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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 No. 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 77-0160744
(State or other jurisdiction of (IRS 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: (858) 550-7500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Warrants to purchase one share of Common Stock, $.001 par value
Preferred Share Purchase Rights
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of February 29, 2000 was $1,034,768,582. For purposes of this
calculation, shares of Common Stock held by directors, officers and 5%
stockholders known to the Registrant have been deemed to be owned by affiliates
which should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
As of February 29, 2000 the registrant had 53,249,143 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed not later than 120
days after December 31, 1999, in connection with the Registrant's 2000 Annual
Meeting of Stockholders, referred to herein as the "Proxy Statement," are
incorporated by reference into Part III of this Form 10-K. Certain exhibits
filed with the Registrant's prior registration statements and period reports
under the Securities Exchange Act of 1934 are incorporated herein by reference
into Part IV of this Report.
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Table of Contents
Part I
Item 1. Business
Overview...............................................................................1
Business Strategy......................................................................2
Ligand Marketed Products...............................................................3
Product Development Process............................................................4
Ligand Clinical Development and Research Programs......................................5
Collaborative Research and Development Programs........................................9
Technology.............................................................................13
Manufacturing..........................................................................16
Quality Assurance......................................................................17
Research and Development Expenses......................................................17
Competition............................................................................17
Government Regulation..................................................................17
Patents and Proprietary Rights.........................................................18
Human Resources........................................................................18
Risks and Uncertainties................................................................18
Item 2. Properties..............................................................................24
Item 3. Legal Proceedings.......................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.....................................24
Part II
Item 5. Markets For Registrant's Common Stock and Related Stockholders Matters..................24
Item 6. Selected Consolidated Financial Data....................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...26
Item 7A.Quantitative and Qualitative Disclosures About Market Risk..............................30
Item 8. Consolidated Financial Statements and Supplementary Data................................30
Item 9. Changes and Disagreements with Accountants and Financial Disclosure.....................30
Part III
Item 10.Directors and Executive Officers of the Registrant......................................30
Item 11.Executive Compensation..................................................................30
Item 12.Security Ownership of Certain Beneficial Owners and Management..........................30
Item 13.Certain Relationships and Related Transactions..........................................30
Part IV
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................31
Financial Statements
Report of Ernst & Young LLP, Independent Auditors...............................................F-2
Consolidated Balance Sheets.....................................................................F-3
Consolidated Statements of Operations...........................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit).......................................F-5
Consolidated Statements of Cash Flows...........................................................F-6
Notes to Consolidated Financial Statements......................................................F-7
i
GLOSSARY
PRODUCTS AND INDICATIONS
ONTAK(R)(denileukin diftitox) Approved in February 1999 in the U.S. for
the treatment of patients with persistent or
recurrent cutaneous T-cell lymphoma whose
malignant cells express the CD25 component
of the Interleukin-2 receptor.
Panretin(R) (alitretinoin) gel 0.1% Approved in February 1999 in the U.S. for
the topical treatment of cutaneous lesions
of patients with AIDS-related Kaposi's sarcoma.
Targretin(R)(bexarotene) capsules Approved in December 1999 in the U.S. for
once daily oral administration for the
treatment of cutaneous manifestations of
cutaneous T-cell lymphoma in patients who
are refractory to at least one prior
systemic therapy.
CTCL Cutaneous T-cell lymphoma
HIV Human immunodeficiency virus
HRT Hormone replacement therapy
KS Kaposi's sarcoma
NHL Non-Hodgkin's lymphoma
SCIENTIFIC TERMS
AR Androgen Receptor
ER Estrogen Receptor
IR Intracellular Receptor
JAK Janus Kinase family of tyrosine protein kinases
PPAR Peroxisome Proliferation Activated Receptor
PR Progesterone Receptor
RAR Retinoic Acid Receptor
RR Retinoid Responsive Intracellular Receptor
RXR Retinoid X Receptor
SARM Selective Androgen Receptor Modulator
SERM Selective Estrogen Receptor Modulator
STAT Signal Transducer and Activator of Transcription
REGULATORY TERMS
CHPB Canadian Health Protection Branch
EMEA European Agency for the Evaluation of Medicinal Products
FDA United States Food and Drug Administration
IND Investigational New Drug Application (United States)
MAA Marketing Authorization Application (Europe)
NDA New Drug Application (United States)
NDS New Drug Submission (Canada)
ii
PART I
ITEM 1. BUSINESS
The discussion of our business contained in this annual report on form 10-K
may contain certain projections, estimates and other forward-looking statements
that involve a number of risks and uncertainties, including those discussed
below at "Risks and Uncertainties." While this outlook represents management's
current judgment on the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested below. 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 annual report.
Our trademarks, trade names and service marks referenced in this annual
report include ONTAK(R), Panretin(R) and Targretin(R). Each other trademark,
trade name or service mark appearing in this annual report belongs to its
holder.
References to Ligand Pharmaceuticals Incorporated ("Ligand", the "Company",
"we" or "our") include its wholly owned subsidiaries - Glycomed Incorporated;
Ligand Pharmaceuticals (Canada) Incorporated; Ligand Pharmaceuticals
International, Inc.; Marathon Biopharmaceuticals, Inc.; and Seragen, Inc.
OVERVIEW
Our goal is to build a profitable pharmaceutical company which discovers,
develops and markets new 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. We
strive to develop drugs that are more effective and/or safer than existing
therapies and that are more convenient (taken orally or topically administered)
and cost effective. We plan to build a profitable pharmaceutical company by
generating income from two diversified profit centers: sales revenues from
specialty oncology products developed and marketed by Ligand, and research,
milestone and royalty revenues resulting from collaborations where large
pharmaceutical partners develop and market products in large markets beyond
Ligand's strategic focus or resources.
We currently market three oncology products in the United States ("U.S."),
all of which were approved by the U.S. Food and Drug Administration ("FDA") in
1999 -- Panretin(R) gel, ONTAK(R) and Targretin(R) capsules. The FDA is
currently reviewing an NDA for a fourth product, Targretin(R) gel, which review
is expected to be completed in June 2000. In Europe, Marketing Authorization
Applications ("MAA") for Targretin(R) capsules and Panretin(R) gel are under
review by the European Agency for the Evaluation of Medicinal Products ("EMEA").
We also continue efforts to in-license and acquire products, such as ONTAK(R)
(acquired in the 1998 Seragen acquisition) and Morphelan(TM) (licensed from
Elan), which have near-term prospects of FDA approval and which can be marketed
by our specialty cancer and HIV-center sales force in the U.S. Additional
products are being developed through our internal development programs.
Currently, Ligand has seven products in clinical development, including marketed
products in clinical development for larger market indications such as
non-Hodgkin's lymphoma ("NHL"), psoriasis and various cancers.
We have established research and development collaborations with numerous
global pharmaceutical companies, including Abbott Laboratories, Allergan,
American Home Products, Glaxo Wellcome, Eli Lilly, Parke-Davis (Warner-Lambert),
Pfizer, SmithKline Beecham and, early in 2000, Organon (Akzo-Nobel). During
1999, our corporate partners had seven compounds on human development track,
including two products scheduled to enter Phase III clinical trials in 2000, and
numerous compounds in research and pre-clinical stages. These corporate partner
products are being studied for the treatment of large market indications such as
breast cancer, osteoporosis, diabetes and cardiovascular disease.
Internal and collaborative research and development programs utilize our
proprietary science technology based on our leadership position in gene
transcription technology. Our proprietary technologies involve two natural
mechanisms that regulate gene activity: (1) non-peptide hormone activated
Intracellular Receptors ("IRs") and (2) cytokine and growth factor activated
Signal Transducers and Activators of Transcription ("STATs"). Panretin(R) gel,
Targretin(R) capsules and all of our corporate partner products currently on
human development track are IR modulators, discovered using our IR technology.
In late 1998, we assembled a specialty oncology and HIV-center sales and
marketing team to market in the U.S. products developed, acquired or licensed by
us. In late 1999, we expanded our U.S. sales force from 20 to 40 sales
representatives to support the launch of Targretin(R) capsules and increase
market penetration of ONTAK(R) and Panretin(R) gel. Internationally, through
marketing and distribution agreements with Ferrer and Alfa Wassermann, we have
established a European and Latin American marketing and distribution capability
in anticipation of potential product approvals in Europe and Latin America for
Panretin(R) gel and Targretin(R) capsules.
1
BUSINESS STRATEGY
Our goal is to become a profitable pharmaceutical research, development and
marketing company that generates significant cash flow. Building primarily on
our proprietary IR and STATs technologies, our strategy is to generate cash flow
primarily from (1) the sale in the U.S. and Europe of specialty oncology
products developed, acquired or in-licensed by us and (2) research, milestone
and royalty revenues from the development and sale of products developed and
marketed by our collaborative partners.
Building a Specialty Oncology Franchise in the U.S. and Europe
Our strategy is to develop a specialty cancer product pipeline based on our
IR and STATs technologies and acquired and in-licensed products and to market
these products initially with a specialized sales force in the U.S. and directly
or through marketing partners in selected international markets. Focusing
initially on niche oncology indications with the possibility of expedited
regulatory approval has allowed us to bring products to market quickly. This
strategy also allows us to market these products with a specialty oncology sales
force, spreading the cost of our sales and marketing infrastructure among
multiple products. Our goal is to expand the markets for our products through
additional indication approvals, approvals in international markets and
marketing and distribution agreements in select international markets where we
will not market directly. To further leverage our sales force, we intend to
selectively license-in or acquire complementary technology and/or products in
advanced stages of development.
Building a Collaborative-Based Business in Large Product Markets
Our strategy in our collaborative research and development business is to
share the risks and benefits of discovering and developing drugs to treat
diseases that are beyond Ligand's strategic focus or resources. These diseases
typically affect large populations often treated by primary care physicians and
drugs to treat these diseases may be more costly to develop and/or to market
effectively with a small specialty sales force. Despite these risks, drugs
approved for these indications may have large market potential - often in excess
of $1.0 billion in sales.
Since our inception, we have entered into 11 significant collaborations
with major pharmaceutical companies focusing on a broad range of disease
targets. In 1999, our corporate partners advanced four compounds into human
development track and two additional compounds were scheduled to enter Phase III
trials in 2000.
Initiation of
Corporate Collaborator (1) Collaboration Focus
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Pfizer Inc. May 1991 Osteoporosis, breast cancer
Allergan, Inc. June 1992 Skin disorders, type II diabetes
Glaxo-Wellcome plc September 1992 Cardiovascular diseases
Abbott Laboratories July 1994 Inflammatory diseases
Wyeth-Ayerst, the pharmaceutical division September 1994 Women's and men's health, oncology
of American Home Products
SmithKline Beecham February 1995 Oncology, anemia
Eli Lilly November 1997 Type II diabetes, metabolic and
cardiovascular diseases
SmithKline Beecham April 1998 Obesity
Parke-Davis Pharmaceutical Research and September 1999 Women's health
Development of Warner-Lambert Company
Organon February 2000 Women's health
(1) A collaboration initiated in 1994 with Sankyo Company, Ltd. has been
completed.
2
We have entered into research and development collaborations with the goal
of generating research, milestone and royalty revenues in market opportunities
resulting from Ligand's technologies that are beyond Ligand's strategic focus or
resources. Our collaborative programs focus on discovering drugs for certain
cardiovascular, inflammatory, metabolic and other diseases, as well as broad
applications for women's and men's health. We believe that our collaborators
have the resources, including clinical and regulatory experience, manufacturing
capabilities and marketing infrastructure, needed to develop and commercialize
drugs for these markets. The arrangements generally provide for collaborative
discovery programs funded largely by the corporate partners aimed at discovering
new therapies for diseases treated by primary care physicians. In general, drugs
resulting from these collaborations will be developed, manufactured and marketed
by the corporate partners. Our collaborative agreements provide for Ligand to
receive: (1) research revenue during the drug discovery stage; (2) milestone
revenue for compounds successfully moving through clinical development; and (3)
royalty revenue from the sale of drugs developed through collaborative efforts.
LIGAND MARKETED PRODUCTS
We currently market three oncology products in the U.S.
Marketed Approved U.S. European Indications in
Product(1) Indication Status Status Development (2)
- ---------- ---------- --------- --------- ---------------
ONTAK(R) CTCL Marketed -- NHL, psoriasis
Panretin(R) gel KS Marketed MAA filed Skin cancers
Targretin(R) capsules CTCL Marketed MAA filed Psoriasis, advanced breast cancer,
various other cancers
(1) We also market two oncology products in-licensed for marketing
exclusively in Canada -- PHOTOFRIN(R) and Proleukin(R). Product sales
from PHOTOFRIN(R) and Proleukin(R) in 1999 were not significant
compared to total product sales and are not expected to be in the
future.
(2) For a discussion of other indications in development, see "Ligand
Clinical Development and Research Programs".
U.S. SPECIALTY ONCOLOGY FRANCHISE. We have developed a cancer product
pipeline that includes three products marketed in the U.S. and several
late-stage products nearing NDA submission or approval. The FDA has approved
Panretin(R) gel, ONTAK(R) and Targretin(R) capsules and is currently reviewing
the NDA for Targretin(R) gel, which review is expected to be completed in June
2000. The five retinoid products in our cancer pipeline, Panretin(R) gel,
Panretin(R) capsules, Targretin(R) gel, Targretin(R) capsules and LGD1550, were
developed using IR technology. Retinoids may offer important clinical advantages
over currently available cancer therapies by triggering natural mechanisms to
halt or reverse the progress of various forms of cancer. In 1999, we doubled our
sales force to 40 representatives and put in place additional resources and
infrastructure to support our sales and marketing efforts. Our sales and
marketing organization now includes more than 85 people. Our targeted physician
market consists of 3,500 oncologists and 3,500 dermatologists in the U.S. We
believe that a 40-person sales force can efficiently cover the 3,200 offices or
centers these physicians represent and is adequate to market our products until
the launch of another product following regulatory approval or expansion of
indications for our existing products.
EUROPEAN AND LATIN AMERICAN SPECIALTY ONCOLOGY FRANCHISE. In early 1999, we
laid the groundwork for global commercialization with the initiation of European
operations through our subsidiary, Ligand Pharmaceuticals International, Inc.,
with headquarters in London to support our business development efforts in
Europe. In 1999, we submitted two MAAs via the EMEA seeking marketing clearance
in Europe for Targretin(R) capsules and for Panretin(R) gel. Also in 1999, we
entered into marketing and distribution agreements with Ferrer International
S.p.A. for territories in Spain, Portugal, Greece, and Latin America and Alfa
Wassermann in Italy for the marketing and distribution of ONTAK(R) and
Panretin(R) in all indications and Targretin(R) in cancer and dermatological
indications. We expect to enter into additional marketing and distribution
agreements during 2000 for select European markets where we will not market our
products directly.
CTCL MARKET. CTCL is a type of NHL that appears initially in the skin, but
over time may involve other organs. CTCL is a cancer of T-lymphocytes, white
blood cells that play a central role in the body's immune system. The disease
can be extremely disfiguring and debilitating and median survival for late-stage
patients is less than three years. The prognosis for CTCL is based in part on
the stage of the disease when diagnosed. CTCL is most commonly a slowly
progressing cancer, and many patients live with the complications of CTCL for 10
or more years after diagnosis. However, some patients have a much more
aggressive form of this disease. CTCL affects an estimated 16,000 people in the
U.S. With ONTAK(R) and Targretin(R) capsules currently approved in the U.S. for
the treatment of CTCL, and Targretin(R) gel granted priority review status by
the FDA, our current strategy is to have multiple products available for
treating CTCL.
3
ONTAK(R). ONTAK(R), approved for marketing in February 1999 by the FDA for
the treatment of patients with persistent or recurrent cutaneous T-cell lymphoma
("CTCL") whose malignant cells express the CD25 component of the interleukin-2
("IL-2") receptor, was developed using Seragen's fusion protein technology.
ONTAK(R) is the first product commercialized by us for the treatment of CTCL and
the first treatment to be approved for CTCL in nearly 10 years. The FDA acted
under the accelerated approval regulations in its approval of ONTAK(R) and
requested that we conduct certain post-approval clinical and research studies to
further document the safety, efficacy and pharmacokinetic profile of this drug.
ONTAK(R) is currently in two Phase II clinical trials for the treatment of
patients with NHL. Clinical trials using ONTAK(R) for the treatment of psoriasis
have also been conducted. These indications provide significantly larger market
opportunities than CTCL.
TARGRETIN(R) CAPSULES. In late December 1999, the FDA granted marketing
approval for Targretin(R) capsules with once daily oral administration for the
treatment of cutaneous manifestations of CTCL in patients who are refractory to
at least one prior systemic therapy. We launched sales and marketing of
Targretin(R) capsules in January 2000. Targretin(R) capsules offer the
convenience of a daily oral dose administered by the patient at home. At the
request of the FDA, we agreed to conduct certain post-approval Phase IV clinical
and pharmacokinetic studies. We are developing Targretin(R) capsules in a
variety of larger market opportunities, including moderate to severe plaque
psoriasis and advanced breast cancer. We are also pursuing approval of
Targretin(R) capsules for the treatment of CTCL in Europe, where we submitted an
MAA with the EMEA in November 1999.
PANRETIN(R) GEL. Panretin(R) gel, a topical retinoid developed utilizing IR
technology, was approved for marketing by the FDA in February 1999 for the
topical treatment of cutaneous lesions of patients with AIDS-related Kaposi's
sarcoma ("KS"). Panretin(R) gel was approved in June 1999 by Canada's Health
Protection Branch ("CHPB") for the same indication. As the first patient-applied
treatment for AIDS-related KS, Panretin gel represents a new non-invasive option
to the traditional management of this disease. Most approved therapies require
the time and expense of periodic visits to a healthcare facility and
administration of the treatment by a doctor or nurse. AIDS-related KS adversely
affects the quality of life for thousands of people in the U.S. We are also
pursuing approval of Panretin(R) gel for the treatment of cutaneous lesions of
patients with AIDS-related KS in Europe; we submitted an MAA with the EMEA in
February 1999. Panretin(R) gel is currently in clinical development for certain
skin cancers.
PRODUCT DEVELOPMENT PROCESS
The development phase for a compound refers to the current stage of
development for a particular indication. There are three phases in product
development -- the research phase, the preclinical phase and the clinical trials
phase. (See "Government Regulation" for a more complete description of the
regulatory process.) Research activities include research related to specific IR
and STATs targets and the identification of lead compounds. Lead compounds are
chemicals that have been identified that meet pre-selected criteria in cell
culture models for activity and potency against IR or STATs targets. More
extensive evaluation is then undertaken to determine if the compound should be
selected to enter into preclinical development. Once a lead compound is
selected, chemical modification of the compound is then undertaken to create the
best drug candidate.
The preclinical phase includes pharmacology and toxicology testing in
preclinical models (in vitro and in vivo), formulation work and manufacturing
scale-up to gather necessary data to comply with applicable regulations prior to
commencement of human clinical trials. Development candidates are lead compounds
that have successfully undergone in vitro and in vivo evaluation to demonstrate
that they have an acceptable profile, which justifies taking them through
preclinical development with the intention of filing an Investigational New Drug
application ("IND") and initiating human clinical testing.
Clinical trials are typically conducted in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into humans,
the emphasis is on testing for adverse effects, dosage tolerance, absorption,
metabolism, distribution, excretion and clinical pharmacology. Phase II involves
studies in a representative patient population to determine the efficacy of the
pharmaceutical for specific targeted indications, to determine dosage tolerance
and optimal dosage and to identify related adverse side effects and safety
risks. Once a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
clinical efficacy further and to further test for safety. Sometimes Phase I and
II trials or Phase II and III trials are combined. In the U.S., the FDA reviews
both the clinical plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.
4
LIGAND CLINICAL DEVELOPMENT AND RESEARCH PROGRAMS
We are developing several proprietary products for which we have worldwide
rights for a variety of cancers and skin diseases, as summarized in the table
below. Many of the indications being pursued are related to larger market
opportunities for our currently marketed products. Our product development
programs are primarily based on products discovered through our IR technology,
with the exception of ONTAK(R) which was developed using Seragen's fusion
protein technology and Morphelan(TM) which was developed by Elan. Our research
programs are based on both our IR and STAT technologies. Seven products are in
advanced stages of development. Five of the products in our proprietary product
development programs are retinoids, discovered and developed using our
proprietary IR technology. (See "Technology" for a discussion of our IR and STAT
technologies and retinoids.)
Program (1) Disease/Indication Development Phase
- ----------- ------------------ -----------------
ONTAK(R) CTCL Marketed
Non-Hodgkin's lymphoma Phase II
Psoriasis Phase II
Targretin(R) capsules CTCL Marketed
Advanced breast cancer Phase II
Moderate-to-severe psoriasis Phase II
Targretin(R) gel CTCL NDA filed
Actinic keratoses Phase II
Skin cancers Phase II (Under
development)
Panretin(R) gel Kaposi's sarcoma Marketed
Basal cell cancer of the skin Phase II (Under
development)
Panretin(R) capsules Kaposi's sarcoma Phase II
Bronchial metaplasia Phase II
LGD1550 capsules Head and neck cancer Phase II (Under
development)
Cervical cancer Phase II (Under
development)
Morphelan(TM) (2) Chronic pain Phase III
SARMs
o LGD2226 (Androgen agonists) Hypogonadism, osteoporosis, male/female Preclinical
sexual dysfunction, cachexia, AIDS-wasting Development/IND track
o LGD1331 (Androgen antagonists) Prostate cancer, hirsutism, acne, benign Preclinical
prostatic hyperplasia, androgenetic alopecia
STATs Cancer, Immunology, Growth Research
Glucocorticoid agonist Cancer Preclinical
(1) This table is not intended to be a comprehensive list of Ligand's
internal research and development programs.
(2) Morphelan(TM) was licensed from Elan. (See "Morphelan Development
Program" below.)
ONTAK(R) Development Programs
ONTAK(R) is the first of a new class of targeted cytotoxic biologic agents
called fusion proteins that was acquired in the acquisition of Seragen. ONTAK(R)
is marketed in the U.S. for CTCL. In addition to ongoing CTCL trials, we are
conducting clinical trials with ONTAK(R) in NHL and psoriasis, indications that
represent significantly larger market opportunities than CTCL. While CTCL
affects approximately 20,000 people in the U.S., NHL affects approximately
300,000 people in the U.S. and moderate to severe psoriasis affects an estimated
1.4 to 1.9 million people in the U.S.
5
In early 1999, ONTAK(R) entered Phase II trials for the treatment of
patients with NHL. One study, being conducted by the Eastern Cooperative
Oncology Group, assesses ONTAK(R) in patients with certain types of low- and
intermediate-grade NHL who have previously been treated with at least one
systemic anti-cancer treatment. A second multi-center trial for ONTAK(R) is
being conducted by us in patients with low-grade NHL who have been previously
treated with at least one chemotherapy regimen and at least one monoclonal
antibody therapy. Interim results of these trials are expected in 2000.
Clinical trials with ONTAK(R) have demonstrated benefits in patients with
long-standing, previously treated severe psoriasis. In the most recent Phase
I/II study, 35 patients received one of three dose levels of ONTAK(R), with
improvement seen at all levels. Eight of the patients had a 50% or greater
improvement as measured by the Mean Psoriasis Area and Severity Index, and 18
showed improvement relative to the Physician's Global Assessment of the
patients' psoriasis. Based on these positive preliminary results, additional
investigation is being considered.
Targretin(R) Capsules Development Programs
Targretin(R) capsules are approved and marketed in the U.S. for CTCL.
Ligand is also investigating the use of Targretin(R) capsules in several cancer
and skin disease markets which represent significantly larger market
opportunities in comparison to the CTCL market. When our collaborative partner
Lilly opted not to proceed with the development of Targretin(R) capsules in
diabetes, all of Lilly's rights to the oral form of Targretin(R) reverted to
Ligand.
In November 1998, we initiated a Phase II trial with Targretin(R) capsules
for the treatment of patients with advanced breast cancer. The open-label study
will assess the efficacy, safety and tolerability of Targretin(R) capsules at
two dose levels in up to 180 patients at approximately 30 sites at leading
cancer centers throughout the U.S. This year, experts predict that more than
180,000 cases of breast cancer will be diagnosed, making it the most common
non-skin malignancy in the U.S. among women. The prevalence of breast cancer in
the U.S. is estimated to have reached more than 2 million.
We are also conducting a Phase II trial with Targretin(R) capsules for the
treatment of patients with moderate to severe psoriasis, a condition that is
estimated to affect between 1.4 and 1.9 million people in the U.S. A phase II
study in patients with head and neck cancers and a Phase II study in KS have
been completed, as well as Phase II/III trial in lung cancer and a Phase II
multicenter trial in type II diabetes in Europe. The diabetes trial demonstrated
the insulin sensitizing effects of this RXR-selective drug in humans.
Targretin(R) Gel Development Programs
In December 1999, we submitted to the FDA an NDA for Targretin(R)
(bexarotene) gel 1%, a novel topical therapy for the treatment of cutaneous
lesions in patients with Stage IA, IB or IIA CTCL who have not tolerated other
therapies or who have refractory or persistent disease. The FDA has granted
Targretin(R) gel orphan drug designation for the treatment of patients with
CTCL, and has granted priority review status of the NDA filing. We have
completed Phase IIA trials with Targretin(R) gel for the treatment of patients
with actinic keratoses, a condition that is estimated to affect up to 5 million
people in the U.S. A Phase II trial with Targretin(R) gel for the treatment of
patients with non-melanoma skin cancer is under development. Non-melanoma skin
cancers affect approximately 500,000 people in the U.S. An MAA filing in Europe
for Targretin(R) gel in CTCL is targeted for 2000.
Panretin(R) Gel Development Program
A Phase II trial is under development for use of Panretin(R) gel in
patients with basal cell carcinoma, a disease with an estimated 600,000 new
cases diagnosed in the U.S. each year.
Panretin(R) Capsules Development Programs
Panretin(R) capsules have demonstrated clinical promise for the systemic
treatment of cutaneous AIDS-related KS, other cancers and skin disorders. In
completed Phase I/II human clinical trials, Panretin(R) capsules were tolerated
at doses up to 140 milligrams per square meter of body surface area per day. At
the maximum tolerated dose, side effects, including headaches, elevated
triglyceride levels, hypercalcemia and mucocutaneous irritation, were dose
limiting toxicities. We have reported favorable results in two Phase II trials
with Panretin(R) capsules in patients with KS and are currently evaluating
whether to proceed with development in KS. Phase II trials with Panretin(R)
capsules are ongoing in bronchial metaplasia. We have completed Phase II trials
in myelodysplastic syndrome, severe plaque psoriasis, and breast and pediatric
cancers, and the NCI-Canada has evaluated the results of a Phase I/II trial
using Panretin(R) capsules in combination with interferon alpha for renal cell
carcinoma.
6
LGD1550 Capsules Development Program
LGD1550 is a potent RAR agonist that strongly inhibits growth of several
human cancer cell lines. Phase I/ IIA clinical trials in advanced cancer have
shown that LGD1550 capsules were well tolerated. Investigators observed
dose-limiting skin toxicities, diarrhea and abdominal cramps. Dose-limiting
toxicities, such as headache and lipid abnormalities, frequently observed with
other retinoids, have not been observed with LGD1550. Unlike all-trans retinoic
acid, a retinoid approved for the treatment of acute promyelocytic leukemia,
LGD1550 does not appear to induce its own metabolism over the dose range tested
since blood levels are maintained with continued therapy. Phase II studies with
LGD1550 in combination with chemotherapy for the treatment of patients with
cervical and head and neck cancers are under development. The prevalence of
cervical cancer cases in the U.S. is estimated at 205,000 cases, while the
prevalence of head and neck cancer in the U.S. is estimated at more than 210,000
cases.
Morphelan(TM) Development Program
As part of a broader strategic alliance formed in 1998 with Elan, Elan
licensed to Ligand exclusive rights to market Elan's proprietary product
Morphelan(TM) in the U.S. and Canada for pain management in cancer and HIV
patients. We also have an option to co-promote Morphelan(TM) in continental
Europe for the same indications. Morphelan(TM), a once-daily, oral capsule form
of morphine, may provide sustained pain management for HIV and cancer patients
as compared to current therapies requiring frequent doses. Enrollment in Phase
III clinical trials in the U.S. has recently been completed by Elan. We
anticipate submission of an NDA in the U.S. by Elan in the first half of 2000.
If approved, we will market and sell Morphelan(TM) through our existing
specialty cancer and HIV-center sales force.
SARMs Programs
We are pioneering the development of tissue selective androgen receptor
modulators ("SARMs"), a novel class of non-steroidal, orally active molecules
that selectively modulate the activity of the androgen receptor ("AR") in
different tissues, providing a wide range of opportunities for the treatment of
many diseases and disorders in both men and women. Tissue-selective AR agonists
or antagonists may provide utility in male hormone replacement therapy and the
treatment of skin disorders, osteoporosis, sexual dysfunction in men and women,
prostate cancer, benign prostatic hyperplasia ("BPH") and other diseases. The
use of androgen antagonists has shown efficacy in the treatment of prostate
cancer, with three androgen antagonists currently approved by the FDA for use in
the treatment of prostate cancer. However, we believe that there is a
substantial medical need for improved androgen modulators for use in the
treatment of prostate cancer due to significant side effects seen with currently
available drugs that may be eliminated or reduced by SARMs.
Our SARMs programs have been our largest internally funded programs over
the past five years. We believe that our intellectual property in the SARM area
is strong. We have assembled an extensive SARM compound library and one of the
largest and most experienced AR drug discovery teams in the pharmaceutical
industry. We intend to pursue the specialty applications emerging from SARMs
internally, but may seek collaborations with major pharmaceutical companies to
exploit broader clinical applications.
We have two first generation SARMs in preclinical development: (1) LGD1331,
an androgen antagonist for acne, prostate cancer, BPH and hirsutism, and (2)
LGD2226, an androgen agonist for male hypogonadism, male and female sexual
dysfunction and osteoporosis. Preclinical studies of LGD1331 indicate that it
may have utility for treating acne and hirsutism disorders that affect a
significant number of women. In vivo studies of LGD1331 have revealed favorable
characteristics, including indirect evidence of diminished effects on the
central nervous system, compared with currently marketed drugs of this type for
the treatment of these conditions.
STATs Research Programs
In contrast to our IR program, our STATs programs focus on receptors found
on the surface of the cell. STATs play a modulating role in the biology of
cytokines and growth factors. Many diseases, such as inflammatory conditions,
may result from excessive cytokine activity, and others may result from
insufficient cytokine activity. (See "Technology -- STATs Technology" for a more
complete discussion of our STATs technology.) In our STATs programs, we seek to
develop drug candidates that mimic or block the activity of relevant cytokines
for use in a variety of conditions including cancer, inflammation and disorders
of blood cell formation.
Our program to discover and develop small molecule, orally available drugs
to act as interferon agonists for potential application in various cancers and
viral diseases is ongoing. We are also continuing an internal preclinical
program aimed at discovering novel immunomodulatory drugs. Clinically, it is
well established that a variety of immune disorders are characterized by
unbalanced helper T-cell responses. Helper T-cells are white blood cells
critical to immune response.
7
Several cytokines play a key role in regulating the proper balance of
helper T-cell responses, including Interleukin-4 ("IL-4") and Interleukin-12
("IL-12"). Regulating helper T-cell responses through modulation of IL-4 or
IL-12 signaling pathways may have application in allergy and asthma in the case
of IL-4, and transplant rejection and autoimmune diseases in the case of IL-12.
Compelling in vivo evidence suggests that pharmacological intervention in the
Janus Kinase family of tyrosine protein kinases ("JAK")/STAT signaling pathways
activated by IL-4 or IL-12 could result in drugs with novel mechanisms of action
that may not only complement, but also greatly improve on current therapies.
X-Ceptor Research Programs
Extensive work in the area of IRs has resulted in the identification and
discovery of more than 50 members of the IR superfamily that do not interact
with the known non-peptide hormones. We believe that among these orphan IRs
there may be receptors for uncharacterized small molecule hormones and that the
physiological roles of the various orphan receptors are likely to be diverse and
important to human biology and disease. In 1999, we invested in a new private
corporation, X-Ceptor Therapeutics, Inc., to fund research to identify
therapeutic products from orphan nuclear receptors. X-Ceptor, funded with $25.0
million primarily from outside investors, will enable accelerated development of
this early stage technology in a manner that offers upside reward while
minimizing the risk and burden of direct management, financing or full profit
and loss responsibility. Taking the position of minority equity investor, we
contributed cash, warrants and enabling technology to X-Ceptor and have the
right to reacquire all of the capital stock of X-Ceptor for a predetermined
purchase price in 2002 or 2003. (See Note 12 to the consolidated financial
statements.)
8
COLLABORATIVE RESEARCH AND DEVELOPMENT PROGRAMS
We are pursuing several major collaborative drug discovery programs to
further develop the research and development of compounds based on our IR and
STAT technologies. These collaborations focus on several large market
indications as shown in the table below.
Indication U.S. Prevalence
---------- ---------------
Osteoporosis 10 million
Breast Cancer 2 million
Hormone Replacement Therapy 7 million
Cardiovascular Disease 58 million
Contraception 35 million
Type II Diabetes 15 million
Obesity 48 million
During 1999, there were seven collaborative products on a human development
track -- droloxifene, lasofoxifene, TSE424, ERA923, WAY160910, GW544 and GWXXX.
(See Note 10 to the consolidated financial statements for a description of the
financial terms of our key ongoing collaboration agreements.)
Development
Program (1) Disease/Indication Phase Marketing Rights
- -------- ------------------ ----- ----------------
SEX HORMONE MODULATORS
SERMs
o Droloxifene (2) Osteoporosis Discontinued Pfizer
o Lasofoxifene (CP336,156) Osteoporosis, breast cancer Phase II/III Pfizer
o TSE424 Post-menopausal osteoporosis Phase II/III AHP
o ERA923 Breast cancer Phase I AHP
o ER Modulators HRT, osteoporosis, cardiovascular disease, Research Parke-Davis
breast cancer, mood and cognitive disorders
PR Modulators
o PR Modulators HRT, contraception, reproductive disorders Research Organon
o WAY160910 (PR Antagonists) HRT, contraception Preclinical/ AHP
IND track
o PR Agonists (LGD1447 series) Contraception, reproductive disorders Preclinical AHP/Ligand(3)
CARDIOVASCULAR/METABOLIC DISEASE
GW544 (PPAR Modulators ) Type II diabetes, cardiovascular disease Phase I Glaxo
GWXXX (PPAR Modulators) Cardiovascular disease Preclinical/ Glaxo
IND track
PPAR Modulators Diabetes, metabolic diseases Preclinical Lilly
RXR Modulators Diabetes, metabolic diseases Preclinical Lilly
ob-gene Pathway Metabolic diseases Research Lilly
ob-Leptin Metabolic diseases Research SmithKline Beecham
AGN4204 and AGN4326 Type II diabetes Preclinical Allergan
INFLAMMATORY DISEASE
Glucocorticoid Agonists Inflammation Preclinical Abbott/Ligand(3)
AGN4310 Psoriasis, mucocutaneous toxicity Preclinical/ Allergan
IND track
STATs
Hematopoietic Growth Factors Oncology, anemia Preclinical SmithKline Beecham/
Ligand(3)
(1) This table is not intended to be a comprehensive list of Ligand's
collaborative research and development programs.
(2) In December 1999, Pfizer chose not to continue development of droloxifene.
(3) We have retained certain compound rights in our collaborations with AHP,
Abbott, and SmithKline Beecham.
9
Sex Hormone Modulators Collaborative Programs
The primary objective of our sex hormone modulators collaborative programs
is to develop drugs for hormonally responsive cancers of men and women, hormone
replacement therapies and the treatment and prevention of diseases affecting
women's health, as well as hormonal disorders prevalent in men. Our programs,
both collaborative and internal, in the sex hormone modulators area target
development of tissue-selective modulators of the progesterone receptor ("PR"),
the estrogen receptor ("ER") and the androgen receptor ("AR"). Through our
collaborations with Pfizer and AHP, three selective ER modulators ("SERMs") are
in development in osteoporosis and advanced breast cancer. In collaboration with
Parke-Davis, we are seeking SERMs for the treatment of osteoporosis, breast
cancer, cardiovascular disease, and mood and cognitive disorders. In addition,
we are developing two SARMS in our internal programs and seek to enter into
collaborations with large global pharmaceutical companies for the development of
SARMs in large markets beyond our strategic focus or resources.
SERMS. Over the past eight years of collaboration with corporate partners
on the discovery, development and enhancement of SERMs, four SERMs (including
droloxifene) have emerged covering three generations of advancements in
efficacy. Today, Ligand is the principal company to have three generations of
SERMs in its collaborative pipeline, and we believe the clinical trials being
conducted by our collaborative partners on second-generation SERMs are furthest
advanced among all clinical trials for SERMs. Our partners Pfizer and AHP each
have second-generation SERMs moving into Phase III trials in 2000, and
Parke-Davis's goal is to declare one or more third-generation SERMs as clinical
development candidates.
PR MODULATORS. We are also developing novel non-steroidal PR antagonists,
partial agonists and agonists internally and in collaboration with AHP and
Organon, for use in hormone replacement therapy, contraception, reproductive
disorders and other applications in women's health. Exploratory clinical
research indicates that PR antagonists may have utility in contraception and in
a variety of chronic diseases, including endometriosis and cancer. We believe
that more selective PR antagonists may be useful in the treatment of many
hormone responsive diseases, including gynecological and malignant disorders,
such as breast and uterine cancer, uterine fibroids (benign smooth muscle
tumors) and endometriosis. Although current PR antagonists are used clinically
for acute contraceptive indications, their use in chronic diseases is likely to
be limited by their cross-reaction with the glucocorticoid receptor, which is
anticipated to produce adverse side effects with long-term administration. We
have discovered specific PR antagonists that do not cross-react with the IR for
glucocorticoids. We have also discovered several additional non-steroidal lead
compounds that are PR modulators. In addition, we have discovered closely
related compounds that are full agonists of the PR, which may be useful in
contraception, reproductive disorders, and hormone replacement therapy.
AHP COLLABORATION. In 1994, we entered into a collaborative research
agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of AHP, to
discover and develop drugs that interact with estrogen or progesterone receptors
for use in hormone replacement therapy, anti-cancer therapy, gynecological
diseases, central nervous system disorders associated with menopause and
fertility control. We granted AHP exclusive worldwide rights to all products
discovered in the collaboration that are agonists or antagonists to the PR and
ER for application in the fields of women's health and cancer therapy.
As part of this collaboration, we tested AHP's extensive chemical library
for activity against a selected set of targets of our internal programs. We may
select for internal development up to 24 lead compounds to which we will have
worldwide rights. In 1996, AHP exercised its option to include compounds we
discovered that modulate PRs and to expand the collaboration to encompass the
treatment or prevention of osteoporosis through the ER. AHP also added four
advanced chemical compound series from its internal ER-osteoporosis program to
the collaboration. The research phase of the collaboration ended in August 1998.
AHP has ongoing clinical studies with two SERMs. AHP is developing TSE424
for the treatment of post-menopausal osteoporosis, with Phase II trials ongoing,
and has announced their intention to initiate Phase III trials in 2000. ERA923
is being developed for the treatment of breast and reproductive cancers. AHP
filed an IND for ERA923 for the treatment of women with breast cancer in
December 1998 and Phase I trials in breast cancer are nearing completion. AHP
has also elected to proceed with IND track development of WAY160910, a
non-steroidal PR antagonist that may be useful in the creation of the first
estrogen-free oral contraceptive.
PFIZER COLLABORATION. In 1991, we entered into a five-year collaborative
research and development and license agreement with Pfizer to develop better
alternative therapies for osteoporosis. In November 1993, we jointly announced
the successful completion of the research phase of our alliance with the
identification of a development candidate and backups for the prevention and
treatment of osteoporosis. In preclinical studies, the candidates from the
program mimic the beneficial effects of estrogen on bone and have an impact on
blood serum lipids often associated with cardiac benefits without increasing
uterine or breast tissue proliferation.
10
We have milestone and royalty rights to two SERMs, lasofoxifene and
droloxifene, which over the past year have been under development by Pfizer for
osteoporosis and breast cancer. Lasofoxifene, previously known as CP336,156, is
a second generation estrogen partial agonist discovered through our
collaborative relationship with Pfizer to which Pfizer has retained marketing
rights. Droloxifene, a first generation estrogen antagonist, is a Pfizer
compound for which we performed work at Pfizer's request. These SERMs have been
shown to reduce bone loss and decrease low-density lipoprotein levels ("LDL", or
"bad" cholesterol). In late 1999, Pfizer announced that it planned to move
lasofoxifene forward into Phase III studies in 2000 for the treatment of breast
cancer and osteoporosis and that it would discontinue development of
droloxifene. Our royalty rights on sales of lasofoxifene are double that for
droloxifene.
PARKE-DAVIS COLLABORATION. In September 1999, we entered into a research,
development and license agreement with the Parke-Davis Pharmaceutical Research
and Development ("Parke-Davis") of Warner-Lambert Company. The research and
development collaboration will focus on the discovery, characterization, design
and development of third-generation small molecule compounds with beneficial
effects for the treatment and prevention of diseases mediated through the ER.
Some of the diseases affected by drugs that act upon the ER are osteoporosis,
cardiovascular disease, breast cancer, and mood and cognitive disorders.
Parke-Davis's goal is to declare one or more third-generation SERMs as clinical
development candidates.
ORGANON COLLABORATION. In February 2000, we entered into a collaboration
with Organon to focus on small molecule compounds with potential effects for the
treatment and prevention of gynecological diseases mediated through the
progesterone receptor. The objective of the collaboration is the discovery of
new non-steroidal compounds that are tissue-selective in nature and may have
fewer side effects. Such compounds may provide utility in hormone replacement
therapy, oral contraception, reproductive diseases, and other hormone-related
disorders.
Cardiovascular/Metabolic Disease Collaborative Programs
We are exploring the role of certain IRs, including the peroxisome
proliferation activated receptors ("PPARs"), in cardiovascular and metabolic
disorders. PPARs, a subfamily of orphan IRs, have been implicated in processes
that regulate plasma levels of very low density lipoproteins and triglycerides.
(See "Technology -- Intracellular Receptor Technology" for a discussion of PPARs
and orphan IRs.) Data implicate PPARs in the mechanism of action of lipid
lowering drugs such as Lopid(R). There are three subtypes of the PPAR subfamily
with defined novel aspects of their action -- alpha, beta and gamma. The subtype
PPAR alpha appears to regulate the metabolism of certain lipids and is useful in
treating hyperlipidemia. PPAR gamma plays a role in fat cell differentiation and
cellular responses to insulin. Modulators of PPAR gamma activity (e.g., the
glitazone class of insulin sensitizers) have utility in the management of type
II diabetes. PPARs are believed to function in cells in partnership with RXRs.
In addition to compounds that act directly on PPARs and that may have utility in
various cardiovascular and metabolic disorders, certain retinoids are able to
activate this RXR:PPAR complex (e.g., Targretin(R) capsules) and they may also
have utility in these disorders. We have three collaborative partners, Glaxo,
Lilly and SmithKline Beecham, in the areas of cardiovascular and metabolic
diseases, with two compounds on a clinical development tract. (See "STATs
Collaborative Program" below for a discussion of the SmithKline Beecham
collaboration.)
GLAXO COLLABORATION. In 1992, we entered into a five-year collaboration
with Glaxo to discover and develop drugs for the prevention or treatment of
atherosclerosis and other disorders affecting the cardiovascular system. The
collaboration focuses on discovering drugs which produce beneficial alterations
in lipid and lipoprotein metabolism in three project areas: (1) regulation of
cholesterol biosynthesis and expression of a receptor which removes cholesterol
from the blood stream, (2) the IRs influencing circulating HDL levels, and (3)
PPARs, the subfamily of IRs activated by lipid lowering drugs, such as Lopid(R)
and Atromid-S. The collaborative research program was successfully completed in
1997 with the identification of a novel lead structure that activates selected
PPAR subfamily members and the identification of a different lead compound that
shows activity in preclinical models for lowering LDL cholesterol by
up-regulating LDL receptor gene expression in liver cells. We retained the right
to develop and commercialize products arising from the collaboration in markets
not exploited by Glaxo or where Glaxo is not developing a product for the same
indication.
In 1999, Glaxo advanced two compounds to exploratory development: (1)
GW544, a PPAR agonist in Phase I trials for diabetes, that is also under
investigation as a potential therapy for cardiovascular disease; and (2) a
second candidate that is in preclinical development for cardiovascular disease.
Cardiovascular disease affects more than 58 million Americans and is estimated
to be responsible for 30% of all deaths worldwide each year.
LILLY COLLABORATION. In 1997, we entered into a strategic alliance with
Lilly for the discovery and development of products based upon our IR technology
with broad applications in the fields of metabolic diseases, including diabetes,
obesity, dyslipidemia, insulin resistance and cardiovascular diseases associated
with insulin resistance and obesity. Under the alliance, Lilly received: (1)
worldwide, exclusive rights to our compounds and technology associated with the
RXR receptor in the
11
field; (2) rights to use our technology to develop an RXR compound in
combination with a SERM in cancer; (3) worldwide, exclusive rights in certain
areas to our PPAR technology, along with rights to use PPAR research technology
with the RXR technology; and (4) exclusive rights to our HNF4 receptor and the
obesity gene promoter technology. Lilly has the right to terminate the
development of compounds under the agreements. We would receive rights to
certain of such compounds in return for a royalty to Lilly, the rate of which is
dependent on the stage at which the development is terminated.
Under the alliance, we retained or received: (1) exclusive rights to
independently research, develop and commercialize Targretin(R) and other RXR
compounds in the fields of cancer and dermatology; (2) an option to obtain
selected rights to one of Lilly's specialty pharmaceutical products; and (3)
rights to receive milestones, royalties and options to obtain certain
co-development and co-promotion rights for the Lilly-selected RXR compound in
combination with a SERM.
Our rights under the initial agreements have changed. In connection with
the acquisition of Seragen in 1998, we obtained from Lilly its rights to
ONTAK(R) in satisfaction of our option to obtain selected rights to one of
Lilly's specialty pharmaceutical products. In 1999, we agreed to focus our
collaborative efforts on the RXR modulator second-generation program, which has
compounds with improved therapeutic indices relative to the three
first-generation compounds, and on co-agonists of the PPAR receptor program. In
early 1999, Lilly opted not to proceed with the development of certain
first-generation compounds, including Targretin(R), in the RXR program for
diabetes. As a result of this decision, all rights to the oral form of
Targretin(R) reverted to us and LGD1268 and LGD1324 returned to the pool of
eligible RXR modulators for possible use in oncology in combination with a SERM
under the collaboration agreement between Ligand and Lilly.
Inflammatory Disease Collaborative Program
Abbott Collaboration. In 1994, we entered into a collaborative research
agreement with Abbott to discover and develop small molecule compounds for the
prevention or treatment of inflammatory diseases. The collaborative program
includes several molecular approaches to discovering modulators of
glucocorticoid receptor activity that have significantly improved therapeutic
profiles relative to currently known anti-inflammatory steroids such as
prednisone and dexamethasone. The collaboration is focused on the development of
novel non-steroidal glucocorticoids that maintain the efficacy of
corticosteroids that are currently used to treat inflammatory diseases, but lack
some or all of corticosteroids' dose-limiting side effects. Several compounds
discovered during the collaboration have progressed to advanced preclinical
testing in an effort to select a clinical candidate.
Abbott received exclusive worldwide rights for all products discovered in
the collaboration for use in inflammation. We received exclusive worldwide
rights for all anti-cancer products discovered in the collaboration. Abbott will
make milestone and royalty payments on products targeted at inflammation
resulting from the collaboration, while we will make milestone and royalty
payments on products targeted at anti-cancer resulting from the collaboration.
Each party will be responsible for the development, registration and
commercialization of the products in its respective field.
STATs Collaborative Program
Our proprietary STAT technology is distinct from our IR technology
platform. STATs are activated through a receptor located on the surface of the
cell rather than a receptor located within the cell. STAT technology provides us
with a second broadly enabling drug discovery platform that has potential
applications in cancer, inflammation, asthma, allergy, infectious disease,
anemia, obesity, diabetes and growth disorders. (See "Technology" for a more
complete discussion of our STAT technology.) We are pursuing product development
opportunities based on our STAT technology through a collaboration with
SmithKline Beecham and internally funded programs focusing on interferon
agonists and other cytokine agonists and antagonists.
SMITHKLINE BEECHAM COLLABORATION. In 1995, we entered into a collaborative
agreement with SmithKline Beecham to utilize our proprietary STATs technology to
discover and characterize small molecule, orally bioavailable drugs to control
hematopoiesis (the formation and development of blood cells) for the treatment
of a variety of blood cell deficiencies. In 1998, we announced with SmithKline
Beecham the discovery of the first non-peptide small molecule that mimics the
activity of Granulocyte- Colony Stimulating Factor ("G-CSF"), a natural hormone
that stimulates production of infection-fighting neutrophils (a type of white
blood cell). This molecule could lead to the development of an orally active
drug that could replace recombinant G-CSF (sold by Amgen as Neupogen(TM)), a
drug that must be administered by injection. While this lead compound has only
been shown to be active in mice, its discovery is a major scientific milestone
and suggests that orally active, small molecule mimics can be developed not only
for G-CSF, but for other cytokines as well. Ligand and SmithKline Beecham
continue to pursue development of this compound series.
A number of lead series have been found that mimic the activity of natural
growth factors for white cells and platelets. These are currently being
optimized through medicinal chemistry. Based on the progress achieved to date,
SmithKline
12
Beecham and Ligand have chosen to extend this collaboration for a year beyond
the term of the original contract.
Under the collaboration, we have the right to select up to three compounds
related to hematopoietic targets for development as anti-cancer products other
than those compounds selected for development by SmithKline Beecham. SmithKline
Beecham has the option to co-promote these products with us in North America and
to develop and market them outside North America.
In April 1998, we formed a new collaboration with SmithKline Beecham to
develop small molecule drugs that modulate the signaling pathway controlled by
leptin as a means of discovering orally available drugs for treatment or
prevention of obesity. Under the new agreement, SmithKline Beecham obtained
exclusive worldwide rights to products resulting from the obesity collaboration
and has agreed to make milestone payments to us as compounds progress through
preclinical and clinical development, and royalty payments on sales, if products
result from the research.
Allergan and ALRT Programs
In 1997, in conjunction with the buyback of Allergan Ligand Retinoid
Therapeutics, Inc. ("ALRT"), we agreed with Allergan to restructure the terms
and conditions relating to research, development, and commercialization and
sublicense rights for the ALRT compounds. (See Note 11 to the consolidated
financial statements.) Under the restructured arrangement, we received
exclusive, worldwide development, commercialization and sublicense rights to
Panretin(R) capsules and Panretin(R) gel, LGD1550, LGD268 and LGD324. Allergan
received exclusive, worldwide development, commercialization and sublicense
rights to LGD4310, an RAR antagonist. Allergan also received LGD4326 and
LGD4204, two advanced preclinical RXR selective compounds. In addition, we
participated in a lottery with Allergan for each of the approximately 2,000
retinoid compounds existing in the ALRT compound library as of the closing date,
with each party acquiring exclusive, worldwide development, commercialization
and sublicense rights to the compounds which they selected. Ligand and Allergan
will each pay the other a royalty based on net sales of products developed from
the compounds selected by each in the lottery and the other ALRT compounds to
which each acquires exclusive rights. We will also pay to Allergan royalties
based on our net sales of Targretin(R) for uses other than oncology and
dermatology indications. In the event that we license commercialization rights
to Targretin(R) to a third party, we will pay to Allergan a percentage of
royalties payable to us with respect to sales of Targretin(R) other than in
oncology and dermatology indications. Allergan has two compounds (AGN4204 and
AGN4326) in preclinical development for type II diabetes and one compound
(AGN4310) in preclinical development for psoriasis and mucocutaneous toxicity.
TECHNOLOGY
In our successful efforts to discover new and important medicines, we and
our exclusive academic collaborators have concentrated on two areas of research:
advancing the understanding of the activities of hormones and hormone-related
drugs and making scientific discoveries related to IR and STAT technologies. We
believe that our expertise in these technologies will enable us to develop
novel, small-molecule drugs acting through IRs or STATs with more
target-specific properties than currently available drugs, resulting in either
improved therapeutic and side effect profiles and new indications for IRs or
novel mechanisms of action and oral activity for STATs. Both STATs and IRs are
families of transcription factors that change cell function by selectively
turning on or off particular genes in response to circulating signals that
impinge on cells. In addition to our proprietary IR and STAT technologies, we
acquired fusion protein technology, which was utilized by Seragen in the
development of ONTAK(R).
Intracellular Receptor ("IR") Technology
Hormones occur naturally within the body and control processes such as
reproduction, cell growth, and differentiation. Hormones generally fall into two
general classes, the non-peptide hormones and the peptide hormones. The
non-peptide hormones include the retinoids, sex steroids (estrogens, progestins
and androgens), adrenal steroids (glucocorticoids and mineralocorticoids),
vitamin D and thyroid hormone. These non-peptide hormones act by binding to
their corresponding IRs to regulate the expression of genes in order to maintain
and restore balanced cellular function within the body. Hormonal imbalances can
lead to a variety of diseases. The hormones themselves and drugs that mimic or
block hormone action may be useful in the treatment of these diseases.
Furthermore, hormone mimics (agonists) or blockers (antagonists) can be used in
the treatment of diseases in which the underlying cause is not hormonal
imbalance. The effectiveness of the IRs as drug targets is clearly demonstrated
by currently available drugs acting through IRs for several diseases. However,
the use of most of these drugs has been limited by their often significant side
effects. Examples of currently marketed hormone-related drugs acting on IRs are
glucocorticoids (steroids used to treat inflammation), natural and synthetic
estrogens and progesterones (used for hormone replacement therapy and
contraception), tamoxifen (an estrogen antagonist used in the treatment of
breast cancer), and various retinoids such as Accutane(R) and Retin-A(R) (used
to treat acne and others to treat psoriasis).
13
We have built a strong proprietary position and accumulated substantial
expertise in IRs applicable to drug discovery and development. Building on our
scientific findings about the molecular basis of hormone action, we have created
proprietary new tools to explore and manipulate non-peptide hormone action for
potential therapeutic benefit. We employ a proprietary cell-culture based assay
system for small molecules that can modulate IRs, referred to as the
co-transfection assay. The co-transfection assay system simulates the actual
cellular processes controlled by IRs and is able to detect whether a compound
interacts with a particular human IR and whether this interaction mimics or
blocks the effects of the natural regulatory molecules on target gene
expression.
The understanding of non-peptide hormones and their actions has increased
substantially in the last 15 years. Driving this rapid expansion of knowledge
has been the discovery of the family of IRs through which all the known
small-molecule, non-peptide hormones act. We and our academic collaborators and
consultants have made major discoveries pertaining to IRs and small molecule
hormones and compounds, which interact with these IRs. These discoveries
include: (1) the identification of the IR superfamily, (2) the recognition of IR
subtypes, (3) the heterodimer biology of RXR-selective compounds and (4) the
discovery of orphan IRs. We believe that each of these broad areas of knowledge
provides important opportunities for drug discovery.
IR SUPERFAMILY. The receptors for all the non-peptide hormones are closely
related members of a superfamily of proteins known as IRs. Human IRs for all of
the known non-peptide hormones have now been cloned, in many cases by our
scientists or our collaborators. The structure and underlying mechanism of
action of the IRs have many common features, such that drug discovery insights
about one IR can often be directly applied to other members of the IR
superfamily, bringing synergy to our IR-focused drug discovery efforts. First
generation drugs were developed and commercialized for their therapeutic
benefits prior to the discovery of IRs and often cross-react with the IRs for
hormones other than the intended target, which can result in significant side
effects. The understanding that IRs are structurally similar has enabled us to
determine the basis for the side effects of some first-generation drugs and to
discover improved drug candidates.
IR SUBTYPES. For some of the non-peptide hormones, several closely related
but non-identical IRs, known as IR subtypes, have been discovered. These include
six subtypes of the IRs for retinoids, two subtypes of the IRs for thyroid
hormone, two subtypes for the ER, and three subtypes for the PPARs. Patent
applications covering many of these IR subtypes have been exclusively licensed
by us. We believe that drugs capable of selective modulation of IR subtypes will
allow more specific pharmacological intervention better matched to therapeutic
need. Targretin(R), an RXR selective molecule, was discovered as a result of our
understanding of retinoid receptor subtypes.
RETINOID RESPONSIVE IRS ("RRS.") Retinoic acid, a derivative of Vitamin A,
is one of the body's natural regulatory hormones that has a broad range of
biological actions, influencing cell growth, differentiation, programmed cell
death and embryonic development. Many chemical analogues of retinoic acid,
called retinoids, also have biological activity. Specific retinoids have been
approved by the FDA for the treatment of psoriasis and certain severe forms of
acne. Evidence also suggests that retinoids can be used to arrest and, to an
extent, reverse the effects of skin damage arising from prolonged exposure to
the sun. Other evidence suggests that retinoids are useful in the treatment of a
variety of cancers, including kidney cancer and certain forms of leukemia. For
example, all-trans-Retinoic-acid has been approved by the FDA for the treatment
of acute promyelocytic leukemia. Retinoids have also shown an ability to reverse
precancerous (premalignant) changes in tissues, reducing the risk of development
of cancer, and may have potential as preventive agents for a variety of
epithelial malignancies, including skin, head and neck, bladder and prostate
cancer. Currently marketed retinoids, which were developed and commercialized
prior to the discovery of retinoid-responsive IRs, cause significant side
effects. These include severe birth defects if fetal exposure occurs, severe
irritation of the skin and mucosal surfaces, elevation of plasma lipids,
headache and skeletal abnormalities.
The six RRs that have been identified to date can be grouped in two
subfamilies -- retinoic acid receptors ("RARs") and retinoid X receptors
("RXRs"). Patent applications covering members of both families of RRs have been
licensed exclusively to us primarily from The Salk Institute. The RR subtypes
appear to have different functions, based on their distribution in the various
tissues within the body and data arising from in vitro and in vivo studies,
including studies of transgenic mice. Several of the retinoids currently in
commercial use are either non-selective in their pattern of RR subtype
activation or are not ideal drugs for other reasons. We are developing
chemically synthesized retinoids that, by selectively activating RR subtypes,
may preserve desired therapeutic effects while reducing side effects.
We have two retinoid products approved by the FDA (Panretin(R) gel and
Targretin(R) capsules) and five retinoid products in clinical trials
(Panretin(R) gel, Panretin(R) capsules, Targretin(R) capsules, Targretin(R) gel
and LGD1550 capsules). Panretin(R) gel and Panretin(R) capsules incorporate
9-cis retinoic acid, a retinoid isolated and characterized by us in 1991 in
collaboration with scientists at The Salk Institute and Baylor. 9-cis retinoic
acid is the first non-peptide hormone discovered in over 25 years and appears to
be a natural ligand for the RAR and RXR subfamilies of retinoid receptors.
Bexarotene, the active substance in Targretin(R), is a synthetic retinoid
developed by us that shows selective retinoid receptor subtype activity that is
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different from that of 9-cis retinoic acid, the active substance in Panretin(R).
Targretin(R) selectively activates a subclass of retinoid receptors called RXRs.
RXRs play an important role in the control of a variety of cellular functions.
LGD1550 is a potent RAR agonist that strongly inhibits growth of several human
cancer cell lines.
RXRS. RXRs can form a dimer with numerous IRs, such as the retinoic acid
receptor ("RAR"), thyroid hormone receptor and vitamin D receptor. While RXRs
are widely expressed, their IR partners are more selectively expressed in
different tissues, such as liver, fat or muscle. As a result, compounds that
bind RXRs offer the unique potential to treat a variety of diseases, including
cancer and metabolic diseases. In preclinical models of type II diabetes, RXR
agonists appear to stimulate the physiological pathways responsive to RXR-PPAR
receptor partners expressed in key target tissues that are involved in glucose
metabolism. As a result, a discrete set of genes is activated in these tissues,
resulting in a decrease in serum glucose levels and insulin.
ORPHAN RECEPTORS. Over 50 additional members of the IR superfamily, which
do not interact with the known non-peptide hormones, have been discovered. These
members of the IR superfamily have been designated orphan receptors. We believe
that among the orphan IRs may be receptors for uncharacterized small molecule
hormones and that the physiological roles of the various orphan IRs are likely
to be diverse. We have devised strategies to isolate small molecules that
interact with orphan IRs and this technology forms the basis of the newly formed
company X-Ceptor. (See Note 12 to the consolidated financial statements.)
Signal Transducers and Activators of Transcription ("STAT") Technology
STATs are a family of proteins that are a key part of the signal
transduction pathway for a variety of biologically important polypeptide
hormones (e.g., interferons, interleukins, leptin and hematopoietic growth
factors). STATs play a role in the biology of cytokines and growth factors
functionally analogous to that played by IRs in the biology of the non-peptide
hormones. When various cytokines or growth factors bind to their receptors on
the cell surface, this triggers the activation of specific members of the Janus
Kinase family of tyrosine protein kinases ("JAKs"), which in turn activate
specific STATs. The activated STATs enter the cell nucleus and bind to the
control regions of specific target genes and alter their expression, thereby
modulating physiologic or pathophysiologic processes.
The discovery of STATs, the elucidation of their roles in interferon signal
transduction, and the first cloning of genes encoding STATs were all
accomplished by our exclusive collaborator, Dr. James Darnell, and were
described initially in 1992. A total of seven members of the STAT family have
been identified and a large number of peptide hormones have been shown to
utilize STAT signaling pathways. These peptide hormones include the interferons
(alpha, beta and gamma), the hematopoietic colony stimulating factors
(interleukin-3, EPO, G-CSF, GM-CSF and thrombopoietin), growth hormone,
prolactin, leptin and many of the interleukins.
Many diseases, such as certain inflammatory conditions, may be the result
of excessive activity of certain cytokines. In these conditions it may prove
beneficial to block the actions of specific cytokines. In other pathological
states, there is insufficient activity of specific cytokines. For example, in
patients with chronic renal failure, diminished erythropoietin ("EPO") release
by the damaged kidneys results in the inadequate production of red blood cells,
causing anemia. Recombinant human EPO protein (Epogen(R)) can be administered to
correct this anemia effectively, but must be injected. Many other cytokines are
useful as injected protein medicines, including interferons (Intron-A(R),
Roferon(R), Betaseron(R)), interleukins (e.g., Proleukin(R), which we market in
Canada), and hematopoietic growth factors (Epogen(R), Neupogen(R)). Each of
these and many other cytokines appear to exert their actions through JAK/STAT
signal transduction pathways.
We are utilizing JAK/STAT technologies to seek low molecular weight
compounds able to mimic or block the actions of medically relevant cytokines for
uses in various pathological conditions, including cancer, inflammation and
disorders of blood cell formation. Because these compounds are small molecules,
they have the potential to offer significant advantages over current recombinant
cytokine-based therapies, including oral bioavailability, greater ease of
manufacture and improved stability.
We are using our high throughput screening assays to discover small
molecule drugs for potential application in various cancers and viral diseases
and that act as cytokine agonists and antagonists in cancer and immunology. We
have also established a collaboration with SmithKline Beecham to discover and
characterize small molecule drugs to modulate specific JAK/STAT pathways to
control the formation of red and white blood cells for treating patients with
cancer or anemia and a second collaboration in this area related to obesity.
Proof of principle for this approach was achieved with SmithKline Beecham in the
area of G-CSF mimics. We have additional assays under development to allow high
throughput screening for and subsequent optimization of small molecule drugs
that act through JAK/STAT signaling pathways to block or mimic other medically
significant cytokines and growth factors.
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Fusion Protein Technology
Our fusion protein technology was developed by Seragen, which we acquired
in 1998. Seragen's fusion proteins consist of a fragment of diphtheria toxin
genetically fused to a ligand that binds to specific receptors on the surface of
target cells. Once bound to the cell, the fusion proteins are designed to enter
the cell and destroy the ability of the cell to manufacture proteins, resulting
in cell death. Using this platform, Seragen genetically engineered six fusion
proteins, each of which consists of a fragment of diphtheria toxin fused to a
different targeting ligand, such as a polypeptide hormone or growth factor.
ONTAK(R), which is approved in the U.S. for the treatment of patients with
persistent or recurrent CTCL, is a fusion protein consisting of a fragment of
diphtheria toxin genetically fused to a part of interleukin-2. In addition to
treatment of CTCL, fusion proteins may have utility in oncology, dermatology,
infectious diseases and autoimmune diseases. Seragen has entered into exclusive
license agreements with Harvard University and other parties for patents related
to fusion protein technology and has been issued four U.S. patents for
improvements in the technology licensed from Harvard University.
Academic Collaborations
To date, we have licensed technology from The Salk Institute, Baylor
College of Medicine and Rockefeller University and developed relationships with
key scientists to further the development of our core IR and STAT technologies.
THE SALK INSTITUTE OF BIOLOGICAL STUDIES. In 1988, we established an
exclusive relationship with The Salk Institute, which is one of the research
centers in the area of IR technology. Under the agreement, we have an exclusive,
worldwide license to certain IR technology developed in the laboratory of Dr.
Ronald Evans, a Salk professor and Howard Hughes Medical Institute Investigator.
Dr. Evans cloned and characterized the first IR in 1985 and is an inventor of
the co-transfection assay used by us to screen for IR modulators. Under the
agreement, we are obligated to make certain royalty payments based on sales of
certain products developed using the licensed technology, as well as certain
minimum annual royalty payments.
In May 1998, we submitted an NDA to the FDA for Panretin(R) gel for the
treatment of AIDS-related KS. In connection with the submission, we exercised an
option to acquire a fully paid up license for the patent rights to Panretin(R)
by paying a one-time license fee of approximately $4.1 million to The Salk
Institute.
We have also entered into exclusive consulting agreements with Dr. Evans
that continue through July 2001. Dr. Evans serves as Chairman of Ligand's
Scientific Advisory Board.
BAYLOR COLLEGE OF MEDICINE. In 1990, we established an exclusive
relationship with Baylor, which is a center of IR technology. We entered into a
series of agreements with Baylor under which we have an exclusive, worldwide
license to IR technology developed at Baylor and to future improvements made in
the laboratory of Dr. Bert W. O'Malley through September 2000. Dr. O'Malley is a
professor and the Chairman of the Department of Cell Biology at the Baylor
College of Medicine and the Director of the Center for Reproductive Biology who
leads IR research at that institution.
We work closely with Dr. O'Malley and Baylor in scientific IR research,
particularly in the area of sex steroids and orphan IRs. Under the agreement, we
are obligated to make payments to Baylor College of Medicine in support of
research done in Dr. O'Malley's laboratory through September 2000. We are also
obligated to make certain royalty payments based on the sales of products
developed using the licensed technology. We have entered into an exclusive
consulting agreement with Dr. O'Malley through September 2002. Dr. O'Malley is a
member of Ligand's Scientific Advisory Board.
ROCKEFELLER UNIVERSITY. In September 1992, we entered into a worldwide,
exclusive license agreement with Rockefeller University and exclusive consulting
agreements with Dr. James Darnell of Rockefeller University and Dr. David Levy
of NYU to develop and commercialize certain technology involving STATs to
control gene expression. Dr. Darnell is one of the leading investigators of the
control of gene expression by STATs. Rockefeller University will receive a
royalty on any commercialized products developed using the technology. Related
technology was assigned by NYU to Rockefeller University and is covered by the
license agreement with us.
In addition to the collaborations discussed above, we also have a number of
other consulting, licensing, development and academic agreements by which we
strive to advance our technology.
MANUFACTURING
We currently have no manufacturing facilities and, accordingly, rely on
third parties, including our collaborative partners, for commercial or clinical
production of any products or compounds.
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Certain raw materials necessary for the commercial manufacturing of our
products are custom and must be obtained from a specific sole source. In
addition, our finished products are produced by sole source manufacturers. We
currently attempt to manage the risk associated with such sole source raw
materials and production by actively managing our inventories and supply and
production arrangements. We attempt to remain appraised of the financial
condition of our suppliers and their ability to continue to supply our raw
materials and finished products in an uninterrupted and timely manner.
Unavailability of certain materials or the loss of current sources of production
could cause an interruption in production and a reduced supply of finished
product pending establishment of new sources, or in some cases, implementation
of alternative processes. For a discussion of the risks associated with
manufacturing see "Risks and Uncertainties."
QUALITY ASSURANCE
Our success depends in great measure upon customer confidence in the
quality of our products and in the integrity of the data that support their
safety and effectiveness. The quality of our products arises from our total
commitment to quality in all aspects of our business, including research and
development, purchasing, manufacturing, and distribution. Quality-assurance
procedures have been developed relating to the quality and integrity of our
scientific information and production processes.
Control of production processes involves rigid specifications for
ingredients, equipment, and facilities, manufacturing methods, packaging
materials, and labeling. Control tests are made at various stages of production
processes and on the final product to assure that the product meets all
regulatory requirements and our standards. These tests may involve chemical and
physical microbiological testing, preclinical testing, human clinical trials, or
a combination of these trials.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $59.4 million, $70.3 million and
$71.9 million in fiscal 1999, 1998 and 1997, respectively, of which
approximately 73%, 75%, and 29% we sponsored, and the remainder of which was
funded pursuant to collaborative research and development arrangements.
COMPETITION
Some of the drugs we are developing will compete with existing therapies.
In addition, a number of companies are pursuing the development of novel
pharmaceuticals, which target the same diseases that we are targeting. A number
of pharmaceutical and biotechnology companies are pursuing IR-related or
STAT-related approaches to drug discovery and development. Furthermore, academic
institutions, government agencies, and other public and private organizations
conducting research may seek patent protection with respect to potentially
competing products or technologies and may establish collaborative arrangements
with our competitors.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales. For a discussion of the risks associated with competition see "Risks and
Uncertainties."
GOVERNMENT REGULATION
The manufacturing and marketing of our products, our ongoing research and
development activities, and products being developed by our collaborative
partners are subject to regulation for safety and efficacy by numerous
governmental authorities in the United States and other countries. In the United
States, pharmaceuticals are subject to rigorous regulation by federal and
various state authorities, including the FDA. The Federal Food, Drug, and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of our products. There are often comparable regulations, which apply
at the state level. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include (1) preclinical laboratory tests, (2) the submission to
the FDA of an IND, which must become effective before human clinical trials may
commence, (3) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug, (4) the submission of a NDA to the FDA and
(5) the FDA approval of the NDA prior to any commercial sale or shipment of the
drug. A company must pay a one-time user fee for NDA submissions, and annually
pay user fees for each approved product and manufacturing establishment. In
addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with the FDA and in
California, with the Food and Drug Branch of California. Domestic manufacturing
establishments are subject to pre-approval inspections by the FDA prior to
marketing approval and then to biennial inspections and must comply with current
Good Manufacturing Practices ("cGMP"). To supply products for use in the United
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States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in existing
regulations could have a material adverse effect to us.
For marketing outside the United States before FDA approval to market, we
must submit an export permit application to the FDA. We also will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements relating to the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to country
and there can be no assurance that we or any of our partners will meet and
sustain any such requirements. For a discussion of the risks associated with
government regulations see "Risks and Uncertainties."
PATENTS AND PROPRIETARY RIGHTS
We believe that patents and other proprietary rights are important to our
business. Our policy is to file patent applications to protect technology,
inventions and improvements to our inventions that are considered important to
the development of our business. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position.
To date, we have filed or participated as licensee in the filing of
approximately 108 currently pending patent applications in the United States
relating to our technology, as well as foreign counterparts of certain of these
applications in many countries. In addition, we own or are the exclusive
licensee to rights covered by approximately 190 patents issued, granted or
allowed worldwide. Subject to compliance with the terms of the respective
agreements, our rights under our licenses with our exclusive licensors extend
for the life of the patents covering such developments. For a discussion of the
risks associated with patent and proprietary rights see "Risks and
Uncertainties."
HUMAN RESOURCES
As of February 29, 2000, we had 385 full-time employees, of whom 229 were
involved directly in scientific research and development activities. Of these
employees, approximately 69 hold Ph.D. or M.D. degrees.
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 December 31, 1999, our accumulated deficit was $470.3 million. To
date, we have received the majority of our revenues from our collaborative
arrangements and have recently begun receiving revenues from the sale of
pharmaceutical products. 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 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 first half of the 2000 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:
o we may discover during preclinical testing or human studies that our
potential products are ineffective or cause harmful side effects,
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o the products may fail to receive necessary regulatory approvals from the
FDA or foreign authorities in a timely manner or at all,
o we may fail to produce the products, if approved, in commercial quantities
or at reasonable costs, or
o 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 currently rely on another company 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 addition, in Canada we are the sole
marketer of two cancer products other companies have developed. In Europe, we
will rely initially on other companies to distribute and market our products. In
1999, we entered into agreements for the marketing and distribution of our
products in Spain, Portugal, Greece, Italy, and Central and South America and we
established a subsidiary, Ligand Pharmaceuticals International, Inc., with a
branch in London, England to manage our European marketing and operations. We
may not be able to continue to establish and maintain the sales and marketing
capabilities necessary to successfully commercialize our products. 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,
arising from costs to:
o conduct research, preclinical testing and human studies,
o establish pilot scale and commercial scale manufacturing processes and
facilities, and
o establish and develop quality control, regulatory, marketing, sales and
administrative capabilities to support these programs.
Our future operating and capital needs will depend on many factors,
including:
o the pace of scientific progress in our research and development programs
and the magnitude of these programs,
o the scope and results of preclinical testing and human studies,
o the time and costs involved in obtaining regulatory approvals,
o the time and costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims, o competing technological and market
developments,
o our ability to establish additional collaborations,
o changes in our existing collaborations,
o the cost of manufacturing scale-up, and
o the effectiveness of our commercialization activities.
If additional funds are required 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.
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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 or 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, 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 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 debentures in the total principal amount of $50 million. The debentures
bear interest at a rate of 7 1/2% per annum and are due in 2003. In addition, at
December 31, 1999, we had outstanding a $2.5 million convertible note to
SmithKline Beecham Corporation and $85.2 million in zero coupon convertible
notes to Elan. Subsequent to December 31, 1999, we converted $20 million in zero
coupon convertible notes plus accrued interest into 1,600,123 shares of common
stock. Glycomed's failure to make payments when due under its debentures would
cause us to default under the outstanding notes to Elan 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 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 notes outstanding 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 $10 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
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 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
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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.
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.
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. 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.
WE RELY HEAVILY ON COLLABORATIVE RELATIONSHIPS AND TERMINATION OF ANY OF THESE
PROGRAMS COULD REDUCE THE FINANCIAL RESOURCES AVAILABLE TO US.
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 Organon, Warner-Lambert Company, 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 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 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 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.
21
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 technology.
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(R) 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 Hoffmann-La Roche'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 Hoffmann-La Roche 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 Hoffmann-La Roche 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.
WE RELY ON THIRD-PARTY MANUFACTURERS.
We currently have no manufacturing facilities and we rely on others for
clinical or commercial production of our 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 ability to conduct preclinical testing and human clinical trials
will be adversely affected. In addition, our revenues could be adversely
affected if we are unable to supply currently marketed products. 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.
The 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.
22
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 result in
payment of significant amounts of money and divert management's attention from
running the 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 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. 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. Recruiting and retaining
qualified management, operations and scientific personnel to perform research
and development work also is 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. 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:
o the results of research or development testing,
o technological innovations,
o new commercial products,
o government regulation,
o receipt of regulatory approvals by competitors,
o our failure to receive regulatory approvals,
o developments concerning proprietary rights, or
o 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 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 effect of delaying or preventing a change in our ownership.
23
ITEM 2. PROPERTIES
We currently lease and occupy office and laboratory facilities in San
Diego, California. These include a 52,800 square foot facility leased through
June 2014, an 82,000 square foot facility leased through February 2014, and a
7,500 square foot facility leased through February 2001. We believe these
facilities will be adequate to meet our near-term space requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to litigation arising in the normal
course of business. As of the date of this filing, we are not a party to any
litigation which would have a material effect on our financial position,
business operations or cash flows.
On August 4, 1998, a lawsuit was filed in the Court of Chancery of the
State of Delaware which sought to enjoin the acquisition of Seragen by Ligand.
The injunction was denied and the acquisition occurred on August 12, 1998. An
amended complaint was filed on or about December 18, 1998 against Seragen,
Seragen Technology, Inc., specified former directors and officers and Seragen
investors, Boston University and specified trustees, Marathon Biopharmaceuticals
L.L.C., Ligand and Knight Acquisition Corp., a wholly owned subsidiary of Ligand
at the time of the merger with Seragen ("Knight"). Ligand and Knight were not
named as defendants in the original complaint. The operative complaint alleges
claims of self-dealing and breach of fiduciary duties of disclosure, loyalty and
care by the individual defendants and Seragen investors, and seeks damages on
behalf of a class of shareholders who purchased Seragen common stock during the
period April 1992 through August 12, 1998. The lawsuit also challenges the
fairness of Ligand's acquisition of Seragen, and the allocation of the merger
proceeds among the individual defendants, Seragen's investors and minority
shareholders. The defendants in the litigation, including Ligand, Knight and
Seragen, have filed various motions to dismiss the claims. A hearing on these
pending motions is presently scheduled on April 10, 2000. We believe that the
lawsuit is without merit and intend to defend against it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter ended December 31, 1999.
PART II
ITEM 5. MARKETS FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
(a) MARKET INFORMATION
Our common stock trades on the Nasdaq National Market tier of the Nasdaq
Stock Market under the symbol "LGND." The following table sets forth the high
and low sales prices for our common stock on the Nasdaq National Market for the
periods indicated.
Price Range
--------------
High Low
---- ---
Year Ended December 31, 1998:
1st Quarter............................... $ 16 5/8 $ 10 7/8
2nd Quarter............................... 16 3/8 12 1/8
3rd Quarter............................... 13 1/4 5 1/2
4th Quarter............................... 12 3/8 6 15/16
Year Ended December 31, 1999:
1st Quarter............................... $ 14 3/4 $ 8 3/16
2nd Quarter............................... 11 7/16 8 3/16
3rd Quarter............................... 11 3/16 6 7/16
4th Quarter............................... 13 7/8 7 1/2
(b) HOLDERS
As of February 29, 2000, there were approximately 2,127 holders of record
of the common stock.
24
(c) DIVIDENDS
We have never declared or paid any cash dividends on our capital stock and
do not intend to pay any cash dividends in the foreseeable future. We currently
intend to retain our earnings, if any, to finance future growth. We have no
contractual restrictions on paying dividends.
(d) RECENT SALES OF UNREGISTERED SECURITIES
On December 8, 1999, we issued to Elan International Services, Ltd.
("EIS"), a subsidiary of Elan Corporation, plc ("Elan"), 498,433 shares of our
common stock as payment of a $5 million milestone due Elan under the Morphelan
license agreement. On December 31, 1999, we issued to EIS 2,433,032 shares of
our common stock related to the conversion of $20 million in zero coupon
convertible senior notes plus accrued interest. The shares of common stock were
issued to a single entity, EIS, under a claim of exemption under Regulation S
promulgated by the Securities and Exchange Commission or, alternatively, under
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to our
consolidated financial statements has been derived from the audited financial
statements. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this filing.
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
(in thousands, except net loss per share data)
Consolidated Statement of Operations Data:
Revenues:
Product sales (1)....................................... $ 11,307 $ 406 $ 418 $ -- $ --
Collaborative research and development and other
revenues............................................. 26,978 17,267 51,281 36,842 24,516
Contract manufacturing.................................. 2,610 -- -- -- --
------------ ------------ ------------ ------------ -----------
Total revenues..................................... 40,895 17,673 51,699 36,842 24,516
------------ ------------ ------------ ------------ -----------
Costs and expenses:
Cost of products sold (1)............................... 3,563 466 520 -- --
Contract manufacturing.................................. 6,926 -- -- -- --
Research and development................................ 59,442 70,273 71,906 59,494 41,636
Selling, general and administrative (1)................. 27,257 16,568 10,108 10,205 8,181
Technology milestone payment (2)........................ 5,000 -- -- -- --
Write-off of acquired in-process technology (3)......... -- 45,000 64,970 -- 19,564
ALRT contribution....................................... -- -- -- -- 17,500
------------ ------------ ------------ ------------ -----------
Total costs and expenses........................... 102,188 132,307 147,504 69,699 86,881
------------ ------------ ------------ ------------ -----------
Loss from operations..................................... (61,293) (114,634) (95,805) (32,857) (62,365)
------------ ------------ ------------ ------------ -----------
Other income (expense):
Interest income...................................... 2,470 3,070 3,743 3,704 3,603
Interest expense (4)................................. (12,979) (8,322) (8,088) (8,160) (5,410)
Debt conversion expense.............................. (2,200) -- -- -- --
Other................................................ (717) 2,000 -- -- --
------------ ------------ ------------ ------------ -----------
Total other income (expense)...................... (13,426) (3,252) (4,345) (4,456) (1,807)
------------ ------------ ------------ ------------ -----------
Net loss................................................. $ (74,719) $ (117,886) $ (100,150) $ (37,313) $ (64,172)
============ ============ ============ ============ ===========
Basic and diluted net loss per share..................... $ (1.58) $ (2.92) $ (3.02) $ (1.30) $ (2.70)
============ ============ ============ ============ ===========
Shares used in computing net loss per share.............. 47,146,312 40,392,421 33,128,372 28,780,914 23,791,542
============ ============ ============ ============ ===========
25
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- -----------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, short term
investments and restricted investments.....$ 49,166 $ 72,521 $ 86,287 $ 84,179 $ 76,903
Working capital.............................. 35,978 51,098 62,399 71,680 57,349
Total assets................................. 134,645 156,020 107,423 102,140 93,594
Long-term debt (4)........................... 136,634 90,487 51,379 53,914 49,864
Accumulated deficit.......................... (470,349) (395,630) (277,744) (177,594) (140,281)
Total stockholders' equity (deficit)......... (25,590) (11,362) 34,349 34,461 28,071
(1) We began selling and marketing ONTAK and Panretin in 1999.
(2) Consists of technology payment to Elan related to Morphelan. See note 7 of
notes to consolidated financial statements.
(3) Includes write-offs related to the Seragen merger and technology acquired
from Elan in 1998 and the ALRT transaction in 1997. See notes 4, 7, and 11,
respectively, of notes to consolidated financial statements.
(4) Increase in 1999 and 1998 relates to the issuance of zero coupon
convertible notes to Elan. See note 7 of notes to consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This annual report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed 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. 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 annual 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 drug discovery and development programs focused on intracellular receptors,
also known as IRs, and signal transducers and activators of transcription, also
known as STATs. 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 and period to period as a result of differences in the timing
of expenses incurred and revenues earned from collaborative research and
development, product sales and other arrangements. Some of these fluctuations
may be significant. As of December 31, 1999, our accumulated deficit was $470.3
million.
The consolidated results include the results of : Ligand Pharmaceuticals
Incorporated; Seragen, Inc. ("Seragen"), acquired in 1998; Marathon
Biopharmaceuticals, Inc. ("Marathon"), established in 1999 subsequent to an
asset acquisition; Ligand Pharmaceuticals International, Inc., established in
1999; Ligand Pharmaceuticals (Canada) Incorporated; Glycomed Incorporated; and
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"), acquired in 1997.
In January 1999, we consummated the purchase of the assets of Marathon
Biopharmaceuticals LLC ("Marathon LLC"). The purchase of the Marathon LLC assets
was completed under an agreement between us, Marathon LLC and other subsidiaries
of Boston University dated May 11, 1998. The purchase price consisted of a $5
million payment in January 1999 satisfied through the issuance of 402,820 shares
of our common stock and a $3 million cash payment in August 1999.
In February 1999, the United States Food and Drug Administration ("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 known as KS, and ONTAK for the treatment of patients with persistent or
recurrent cutaneous T-cell lymphoma, also known as CTCL.
In March 1999, we issued to Eli Lilly and Company ("Lilly") 434,546 shares
of our common stock as payment of a $5 million milestone due to Lilly under an
agreement with us and Seragen covering rights to ONTAK. In addition, we signed
marketing and distribution agreements with Ferrer Internacional S.A. to
exclusively market and distribute, in Spain, Portugal,
26
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 submitted a new drug application to the FDA seeking
marketing clearance for Targretin capsules. The indication sought was 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 in December 1999. In addition, we
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. For
additional details regarding X-Ceptor, please see note 12 of the notes to
consolidated financial statements.
In July 1999, we issued $40 million of zero coupon convertible notes under
the terms of our strategic alliance with Elan Corporation, plc ("Elan") and in
August 1999 agreed to amend the underlying financing arrangement to provide for
the use of the $30 million of additional financing available under the
arrangement for general corporate purposes. In August 1999, we issued $20
million of convertible notes under the amended agreement. For additional
details, please see note 7 of the notes to consolidated financial statements.
In August 1999, in addition to making the $3 million cash payment for the
Marathon LLC assets, we made a cash payment of $34.1 million related to our
contingent merger obligation to Seragen stakeholders. For additional details,
please see note 4 of the notes to consolidated financial statements.
In September 1999, we entered into a royalty arrangement with Hoffmann-La
Roche Inc. and a collaborative research and development arrangement with
Parke-Davis. For additional details, please see notes 8 and 10, respectively, of
the notes to consolidated financial statements.
In December 1999, in addition to receiving FDA approval for Targretin
capsules, we submitted a new drug application for Targretin gel for the
treatment of patients with early stage CTCL. In February 2000, the new drug
application was accepted for priority review by the FDA. Under the priority
review, the FDA is expected to complete its review within six months of the
December 1999 submission date. In December 1999, we also completed an exchange
offer for warrants originally issued in 1995, resulting in net proceeds to us of
$13.9 million. In addition, we issued 498,443 shares of common stock to Elan as
a $5 million technology milestone payment and 2,433,032 shares related to Elan's
conversion of $20 million of outstanding zero coupon convertible notes and
accrued interest. We also sold certain royalty rights to a third party for $3.25
million and entered into a marketing and distribution agreement with Alfa
Wassermann S.p.A. for the marketing and distribution of our oncology products in
Italy.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 ("1999"), AS COMPARED WITH YEAR ENDED DECEMBER 31,
1998 ("1998")
Total revenues for 1999 were $40.9 million, an increase of $23.2 million as
compared to 1998. Loss from operations for 1999 was $61.3 million, a decrease of
$53.3 million as compared to 1998. Net loss for 1999 was $74.7 million or
$(1.58) per share, a decrease of $43.2 million from the 1998 net loss of $117.9
million or $(2.92) per share. The principal factors causing these changes are
discussed below.
In 1999 we wrote off $5 million related to a milestone payment made to Elan
under the license agreement for its product Morphelan. In 1998 we wrote off $30
million of acquired in-process technology related to the merger with Seragen and
$15 million related to the license agreement with Elan. For additional details,
please see notes 4 and 7, respectively, of the notes to consolidated financial
statements.
Product sales for 1999 were $11.3 million, as compared to $406,000 in 1998.
The increase is due to revenues from sales of ONTAK and Panretin gel, approved
by the FDA in February 1999. Contract manufacturing sales for 1999 were $2.6
million. These sales were generated under contract manufacturing agreements
performed at the Marathon facility acquired in January 1999.
Collaborative research and development and other revenues for 1999 were $27
million, an increase of $9.7 million over 1998. The increase in 1999 was due
primarily to $5.1 million of revenue earned under royalty arrangements and $3.3
million earned in connection with marketing and distribution agreements entered
into in 1999. The year-to-year comparison of collaborative research and
development and other revenues is as follows ($,000):
27
Year Ended
December 31,
1999 1998
------------- ------------
Collaborative research and development
$16,001 $16,406
Royalties 5,102 -- --
Marketing and distribution agreements 3,250 -- --
Milestone revenues 2,625 861
------------- ------------
$26,978 $17,267
============= ============
Certain collaborative research partners accounted for greater than 10% of
total revenues in 1999 and 1998. For additional details, please see note 2 of
notes to consolidated financial statements.
Cost of products sold increased from $466,000 in 1998 to $3.6 million in
1999. The increase is due to manufacturing costs, amortization of acquired
technology, and royalty expenses associated with the sale of our new products.
Contract manufacturing costs incurred at the Marathon facility were $6.9
million.
Research and development expenses were $59.4 million in 1999, compared to
$70.3 million in 1998. The decrease was due primarily to the reduction of
clinical trial activity related to Panretin gel and Targretin capsules, approved
by the FDA in February 1999 and December 1999, respectively, offset in part by
increased clinical costs for Targretin gel submitted to the FDA for approval in
December 1999. Selling, general and administrative expenses were $27.3 million
in 1999, up from $16.6 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 expense in 1999 was $13 million, an increase of $4.7 million over
1998. The increase is due to the accretion related to the $100 million in issue
price of zero coupon convertible notes issued to Elan in November 1998 ($40
million), July 1999 ($40 million) and August 1999 ($20 million). The debt
conversion expense of $2.2 million relates to the incentive provided to Elan for
their conversion of $20 million in notes in December 1999.
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. For additional details, please see note 13 of
the notes to consolidated financial statements.
YEAR ENDED DECEMBER 31, 1998 ("1998"), AS COMPARED WITH YEAR ENDED DECEMBER 31,
1997 ("1997")
Total revenues for 1998 were $17.7 million, a decrease of $34 million as
compared to 1997. Loss from operations for 1998 was $114.6 million, an increase
of $18.8 million as compared to 1997. Net loss for 1998 was $117.9 million or
$(2.92) per share, an increase of $17.7 million from the 1997 net loss of $100.2
million or $(3.02) per share. The principal factors causing these changes are
discussed below.
In 1998, we wrote off $45 million of in-process technology compared to $65
million in 1997. The 1997 write-off related to the acquisition of ALRT. For
additional details on the acquisition of ALRT, please see note 11 of the notes
to consolidated financial statements.
Collaborative research and development and other revenues for 1998 were
$17.3 million, a decrease of $34 million over 1997. The decrease was primarily
related to the elimination of $19 million in revenues earned form ALRT due to
the purchase of ALRT in 1997, the completion of research and development
collaborations in 1997 and early 1998 which reduced 1998 revenues by $6.4
million, and a reduction in revenues earned in 1998 in the research and
development collaboration with Lilly of $9.4 million. The year to year
comparison of collaborative research and development and other revenues is as
follows ($,000):
Year Ended
December 31,
1998 1997
------------- -------------
Collaborative research and development $16,406 $32,284
Milestone revenues 861 -- --
ALRT -- -- 18,997
------------- ------------
$17,267 $51,281
============= ============
28
Certain collaborative research partners accounted for greater than 10% of
total revenues in 1998 and 1997. For additional details, please see note 2 of
notes to consolidated financial statements.
Research and development expenses were $70.3 million in 1998, compared to
$71.9 million in 1997. The decrease was due primarily to the stage of clinical
trials on potential products in 1998 as compared to 1997. Selling, general and
administrative expenses were $16.6 million in 1998, up from $10.1 million in
1997. The increase was due primarily to increased costs associated with the
expansion of our sales and marketing activities in preparation for the launch of
our new products.
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, investment income and product sales.
As of December 31, 1999, we had acquired a total of $43.9 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
equipment financing arrangements. We lease our office and laboratory facilities
under operating lease arrangements. Our current facilities were occupied in
December 1997. Our equipment financing arrangements extend through June 30, 2000
with $1.8 million of financing available under those arrangements at December
31, 1999. For additional details on our commitments under leases and equipment
financing arrangements, please see note 8 of the notes to consolidated financial
statements.
Working capital decreased to $36 million as of December 31, 1999, from
$51.1 million at the end of 1998. The decrease in working capital resulted from
decreases in cash and cash equivalents of $2.9 million and short-term
investments of $19.9 million used to finance operating activities offset in part
by an increase in accounts receivable of $1.7 million related to the sale of the
recently introduced products, a decrease in accounts payable of $7 million due
to a reduction in research and development activities, and lower deferred
revenues of $1.1 million due to the timing of completion of collaborative
agreements.
For the same reasons, cash and cash equivalents, short-term investments and
restricted investments decreased to $49.2 million at December 31, 1999 from
$72.5 million at December 31, 1998. We primarily invest our cash in United
States government and investment grade corporate debt securities.
In 1999, we issued $60 million of zero coupon convertible notes under the
terms of our strategic alliance with Elan. We have $10 million of additional
financing available under the arrangement that may be used for general corporate
purposes. In December 1999 and March 2000, Elan converted a total of $40 million
of notes plus accrued interest into common stock. For additional details, please
see notes 7 and 14 of the notes to consolidated financial statements.
In August 1999, we made a $37.1 million cash payment due for the purchase
of the assets of Marathon and the acquisition of Seragen. However, we withheld
$2.9 million of the total amount due specified Seragen stakeholders for
potential contingencies. For additional details, please see note 4 of the notes
to consolidated financial statements.
We may be required to make milestone payments of up to $10 million to Elan
under the Morphelan license agreement and $5 million to Lilly related to sales
of ONTAK. These payments may be made in cash or our common stock. For additional
details, please see notes 7 and 4, respectively, of the notes to consolidated
financial statements.
In December 1999, we generated cash flows from the sale of a royalty stream
for $3.25 million and the exercise of certain warrants under an exchange offer
resulting in net proceeds of $13.9 million. In January 2000, we sold the
contract manufacturing assets of Marathon resulting in cash proceeds of $10
million.
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 2000. 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.
29
NEW ACCOUNTING PRONOUNCEMENT
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 generally accepted
accounting principles to revenue recognition in financial statements, including
the recognition of nonrefundable up-front fees received in conjunction with a
research and development arrangement. The evaluation of the impact of SAB No.
101 has not been completed. However, to the extent SAB No. 101 would be
applicable and have a material impact, we would implement this new pronouncement
beginning with the first quarter of 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 our investment portfolio includes fixed-income
securities of $15.2 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 have
no material impact on our financial condition, results of operations or cash
flows.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required by
this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections labeled "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
2000 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation and Other Information"
appearing in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Principal Stockholders" and "Security Ownership of
Directors and Management" appearing in the Proxy Statement are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Executive Compensation and Other Information" and
"Certain Relationships and Related Transactions" appearing in the Proxy
Statement are incorporated herein by reference.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this report.
CONSOLIDATED FINANCIAL STATEMENTS OF LIGAND PHARMACEUTICALS INCORPORATED
Report of Ernst & Young LLP, Independent Auditors..................................................................F-2
Consolidated Balance Sheets at December 31, 1999 and 1998..........................................................F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999............F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
December 31, 1999..................................................................................................F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999............F-6
Notes to Consolidated Financial Statements.........................................................................F-7
(b) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed by the Company during the fourth
quarter of 1999:
Date of Filing Description
-------------- -----------
November 19, 1999 Item 5, Warrant Exchange Offer
December 14, 1999 Items 5 and 7, FDA Recommends Marketing Approval for Targretin Capsules
December 23, 1999 Items 5 and 7, Receipt of $13.9 Million From Warrant Exchange Offer
(c) EXHIBITS - 1999 10-K
Exhibit Number Description
- -------------- -----------
2.1 (1) Agreement and Plan of Reorganization dated May 11, 1998, by and among the Company, Knight
Acquisition Corp. and Seragen, Inc. (Filed as Exhibit 2.1).
2.2 (1) Option and Asset Purchase Agreement, dated May 11, 1998, by and among the Company, Marathon
Biopharmaceuticals, LLC, 520 Commonwealth Avenue Real Estate Corp. and 660 Corporation. (Filed
as Exhibit 10.3).
3.1 (1) Amended and Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.2)
3.2 (1) Bylaws of the Company, as amended. (Filed as Exhibit 3.3)
3.3 (2) Amended Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock of Ligand Pharmaceuticals Incorporated.
4.1 (16) Preferred Shares Rights Agreement, dated as of September 13, 1996, by and between Ligand
Pharmaceuticals Incorporated and Wells Fargo Bank, N.A. (Filed as Exhibit 10.1).
4.2 (13) 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). (Filed as
Exhibit 10.1)
10.1 (3) The Company's 1992 Stock Option/Stock Issuance Plan, as amended.
10.2 (4) Form of Stock Option Agreement.
10.3 (4) Form of Stock Issuance Agreement.
10.12 (4) 1992 Employee Stock Purchase Plan.
10.13 (4) Form of Stock Purchase Agreement.
10.30 (4) Form of Proprietary Information and Inventions Agreement.
10.46 (4) Form of Indemnification Agreement between the Company and each of its directors.
10.47 (4) Form of Indemnification Agreement between the Company and each of its officers.
10.69 (5) Form of Automatic Grant Option Agreement.
10.97 (6) Research, Development and License Agreement, dated December 29, 1994, between SmithKline
Beecham Corporation and the Company (with certain confidential portions omitted).
31
Exhibit Number Description
- -------------- -----------
10.98 (6) Stock and Note Purchase Agreement, dated February 2, 1995, between SmithKline Beecham
Corporation, S.R. One, Limited and the Company (with certain confidential portions omitted).
10.99 (6) Third Addendum to Amended Registration Rights Agreement, dated February 3, 1995, between S. R.
One, Limited and the Company.
10.158 (7) Lease, dated March 7, 1997, between the Company and Nexus Equity VI LLC.
10.167 (8) Development and License Agreement, dated November 25, 1997, between the Company and Eli Lilly
and Company (with certain confidential portions omitted).
10.168 (8) Collaboration Agreement, dated November 25, 1997, among the Company, Eli Lilly and Company, and
Allergan Ligand Retinoid Therapeutics, Inc. (with certain confidential portions omitted).
10.169 (8) Option and Wholesale Purchase Agreement, dated November 25, 1997, between the Company and Eli
Lilly and Company (with certain confidential portions omitted).
10.170 (8) Stock Purchase Agreement, dated November 25, 1997, between the Company and Eli Lilly and
Company.
10.171 (8) First Amendment to Option and Wholesale Purchase Agreement dated February 23, 1998, between the
Company and Eli Lilly and Company (with certain confidential portions omitted).
10.172 (8) Second Amendment to Option and Wholesale Purchase Agreement, dated March 16, 1998, between the
Company and Eli Lilly and Company (with certain confidential portions omitted).
10.173 (9) Ninth Addendum to Amended Registration Rights Agreement, dated June 24, 1994, between the
Company and SmithKline Beecham plc., and is effective as of April 24, 1998.
10.174 (9) Leptin Research, Development and License Agreement, dated March 17, 1998, between the Company
and SmithKline Beecham, plc (with certain confidential portions omitted).
10.175 (9) Stock and Warrant Purchase Agreement, dated March 17, 1998, among the Company, SmithKline
Beecham, plc. and SmithKline Beecham Corporation (with certain confidential portions omitted).
10.176 (10) Secured Promissory Note, dated March 7, 1997, in the face amount of $3,650,000, payable to the
Company by Nexus Equity VI LLC. (Filed as Exhibit 10.1).
10.177 (10) Amended memorandum of Lease effective March 7, 1997, between the Company and Nexus Equity VI
LLC. (Filed as Exhibit 10.2)
10.178 (10) First Amendment to Lease, dated March 7, 1997, between the Company and Nexus Equity VI LLC.
(Filed as Exhibit 10.3)
10.179 (10) First Amendment to secured Promissory Note, date March 7, 1997, payable to the Nexus Equity VI
LLC. (Filed as Exhibit 10.4)
10.183 (11) Extension Option Agreement, dated May 11, 1998, by and among the Company, Seragen, Inc.,
Marathon Biopharmaceuticals, LLC, 520 Commonwealth Avenue Real Estate Corp. and 660
Corporation. (Filed as Exhibit 99.5)
10.184 (11) Letter agreement, dated May 11, 1998, by and among the Company, Eli Lilly & Company and
Seragen, Inc. (Filed as Exhibit 99.6).
10.185 (1) Amendment No. 3 to Option and Wholesale Purchase Agreement, dated May 11, 1998, by and between
Eli Lilly and Company and the Company. (Filed as Exhibit 10.6).
10.186 (1) Agreement, dated May 11, 1998, by and among Eli Lilly and Company, the Company and Seragen,
Inc. (Filed as Exhibit 10.7).
10.188 (11) Settlement Agreement, dated May 1, 1998, by and among Seragen, Inc., Seragen Biopharmaceuticals
Ltd./Seragen Biopharmaceutique Ltee, Sofinov Societe Financiere D'Innovation Inc., Societe
Innovatech Du Grand Montreal, MDS Health Ventures Inc., Canadian Medical Discoveries Fund Inc.,
Royal Bank Capital Corporation and Health Care and Biotechnology Venture Fund (Filed as Exhibit
99.2).
10.189 (11) Accord and Satisfaction Agreement, dated May 11, 1998, by and among Seragen, Inc., Seragen
Technology, Inc., Trustees of Boston University, Seragen LLC, Marathon Biopharmaceuticals, LLC,
United States Surgical Corporation, Leon C. Hirsch, Turi Josefsen, Gerald S.J. and Loretta P.
Cassidy, Reed R. Prior, Jean C. Nichols, Elizabeth C. Chen, Robert W. Crane, Shoreline Pacific
Institutional Finance, Lehman Brothers Inc., 520 Commonwealth Avenue Real Estate Corp. and 660
Corporation (Filed as Exhibit 99.4).
10.190 (1) Amendment No. 1 to Service Agreement, dated as of May 11, 1998, by and between Seragen, Inc.
and Marathon Biopharmaceuticals, LLC. (Filed as Exhibit 10.11)
32
Exhibit Number Description
- -------------- -----------
10.191 (10) Letter of Agreement dated September 28, 1998 among the Company, Elan Corporation, plc and Elan
International Services, Ltd. (with certain confidential portions omitted), (Filed as Exhibit
10.5)
10.192 (10) Stock Purchase Agreement dated September 30, 1998 between the Company and Elan International
Services, Ltd. (with certain confidential portions omitted), (Filed as Exhibit 10.6)
10.193 (10) Tenth Addendum to Registration Rights Agreement dated September 30, 1998 between the Company
and Elan International Services, Ltd. (Filed as Exhibit 10.7)
10.194 (12) Eleventh Addendum to Registration Rights Agreement dated November 9, 1998 between the Company
and Elan International Services, Ltd.
10.195 (12) Zero Coupon Convertible Senior Note Due 2008 dated November 9, 1998 between the Company and
Elan International Services, Ltd., No. R-1.
10.196 (12) Zero Coupon Convertible Senior Note Due 2008 dated November 9, 1998 between the Company and
Elan International Services, Ltd., No. R-2.
10.197 (14) Research, Development and License Agreement by and between the Company and Warner-Lambert
Company dated September 1, 1999 (with certain confidential portions omitted). (Filed as
Exhibit 10.1)
10.198 (14) Stock Purchase Agreement by and between the Company and Warner-Lambert Company dated September
1, 1999 (with certain confidential portions omitted). (Filed as Exhibit 10.2)
10.199 (14) Thirteenth Addendum to Amended Registration Rights Agreement dated June 24, 1994, between the
Company and Warner-Lambert Company, effective September 1, 1999. (Filed as Exhibit 10.3)
10.200 (14) Nonexclusive Sublicense Agreement, effective September 8, 1999, by and among Seragen, Inc.,
Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. (with certain confidential portions
omitted). (Filed as Exhibit 10.4)
10.201 (14) Amendment to Development, Licence and Supply Agreement between the Company and Elan
Corporation, plc dated August 20, 1999 (with certain confidential portions omitted). (Filed as
Exhibit 10.5)
10.202 (14) Ligand Purchase Option (to acquire outstanding capital stock of X-Ceptor Therapeutics, Inc.),
contained in Schedule I to the Certificate of Incorporation of X-Ceptor Therapeutics, Inc., as
amended. (Filed as Exhibit 10.6)
10.203 (14) License Agreement effective June 30, 1999 by and between the Company and X-Ceptor Therapeutics,
Inc. (with certain confidential portions omitted). (Filed as Exhibit 10.7)
10.204 (14) Zero Coupon Convertible Senior Note Due 2008 dated July 14, 1999 between the Company and
Monksland Holdings, B.V., No. R-3. (Filed as Exhibit 10.10)
10.205 (14) Zero Coupon Convertible Senior Note Due 2008 dated August 31, 1999 between the Company and
Monksland Holdings, B.V., No. R-4. (Filed as Exhibit 10.11)
10.206 (14) Stock Purchase Agreement dated September 30, 1999 by and between the Company and Elan
International Services, Ltd. (with certain confidential portions omitted). (Filed as Exhibit
10.13)
10.207 (14) Fourteenth Addendum to Amended Registration Rights Agreement dated June 24, 1994 between the
Company and Elan International Services, Ltd., effective September 30, 1999. (Filed as Exhibit
10.14)
10.208 (14) Twelfth Addendum to Amended Registration Rights Agreement dated June 24, 1994 between the
Company and Elan International Services, Ltd., effective August 4, 1999. (Filed as Exhibit
10.16)
10.209 (14) Series X Warrant dated August 4, 1999 between the Company and Elan International Services, Ltd.
(Filed as Exhibit 10.15)
10.210 (15) Securities Purchase Agreement dated November 6, 1998 among Elan Corporation, plc, Elan
International Services, Ltd. and the Company (filed as Exhibit 1). (Filed as Exhibit 10.8)
10.211 (15) Development, Licence and Supply Agreement dated November 6, 1998 between Elan Corporation, plc
and the Company (filed as Exhibit 2). (Filed as Exhibit 10.9)
10.212 (15) Letter Agreement dated August 13, 1999 among the Company, Elan International Services, Ltd. and
Elan Corporation, plc (filed as Exhibit 3). (Filed as Exhibit 10.12)
10.213 Incentive Agreement dated December 31, 1999 among the Company, Elan International Services,
Ltd. and Monksland Holdings, BV.
10.214 Fifteenth Addendum to Amended Registration Rights Agreement dated June 24, 1994, among the
Company and certain other persons, effective October 6, 1999.
33
Exhibit Number Description
- -------------- -----------
10.215 Sixteenth Addendum to Amended Registration Rights Agreement dated June 24, 1994, between
the Company and Elan International Services, Ltd., effective December 31, 1999.
10.216 Amendment to Ligand Purchase Option (to acquire outstanding capital stock of X-Ceptor
Therapeutics, Inc.), contained in Schedule I to the Certificate of Incorporation of X-Ceptor
Therapeutics, Inc., as amended October 1, 1999.
10.217 Amended and Restated Series X Warrant dated November 22, 1999 between the Company and Elan
International Services, Ltd.
10.218 Royalty Stream Purchase Agreement dated as of December 31, 1999 among Seragen, Inc., the Company,
Pharmaceutical Partners, L.L.C., Bioventure Investments, Kft, and Pharmaceutical Royalties, LLC.
(with certain confidential portions omitted).
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 35).
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 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 same numbered exhibit filed with the Registration
Statement on Form S-4 (No. 33-90160) filed on March 9, 1995, as amended.
(4) 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.
(5) This exhibit was previously filed as part of, and is hereby incorporated by
reference to Exhibit 99.1 filed with the Company's Form S-8 (No. 33-85366),
filed on October 17, 1994.
(6) This exhibit was previously filed as part of, and is hereby incorporated by
reference to, the same numbered exhibit filed with the Registration
Statement on Form S-1/S-3 (No. 33-87598 and 33-87600) filed on December 20,
1994, as amended.
(7) 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, 1996.
(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 Annual
Report on Form 10-K for the period ended December 31, 1997.
(9) 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, 1998.
(10) This exhibit was previously filed as part of and is hereby incorporated by
reference to the numbered exhibit filed with the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1998.
(11) Previously filed as, and hereby incorporated by reference to, the numbered
exhibit filed with the Current Report on Form 8-K of Seragen, Inc. filed
with the Commission on May 15, 1998.
(12) 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, 1998.
(13) 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 December 24, 1998.
(14) This exhibit was previously filed as part of and is hereby incorporated by
reference to the numbered exhibit filed with the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1999.
(15) This exhibit was previously filed as part of, and is hereby incorporated by
reference to the numbered exhibit filed with, the Schedule 13D of Elan
Corporation, plc, filed on January 6, 1999, as amended.
(16) This exhibit was previously filed as part of, and is hereby incorporated by
reference, the numbered exhibit filed with the Company's Registration
Statement on Form S-3 (No. 333-12603) filed on September 25, 1996, as
amended.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ DAVID E. ROBINSON
------------------------------------------
David E. Robinson,
President and Chief Executive Officer
Date: March 29, 2000
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints David E. Robinson or Paul V. Maier, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ DAVID E. ROBINSON Chairman of the Board, President, March 24, 2000
- ----------------------------------- Chief Executive Officer and Director
David E. Robinson (Principal Executive Officer)
/s/ PAUL V. MAIER Senior Vice President, Chief Financial Officer March 24, 2000
- ----------------------------------- (Principal Financial and Accounting Officer)
Paul V. Maier
/s/ HENRY F. BLISSENBACH Director March 26, 2000
- -----------------------------------
Henry F. Blissenbach
/s/ ALEXANDER D. CROSS Director March 26, 2000
- -----------------------------------
Alexander D. Cross
/s/ JOHN GROOM Director March 28, 2000
- -----------------------------------
John Groom
/s/ IRVING S. JOHNSON Director March 27, 2000
- -----------------------------------
Irving S. Johnson
/s/ CARL C. PECK Director March 28, 2000
- -----------------------------------
Carl C. Peck
/s/ MICHAEL A. ROCCA Director March 24, 2000
- -----------------------------------
Michael A. Rocca
35
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)............ F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ligand Pharmaceuticals Incorporated
We have audited the accompanying consolidated balance sheets of Ligand
Pharmaceuticals Incorporated as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ligand
Pharmaceuticals Incorporated at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 22, 2000
F-2
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31,
----------------------
1999 1998
---------- ----------
Current assets:
Cash and cash equivalents............................................ $ 29,903 $ 32,801
Short-term investments............................................... 17,252 37,166
Accounts receivable, net ............................................ 1,657 --
Inventories.......................................................... 5,732 6,166
Other current assets................................................. 2,135 1,860
---------- ----------
Total current assets......................................... 56,679 77,993
Restricted investments............................................... 2,011 2,554
Property and equipment, net.......................................... 20,542 23,722
Acquired technology, net ............................................ 38,969 40,312
Other assets......................................................... 16,444 11,439
---------- ----------
$ 134,645 $ 156,020
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................................... $ 5,395 $ 12,363
Accrued liabilities.................................................. 8,173 7,216
Deferred revenue..................................................... 3,028 4,115
Current portion of equipment financing obligations .................. 4,105 3,201
---------- ----------
Total current liabilities.................................... 20,701 26,895
---------- ----------
Long-term equipment financing obligations ............................. 6,907 8,165
Convertible subordinated debentures.................................... 41,977 39,302
Accrued acquisition obligation......................................... 2,900 50,000
Convertible note....................................................... 2,500 2,500
Zero coupon convertible senior notes................................... 85,250 40,520
Commitments
Stockholders' deficit:
Convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized; none issued........................................... -- --
Common stock, $0.001 par value; 80,000,000 shares authorized,
53,018,248 shares and 45,690,067 shares issued at December 31, 1999
and 1998, respectively............................................ 53 46
Paid-in capital...................................................... 448,784 384,715
Deferred warrant expense ............................................ (3,460) --
Adjustment for unrealized losses on available-for-sale securities.... (607) (482)
Accumulated deficit.................................................. (470,349) (395,630)
---------- ----------
(25,579) (11,351)
Less treasury stock, at cost (1,114 shares).......................... (11) (11)
---------- ----------
Total stockholders' deficit ................................. (25,590) (11,362)
---------- ----------
$ 134,645 $ 156,020
========== ==========
See accompanying notes.
F-3
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except net loss per share data)
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Product sales.................................... $ 11,307 $ 406 $ 418
Collaborative research and development and other
revenues ...................................... 26,978 17,267 51,281
Contract manufacturing........................... 2,610 -- --
----------- ----------- -----------
Total revenues............................ 40,895 17,673 51,699
----------- ----------- -----------
Costs and expenses:
Cost of products sold ............................ 3,563 466 520
Contract manufacturing ........................... 6,926 -- --
Research and development.......................... 59,442 70,273 71,906
Selling, general and administrative............... 27,257 16,568 10,108
Technology milestone payment ..................... 5,000 -- --
Write-off of acquired in-process technology....... -- 45,000 64,970
----------- ----------- -----------
Total costs and expenses.................. 102,188 132,307 147,504
----------- ----------- -----------
Loss from operations................................ (61,293) (114,634) (95,805)
----------- ----------- -----------
Other income (expense) :
Interest income................................. 2,470 3,070 3,743
Interest expense................................ (12,979) (8,322) (8,088)
Debt conversion expense ........................ (2,200) -- --
Other........................................... (717) 2,000 --
------------ ----------- -----------
Total other income (expense) ........... (13,426) (3,252) (4,345)
------------ ------------ -----------
Net loss............................................ $ (74,719) $ (117,886) $ (100,150)
=========== =========== ===========
Basic and diluted net loss per share................ $ (1.58) $ (2.92) $ (3.02)
=========== =========== ===========
Shares used in computing net loss per share......... 47,146,312 40,392,421 33,128,372
============ ============ ============
See accompanying notes.
F-4
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the three years ended December 31, 1999
(in thousands, except share data)
Adjustment
for unrealized
gains (losses) Deferred Treasurey Total
Common stock on available- compensation stock stockholders'
------------------ Paid-in for-sale Accumulated and ------------- equity Comprehensive
Shares Amount Capital Warrants securities deficit consulting Shares Amount(deficit) income(loss)
--------- ------- ------- --------- ----------- --------- ----------- ------ ------ ------- -------------
Balance at
December 31, 1996........31,799,617 $ 32 $214,887 $(2,453) $(78) $(177,594) $ (322) (1,114) $(11) $34,461
Issuance of
Common Stock..............6,704,842 7 96,794 -- -- -- -- -- -- 96,801
Amortization of
deferred compensation
and consulting fees...... -- -- -- -- -- -- 322 -- -- 322
Amortization of warrant
subscription receivable... -- -- -- 1,535 -- -- -- -- -- 1,535
Write-off of warrant
subscription receivable... -- -- -- 918 -- -- -- -- -- 918
Adjustment of unrealized
gains on available-for-sale
securities............. -- -- -- -- 462 -- -- -- -- 462 462
Net loss............... -- -- -- -- -- (100,150) -- -- -- (100,150) (100,150)
--------- ----- -------- ------- ----- --------- ------ ----- ---- --------- ---------
Balance at
December 31, 1997...... 38,504,459 39 311,681 -- 384 (277,744) -- (1,114) (11) 34,349 $(99,688)
=========
Issuance of
Common Stock........... 7,185,608 7 73,034 -- -- -- -- -- -- 73,041
Adjustment of
unrealized losses on
available-for-sale
securities............. -- -- -- -- (866) -- -- -- -- (866) (866)
Net loss............... -- -- -- -- -- (117,886) -- -- -- (117,886) (117,886)
--------- ----- -------- ------- ---- --------- ------ ----- ---- --------- ---------
Balance at
December 31, 1998...... 45,690,067 46 384,715 -- (482) (395,630) -- (1,114) (11) (11,362) $(118,752)
=========
Issuance of
Common Stock .......... 7,328,181 7 59,695 -- -- -- -- -- -- 59,702
Adjustment of unrealized
losses on available-
for-sale securities.... -- -- -- -- (125) -- -- -- -- (125) (125)
Issuance of warrants... -- -- 4,374 (3,990) -- -- -- -- -- 384
Amortization of
deferred warrant expense -- -- -- 530 -- -- -- -- -- 530
Net loss .............. -- -- -- -- -- (74,719) -- -- -- (74,719) (74,719)
---------- ----- -------- --------- ----- --------- ------ ------- ----- ---------- ----------
Balance at
December 31, 1999 ..... 53,018,248 $ 53 $448,784 $(3,460) $(607) $(470,349) $ -- (1,114) $(11) $(25,590) $ (74,844)
========== ===== ======== ========= ===== ========== ====== ======= ===== ========= ==========
See accompanying notes.
F-5
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
---------------------------------
1999 1998 1997
----------- ----------- --------
OPERATING ACTIVITIES
Net loss............................................................. $ (74,719) $(117,886) $(100,150)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization of property and equipment.......... 5,565 4,326 4,133
Amortization of acquired technology ............................. 1,343 -- --
Amortization of deferred warrant expense ........................ 530 -- --
Amortization of warrant subscription receivable.................. -- -- 2,453
Write-off of acquired in-process technology...................... -- 45,000 64,970
Technology milestone payment .................................... 5,000 -- --
Accretion of debt discount and interest.......................... 7,942 3,194 2,675
Debt conversion expense.......................................... 2,200 -- --
Other............................................................ 195 257 546
Change in operating assets and liabilities:
Accounts receivable ........................................... (1,657) -- --
Receivable from a related party................................ -- -- 3,087
Inventories.................................................... 434 (2,899) --
Other current assets .......................................... (275) (1,031) 856
Accounts payable and accrued liabilities....................... (6,011) 891 7,605
Deferred revenue............................................... (1,087) 1,499 465
---------- --------- ---------
Net cash used in operating activities................................ (60,540) (66,649) (13,360)
---------- --------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments.................................. (21,402) (52,245) (35,033)
Proceeds from short-term investments................................. 41,191 35,191 60,339
Purchase of property and equipment................................... (2,385) (5,457) (7,424)
Proceeds from sale of property and equipment......................... -- 92 109
Payment of accrued acquisition obligation ........................... (37,100) -- --
Increases in other assets............................................ (7,525) (4,462) (4,306)
Decreases in other assets............................................ 2,325 925 146
Net cash paid for exercise of ALRT stock purchase option............. -- -- (12,661)
Net cash paid for Seragen acquisition................................ -- (5,756) --
--------- --------- ---------
Net cash provided by (used in) investing activities.................. (24,896) (31,712) 1,170
--------- --------- ---------
FINANCING ACTIVITIES
Principal payments on equipment financing obligations................. (3,381) (2,983) (3,210)
Proceeds from equipment financing arrangements ....................... 3,027 3,095 3,146
Net change in restricted investments.................................. 543 503 470
Net proceeds from the issuance of convertible note.................... -- -- 2,500
Net proceeds from issuance of zero coupon convertible senior notes.... 60,000 30,000 --
Net proceeds from sale of common stock and warrants................... 22,349 38,295 36,706
--------- --------- ---------
Net cash provided by financing activities............................. 82,538 68,910 39,612
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. (2,898) (29,451) 27,422
Cash and cash equivalents at beginning of year........................ 32,801 62,252 34,830
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 29,903 $ 32,801 $ 62,252
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid......................................................... $ 4,941 $ 5,736 $ 5,444
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of zero coupon convertible senior note to common stock ..... 20,537 -- --
Issuance of common stock to satisfy accrued acquisition obligations.... 10,000 -- --
Issuance of common stock for technology milestone payment ............. 5,000 -- --
Issuance of warrants to X-Ceptor investors ............................ 3,990 -- --
Issuance of common stock for debt conversion incentive ................ 2,200 -- --
Issuance of common stock to purchase Seragen........................... -- 25,996 --
Issuance of convertible note and common stock for technology license... -- 15,000 --
Conversion of convertible note to common stock......................... $ -- $ 3,750 $ 7,500
See accompanying notes.
F-6
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS BUSINESS
Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"
or "Ligand"), develops and markets drugs that address critical unmet medical
needs of patients in the areas of cancer, skin diseases, and men's and women's
hormone-related diseases, as well as osteoporosis, metabolic disorders and
cardiovascular and inflammatory diseases. Ligand's drug discovery and
development programs are based on gene transcription technology, primarily
related to Intracellular Receptors and Signal Transducers and Activators of
Transcription. The Company includes its direct wholly owned subsidiaries, Ligand
Pharmaceuticals International, Inc., Glycomed Incorporated ("Glycomed"), Ligand
Pharmaceuticals (Canada) Incorporated, Allergan Ligand Retinoid Therapeutics,
Inc. ("ALRT") and Seragen, Inc. ("Seragen").
In February 1999, the Company was granted U.S. Food and Drug Administration
("FDA") marketing approval for its first two products, Panretin(R) gel
("Panretin") for the treatment of Kaposi's sarcoma in AIDS Patients and
ONTAK(TM) ("ONTAK") for the treatment of patients with persistent or recurrent
cutaneous T-cell lymphoma ("CTCL"). In December 1999, the FDA approved Targretin
(R) capsules ("Targretin") for the treatment of CTCL in patients who are
refractory to at least one prior systemic therapy. The Company also submitted a
New Drug Application ("NDA") to the FDA in December 1999 for Targretin (R) gel
for the treatment of patients with early stage CTCL.
The Company's other potential products are in various stages of
development. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons. Substantially all
of the Company's revenues to date have been derived from its research and
development agreements with major pharmaceutical collaborators. Prior to
generating revenues from these products, the Company must complete the
development of its products in the human health care market. No assurance can be
given that: (1) product development efforts will be successful, (2) required
regulatory approvals for any indication will be obtained, (3) any products, if
introduced, will be capable of being produced in commercial quantities at
reasonable costs or that, (4) patient and physician acceptance of these products
will be achieved. There can be no assurance that Ligand will ever achieve or
sustain profitability.
The Company faces risks common to companies whose products are in various
stages of development. These risks include, among others, the Company's need for
additional financing to complete its research and development programs and
commercialize its technologies. The Company expects to incur substantial
additional research and development expenses, including continued increases in
personnel and costs related to preclinical testing, clinical trials, and sales
and marketing expenses related to product sales. The Company intends to seek
additional funding sources of capital and liquidity through collaborative
arrangements, collaborative research or through public or private financing.
There is no assurance such financing would be available under favorable terms,
if at all.
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The patent positions of
pharmaceutical and biotechnology firms, including the Company, are uncertain and
involve complex legal and technical questions for which important legal
principles are largely unresolved.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to amounts included in the prior years financial statements to
conform to the presentation for the year ended December 31, 1999.
USE OF ESTIMATES
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.
F-7
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of highly liquid securities with original
maturities at the date of acquisition of less than three months. Investments
with an original maturity of more than three months are considered short-term
investments and have been classified by management as available-for-sale. Such
investments are carried at fair value, with unrealized gains and losses included
as a separate component of shareholders' deficit.
RESTRICTED INVESTMENTS
Restricted investments consist primarily of a certificate of deposit held
with a financial institution as collateral under an equipment financing
arrangement.
CONCENTRATIONS OF CREDIT RISK
The Company invests its excess cash principally in United States government
debt securities, investment grade corporate debt securities and certificates of
deposit. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors throughout the United States. The Company has not
experienced significant credit losses on customer accounts.
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 (in
thousands):
December 31,
----------------------
1999 1998
---------- ----------
Raw materials................................... $ 705 $ 2,382
Work-in-process................................. 3,645 3,634
Finished goods.................................. 1,382 150
---------- ----------
$ 5,732 $ 6,166
========== ==========
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following (in
thousands):
December 31,
----------------------
1999 1998
--------- ---------
Property........................................... $ 2,649 $ 2,649
Equipment and leasehold improvements............... 41,240 38,854
Less accumulated depreciation and amortization .... (23,347) (17,781)
--------- ---------
Net property and equipment......................... $20,542 $23,722
========= =========
Depreciation of equipment and leasehold improvements is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to fifteen years. Assets acquired pursuant to capital lease
arrangements and leasehold improvements are amortized over their estimated
useful lives or their related lease term, whichever is shorter.
ACQUIRED TECHNOLOGY
Acquired technology represents the ONTAK technology acquired in the merger
with Seragen which is being amortized on a straight-line basis over the period
estimated to be benefited of 15 years. Amortization of acquired technology is
included in cost of products sold in the consolidated statements of operations
and totaled $1.3 million for the year ended December 31, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, if indicators of impairment exist, the Company
assesses the
F-8
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the carrying value of the asset to the
present value of the expected future cash flows associated with the use of the
asset. While the Company's current and historical operating and cash flow losses
are indicators of impairment, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets' carrying value, and
accordingly the Company has not recognized any impairment losses through
December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents, securities
available-for-sale, receivables, accounts payable and accrued liabilities are
considered to be representative of their respective fair values because of the
short-term nature of those investments. The fair values of the Company's
equipment financing obligations, convertible subordinated debentures,
convertible note, and zero coupon convertible senior notes approximates their
carrying values based upon the current rates and terms offered to the Company
for similar financing arrangements.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment, net of allowances
for returns, rebates and chargebacks. The Company is obligated to accept from
customers the return of pharmaceuticals which have reached their expiration
date. Contract manufacturing and collaborative research and development and
other revenues are recognized on a basis consistent with the performance
requirements of the contract. Payments received in advance of performance are
recorded as deferred revenue.
Revenues from significant customers, which accounted for greater than 10%
of total revenues, are as follows (in thousands):
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------------- -------------- ----------
Eli Lilly (Note 10)................................. $ 10,095 $ 10,353 $ 19,708
SmithKline Beecham (Note 10)........................ $ 3,652 $ 3,737 $ 3,235
Allergan Ligand Retinoid Therapeutics (Note 11) .... -- -- $ 18,997
COSTS AND EXPENSES
Cost of products sold includes manufacturing costs, amortization of
acquired technology, and royalty expenses associated with the Company's
commercial products. Research and development costs are expensed as incurred.
Costs and expenses included in research and development expenses related to
collaborative research and development arrangements for the years ended December
31, 1999, 1998, and 1997 were $16 million, $17.3 million, and $51.3 million,
respectively.
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 dilutive computation would be anti-dilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and with the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation (Note 9).
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement has no impact on the Company's net loss or shareholders' deficit.
SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income.
F-9
3. INVESTMENTS
The following table summarizes the various investment categories at (in
thousands):
Gross Unrealized Estimated Fair
Cost Gains (Losses) Value
--------- ----------- ------------
December 31, 1999
U.S. Government Securities................... $ 2,610 $ (12) $ 2,598
Corporate Obligations........................ 12,653 (45) 12,608
Certificates of Deposit...................... 2,046 -- 2,046
--------- ----------- ------------
17,309 (57) 17,252
Certificates of Deposit-restricted........... 2,011 -- 2,011
Equity securities............................ 693 (550) 143
--------- ------------ ------------
$ 20,013 $ (607) $ 19,406
========= ============ ============
December 31, 1998
U.S. Government Securities................... $ 13,240 $ 5 $ 13,245
Corporate Obligations........................ 19,262 63 19,325
Certificates of Deposit...................... 4,596 -- 4,596
--------- ----------- ------------
37,098 68 37,166
Certificates of Deposit-restricted........... 2,554 -- 2,554
Equity securities............................ 693 (550) 143
--------- ----------- ------------
$ 40,345 $ (482) $ 39,863
========= ============ ============
Equity securities are included in long-term other assets.
Realized gains on sales of available-for-sale securities for the year ended
December 31, 1998 were $2 million. There were no material realized gains or
losses for the years ended December 31, 1999 and 1997.
The amortized cost and estimated fair value of investments at December 31,
1999 and 1998, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.
December 31, 1999 December 31, 1998
------------------------- ----------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
Due in one year or less..................... $ 5,606 $ 5,606 $ 24,270 $ 24,291
Due after one year through three years...... 13,714 13,657 15,382 15,429
Due after three years....................... -- -- -- --
-------- -------- -------- --------
19,320 19,263 39,652 39,720
Equity securities........................... 693 143 693 143
-------- -------- -------- --------
$ 20,013 $ 19,406 $ 40,345 $ 39,863
======== ======== ======== ========
4. MERGER WITH SERAGEN
In August 1998, the Company completed a merger with Seragen (the "Merger")
and entered into an agreement with Seragen and Eli Lilly and Company ("Lilly")
under which Lilly assigned to the Company Lilly's rights and obligations under
its agreements with Seragen, including its sales and marketing rights to
ONTAK(TM). In addition, the Company had previously announced that it had signed
a definitive asset purchase agreement to acquire substantially all the assets of
Marathon Biopharmaceuticals, LLC, ("Marathon") which provided manufacturing
services to Seragen under a service agreement.
Under the terms of the merger agreement, Ligand paid merger consideration
at closing in the amount of $31.7 million, $5.7 million of which was in cash and
$26 million of which was through the issuance of approximately 1,858,515 shares
of the Company's Common Stock valued at $13.99 per share. The valuation of the
Company's Common Stock for this portion of the transaction was based on the
average closing share price for the five trading days prior to signing of the
definitive agreement in May 1998. The merger agreement also called for an
additional $37 million payment in cash and/or the Company's Common Stock, at the
Company's option, to be paid six months after the date of receipt of final FDA
approval to market ONTAK. The final FDA approval occurred in February 1999. In
August 1999, the Company made a cash payment of $34.1 million. Pending
resolution of final contingencies and in accordance with the terms of the merger
agreement, the Company withheld the remaining $2.9 million from payments made to
certain Seragen stakeholders. The Company purchased substantially all of the
assets of Marathon for $8 million through the issuance in January 1999 of
402,820 shares of
F-10
the Company's Common Stock with a fair value of $5 million and a $3 million
cash payment in August 1999, six months after the FDA approval of ONTAK.
The Company's agreement with Lilly provides for a milestone payment to
Lilly upon ONTAK approval by the FDA, a potential future milestone payment to
Lilly based on cumulative sales of ONTAK, royalties to Lilly on sales of ONTAK,
and payments by Lilly to Ligand as reimbursement for certain ONTAK clinical and
other costs incurred by the Company. In March 1999, Ligand issued to Lilly
434,546 shares of the Company's Common Stock as payment of the $5 million
milestone for the ONTAK approval. In addition, upon cumulative net sales of
ONTAK reaching $20 million, Lilly will receive a second $5 million milestone
payment.
The Merger was accounted for using the purchase method of accounting. The
purchase price, totaling $84.1 million, which included liabilities assumed of
$2.3 million was allocated to the fair value of the assets acquired. The
purchase price is composed of and allocated to the fair value of assets acquired
as follows (in thousands):
Issuance of Common Stock (including transaction costs)................ $ 25,996
Amounts due to Seragen stakeholders, Marathon and Lilly, payable in
Common Stock or cash................................................ 50,000
Liabilities assumed................................................... 2,360
Net cash paid......................................................... 5,756
--------
$ 84,112
========
Inventories........................................................... $ 3,230
Property and equipment................................................ 7,905
Identifiable intangible assets:
Write-off of in-process technology.................................. 30,000
Acquired technology................................................. 40,312
Other intangibles................................................... 2,665
--------
$ 84,112
========
The following pro forma condensed statement of operations information has
been prepared to give effect to the Merger as if such transaction had occurred
at the beginning of the periods presented. The historical results of operations
have been adjusted to reflect (1) adjustment for depreciation resulting from
adjusting the basis of certain property and equipment to fair value and
amortization over 10 years, (2) amortization of acquired technology over 15
years, (3) elimination of Seragen stock issuance costs (1997) and compensation
expense amortization (1998), (4) elimination of interest income for Seragen and
reduction of Ligand interest income resulting from use of $6 million for the
Merger at an annual interest rate of 5.5%, and (5) elimination of interest
expense related to certain Seragen liabilities. The information presented is not
necessarily indicative of the results of future operations of the merged
companies. Included in the 1998 net loss is a one-time charge of $30 million
related to in-process research and development included in the intangibles
acquired.
Pro Forma Results of Operations (Unaudited)
(in thousands)
Year Ended December 31,
----------------------------
1998 1997
------------ ------------
Revenues.................................. $ 20,477 $ 56,413
Net loss.................................. (124,867) (118,675)
Weighted average shares outstanding....... 40,392 34,987
Loss per share............................ (3.09) (3.39)
5. OTHER ASSETS AND ACCRUED LIABILITIES
Other assets comprise the following (in thousands):
December 31,
----------------------------
1999 1998
------------ ------------
Deferred rent............................ $ 3,381 $ 3,429
Prepaid royalty buyout (Note 8).......... 3,944 4,080
Intangible assets acquired (Note 4) ..... 2,651 2,665
Investment in X-Ceptor (Note 12)......... 5,246 --
Other.................................... 1,222 1,265
--------- -------
$ 16,444 $11,439
========= =======
F-11
Accrued liabilities comprise the following (in thousands):
December 31,
----------------------------
1999 1998
------------ ------------
Accrued legal............................ $ 431 $ 1,140
Accrued interest......................... 1,972 1,972
Accrued compensation..................... 2,981 1,784
Other.................................... 2,789 2,320
--------- --------
$ 8,173 $ 7,216
========= ========
6. CONVERTIBLE SUBORDINATED DEBENTURES
The convertible subordinated debentures pay interest semi-annually at 7.5%
per annum and are due in 2003. The difference between the face value and the
fair market value at the acquisition date is being accreted up to the face value
over the remaining term of the debentures and the accretion is charged to
interest expense. The debentures are convertible into the Company's Common Stock
at $26.52 per share.
7. STRATEGIC ALLIANCE AND FINANCING
In September 1998, the Company and Elan Corporation, plc ("Elan") signed a
binding letter of agreement. Under the terms of the agreement, Elan purchased
approximately $20 million of the Company's Common Stock. Elan also purchased
from the Company $40 million in issue price of Zero Coupon Convertible Senior
Notes, due 2008 with an 8% per annum yield to maturity (the "Notes"). These
Notes are convertible into the Company's Common Stock at $14 per share. Under
the terms of the initial agreement, up to an additional $70 million of Notes
which Elan could also purchase would be convertible into the Company's Common
Stock at a price which would be the average of the closing prices of the
Company's Common Stock for the 20 trading days immediately prior to the issuance
of a Note plus a premium; however, in no event would the conversion price be
less than $14 per share or more than $20 per share. The Notes could be used to
finance the final payments for the Seragen merger as well as other acquisitions
of complementary technologies, subject to the consent of Elan.
In July 1999, the Company issued an additional $40 million of Notes to Elan
under the terms of the initial agreement, which are convertible at $14 per
share. In August 1999, the Company and Elan agreed to amend the initial
agreement to provide that the remaining takedown of up to $30 million in Notes
may be utilized for general corporate purposes. Pursuant to this amended
agreement, in August 1999, the Company issued $20 million of Notes with terms
similar to the Notes previously issued, but convertible at $9.15 per share,
which represented a premium over the Company's stock price on the date of
issuance. In December 1999, Elan converted the $20 million Note plus accrued
interest into 2,244,460 shares of the Company's Common Stock. The Company
provided Elan a $2.2 million conversion incentive through the issuance of an
additional 188,572 shares of the Company's Common Stock. The incentive was
recorded as debt conversion expense in other income (expense). In March 2000,
Elan converted an additional $20 million in Notes plus accrued interest into
1,600,123 shares of Common Stock (see Note 14).
The agreement with Elan contains an anti-dilution provision. In accordance
with such provision and as a result of other equity issuances by the Company,
the Company sold Common Stock and warrants to Elan in 1999 totaling $839,000.
Assuming conversion of its outstanding Notes and warrants, Elan would own
approximately 17% of Ligand's shares on a fully diluted basis.
Elan also agreed to exclusively license to the Company in the United States
and Canada its proprietary product Morphelan(TM), a once-daily,
sustained-release, solid oral dosage form of morphine for pain in oncology and
HIV patients. For the rights to Morphelan(TM) the Company paid Elan certain
license fees in 1998, with milestone payments due upon the occurrence of certain
events up to and including the approval of the NDA in the United States.
Payments may be in cash, or subject to certain conditions, in the Company's
Common Stock or Notes. In November 1998, the Company paid Elan $5 million
through the issuance of 429,185 shares of the Company's Common Stock and $10
million from the issuance of Notes. In December 1999, the Company paid Elan a $5
million milestone payment through the issuance of 498,443 shares of the
Company's Common Stock. The 1999 consideration of $5 million was written off as
a technology milestone payment and the 1998 consideration of $15 million was
written off as acquired in-process technology. Elan could receive up to $5
million upon submission of the Morphelan(TM) NDA and another $5 million upon
approval of Morphelan by the FDA.
8. COMMITMENTS
LEASES AND EQUIPMENT NOTES PAYABLE
The Company has entered into capital lease and equipment note payable
agreements which require monthly payments
F-12
through September 2004. The carrying value of equipment under these
agreements at December 31, 1999 and 1998 was $20.1 million and $17.3 million,
respectively. At December 31, 1999 and 1998, accumulated amortization was $7.9
million and $7.3 million, respectively. The underlying equipment is used as
collateral under the equipment notes payable.
The Company has also entered into operating lease agreements for office and
research facilities with varying terms through August 2015. The agreements
provide for increases in annual rentals based on changes in the Consumer Price
Index or fixed percentage increases varying from 3% to 6%. One of these leases
requires an irrevocable standby letter of credit of $1.3 million to secure the
performance of the Company's lease obligations. Rent expense for the years ended
December 31, 1999, 1998 and 1997 was $3.2 million, $3.2 million and $3.4
million, respectively.
At December 31, 1999, annual minimum rental payments due under the
Company's leases and equipment notes payable are as follows (in thousands):
Obligations under
capital leases and
equipment notes
payable Operating leases
---------------- ----------------
2000..................................... $ 4,894 $ 3,287
2001..................................... 3,662 2,975
2002..................................... 2,519 2,888
2003..................................... 1,295 2,871
2004..................................... 285 2,928
Thereafter............................... -- 31,954
------------ -----------
Total minimum lease payments... 12,655 $ 46,903
===========
Less amounts representing interest....... (1,643)
------------
Present value of minimum lease payments.. 11,012
------------
Less current portion..................... 4,105
------------
$ 6,907
============
In 1997, one of the Company's main operating lease agreements for office
and research facilities expired, and the Company moved into a second
build-to-suit facility. In early 1997, the Company entered into a 17-year lease
and the Company loaned the construction partnership $3.7 million, which is being
repaid with interest over a 10-year period.
ROYALTY AGREEMENTS
The Company has entered into royalty agreements requiring payments in 1999
ranging from 1% to 15% of net sales and up to 35% for license and other royalty
arrangements. Currently, the Company is making minimum royalty payments under
three agreements, of $315,000 per year. Royalty expense for the years ended
December 31, 1999, 1998 and 1997 was $967,000, $75,000 and $276,000,
respectively, and is included in cost of products sold in the consolidated
statements of operations.
In May 1998, the Company elected to make a final one-time $4.1 million
royalty payment to The Salk Institute for Biological Studies as an alternative
to paying future royalty payments based on total net sales of defined potential
products. The one-time payment is being amortized over the remaining life of the
related patents.
In September 1999, Ligand and Seragen entered into a sublicense agreement
with Hoffmann-La Roche Inc. ("Roche"), with respect to Seragen's rights under a
family of patents called the "Strom Patents." The Strom Patents, licensed by
Seragen from Beth Israel Deaconess Medical Center ("Beth Israel"), cover the use
of antibodies that target the interleukin-2 receptor to treat transplant
rejection and autoimmune diseases. In consideration for the sublicense, Roche
paid Seragen a $2.5 million royalty based on sales occurring before the date of
the agreement plus Roche will pay royalties on subsequent sales of licensed
products. Seragen will also receive milestone payments in the event Roche
receives U.S. regulatory approval of licensed products. A non-exclusive license
was previously issued by Seragen to Novartis requiring similar royalty payments.
Beth Israel receives approximately 35% of the total royalty and milestone
payments made related to the Strom Patents.
In December 1999, the Company and Seragen entered into an agreement with
Pharmaceutical Partners LLC ("Pharma") whereby Pharma purchased Seragen's
royalty stream to be received under the Roche and Novartis royalty agreements
described above. Pharma paid $3.25 million in December 1999 and would pay an
additional $3.25 million should sales exceed a predetermined amount in any of
years 2001 through 2004. In addition, Seragen retains the patents and the right
to receive the future milestone payments from Roche described above.
F-13
9. STOCKHOLDERS' EQUITY
WARRANTS
At December 31, 1999, the Company had outstanding warrants to purchase
2,586,299 shares of the Company's Common Stock, of which 1,286,643 warrants
relate to ALRT ("ALRT warrants") (Note 11). The ALRT warrants have an exercise
price of $7.12 per share, the additional warrants have exercise prices ranging
from $10 to $20 per share and expire at various dates through October 6, 2006.
In 1999 and 1998, the Company received net proceeds of approximately $17.4
million and $12.5 million, respectively, from investors who elected to exercise
their ALRT warrants to purchase 2,939,717 and 2,267,836 shares, respectively.
The Company agreed to pay a cost of money incentive to the investors for the
early exercise of those warrants which was recorded as a reduction of equity.
STOCK PLANS
The Company's 1992 Stock Option Stock Issuance Plan provides for the
issuance of up to 9,073,457 shares of the Company's Common Stock. The large
majority of the options granted have 10 year terms and vest over four years of
continued employment. The Company's employee stock purchase plan also provides
for the sale of up to 355,000 shares of the Company's Common Stock.
Following is a summary of the Company's stock option plan activity and
related information:
Weighted Average
Shares Exercise Price
-------------- -----------
Balance at December 31, 1996................. 3,796,882 $ 9.55
Granted.................................... 875,339 12.75
Exercised.................................. (384,340) 8.59
Cancelled.................................. (219,375) 10.65
-------------- -----------
Balance at December 31, 1997................. 4,068,506 10.26
Granted.................................... 1,584,604 11.10
Exercised.................................. (211,524) 7.52
Cancelled.................................. (396,567) 11.30
-------------- -----------
Balance at December 31, 1998................. 5,045,019 10.56
Granted.................................... 894,792 10.67
Exercised.................................. (228,991) 8.29
Cancelled.................................. (405,361) 11.82
-------------- -----------
Balance at December 31, 1999................. 5,305,459 $ 10.58
============= ===========
Options exercisable at December 31, 1999..... 3,344,575 $ 10.33
============= ===========
Options exercisable at December 31, 1998..... 2,814,876 $ 9.79
============= ===========
Options exercisable at December 31, 1997..... 2,442,187 $ 9.31
============= ===========
Following is a further breakdown of the options outstanding as of December
31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------
Weighted
average
Options remaining life Weighted average Number Weighted average
Range of exercise prices outstanding in years exercise price Exercisable exercise price
------------------------ ----------- -------- ---------------- ----------------- ----------------
$4.68 - 8.65........... 1,091,071 5.28 $ 7.37 932,795 $ 7.33
9.00 - 9.60........... 1,067,734 6.67 9.33 652,531 9.33
9.77 - 11.25.......... 1,137,439 7.69 10.60 529,178 10.55
11.26 - 13.00.......... 1,253,868 7.48 12.22 769,771 12.28
13.25 - $16.38.......... 755,347 7.76 14.22 460,300 14.31
------------- --------------- ------------- --------------- ------------
5,305,459 6.95 $ 10.58 3,344,575 $ 10.33
============= =============== ============= =============== ============
At December 31, 1999, 768,507 shares were available under the plans for
future grants of stock options or sale of stock.
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
estimated weighted average fair value at grant date for the options granted
during 1999, 1998, and 1997 were $6.73, $6.65, and $5.96
F-14
per option, respectively. The fair value for these options was estimated at
the dates of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, 1998 and 1997:
1999 1998 1997
----------- ------------ ----------
Risk free interest rates........... 6.3% 4.8% 6.3%
Dividend yields.................... -- -- --
Volatility......................... 70.0% 62.0% 42.7%
Weighted average expected life..... 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net loss per share
information):
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
Net loss as reported............. $ (74,719) $ (117,886) $ (100,150)
Net loss pro forma............... (80,549) (121,916) (102,929)
Net loss per share as reported... (1.58) (2.92) (3.02)
Net loss per share pro forma..... (1.71) (3.01) (3.11)
The pro forma effect on net loss for 1999, 1998 and 1997 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
SHAREHOLDER RIGHTS PLAN
In September 1996, the Company's Board of Directors adopted a preferred
shareholder rights plan (the "Shareholder Rights Plan"), as amended, which
provides for a dividend distribution of one preferred share purchase right (a
"Right") on each outstanding share of the Company's Common Stock. Each Right
entitles stockholders to buy 1/1000th of a share of Ligand Series A
Participating Preferred Stock at an exercise price of $100, subject to
adjustment. The Rights will become exercisable following the tenth day after a
person or group announces an acquisition of 20% or more of the Common Stock, or
announces commencement of a tender offer, the consummation of which would result
in ownership by the person or group of 20% or more of the Common Stock. The
Company will be entitled to redeem the Rights at $0.01 per Right at any time on
or before the earlier of the tenth day following acquisition by a person or
group of 20% or more of the common stock and September 13, 2006.
In November 1998, the Shareholder Rights Plan was amended to exclude Elan
or any of its affiliates as an acquiring person to the extent of their ownership
on or before November 9, 2005 of up to 25% of the Company's Common Stock on a
fully diluted basis or thereafter to the extent their ownership exceeds 20% on
November 9, 2005. However, shares acquired pursuant to the arrangements with
Elan described in Note 7 are not counted in such determination unless additional
shares of the Company's Common Stock have been acquired by Elan outside of such
arrangements.
10. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
ELI LILLY AND COMPANY
In November 1997, the Company entered into a strategic alliance with Lilly
for the discovery and development of products based on Ligand's Intracellular
Receptor technology. Under the agreement, Lilly made a $31.25 million equity
investment and agreed to support up to $49 million in research funding. Revenues
recognized under the agreement for the years ended December 31, 1999, 1998 and
1997 were $9 million, $10 million and $19.7 million, respectively. The Company
also had the option to obtain selected rights to one Lilly specialty
pharmaceutical product. In connection with the August 1998 acquisition of
Seragen, Ligand obtained from Lilly its rights to ONTAK and entered into an
agreement where Lilly is to fund certain clinical and other regulatory costs
incurred by Ligand as mandated by the FDA in the approval of ONTAK. Revenues
recognized under this agreement for the years ended December 31, 1999 and 1998
were $1 million and $353,000, respectively.
F-15
SMITHKLINE BEECHAM
In February 1995, the Company entered into a research collaboration with
SmithKline Beecham Corporation ("SmithKline Beecham") to discover and
characterize small molecule drugs to control hematopoiesis. Revenues recognized
under the agreement for the years ended December 31, 1999, 1998 and 1997 were
$2.7 million, $3 million and $3.2 million, respectively. SmithKline Beecham has
agreed to provide the Company up to $21.5 million in research funding and equity
investments. To date, SmithKline Beecham has made equity investments of $10
million and invested $2.5 million as a convertible note. The note is convertible
into the Company's Common Stock at $13.56 per share and is due October 2002
unless converted into the Company's Common Stock earlier. The interest on the
note is payable semi-annually at prime.
In April 1998, SmithKline Beecham plc. and the Company initiated a new
collaboration to develop small molecule drugs for the treatment or prevention of
obesity. As part of the collaboration, SmithKline Beecham plc. purchased $5
million of the Company's Common Stock and also purchased for $1 million a
warrant to purchase 150,000 shares of Ligand Common Stock at $20 per share. The
warrant expires in five years, and Ligand may require SmithKline Beecham plc. to
exercise the warrant under certain circumstances after three years. SmithKline
Beecham plc. will also purchase additional Ligand Common Stock at a 20% premium
if a certain research milestone is achieved and will make cash payments to
Ligand if subsequent milestones are met. Revenues recognized under the agreement
for the years ended December 31, 1999 and 1998 were $1 million and $700,000,
respectively.
PARKE-DAVIS
In September 1999, Ligand entered into a research, development and license
agreement with the Parke-Davis Pharmaceutical Research Division ("Parke-Davis")
of Warner-Lambert Company ("Warner-Lambert") to discover, characterize, design
and develop small molecule compounds with beneficial effects for the treatment
and prevention of diseases mediated through the estrogen receptor. Some of the
diseases affected by drugs that act upon the estrogen receptor are osteoporosis,
cardiovascular disease, breast cancer, and mood and cognitive disorders.
Under the terms of the agreement, the Company may receive up to $13 million
in research funding through December 2002 as well as future product milestone
payments and royalties. Parke-Davis will fund the costs of developing and
marketing compounds selected from the collaboration and has been granted the
worldwide rights to manufacture and sell any products resulting from the
collaboration. The Company will be entitled to milestones at various stages of
each compound's development. Upon the marketing of a product, Parke-Davis will
pay the Company royalties on net sales of each product on a product-by-product
basis. In addition, Warner-Lambert purchased $2.5 million of the Company's
Common Stock at fair value.
ABBOTT LABORATORIES
In July 1994 the Company entered into a long-term collaborative research
agreement with Abbott Laboratories ("Abbott") to discover and develop drugs for
the prevention or treatment of inflammatory diseases. Revenues under the
agreement, which was completed in July 1999, for the years ended December 31,
1999, 1998 and 1997 were $600,000, $1.2 million and $1.7 million, respectively.
AMERICAN HOME PRODUCTS CORPORATION
In September 1994, the Company entered into a collaborative research
agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of
American Home Products, to discover and develop drugs which interact with the
estrogen or progesterone receptors. Revenues under the agreement, which was
completed in September 1998, for the years ended December 31, 1998 and 1997 were
$1.3 million and $4 million, respectively.
11. ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
In December 1994, the Company and Allergan, Inc. ("Allergan") formed ALRT
for retinoid product research and development. In September 1997, the Company
and Allergan exercised their respective options to purchase the callable common
stock (the "Stock Purchase Option") and certain assets (the "Asset Purchase
Option") of ALRT. The Company's exercise of the Stock Purchase Option required
the issuance of 3,166,567 shares of the Company's Common Stock along with cash
payments totaling $25 million to holders of the callable common stock in
November 1997. Allergan's exercise of the Asset Purchase Option required a cash
payment of $8.9 million which was used by the Company to pay a portion of the
Stock Purchase Option.
F-16
In November 1997, ALRT became a wholly owned subsidiary of the Company. The
transaction was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
allocated to in-process technology and was written off, resulting in a one-time
non-cash charge to results of operations of $65 million. Details of the
acquisition are as follows (in thousands):
Total consideration:
Issuance of Common Stock ....................... $ 52,595
Liabilities assumed ............................ 1,010
Warrant subscription receivable write-off ...... 918
Net cash paid for ALRT net of cash received .... 12,661
--------
$ 67,184
========
Less:
Deferred liabilities write-off.................. $ 2,214
Write-off of in-process technology.............. 64,970
--------
$ 67,184
========
12. X-CEPTOR THERAPEUTICS, INC.
In June 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. Ligand invested $6 million in X-Ceptor through the
acquisition of convertible preferred stock and owns approximately 17% of
X-Ceptor's outstanding capital stock. Ligand is accounting for its investment in
X-Ceptor using the equity method of accounting. Ligand's interest in X-Ceptor
losses in 1999 was $754,000, which is included in other income (expense) in the
consolidated statements of operations. 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 made a license payment of $2
million to Ligand. Ligand recognized $1.7 million as revenue in 1999
representing the third-party ownership of X-Ceptor. Ligand has not performed any
research and development activities on behalf of X-Ceptor.
Ligand also issued warrants to X-Ceptor investors, founders and certain
employees to purchase 950,000 shares of Ligand Common Stock with an exercise
price of $10 per share and expiration date of October 6, 2006. The warrants were
recorded at their fair value of $4.20 per warrant or $3.9 million as deferred
warrant expense within stockholders' deficit and are being amortized to
operating expense through June 2002. Amortization was $530,000 in 1999, which is
included in research and development expense in the consolidated statements of
operations.
Ligand has 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 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.
13. INCOME TAXES
At December 31, 1999, the Company had consolidated federal and combined
California income tax net operating loss carryforwards of approximately $394
million and $78 million, respectively. The difference between the federal and
California tax loss carryforwards is primarily attributable to the
capitalization of research and development expenses for California income tax
purposes and the 50% limitation on California loss carryforwards. The Company
also had foreign net operating loss carryforwards of approximately $5 million,
which will begin to expire in 2001 unless previously utilized.
The federal tax loss carryforward will begin to expire in 2002, unless
previously utilized. The California tax loss carryforwards began expiring in
1998 (approximately $2 million expired in 1999). The Company also had
consolidated federal and combined California research tax credit carryforwards
of approximately $17 million and $5 million, respectively, which will begin to
expire in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of a portion of
net operating loss and credit carryforwards will be limited because of
cumulative changes in ownership of more than 50% which occurred within three
year periods during 1989, 1992 and 1996. However, the Company does not believe
the limitations will have a material impact upon the future utilization of these
carryforwards. In addition, use of Glycomed's and Seragen's preacquisition tax
net operating and
F-17
credit carryforwards will also be limited because the acquisitions by the
Company represent changes in ownership of more than 50%. Such tax net operating
losses and credit carryforwards have been reduced, including the related
deferred tax assets.
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance has been recognized to
fully offset the deferred tax assets as of December 31, 1999 and 1998 as
realization of such assets is uncertain.
December 31,
-----------------------
1999 1998
---------- ----------
(in thousands)
Deferred tax liabilities:
Acquired subordinated debt.................. $ 3,270 $ 4,387
Purchased intangible assets................. 16,964 17,621
Fixed assets................................ 2,251 2,684
---------- ----------
Total deferred tax liabilities.... 22,485 24,692
---------- ----------
Deferred tax assets:
Net operating loss carryforwards............ 144,440 126,771
Research and development credits............ 21,065 17,218
Capitalized research and development........ 9,366 13,604
Capitalized license......................... 8,149 6,150
Accrued expenses............................ 910 1,347
Other, net ................................. 4,330 1,593
---------- ----------
Total deferred tax assets......... 188,260 166,683
---------- ----------
Net deferred tax assets..................... 165,775 141,991
Valuation allowance for deferred tax assets. (165,775) (141,991)
---------- ----------
$ -- $ --
========== ==========
As of December 31, 1999, approximately $2.4 million of the valuation
allowance for deferred tax assets related to benefits of stock option deductions
which, when recognized, will be allocated directly to paid-in capital.
14. SUBSEQUENT EVENTS
SALE OF CONTRACT MANUFACTURING ASSETS
In January 2000, Ligand sold the assets associated with the contract
manufacturing business of Seragen subsidiary Marathon Biopharmaceuticals Inc.
for approximately $10 million in cash. Under the terms of the sale, Seragen has
entered into a long-term supply agreement with the acquirer of the assets for
the manufacture of ONTAK and the performance of certain process and production
development work for the next-generation ONTAK product. Seragen has minimal
purchase commitments under the agreement and the purchase commitments are
consistent with Ligand's current costs to manufacture. The assets sold consist
primarily of property and equipment of $6.7 million and intangibles of $2.7
million. The Company recognized an immaterial gain on this transaction in
January 2000.
RESEARCH AND DEVELOPMENT COLLABORATION
In February 2000, the Company and Organon entered into a collaboration to
focus on small molecule compounds with potential effects for the treatment and
prevention of gynecological diseases mediated through the progesterone receptor.
Under the terms of the collaboration, Ligand received up front payments and may
receive milestone and royalty payments on a product-by-product basis. Organon
has been granted exclusive worldwide rights to manufacture and sell any products
resulting from the collaboration.
CONVERSION OF ZERO COUPON CONVERTIBLE NOTES
In March 2000, Elan converted an additional $20 million in Notes plus
accrued interest, convertible at $14 per share, into 1,501,543 shares of the
Company's Common Stock. The Company provided Elan a $2 million conversion
incentive through the issuance of an additional 98,580 shares of the Company's
Common Stock. The incentive was recorded as debt conversion expense in other
income (expense) in the first quarter of 2000.
F-18