 2000 to $15.9 million in 2001. The increase is due to higher 2001 milestones of $3.8 million compared to $1 million in 2000, and $1.0 million of revenue recognized as previously deferred up-front fees from Bristol-Myers Squibb and $1.1 million in payments due in connection with the June 2001 termination of the Bristol-Myers Squibb research and collaboration agreement.
Cost of products sold increased $1.8 million from $4.1 million in 2000 to $5.9 million in 2001. This increase is in connection with the growth in product sales.
Research and development expenses increased from $25.3 million in 2000 to $25.6 million in 2001 reflecting increased spending in studies related to the use of our products in potential new indications, partially offset by reduced registration activities.
Selling, general and administrative expenses were $19.0 million in 2001 compared to $17.4 million in 2000, an increase of 9%. The increase is primarily due to costs associated with the implementation of fully dedicated oncology and dermatology sales forces in the first quarter of 2001, including the addition of 10 sales representatives, and post marketing clinical trials, partially offset by higher promotion and advertising expenses incurred in 2000 in connection with the launch of Targretin capsules.
Other expense, net decreased 13% from $7.1 million in 2000 to $6.2 million in 2001. The decrease is due to debt conversion expenses of $2 million incurred in 2000 related to the conversion of $20 million convertible notes held by Elan, partially offset by gains on the sale of manufacturing assets and investment securities in 2000.
Liquidity and Capital Resources
We have financed our operations through private and public offerings of our equity securities, collaborative research and development and other revenues, issuance of convertible notes, capital and operating lease transactions, equipment financing arrangements, product sales and investment income.
Working capital was $32.1 million at June 30, 2001 compared to $16.2 million at December 31, 2000. Cash and cash equivalents, short-term investments, restricted investments and funds receivable from Elan totaled $48.3 million at June 30, 2001 compared to $35.1 million at December 31, 2000. We primarily invest our cash in United States government and investment grade corporate debt securities.
Significant cash inflows during the first half of 2001 include proceeds of $22.4 million of net cash received in a private placement of 2 million shares of our common stock and $10 million from the proceeds on the final note issued to Elan. Significant cash outflows include $9.5 million of net cash used to finance operating activities in 2001 compared to $21.7 million in 2000.
Our subsidiary, Glycomed, is obligated to make payments under convertible subordinated debentures in the total principal amount of $50 million. The debentures pay interest semi-annually at a rate of 7 ½% per annum, are due in 2003 and convertible into our common stock at $26.52 per share. In addition, at June 30, 2001, we had outstanding a $2.5 million convertible note to GlaxoSmithKline due in 2002 with interest at prime and convertible into our common stock at $13.56 per share as well as $83.0 million in zero coupon convertible senior notes to Elan, due 2008 with an 8% per annum yield to maturity and convertible into our common stock at approximately $14 per share.
Certain of our property and equipment is pledged as collateral under various equipment financing arrangements. As of June 30, 2001, $6.4 million was outstanding under such arrangements with $2.7 million classified as current. Our equipment financing arrangements have terms of four to seven years with interest ranging from 6.75% to 11.02% per annum. We lease our office and research facilities under operating lease arrangements with varying terms through August 2015.
We may be required to make a milestone payment of $5 million to Elan and are required to spend $7 million through May 2003 for clinical expenditures under the Morphelan license agreement. For additional details, please see note 6 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 at least the next 12 months. 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.
Financial Condition
June 30, 2001 compared to December 31, 2000
Funds receivable from Elan decreased by $10 million reflecting the receipt of cash proceeds in January 2001 on the final note issued by Elan.
Accrued liabilities decreased by $3.6 million reflecting the issuance of our common stock in satisfaction of a $5 million Lilly milestone obligation for ONTAK discussed in note 4 of the notes to consolidated financial statements.
Stockholders’ deficit decreased by $9.5 million due primarily to the proceeds of the private placement described in note 7 of the
Agreement; WHEREAS, concurrentlynotes to consolidated financial statements, the issuance of common stock to Lilly described in note 4 of the notes to consolidated financial statements, and the issuance of common stock upon the exercise of employee stock options, offset in part by the 2001 net loss of $22.2 million.Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, “Business Combinations”. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill and reassessment of the useful lives of existing recognized intangibles. SFAS 142 is effective for fiscal years beginning after December 31, 2001. The Company has not determined the impact, if any, that this statement will have on its financial statements.
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, including 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 sufficient revenues from the sale of products to become profitable.
We were founded in 1987. We have incurred significant losses since our inception. At June 30, 2001, our accumulated deficit was $564.9 million. To date, we have received the majority of our revenues from our collaborative arrangements and only began receiving revenues from the sale of pharmaceutical products in 1999. 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.
Most of our products in development will require extensive additional development, including preclinical testing and human studies, as well as regulatory approvals, before we can market them. We 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 already been received, will be available for sale until the first half of the 2002 calendar year at the earliest, if at all. There are many reasons that we or our collaborative partners may fail in our efforts to develop our other potential products, including the possibility that:
We are building marketing and sales capabilities in the united states and europe which is an expensive and time-consuming process.
Developing the sales force to market and sell products is a difficult, expensive and time-consuming process. We have developed a U.S. sales force of approximately 50 people, some of which are contracted from a third party, and we rely on third parties to distribute our products. The distributor is responsible for providing many marketing support services, including customer service, order entry, shipping and billing, and customer reimbursement assistance. In Europe, we will rely initially on other companies to distribute and market our products. We have entered into agreements for the marketing and distribution of our products in territories such as the United Kingdom, Germany, France, Spain, Portugal, Greece, Italy, and Central and South America. We may not be able to continue to expand our sales and marketing capabilities sufficiently to successfully commercialize our products in the territories where they receive marketing approval. 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.
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 there are marketed drugs that 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, we will not be successful in developing new products.
Our drug development programs will require substantial additional future capital.
Our drug development programs require substantial additional capital to successfully complete them, arising from costs to:
Our future operating and capital needs will depend on many factors, including:
For example, we are required under the terms of our agreement with Elan, to spend not less than $7 million through May 2003 to undertake additional clinical activities related to the commercialization of Morphelan. In the event we do not spend this amount, any shortfall would have to be paid to Elan. If additional funds are required to support our operations and we are unable to obtain them on terms favorable to us, we may be required to cease or reduce further commercialization of our products, to sell some or all of our technology or assets or to merge with another entity.
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 human testing 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 after regulatory approvals are received, which could be expensive and time-consuming, and failure to successfully conduct those trials could jeopardize continued commercialization.
The rate at which we complete our clinical trials depends on many factors, including our ability to obtain adequate supplies of the products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in patient enrollment may result in increased costs and longer development times. In addition, our collaborative partners have rights to control product development and clinical programs for products developed under the collaborations. As a result,
these collaborators may conduct these programs more slowly or in a different manner than we had expected. Even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.
We may not be able to pay amounts due on our outstanding indebtedness when due which would cause defaults under these arrangements.
We and our subsidiaries may not have sufficient funds to make required payments due under existing debt. If we or our subsidiaries do not have adequate funds, we will be forced to refinance the existing debt and may not be successful in doing so. Our subsidiary, Glycomed, is obligated to make payments under convertible subordinated debentures in the total principal amount of $50 million. The debentures incur interest semi-annually at a rate of 7 ½% per annum, are due in 2003 and convertible into our common stock at $26.52 per share. In addition, at June 30, 2001, we had outstanding a $2.5 million convertible note to GlaxoSmithKline due in 2002 with interest at prime and convertible into our common stock at $13.56 per share. We also had outstanding $83.0 million in zero coupon convertible senior notes to Elan, due 2008 with an 8% per annum yield to maturity and convertible into our common stock at approximately $14 per share. Glycomed’s failure to make payments when due under its debentures and Ligand's failure to make payments due under the convertible note to GlaxoSmithKline would cause us to default under the outstanding notes to Elan.
We may require additional money to run our business and may be required to raise this money on terms which are not favorable to our existing stockholders.
We have incurred losses since our inception and do not expect to generate positive cash flow to fund our operations for one or more years. As a result, we may need to complete additional equity or debt financings to fund our operations. Our inability to obtain additional financing could adversely affect our business. Financings may not be available 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 zero coupon convertible senior notes outstanding to Elan are convertible into common stock at the option of Elan, subject to some limitations, and in January 2001 we issued 2 million shares of our common stock in a private placement. 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 technologies or drug candidates that we would not otherwise relinquish.
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 executionproducts we are developing. These institutions are becoming more aware of the Agreement,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 even datetheir own or through joint ventures and will compete with us in recruiting highly qualified scientific personnel.
Our success will depend on third-party reimbursement and may be impacted by health care reform.
Sales of prescription drugs depend significantly on the parties executedavailability 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.
In addition, 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 such as us. A number of legislative and regulatory proposals to change the health care system have been discussed in recent years. In addition, an Option Agreement by which Ligand granted AHP the irrevocable
option (the "Option"), exercisableincreasing emphasis on or after January 1, 1996, to extend
research at Ligand to include within the Field (as definedmanaged care in the Agreement)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.
We rely heavily on collaborative relationships and termination of any of these programs could reduce the discovery,financial resources available to us.
Our strategy for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaborations with corporate partners, licensors, licensees and others. These collaborations provide us with funding and research and development resources for potential products for the treatment or control of metabolic diseases, hematopoiesis, 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. For example, in June 2001, Bristol-Myers Squibb informed us that they were terminating the mineralocorticoid receptor research and collaboration agreement. Our collaborations may not continue or be successful.
In addition, our collaborators may develop drugs, either alone or with others, that compete with the types of drugs they currently are developing with us. This would result in less support and increased competition for our programs. If products are approved for marketing under our collaborative programs, any revenues we receive will depend on the manufacturing, marketing and sales efforts of our collaborators, who generally retain commercialization rights under the collaborative agreements. Our current collaborators also generally have the right to terminate their collaborations under specified circumstances. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully, our product development under these agreements will be delayed or terminated.
We may have disputes in the future with our collaborators, including disputes concerning which of us owns the rights to any technology developed. For instance, we were involved in litigation with Pfizer, which we settled in April 1996, concerning our right to milestones and royalties based on the development and commercialization of drugsdroloxifene. These and other possible disagreements between us and our collaborators could delay our ability and the ability of our collaborators to achieve milestones or our receipt of other payments. In addition, any disagreements could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.
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, disputes with licensors under our license agreements may arise which could result in additional financial liability or loss of 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 may be kept confidential while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published six months or more after filing. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. 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.
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 treatmenttechnology.
We have learned that Hoffmann-La Roche 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 Hoffmann-La Roche’s patent, which we believe is broader than, but overlaps in part with, Hoffmann-La Roche’s patent. We currently are investigating the scope and validity of osteoporosis whichHoffmann-La Roche’s patent to determine its impact upon our products. The Patent and Trademark Office has informed us that the overlapping claims are ligands of the estrogen receptor, which Option
AHP exercised bypatentable to us and has initiated a writing on February 12, 1996, accompanied by the paymentproceeding to Ligand of the sum of $*** as per Article 3 of the Option Agreement;
WHEREAS, priordetermine whether we or Hoffmann-La Roche are entitled to AHP's exercise of the aforementioned Option, AHP
discovered within its own internal research programs series of chemical
compounds (the "AHP Compounds") active at the *** and having potential utilitya patent. We may not receive a favorable outcome in the treatmentproceeding. In addition, the proceeding may delay the Patent and Trademark Office’s decision regarding our earlier application. If we do not prevail, the Hoffmann-La Roche patent might block our use of *** , which compoundsPanretin®capsules and gel in specified 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 never been subjectadequate remedies for any breach. In addition, our competitors may independently discover our trade secrets.
We rely on third-party manufacturers to screening
by Ligand within the frameworksupply our products and thus have little control over our manufacturing resources.
We currently have no manufacturing facilities and we rely on others for clinical or commercial production of the Research Programour marketed and 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. Any extended and unplanned manufacturing shutdowns could be expensive and could result in inventory and product shortages. If we are unable to develop our own facilities or contract with others for manufacturing services, our revenues could be adversely affected. In addition, if we are unable to supply products in development, our ability to conduct preclinical testing and human clinical trials will be adversely affected. This in turn could also delay our submission of the Agreementproducts for regulatory approval and allour initiation of which series undergoing activenew 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 AHP are describedcosts or in Schedule B
hereto;
WHEREAS, in order to create a broad chemical base of Research Compounds (as
defined in the Agreement) from which can be selected those compounds most
suitable for further evaluation and development, whether such Research Compounds
are *** *** AHP and Ligand have mutually agreed to integrate the AHP Compounds
into the Research Program, whereby the AHP Compounds are deemed to be Research
Compounds suitable for further evaluation and selection for preclinical testing;
WHEREAS, AHP and Ligand wishquantities to make a second amendment ofmarketable products.
The manufacturing process also may be susceptible to contamination, which could cause the Agreementaffected manufacturing facility to give effect toclose until the mutually agreed upon integration of the AHP Compounds into
the Research Program;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, it is agreed by AHP and Ligand as follows:
1. Terms not otherwise defined herein shall have the meanings given them in
the Agreement.
2. Present Article 1 of the Agreement is hereby modified by the inclusion
of a new definition for "AHP Compounds":
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
Page 2 of 7
1.27. "AHP Compounds" shall mean those compounds which AHP has identified
to be *** possessing potential utility in the treatment of *** and other uses
within the Field, and which are specifically defined in Schedule B, which is
attached to this Second Amendment and is deemed to be an integral part of the
Agreement. This definition shall also mean the analogues, whether or not
patented and whether or not within the scope of the definition of Schedule B,
related to the compounds defined in Schedule B synthesized by Ligand and/or AHP
subsequent to the effective date of this Second Agreement, provided, however,
that the analogues synthesized by Ligand i) before the effective date of this
Second Amendment or ii) after the effective date by Ligand, provided that such
synthesis be demonstrably (by Ligand) done by persons not having knowledge of
the Schedule B compounds or related analogues shall not be AHP Compounds under
the Agreement.
3. Present Section 1.20 is hereby modified to read as follows:
1.20. "Research Compound" shall mean an AHP Compound, or a compound,
including an Existing Compound for which AHP acquires rights under Article 7 of
this Agreement, whichcontamination is identified and confirmed as acting throughfixed. In addition, problems with equipment failure or mediatingoperator error also could cause delays in filling our customers’ orders.
Our business exposes us to product liability risks or our products may need to be recalled and we may not have sufficient insurance to cover any claims.
Our business exposes us to potential product liability risks. Our products also may need to be recalled to address regulatory issues. A successful product liability claim or series of claims brought against us could result in payment of significant amounts of money and divert management’s attention from running the activity of a Designated Receptor (a) during the termsbusiness. Some of the Research
Program,compounds we are investigating may be harmful to humans. For example, retinoids as a class are known to contain compounds which can cause birth defects. We may not be able to maintain our insurance on acceptable terms, or (b), exceptour insurance may not provide adequate protection in the case of terminationa product liability claim. To the extent that product liability insurance, if available, does not cover potential claims, we will be required to self-insure the risks associated with such claims.
We 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 may need to hire new scientific, management and operational personnel. Recruiting and retaining qualified management, operations and scientific personnel is also critical to our success. 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. To properly dispose of these hazardous materials in compliance with environmental regulations, we are required to contract with third parties at substantial cost to us. We cannot completely eliminate the risk of accidental contamination or injury from the handling and disposing of hazardous materials, whether by AHP under 16.3 below,us or by AHP, within *** after expiration or earlier terminationour third-party contractors. In the event of the Research Program.
4. The parties agreeany accident, we could be held liable for any damages that AHP Compounds shallresult, which could be deemed tosignificant.
Our stock price may be Research
Compoundsadversely affected by volatility in the Research Program whichmarkets.
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:
Future sales of our common stock may depress our stock price.
Sales of substantial amounts of our common stock in the public market could seriously harm prevailing market prices for our common stock. These sales might make it difficult or impossible for us to sell additional securities when we need to raise capital.
You may not receive a return on your shares other than through the Development Program as defined in
Article 5sale of the Agreement.
*** Portionsyour shares of this pagecommon stock.
We have been omitted pursuantnot paid any cash dividends on our common stock to a request for
Confidential Treatment and filed separately with the Commission.
Page 3 of 7
5. The parties further agree that AHP Compounds which AHP electsdate. We intend to develop
shall be subjectretain any earnings to the payment of milestones and royalties specifically
provided therefor in Article 9, as hereinafter modified.
6. AHP retains all rights to applications of AHP Compounds within and
outside the Field, and Ligand shall have no right to develop AHP Compounds
outside the Field. Accordingly, AHP Compounds are not subject to Ligand rights
as defined in Article 6 of the Agreement, nor to Ligand rights as defined in
Article 8 of the Agreement.
7. In recognition ofsupport the expansion of our business and we do not anticipate paying cash dividends in the chemical baseforeseeable future. Accordingly, other than through a sale of Research
Compoundsyour shares, you will not receive a return on your investment in our common stock.
Our shareholder rights plan and charter documents 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 integratingeffect of AHP Compounds intodelaying or preventing a change in our ownership.
At June 30, 2001 our investment portfolio includes fixed-income securities of $14.9 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the Researchshort maturities of holdings in our investment portfolio, an immediate 10% change in interest rates would not have a material impact on our financial condition, results of operations or cash flows. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense.
We generally conduct business, including sales to foreign customers, in U.S. dollars. 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.
Our Annual Meeting of Stockholders was held on May 25, 2001. The following elections and Development
Programs,proposals were approved at the parties have agreed to provide for a separate category of
milestone and royalty payments in Article 9 of the Agreement to specifically
relate to Research Compounds or Products which are AHP Compounds. Accordingly,
Section 9.1 is modified by the inclusion thereinAnnual Meeting:
Votes Votes Votes Votes Broker
For Against Withheld Abstaining Nonvote
-------- --------- ---------- ---------- -------
1.Election of a third milestone category,
denominated AHP Compounds, with the following payment schedule:
*** ***
*** ***
*** ***
*** ***
***
***
***
*** ***
*** ***
*** ***
*** ***
*** ***
Likewise, Section 9.2 is modified by the inclusion thereinBoard of
a third royalty
category, denominated AHP Compounds, with the following royalty schedule:
*** PortionsDirectors. The total
number of this page have been omitted pursuant to a requestvotes cast for,
Confidential Treatment and filed separately with the Commission.
Page 4 of 7
***
***
***
8. Exceptor withheld for each
nominee was as expressly amended or supplemental by this Second Amendment to
the Agreement, all of the terms and conditions of the Agreement and the First
Amendment shall remain in full force and effect in accordance with their terms.
No agreement or understanding bearing on this Second Amendment to Agreement
shall be binding on either party hereto unless it shall be in writing and signed
by the duly authorized officer or representative or each of AHP and Ligand and
shall expressly refer to this Second Amendment to Agreement.
IN WITNESS WHEREOF, the parties have caused the Amendment to be executed by
their duly authorized representatives.
AMERICAN HOME PRODUCTS CORPORATION LIGAND PHARMACEUTICALS INCORPORATED
By: /s/ illegible By: /s/follows:
Henry F. Blissenbach 52,333,215 -- -- 1,147,854 -- -- -- --
Alexander D. Cross, Ph.D. 52,719,794 -- -- 761,275 -- -- -- --
John Groom 52,340,264 -- -- 1,140,805 -- -- -- --
Irving S. Johnson, Ph.D. 52,770,804 -- -- 710,265 -- -- -- --
Carl C. Peck, M.D. 52,767,411 -- -- 713,658 -- -- -- --
David E. Robinson ------------------------------ -----------------------------------
(Signature) (Signature)
Title: Vice President Title: President/CEO
--------------------------- ------------------------
*** Portions51,187,694 -- -- 2,293,375 -- -- -- --
Michael A. Rocca 52,726,562 -- -- 754,507 -- -- -- --
2.Amendment of the 1992 48,822,607 6,534,586 -- -- 123,876 -- --
Stock Option/Stock
Issuance Plan to increase
the authorized number
of shares of common
stock available for
issuance under such plan
from 9,573,457 to
10,323,457.
3.Amendment of the 1992 52,675,962 693,232 -- -- 111,875 -- --
Employee Stock Purchase
Plan to increase the
authorized number of
shares of common stock
available for purchase
under such plan from
405,000 to 465,000.
4.Ratification of the 53,300,072 135,757 -- -- 45,240 -- --
appointment of
Deloitte & Touche LLP
as the independent
auditors for the fiscal
year ending December 31,
2001.
| Exhibit 3.1 (1) | Amended and Restated Certificate of Incorporation of the Company (Exhibit 3.2). |
| Exhibit 3.2 (1) | Bylaws of the Company, as amended (Exhibit 3.3). |
| Exhibit 3.3 (2) | Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Ligand Pharmaceuticals Incorporated. |
| Exhibit 3.5 (6) | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated June 14, 2000. |
| Exhibit 4.1 (8) | Specimen stock certificate for shares of Common Stock of the Company. |
| Exhibit 4.2 (3) | Preferred Shares Rights Agreement, dated as of September 13, 1996, by and between Ligand Pharmaceuticals Incorporated and Wells Fargo Bank, N.A. (Exhibit 10.1) |
| Exhibit 4.3 (4) | Amendment to Preferred Shares Rights Agreement, dated as of November 9, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Exhibit 99.1). |
| Exhibit 4.5 (7) | Indenture, dated as of December 23, 1992 by and between Glycomed Incorporated and Chemical Trust Company of California. (Filed as Exhibit 4.3). |
| Exhibit 4.6 (5) | First Supplement Indenture, dated as of May 18, 1995 by and among the Company, Glycomed Incorporated and Chemical Trust Company of California. (Filed as Exhibit 10.133). |
| Exhibit 10.238 | Letter Agreement, dated May 17, 2001, between the Company and Gian Aliprandi. |
| Exhibit 10.239 | Research, Development and License Agreement by and between the Company and TAP Pharmaceutical Products Inc. dated June 22, 2001. |
| (1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s 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 same numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1999. |
| (3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the numbered exhibit filed with the Company’s Registration Statement on Form S-3 (No. 333-12603) filed on September 25, 1996, as amended. |
| (4) | 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. |
| (5) | 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. 33-90160) filed on March 9, 1995, as amended. |
| (6) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Annual Report on Form 10-K for the period ended December 31, 2000. |
| (7) | 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-3 of Glycomed Incorporated (Reg. No. 33-55042) filed on November 25, 1992, as amended. |
| (8) | This exhibit was previously filed as part of, and is hereby incorporated by reference to the same numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 33-47257) filed on April 16, 1992 as amended. |
No reports on Form 8-K were filed during the quarter ended June 30, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this page have been omitted pursuantreport to a request for
Confidential Treatment and filed separately with the Commission.
Page 5 of 7
SCHEDULE B
AHP Compounds are compounds definedbe signed on its behalf by the following structural
formulae:
I
***
***
***
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
Page 6 of 7
***
***
***
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
Page 7 of 7
undersigned thereunto duly authorized.
| Ligand Pharmaceuticals Incorporated By: /S/ PAUL V.MAIER Paul V. Maier Senior Vice President, Chief Financial Officer |
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