UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[ X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ______ to ______. Commission File Number: 0-20720
LIGAND PHARMACEUTICALS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 77-0160744
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10275 Science Center Drive 92121-1117
San Diego, CA (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (858) 550-7500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
As of October 31, 1999 the registrant had 47,730,638 shares of common
stock outstanding.
LIGAND PHARMACEUTICALS INCORPORATED
QUARTERLY REPORT
FORM 10-Q
TABLE OF CONTENTS
COVER PAGE.........................................................................................................1
TABLE OF CONTENTS..................................................................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..................................3
Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998.......4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998.................5
Notes to Consolidated Financial Statements..................................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.........................................19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................................................*
ITEM 2. Changes in Securities and Use of Proceeds..........................................................20
ITEM 3. Defaults upon Senior Securities....................................................................*
ITEM 4. Submission of Matters to a Vote of Security Holders................................................*
ITEM 5. Other Information..................................................................................*
ITEM 6. Exhibits and Reports on Form 8-K...................................................................20
SIGNATURE..........................................................................................................22
* No information provided due to inapplicability of item.
2
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
LIGAND PHARMACEUTICALS INCORPORATED
Consolidated Balance Sheets
(in thousands, except share data)
September 30, December 31,
1999 1998
------------------ ------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 26,733 $ 32,801
Short-term investments 19,143 37,166
Accounts receivable, net 2,265 830
Inventories 5,764 6,166
Other current assets 782 1,030
------------------ ------------------
Total current assets 54,687 77,993
Restricted short-term investments 2,013 2,554
Property and equipment, net 21,745 23,722
Acquired technology, net 39,305 40,312
Notes receivable from officers and employees 413 544
Other assets 13,550 10,895
================== ==================
$131,713 $ 156,020
================== ==================
Liabilities and stockholders' deficit Current liabilities:
Accounts payable $ 5,533 $ 12,363
Accrued liabilities 7,042 7,216
Deferred revenue 2,895 4,115
Current portion of equipment financing obligations 3,704 3,201
------------------ ------------------
Total current liabilities 19,174 26,895
------------------ ------------------
Long-term equipment financing obligations 7,140 8,165
Accrued acquisition obligation 2,900 50,000
Convertible note 2,500 2,500
Convertible subordinated debentures 41,308 39,302
Zero coupon convertible notes 103,680 40,520
Stockholders' deficit:
Convertible preferred stock, $.001 par value; 5,000,000
shares authorized; none issued -- -- -- --
Common stock, $.001 par value; 80,000,000 shares
authorized; 47,731,738 shares and 45,690,067 shares issued,
respectively 48 46
Paid-in capital 405,069 384,715
Deferred warrant expense (2,030) -- --
Adjustment for unrealized losses on available-for-sale securities (577) (482)
Accumulated deficit (447,488) (395,630)
------------------ ------------------
(44,978) (11,351)
Less treasury stock, at cost (1,114 shares) (11) (11)
------------------ ------------------
Total stockholders' deficit (44,989) (11,362)
================== ==================
$131,713 $ 156,020
================== ==================
See accompanying notes.
3
LIGAND PHARMACEUTICALS INCORPORATED
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------- ------------ --------------- ------------
Revenues:
Product sales $ 2,830 $ 103 $ 9,127 $ 282
Contract manufacturing sales 656 -- -- 1,884 -- --
Collaborative research and development,
and other milestone revenues 6,279 3,844 17,456 13,117
--------------- ------------ --------------- ------------
Total revenues 9,765 3,947 28,467 13,399
--------------- ------------ --------------- ------------
Costs and expenses:
Cost of products and services sold 3,163 86 8,177 305
Research and development 15,717 16,899 44,799 48,917
Selling, general and administrative 6,015 3,825 20,056 9,924
Write-off of acquired in-process technology -- -- 30,000 -- -- 30,000
--------------- ------------ --------------- ------------
Total costs and expenses 24,895 50,810 73,032 89,146
--------------- ------------ --------------- ------------
Loss from operations (15,130) (46,863) (44,565) (75,747)
--------------- ------------ --------------- ------------
Other income (expense):
Interest income 623 521 1,894 2,406
Interest expense (3,551) (1,933) (8,942) (5,886)
Other (248) -- -- (245) -- --
Realized gain on investments -- -- 2,000 -- -- 2,000
--------------- ------------ --------------- ------------
Total other income (expense) (3,176) 588 (7,293) (1,480)
--------------- ------------ --------------- ------------
Net loss $(18,306) $(46,275) $(51,858) $(77,227)
=============== ============ =============== ============
Basic and diluted net loss per share $ (.39) $ (1.15) $ (1.11) $ (1.97)
=============== ============ =============== ============
Shares used in computing net loss per share 47,476 40,333 46,580 39,256
=============== ============ =============== ============
See accompanying notes.
4
LIGAND PHARMACEUTICALS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
----------------- -------------------
OPERATING ACTIVITIES
Net loss $(51,858) $(77,227)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 4,105 3,215
Amortization of acquired technology 1,007 -- --
Amortization of notes receivable from officers and employees 131 144
Amortization of deferred warrant expense 184 -- --
Accretion of debt discount and interest 5,166 2,006
Gain on sale of property and equipment -- -- (24)
Write off of acquired in-process technology -- -- 30,000
Change in operating assets and liabilities:
Accounts receivable (1,435) -- --
Inventories 402 -- --
Other current assets 248 (2,796)
Accounts payable and accrued liabilities (7,004) (7,070)
Deferred revenue (1,220) 1,695
----------------- -------------------
Net cash used in operating activities (50,274) (50,057)
----------------- -------------------
INVESTING ACTIVITIES
Purchase of short-term investments (17,476) (28,777)
Proceeds from short-term investments 35,405 33,620
Increase in notes receivable from officers and employees -- -- (147)
Increase in other assets (4,137) (7,422)
Decrease in other assets 1,482 3,577
Purchase of property and equipment (2,128) (3,740)
Payment of accrued acquisition obligation (37,100) -- --
Seragen assets acquired -- -- (5,756)
Proceeds from sale of property and equipment -- -- 24
----------------- -------------------
Net cash used in investing activities (23,954) (8,621)
----------------- -------------------
FINANCING ACTIVITIES
Principal payments on equipment financing obligations (2,450) (2,232)
Proceeds from equipment financing arrangements 1,927 2,627
Net change in restricted short-term investment 541 249
Net proceeds from sale of common stock and warrants 8,142 20,721
Proceeds from issuance of zero coupon convertible notes 60,000 -- --
----------------- -------------------
Net cash provided by financing activities 68,160 21,365
----------------- -------------------
Net decrease in cash and cash equivalents (6,068) (37,313)
Cash and cash equivalents at beginning of period 32,801 62,252
================= ===================
Cash and cash equivalents at end of period $26,733 $24,939
================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,686 $ 4,958
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payment of accrued acquisition obligation with common stock $ 10,000 -- --
Warrants due X-Ceptor investors $ 2,214 -- --
Conversion of note to common stock -- -- $ 3,750
Common stock issued to purchase Seragen -- -- $ 25,996
See accompanying notes.
5
LIGAND PHARMACEUTICALS INCORPORATED
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
1. BASIS OF PRESENTATION
The consolidated financial statements of Ligand Pharmaceuticals
Incorporated ("Ligand") for the three and nine months ended September 30, 1999
and 1998 are unaudited. These financial statements reflect all adjustments,
consisting of only normal recurring adjustments which, in the opinion of
management, are necessary to fairly present the consolidated financial position
as of September 30, 1999 and the consolidated results of operations for the
three and nine months ended September 30, 1999 and 1998. The results of
operations for the period ended September 30, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31, 1999.
For more complete financial information, these financial statements, and the
notes thereto, should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998 included in the Ligand
Form 10-K and the unaudited consolidated financial statements for the quarters
ended March 31, 1999 and June 30, 1999 included in the respective Ligand Form
10-Q filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
2. COMPREHENSIVE NET LOSS
Comprehensive net loss for the three and nine month periods ended September
30, 1999 and 1998 is as follows ($,000):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
Comprehensive net loss $(18,308) $(48,012) $(51,953) $(77,510)
========= ========= ========= =========
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Basic and diluted net loss per share amounts are equivalent
for the periods presented as the inclusion of common stock equivalents in the
number of shares used for the diluted computation would be anti-dilutive.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in-first-out method. Inventories consist of the following
($,000):
September 30, December 31,
1999 1998
----------------- ---------------
Raw materials $ 1,114 $ 2,382
Work-in-process 2,843 3,634
Finished goods 1,807 150
---------------- --------------
$ 5,764 $ 6,166
================= ===============
The products Panretin(R) gel and ONTAK(R) received approval for marketing
by the U.S. Food and Drug Administration ("FDA") in February 1999. Ligand uses
third-party manufacturers for all manufacturing related to the production of
Panretin gel commercial inventory. ONTAK commercial inventory is produced at the
manufacturing facility of Marathon Biopharmaceuticals, Incorporated
("Marathon"), a wholly-owned subsidiary of Ligand's subsidiary Seragen, Inc.
("Seragen"). Inventory at September 30, 1999 also includes approximately $1.4
million of Targretin(R). A New Drug
6
Application ("NDA") was filed by Ligand inJune 1999 for Targretin capsules. If
the FDA does not approve the NDA for Targretin capsules for commercial sale, any
capitalized costs related to Targretin will be expensed.
5. STRATEGIC ALLIANCE AND ZERO COUPON CONVERTIBLE NOTES
In July 1999, Ligand issued $40 million of zero coupon convertible notes
under the terms of the strategic alliance entered into in September 1998 with
Elan Corporation, plc and its Elan International Services, Ltd. subsidiary
("Elan"). Consistent with the initial $40 million issued in November 1998, these
notes are due in November 2008, accrue interest at 8% per annum compounded
semi-annually, are convertible at $14 per share, and are callable at accreted
value beginning in November 2001.
In August 1999, Ligand and Elan agreed to amend the September 1998
agreement to provide that the remaining takedown of up to $30 million in zero
coupon convertible notes may be utilized for general corporate purposes.
Pursuant to this amended agreement, in August 1999, Ligand issued $20 million of
zero coupon convertible notes with terms similar to the notes previously issued,
but convertible at $9.15 per share.
Assuming conversion of all of the notes issued to date, Elan would own
approximately 15.9% of Ligand's shares on a fully diluted basis.
6. ACCRUED ACQUISITION OBLIGATION
In August 1999, Ligand made a cash payment of $37.1 million related to the
$40 million contingent merger obligations incurred in connection with the
acquisition of Seragen and the purchase of the Marathon assets. According to the
terms of both acquisition agreements, the payments were due on August 5, 1999,
six months after receipt of final approval of ONTAK by the FDA. Pending
resolution of final contingencies and in accordance with the terms of the
Seragen acquisition agreement, Ligand has withheld $2.9 million from payments
made to certain Seragen stakeholders.
7. COLLABORATIVE ARRANGEMENTS
Warner-Lambert/Parke-Davis - On September 1, 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").
The research and development collaboration will focus on the discovery,
characterization, design and development of 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, Ligand 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. Ligand will be entitled to milestones at various stages of each
compound's development. Upon the marketing of a product, Parke-Davis will pay
Ligand royalties on net sales of each product on a product-by-product basis. In
addition, Warner-Lambert purchased 289,750 shares of Ligand common stock at
approximately $8.63 per share resulting in proceeds to Ligand of $2.5 million.
Hoffmann-La Roche - On September 8, 1999, Ligand and Seragen entered into a
non-exclusive sublicense agreement with Switzerland-based F. Hoffmann-La Roche
Ltd. and its U.S. pharmaceutical subsidiary Hoffmann-La Roche Inc. ("Roche"),
with respect to Seragen's rights under a family of patents called the "Strom
Patents."
The sublicense grants Roche the right to make, use and sell in the U.S.,
Canada, Australia and New Zealand any product containing the active ingredient
daclizumab. Roche currently sells such a product under the trademark Zenapax(R)
for the treatment of acute organ rejection in patients receiving kidney
transplants.
In consideration for the sublicense, Roche paid Seragen a $2.5 million
royalty based on sales of Zenapax(R) occurring before the date of the Roche
agreement plus, commencing in January 2001, royalties on net sales of licensed
products in the U.S., Canada, Australia and New Zealand. Seragen will also
receive milestone payments in the event Roche receives U.S.
7
regulatory approval of licensed products containing daclizumab for use in the
treatment of autoimmune indications.
The Strom Patents, licensed by Seragen from Beth Israel Deaconess Medical
Center ("Beth Israel"), a Harvard Medical School teaching hospital, cover the
use of antibodies that target the interleukin-2 receptor to treat transplant
rejection and autoimmune diseases. Previously a non-exclusive license was issued
to Novartis covering the product Simulect(R) to treat organ transplant
rejection, for which Ligand expects to receive royalty payments beginning in
January 2001. According to the terms of the Beth Israel agreement with Seragen,
Beth Israel also shares in the royalty and milestone payments received by
Seragen. As of September 30, 1999, Ligand had accrued a $640,000 liability to
Beth Israel related to the $2.5 million royalty received resulting in net
revenue to Ligand of $1.86 million.
8. SUBSEQUENT EVENT
X-Ceptor Therapeutics, Inc. - On October 6, 1999, Ligand completed its
second and final investment in X-Ceptor Therapeutics, Inc. ("X-Ceptor"), the
private corporation recently formed to conduct research in the field of orphan
nuclear receptors. Ligand invested $3.2 million in cash in exchange for shares
of Series B Preferred Stock ("Series B Stock").
At the first closing of the Series B Stock financing on June 30, 1999,
Ligand invested $2.8 million in cash in exchange for shares of Series B Stock.
Including Ligand's second investment, Ligand owns approximately 17% of
X-Ceptor's outstanding capital stock on an as converted basis. Ligand has
retained certain rights to repurchase the capital stock of X-Ceptor at varying
prices in June 2002 or June 2003.
At the second closing, Ligand also issued to X-Ceptor investors, founders
and certain employees warrants to purchase 950,000 shares of Ligand common stock
with a final negotiated exercise price of $10 per share and expiration date of
October 6, 2006. The warrants were valued at $4.20 per warrant based on
arms-length negotiations. The value of the warrants is recorded as a component
of stockholders' deficit and amortized to operating expense through June 2002.
Based on Ligand's initial investment, $2.214 million was recorded as deferred
warrant expense as of June 30, 1999. The $1.776 million balance of the total
warrant value of $3.990 million was recorded in October 1999.
8
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed below at "Risks and Uncertainties." This outlook
represents our current judgment on the future direction of our business. Such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. We undertake no obligation to release
publicly the results of any revisions to these forward-looking statements to
reflect events or circumstances arising after the date of this quarterly report.
Panretin(R) and Targretin(R) are registered trademarks of Ligand
Pharmaceuticals Incorporated, and ONTAK(R) is a registered trademark of Seragen,
Inc., our wholly-owned subsidiary.
OVERVIEW
Since January 1989, we have devoted substantially all of our resources to
our drug discovery and development programs focused on intracellular receptors,
also known as IR, 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 arrangements and
product sales. Some of these fluctuations may be significant. As of September
30, 1999, our accumulated deficit was $447.5 million.
In July 1999, we issued $40 million of zero coupon convertible notes under
the terms of our strategic alliance with Elan Corporation, plc and in August
1999 agreed to amend the underlying financing arrangement to provide for the use
of the $30 million of additional financing available under the arrangement for
general corporate purposes. In August 1999, we issued $20 million of zero coupon
convertible notes under the amended arrangement. For additional details, please
see Note 5 of the notes to consolidated financial statements.
In August 1999, we made a cash payment of $37.1 million related to our
contingent merger obligations to Seragen and Marathon stakeholders. For
additional details, please see Note 6 of the notes to consolidated financial
statements.
In September 1999, we entered into collaborative arrangements with
Hoffmann-La Roche Inc. and Warner-Lambert Company. For additional details,
please see Note 7 of the notes to consolidated financial statements.
In October 1999, we completed our second and final investment in X-Ceptor
Therapeutics, Inc. For additional details, please see Note 8 of the notes to
consolidated financial statements.
In October 1999, we received $2 million from Glaxo Wellcome plc as
milestone payments based on Glaxo Wellcome's advancing two research compounds
into exploratory development for the treatment of cardiovascular disease.
Additional milestones are due if the compounds proceed further in development.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("1999"), AS COMPARED WITH THREE MONTHS
ENDED SEPTEMBER 30, 1998 ("1998")
Total revenues for 1999 were $9.8 million, an increase of $5.8 million as
compared to 1998. Loss from operations for 1999 was $15.1 million, a decrease of
$31.8 million as compared to 1998. Net loss for 1999 was $18.3 million or $(.39)
per share, a decrease of $28 million from the 1998 net loss of $46.3 million or
$(1.15) per share. The principal factors causing these changes are discussed
below.
In 1998, we wrote off $30 million of in-process technology acquired in the
August 1998 merger with Seragen.
Product sales for 1999 were $2.8 million, as compared to $103,000 in 1998.
The increase is due to revenues from sales of ONTAK, approved by the FDA in
February 1999.
Contract manufacturing sales for 1999 were $656,000. These sales were
generated under contract manufacturing
9
agreements performed at the Marathon facility acquired in January 1999.
Collaborative research and development and other milestone revenues for
1999 were $6.3 million, an increase of $2.5 million over 1998. The increase was
primarily due to $1.9 million recognized in September 1999 related to revenue
earned under a sublicense arrangement with Hoffmann-La Roche Inc. and payments
of $1 million received in September 1999 from Ferrer Internacional S.A. in
connection with the marketing and distribution agreements entered into in March
1999. The quarter-to-quarter comparison of collaborative research and
development and other milestone revenues is as follows ($,000):
Three Months Ended
September 30,
1999 1998
------------ --------------
Eli Lilly and Company $2,242 $2,558
Hoffmann-La Roche Inc. 1,860 -- --
Ferrer Internacional S.A. 1,000 -- --
SmithKline Beecham, plc 977 886
American Home Products 200 100
Abbott Laboratories -- -- 300
------------ -------------
$6,279 $3,844
============ ==============
Cost of products and services sold increased from $86,000 in 1998 to $3.2
million in 1999. The increase is due to manufacturing costs and royalty expenses
of $1 million associated with our new products as well as contract manufacturing
costs of $2.2 million incurred at the Marathon facility.
Research and development expenses were $15.7 million in 1999, compared to
$16.9 million in 1998. The decrease was primarily due to the stage of clinical
trials on potential products in 1999 as compared to 1998. Selling, general and
administrative expenses were $6 million in 1999, up from $3.8 million in 1998.
The increase was due primarily to increased costs associated with the expansion
of our sales and marketing activities related to the launch of our new products.
Interest income increased from $521,000 in 1998 to $623,000 in 1999, due to
higher cash balances resulting from the $60 million in Elan financings in July
and August 1999.
Interest expense in 1999 was $3.6 million, an increase of $1.7 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).
NINE MONTHS ENDED SEPTEMBER 30, 1999 ("1999"), AS COMPARED WITH NINE MONTHS
ENDED SEPTEMBER 30, 1998 ("1998")
Total revenues for 1999 were $28.5 million, an increase of $15.1 million as
compared to 1998. Loss from operations for 1999 was $44.6 million, a decrease of
$31.1 million as compared to 1998. Net loss for 1999 was $51.9 million or
$(1.11) per share, a decrease of $25.3 million from the 1998 net loss of $77.2
million or $(1.97) per share. The principal factors causing these changes are
discussed below.
In 1998, we wrote off $30 million of in-process technology acquired in the
August 1998 merger with Seragen.
Product sales for 1999 were $9.1 million, as compared to $282,000 in 1998.
The increase is primarily due to revenues of $8.7 million from sales of ONTAK
and Panretin gel, approved by the FDA in February 1999.
Contract manufacturing sales for 1999 were $1.9 million. These sales were
generated under contract manufacturing agreements performed at the Marathon
facility acquired in January 1999.
Collaborative research and development and other milestone revenues for
1999 were $17.5 million, an increase of $4.4 million over 1998. The increase was
primarily due to payments of $2.5 million received from Ferrer Internacional
S.A. in connection with the marketing and distribution agreements entered into
in March 1999, $1.9 million recognized in September 1999 related to a sublicense
arrangement with Hoffmann-La Roche Inc., and $1.7 million recognized in June
1999 related to one-time payments received from X-Ceptor Therapeutics, partially
offset by additional payments of $903,000 received from American Home Products
in 1998 and a one-time payment of $686,000 received from Cytel
10
Corporation in 1998. The year to date comparison of collaborative research
and development and other milestone revenues is as follows ($,000):
Nine Months Ended
September 30,
1999 1998
------------ --------------
Eli Lilly and Company $7,646 $7,558
SmithKline Beecham, plc 2,763 2,694
Ferrer Internacional S.A. 2,500 -- --
Hoffmann-La Roche Inc. 1,860 -- --
X-Ceptor Therapeutics 1,711 -- --
Abbott Laboratories 600 900
American Home Products 376 1,279
Cytel Corporation -- -- 686
------------ --------------
$17,456 $13,117
============ ==============
Cost of products and services sold increased from $305,000 in 1998 to $8.2
million in 1999. The increase is due to manufacturing costs and royalty expenses
of $3 million associated with our new products as well as contract manufacturing
costs of $5.2 million incurred at the Marathon facility.
Research and development expenses were $44.8 million in 1999, compared to
$48.9 million in 1998. The decrease was primarily due to the stage of clinical
trials on potential products in 1999 as compared to 1998 and the completion of
the research portion of the American Home Products collaboration in September
1998. Selling, general and administrative expenses were $20 million in 1999, up
from $9.9 million in 1998. The increase was due primarily to increased costs
associated with the expansion of our sales and marketing activities related to
the launch of our new products.
Interest income declined from $2.4 million in 1998 to $1.9 million in 1999,
reflecting lower cash balances following the use of cash to fund development and
clinical programs and to support commercialization activities as well as lower
interest rates on the available cash balances.
Interest expense in 1999 was $8.9 million, an increase of $3 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).
We have significant net operating loss carry forwards for federal and state
income taxes which are available subject to Internal Revenue Code Sections 382
and 383 carryforward limitations.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through private and public offerings of our
equity securities, collaborative research and other milestone revenues, issuance
of convertible notes, capital and operating lease transactions, equipment
financing arrangements, investment income and product sales.
As of September 30, 1999, we had acquired a total of $43.6 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 an operating lease arrangement. Our current facility was occupied in
December 1997. We have entered into equipment financing arrangements to finance
future capital equipment purchases under arrangements expiring April 30, and
June 30, 2000. As of September 30, 1999, $2.6 million of financing was available
under those arrangements.
Working capital decreased to $35.5 million as of September 30, 1999, from
$51.1 million at the end of 1998. The decrease in working capital resulted from
decreases in cash and cash equivalents of $6.1 million and short-term
investments of $18.1 million used to finance operating activities offset in part
by an increase in accounts receivable of $1.5 million related to the sale of the
recently introduced products, a decrease in accounts payable of $6.9 million due
to a reduction in research and development activities, and lower deferred
revenues of $1.2 million due to the timing of completion of collaboration
agreements.
11
For the same reasons, cash and cash equivalents, short-term investments and
restricted short-term investments decreased to $47.9 million at September 30,
1999 from $72.5 million at December 31, 1998. We primarily invest our cash in
United States government and investment grade corporate debt securities.
In July 1999, we issued $40 million of zero coupon convertible notes under
the terms of our strategic alliance with Elan. In addition, in August 1999, we
and Elan agreed to amend the existing finance arrangement to provide that the
$30 million of additional financing available under the arrangement may be used
for general corporate purposes. Under this amended arrangement, we issued $20
million of zero coupon convertible notes in August 1999. For additional details,
please see Note 5 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. For additional
details, please see Note 6 of the notes to consolidated financial statements.
We believe our available cash, cash equivalents, short-term investments and
existing sources of funding will be adequate to satisfy our anticipated
operating and capital requirements through September 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded computer chip technology, including building controls, security
systems or laboratory equipment. It may also impact the ability to obtain
products or services if the provider encounters and fails to resolve year 2000
related problems.
We have established an active program to identify and resolve year 2000
related issues. This program includes the review and assessment of our
information technology and non-information technology systems, as well as third
parties with whom we have a material relationship. This program consists of four
phases: inventory, risk assessment, problem validation and problem resolution.
The inventory phase identified potential risks we face. They include among
others: computer software, computer hardware, telecommunications systems,
laboratory equipment, and facilities systems, such as security, environment
control and alarm; service providers, such as contract research organizations,
consultants and product distributors; and other third parties. The risk
assessment phase categorizes and prioritizes each risk by its potential impact.
The problem validation phase tests each potential risk, according to priority,
to determine if an action risk exists. In the case of critical third parties,
this step will include a review of their year 2000 plans and activities. The
problem resolution phase will, for each validated risk, determine the
method/strategy for alleviating the risk. It may include anything from
replacement of hardware or software to process modification to selection of
alternative vendors. This step also includes the development of contingency
plans.
We initiated this program in 1998. The inventory and risk assessment phases
were completed in 1998 while the problem validation phase was completed in the
second calendar quarter of 1999. Follow-up reviews of the progress being made by
critical third parties will continue. Contingency plans were developed and
continue to be revised based upon additional information from the follow-up
vendor reviews. As of the end of the third calendar quarter of 1999, the problem
resolution phase has been completed with only minor exceptions. These exceptions
do not involve major systems and generally consist of operational actions that
must occur on or before January 1, 2000.
To date, we had determined that some of our internal information technology
and non-information technology systems were not year 2000 compliant. We actively
corrected the identified problems. These corrections included the replacement of
hardware and software systems, the identification of alternative service
providers and the creation of contingency plans. We estimate that the cost of
correcting the identified problems was approximately $100,000 for hardware and
software upgrades or modifications. In addition, we estimate that we will incur
approximately $400,000 of internal personnel costs by the time the project is
completed. We do not believe that the cost of these actions will have a material
adverse affect on our
12
business. We expect that costs for completion of the project will be part of
normal operating expenses.
Any failure of our internal computer systems or of third-party equipment or
software we use, or of systems maintained by our suppliers, to be year 2000
compliant may adversely affect our business. In addition, adverse changes in the
purchasing patterns of our potential customers as a result of year 2000 issues
affecting them may adversely affect our business. These expenditures by
potential customers may result in reduced funds available to purchase our
products, which could adversely affect our business.
RISKS AND UNCERTAINTIES
The following is a summary description of some of the many risks we face in
our business. You should carefully review these risks in evaluating our business
and the businesses of our subsidiaries. You should also consider the other
information described in this report.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION INVOLVES A NUMBER OF
UNCERTAINTIES AND WE MAY NEVER GENERATE SUFFICIENT REVENUES FROM THE SALE OF
PRODUCTS TO BECOME PROFITABLE.
We were founded in 1987. We have incurred significant losses since our
inception. At September 30, 1999, our accumulated deficit was $447.5 million. To
date, we have received the majority of our revenues from our collaborative
arrangements. We expect to incur additional losses as we continue our research
and development, testing and regulatory activities and as we continue to build
manufacturing and sales and marketing capabilities. To become profitable, we
must successfully develop, clinically test, market and sell our products. Even
if we achieve profitability, we cannot predict the level of that profitability
or whether we will be able to sustain profitability. We expect that our
operating results will fluctuate from period to period as a result of
differences in when we incur expenses and receive revenues from product sales,
collaborative arrangements and other sources. Some of these fluctuations may be
significant.
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 they
are ineffective or cause harmful side effects,
o the products may fail to receive necessary regulatory approvals from
the FDA or other 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, at least initially, rely on another company to distribute
our products. The distributor will be responsible for providing many marketing
support services, including customer service, order entry, shipping and billing,
and customer reimbursement assistance. In addition, in Canada we are the sole
marketer of two cancer products other companies have developed. We may not be
able to continue to establish and maintain the 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
13
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.
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.
OUR PRODUCTS MUST CLEAR SIGNIFICANT REGULATORY HURDLES PRIOR TO MARKETING.
Before we obtain the approvals necessary to sell any of our potential
products, we must show through preclinical studies and clinical trials that each
product is safe and effective. Our failure to show any product's safety and
effectiveness would delay or prevent regulatory approval of the product and
could adversely affect our business. The clinical trials process is complex and
uncertain. The results of preclinical studies and initial clinical trials may
not necessarily predict the results from later large-scale clinical trials. In
addition, clinical trials may not demonstrate a product's safety and
effectiveness to the satisfaction of the regulatory authorities. A number of
companies have suffered significant setbacks in advanced clinical trials or in
seeking regulatory approvals, despite promising results in earlier trials. The
FDA may also require additional clinical trials 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 clinical supplies and patient
enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Delays in patient enrollment may result in
increased costs and longer development times. In addition, some of our
collaborative partners have rights to control product development and clinical
programs for products developed under the collaborations. As a result, these
collaborators may conduct these programs more slowly or in a different manner
than we had expected. Even if clinical trials are completed, we or our
collaborative partners still may not apply for FDA approval in a timely manner
or the FDA still may not grant approval.
WE MAY NOT BE ABLE TO PAY AMOUNTS DUE ON OUR OUTSTANDING INDEBTEDNESS.
14
We and our subsidiaries may not have sufficient cash to make required
payments due under existing debt. We, or our subsidiaries, may not have the
funds necessary to pay the interest on and the principal of existing debt when
due. 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 certain 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, in October 1997, we
issued a $2.5 million convertible note to SmithKline Beecham Corporation and in
November 1998, July 1999, and August 1999 we issued zero coupon convertible
notes with a total issue price of $100 million to Elan. Glycomed's failure to
make payments when due under its debentures would cause us to default under
these notes or other notes we may issue to Elan.
WE MAY REQUIRE ADDITIONAL STOCK OR DEBT FINANCINGS TO FUND OUR OPERATIONS
WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
We have incurred losses since our inception and do not expect to generate
positive cash flow to fund our operations for the 1999 calendar year and perhaps
for one or more subsequent years. As a result, we may need to complete
additional equity or debt financings to fund our operations. Our inability to
obtain additional financing could adversely affect our business. These
financings may not be available on acceptable terms. In addition, these
financings, if completed, still may not meet our capital needs and could result
in substantial dilution to our stockholders. For instance, the $100 million in
notes we issued to Elan are convertible into common stock at the option of Elan,
subject to some limitations. In addition, we may issue additional notes to Elan
with up to a total issue price of $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 certain 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 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
15
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 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 certain
circumstances. If any of our collaborative partners breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully, our product development under these agreements will be delayed or
terminated.
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.
Several drug companies and research and academic institutions have
developed technologies, filed patent applications or received patents for
technologies that may be related to our business. Others have filed patent
applications and received patents that conflict with patents or patent
applications we have licensed for our use, either by claiming the same methods
or compounds or by claiming methods or compounds that could dominate those
licensed to us. In addition, we may not be aware of all patents or patent
applications that may impact our ability to make, use or sell any of our
potential products. For example, United States patent applications are
confidential while pending in the Patent and Trademark Office, and patent
applications filed in foreign countries are often first published six months or
more after filing. Any conflicts resulting from the patent rights of others
could significantly reduce the coverage of our patents and limit our ability to
obtain meaningful patent protection. If other companies obtain patents with
conflicting claims, we may be required to obtain licenses to those patents or to
develop or obtain alternative technology. We may not be able to obtain any such
license on acceptable terms or at all. Any failure to obtain such licenses could
delay or prevent us from pursuing the development or commercialization of our
potential products.
16
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 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 CURRENTLY HAVE LIMITED MANUFACTURING CAPABILITY AND WILL RELY ON THIRD-PARTY
MANUFACTURERS.
We currently have no manufacturing facilities outside of Marathon's
facility and we rely primarily on others for clinical or commercial production
of our potential products. To be successful, we will need to manufacture our
products, either directly or through others, in commercial quantities, in
compliance with regulatory requirements and at acceptable cost. 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. This
in turn could delay our submission of products for regulatory approval and our
initiation of new development programs. In addition, although other companies
have manufactured drugs acting through IRs and STATs on a commercial scale, we
may not be able to do so at costs or in quantities to make marketable products.
Any of these events would adversely affect our business.
Our manufacturing process also may be susceptible to contamination, which
could cause the affected manufacturing facility to close until the contamination
is identified and fixed. In addition, problems with equipment failure or
operator error also could cause delays.
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.
17
WE ARE DEPENDENT ON OUR KEY EMPLOYEES, THE LOSS OF WHOSE SERVICES COULD
ADVERSELY AFFECT US.
We depend on our key scientific and management staff, the loss of whose
services could adversely affect our business. Furthermore, we are currently
experiencing a period of rapid growth, which requires us to hire many new
scientific, management and operational personnel. Accordingly, recruiting and
retaining qualified management, operations and scientific personnel to perform
research and development work also is critical to our success. Although we
believe we will successfully attract and retain the necessary personnel, we may
not be able to attract and retain such personnel on acceptable terms given the
competition among numerous drug companies, universities and other research
institutions for such personnel.
WE USE HAZARDOUS MATERIALS WHICH REQUIRES US TO INCUR SUBSTANTIAL COSTS TO
COMPLY WITH ENVIRONMENTAL REGULATIONS.
In connection with our research and development activities, we handle
hazardous materials, chemicals and various radioactive compounds. We cannot
completely eliminate the risk of accidental contamination or injury from the
handling and disposing of hazardous materials. In the event of any accident, we
could be held liable for any damages that result, which could be significant. In
addition, we may incur substantial costs to comply with environmental
regulations. Any of these events could adversely affect our business.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY VOLATILITY IN THE MARKETS.
The market prices and trading volumes for our securities, and the
securities of emerging companies like us, have historically been highly volatile
and have experienced significant fluctuations unrelated to operating
performance. Future announcements concerning us or our competitors may impact
the market price of our common stock. These announcements might include:
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.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED.
For a discussion of the risks associated with our year 2000 readiness,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
18
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 30, 1999, our investment portfolio included fixed-income
securities of $17.1 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. However, due to the short
duration of our investment portfolio, an immediate 10% change in interest rates
would have no material impact on our financial condition, results of operations
or cash flows.
We generally conduct business, including sales to foreign customers, in
U.S. dollars and as a result we have very limited foreign currency exchange rate
risk. The effect of an immediate 10% change in foreign exchange rates would not
have a material impact on our financial condition, results of operations or cash
flows.
19
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, 1999, Ligand issued to Elan International Services, Ltd. a
warrant exercisable into 91,406 shares of common stock for aggregate cash
consideration of $383,905. The exercise price was $13.80 per share exercisable
for a period of five years from the date of issuance. On October 6, 1999, the
exercise price was changed to $10 per share exercisable for a period of seven
years from October 6, 1999. On September 30, 1999, Ligand issued to Elan
International 52,742 shares of common stock for aggregate cash consideration of
$455,063. Each of the warrant and the shares of common stock were issued to a
single entity, Elan International, under an exemption from registration under
Section 4(2) of the Securities Act of 1933. Both the warrant and the shares of
common stock were issued under a contractual pre-emptive right held by Elan
International.
On September 1, 1999, Ligand issued to Warner-Lambert Company 289,750
shares of common stock for aggregate cash consideration of $2.5 million. The
shares were issued to a single entity, Warner-Lambert, under an exemption from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 6 (A) EXHIBITS
Exhibit 3.1(1) Amended and Restated Certificate of Incorporation of Ligand
Pharmaceuticals Incorporated (filed as Exhibit 3.2).
Exhibit 3.2(1) Bylaws of Ligand Pharmaceuticals Incorporated, as amended
(filed as Exhibit 3.3).
Exhibit 3.3(1) Amended Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred Stock of
Ligand Pharmaceuticals Incorporated (filed as Exhibit 3.4).
Exhibit 10.1(2) Research, Development and License Agreement by and between
Warner-Lambert Company and Ligand Pharmaceuticals
Incorporated dated September 1, 1999.
Exhibit 10.2(2) Stock Purchase Agreement by and between Ligand Pharmaceuticals
Incorporated and Warner-Lambert Company dated
September 1, 1999.
Exhibit 10.3 Thirteenth Addendum to Amended Registration Rights
Agreement dated June 24, 1994, between Ligand Pharmaceuticals
Incorporated and Warner-Lambert Company, effective
September 1, 1999.
Exhibit 10.4(2) Nonexclusive Sublicense Agreement, effective
September 8, 1999, by and among Seragen, Inc., Hoffmann-La
Roche Inc. and F. Hoffmann-La Roche Ltd.
Exhibit 10.5(2) Amendment to Development, Licence and Supply Agreement between
Ligand Pharmaceuticals Incorporated and Elan Corporation, plc
dated August 20, 1999.
Exhibit 10.6 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.
Exhibit 10.7(2) License Agreement effective June 30, 1999 by and between
Ligand Pharmaceuticals Incorporated and X-Ceptor
Therapeutics, Inc.
Exhibit 10.8(3) Securities Purchase Agreement dated November 6, 1998 among
Elan Corporation, plc, Elan International Services, Ltd. and
Ligand Pharmaceuticals Incorporated (filed as Exhibit 1).
Exhibit 10.9(3) Development, Licence and Supply Agreement dated
November 6, 1998 between Elan Corporation, plc and Ligand
Pharmaceuticals Incorporated (filed as Exhibit 2).
Exhibit 10.10 Zero Coupon Convertible Senior Note Due 2008 dated
July 14, 1999 between Ligand Pharmaceuticals Incorporated
and Monksland Holdings, B.V., No. R-3.
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Exhibit 10.11 Zero Coupon Convertible Senior Note Due 2008 dated
August 31, 1999 between Ligand Pharmaceuticals Incorporated
and Monksland Holdings, B.V., No. R-4.
Exhibit 10.12(3) Letter Agreement dated August 13, 1999 among Ligand
Pharmaceuticals Incorporated, Elan International Services,
Ltd. and Elan Corporation, plc (filed as Exhibit 3).
Exhibit 10.13(2) Stock Purchase Agreement dated September 30, 1999 by and
between Ligand Pharmaceuticals Incorporated and Elan
International Services, Ltd.
Exhibit 10.14 Fourteenth Addendum to Amended Registration Rights Agreement
dated June 24, 1994 between Ligand Pharmaceuticals
Incorporated and Elan International Services, Ltd., effective
September 30, 1999.
Exhibit 10.15 Series X Warrant dated August 4, 1999 between Ligand
Pharmaceuticals Incorporated and Elan International Services,
Ltd.
Exhibit 10.16 Twelfth Addendum to Amended Registration Rights Agreement
dated June 24, 1994 between Ligand Pharmaceuticals
Incorporated and Elan International Services, Ltd., effective
August 4, 1999.
Exhibit 27.1 Financial Data Schedule
(1) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the numbered exhibit filed with, the
Registration Statement on Form S-4 (No. 333-58823) filed on July 9, 1998,
as amended.
(2) Certain confidential portions of this exhibit were omitted by means of
marking such portions with an asterisk. This exhibit has been filed
separately with the Secretary of the Commission with the asterisks pursuant
to the Company's Application Requesting Confidential Treatment under Rule
24b-2 of the Securities Act of 1934.
(3) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the numbered exhibit filed with, the Schedule
13D of Elan Corporation, plc, filed on January 6, 1999, as amended.
ITEM 6 (B) REPORTS ON FORMS 8-K
No reports on Form 8-K were filed during the quarter ended on September 30,
1999.
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LIGAND PHARMACEUTICALS INCORPORATED
September 30, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ligand Pharmaceuticals Incorporated
Date: November 15, 1999 By /s/Paul V. Maier
-------------------------
Paul V. Maier
Senior Vice President and Chief Financial Officer
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