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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD COMMISSION FILE
NUMBER: 0-20720
FROM ______________ TO _____________ .
LIGAND PHARMACEUTICALS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0160744
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10275 SCIENCE CENTER DRIVE 92121-1117
SAN DIEGO, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 550-7500
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
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK, $.001 PAR VALUE
(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 28, 1998 was $488,205,375. For purposes of this
calculation, shares of Common Stock held by directors, officers and 5%
stockholders known to 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 28, 1998 the registrant had 38,594,979 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, 1997, in connection with the Registrant's 1998 Annual
Meeting of Stockholders, referred to herein as the "Proxy Statement", are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The discussion of the Company's 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. The Company undertakes no obligation to
release publicly the results of any revisions to these forward-looking
statements to reflect events or circumstances arising after the date hereof.
OVERVIEW
Ligand Pharmaceuticals Incorporated ("Ligand" or the "Company"), a Delaware
corporation, is a biopharmaceutical company engaged in the discovery and
development of small-molecule drugs which mimic or block the activities of
various hormones and cytokines to regulate gene activity and the genetic
processes affecting many diseases. The Company's drug discovery and development
programs are based on its proprietary technologies involving two natural
mechanisms that regulate gene activity: (i) hormone-activated Intracellular
Receptors ("IRs") and (ii) cytokine-activated Signal Transducers and Activators
of Transcription ("STATs"). IRs play key roles in many disease processes,
including certain cancers, disorders of women's health, cardiovascular diseases,
metabolic diseases, inflammatory disorders and skin diseases. Similarly, STATs
influence many biological processes, including cancer, metabolic diseases,
inflammation and blood cell formation. In programs acquired in connection with
the merger with Glycomed Incorporated ("Glycomed") in May 1995 ("the Merger"),
Ligand is also seeking, through licensees, to develop orally active drugs to
modulate biological processes involving complex carbohydrates and other cell
surface components for the treatment of inflammation and cancer.
Ligand currently is developing new drugs through a combination of internal
and collaborative programs, including substantial collaborations with Eli Lilly
and Company ("Lilly"), SmithKline Beecham Corporation ("SmithKline Beecham"),
Wyeth-Ayerst, the pharmaceutical division of American Home Products ("AHP"),
Abbott Laboratories ("Abbott"), Glaxo-Wellcome plc ("Glaxo"), Sankyo Company,
Ltd. ("Sankyo"), Pfizer Inc ("Pfizer") and Allergan, Inc., ("Allergan"). Ligand
has initiated human clinical trials for five potential products: the retinoids
Panretin Capsules (LGD1057), Panretin Gel (LGD1057), LGD1550 Capsules, Targretin
Gel (LGD1069) and Targretin Capsules (LGD1069). Ligand also has 25 non-retinoid
compounds in various stages of development, including a three compound series
being developed by AHP, as well as two compounds which are now under development
by Pfizer for osteoporosis.
IRs are members of a family of hormone-activated proteins that act inside
the cell to directly regulate gene expression and cellular function. Although
the effectiveness of IRs as drug targets has been demonstrated by drugs acting
through IRs already on the market, such as retinoids (e.g., Retin-A(R) for acne
and psoriasis) and sex steroid modulators (e.g., estrogens and progesterones for
hormone replacement therapy and contraception, tamoxifen for breast cancer,
flutamide for prostate cancer), the utility of these first-generation drugs has
been limited by their often significant side effects. STATs are a recently
discovered family of proteins that act inside cells to regulate gene expression
in response to various cytokines such as interferons, interleukins and
hematopoietic growth factors. Imbalances in the activity of these cytokines can
lead to various pathological conditions, such as inflammation. While certain
recombinant cytokines and other proteins which bind to cell surface receptors
have proven to have clinical utility in the treatment of disease, they must be
administered by injection and can be difficult to manufacture.
Ligand and its exclusive academic collaborators have advanced the
understanding of the activities of hormones and hormone-related drugs and have
made scientific discoveries relating to IR and STATs technologies. Ligand
believes that its expertise in these technologies will enable the Company to
develop novel, small-molecule pharmaceutical products acting through IRs or
STATs with more target-specific
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properties than currently available products, resulting in either improved
therapeutic and side effect profiles and new indications for IRs or novel
mechanisms of action and oral bioavailability for STATs.
Through a combination of internal and partnered programs, supplemented by
selective in-licensing of approved cancer products, Ligand has built a pipeline
of numerous potential products and products in advanced preclinical testing,
clinical development or commercialization stages. The most advanced of these
potential products and products are as follows:
PROGRAM PRODUCT DISEASE INDICATION DEVELOPMENT PHASE(1)
- ---------------------------------------------------------------------------------------------------------------
Retinoids Panretin(TM) Gel (LGD1057) Kaposi's Sarcoma ("KS") III
Panretin(TM) Capsules Cancers including KS, other cancers II
Psoriasis II
LGD1550 Capsules Cancers I/IIA
Targretin(TM) Gel (LGD1069) Cutaneous T cell lymphoma ("CTCL") III
Actinic Keratoses II
Targretin(TM) Capsules CTCL II/III
Lung cancer, breast cancer II/III
Cancers, including, kidney, KS, II
prostate, ovarian
Metabolic diseases (diabetes) II(2)
Psoriasis II
Sex steroids Droloxifene(3) Osteoporosis II
CP336,156(4) Osteoporosis II
Oncology Proleukin(R)(5) Kidney cancer Marketed in Canada
PHOTOFRIN(R)(5) Bladder cancer, esophageal cancer Marketed in Canada
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(1) "Development Phase" refers to the current stage of development of the most
advanced indication. See "Business -- Product Development Program" for a
more detailed description of the stages of development for these compounds.
(2) Targretin Capsules has entered Phase II human clinical trials in diabetes in
March 1997 in Europe.
(3) Droloxifene is a compound owned by Pfizer. Ligand performed work on
droloxifene at Pfizer's request. Ligand and Pfizer entered into a settlement
agreement with respect to a lawsuit in April 1996. Under the terms of the
settlement agreement, the Company is entitled to receive milestone payments
if Pfizer continues development and royalties if Pfizer commercializes the
product. See "Business -- Strategic Alliances -- Pfizer Inc."
(4) A compound discovered through the Company's collaborative relationship with
Pfizer to which Pfizer has retained marketing rights. See
"Business -- Strategic Alliances -- Pfizer Inc".
(5) In-licensed product.
Ligand is conducting human clinical trials with five products. Panretin
Capsules, Panretin Gel, Targretin Capsules, Targretin Gel and LGD1550 Capsules
are retinoids that may be useful for the treatment of various cancers, such as
KS, CTCL, lung and prostate cancer or breast cancer and diseases of the skin and
are being developed by Ligand. The Company has completed two pivotal Phase III
trials for Panretin Gel in KS to support an NDA which Ligand intends to file in
early 1998. The Company has completed two Phase II clinical trials for Panretin
Capsules in KS with plans to complete development work and file an NDA in 1999.
Ligand is also performing clinical trials for the retinoids Targretin Capsules
and Targretin Gel. Interim data from a Phase I/II study of Targretin Gel in CTCL
have demonstrated significant activity, and based on discussions with the FDA on
trial design, the Company has launched Phase III clinical trials in this
indication with Targretin Gel and Phase II/III trials in this indication with
Targretin Capsules, each intended to support NDA filings in 1998 or 1999. The
Company has received reports on interim findings from the University of Texas
M.D. Anderson Cancer Center with respect to certain Phase II/III trials of
Targretin Capsules intended to support an NDA in CTCL. See "Business -- Product
Development Program -- Retinoids -- Targretin Gel and Targretin Capsules." The
Company has launched Phase II/III clinical trials with Targretin
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Capsules in lung cancer. There can be no assurance that the clinical trials will
proceed as planned or that any drugs will be successfully developed or
commercialized.
To date, Ligand has entered into collaborations with eight corporate
partners which include, Lilly (for metabolic diseases, including diabetes,
obesity, dislipedemia, insulin resistance and cardiovascular diseases associated
with insulin resistance and obesity), SmithKline Beecham (for hematopoietic
growth factor mimetics for use in oncology and treatment of anemia), AHP (for
women's health, e.g., hormone replacement therapy, osteoporosis, fertility
control), Abbott (for inflammatory diseases, utilizing selected IR-based
approaches), Sankyo (for inflammatory diseases, utilizing selected Glycomed
technologies), Glaxo (for atherosclerosis and other diseases affecting the
cardiovascular system), Allergan (for oncology and dermatology) and Pfizer (for
osteoporosis). These partners provide discovery resources complementary to those
of Ligand and are expected to facilitate the development and commercialization
of potential products for primary care markets. The collaborative partners have
also been an important funding source for Ligand, contributing approximately
two-thirds of its invested capital to date. In addition to Allergan Ligand
Retinoid Therapeutics, Inc. ("ALRT"), the research and development company
formed by Ligand and Allergan, which was funded with net proceeds of $94.3
million to accelerate research and development of certain retinoids ( see
"Strategic Alliances -- Allergan, Inc."), Ligand's research activities have been
supported by commitments from its partners of up to $141.1 million for research
funding. Ligand's collaborative partners have also committed up to $127.8
million of additional equity and convertible notes to Ligand, of which $122.8
million has been received through December 31, 1997, and the remaining $5.0
million is subject to Ligand attaining certain milestones.
In September 1997, Ligand exercised its option to purchase all of the
3,250,000 outstanding shares of Callable Common Stock of ALRT at $21.97 per
share, the original price applicable for purchase from June 3, 1997 to June 3,
1998. Simultaneously, Allergan exercised its option to acquire an undivided
one-half interest in the assets and technologies of ALRT. Certain existing
agreements between Allergan and Ligand had provided for joint development and
joint commercialization of ALRT compounds following exercise of the buyout
option. Allergan and Ligand agreed to amend and restate those agreements so that
ALRT compounds and development programs were divided between Allergan and
Ligand, and each party received exclusive rights under the ALRT technology for
use with their respective compounds and programs. Products and compounds for
which Ligand received worldwide rights include Panretin(TM)Gel and
Panretin(TM)Capsules, LGD1268, LGD1324 and LGD1550. Allergan received ALRT4310,
ALRT326 and ALRT4204 and $4.5 million in cash and rights to future royalties on
certain Ligand products. Allergan and Ligand also completed a lottery to divide
the approximately 2,000 retinoid compounds remaining in the ALRT compound
library as of the ALRT closing date in November 1997. Each party will pay
royalties to the other on net sales, if any, of the successfully developed
compounds it received directly or in the lottery. See "Business -- Strategic
Alliances -- Allergan, Inc."
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BUSINESS STRATEGY
Ligand's business strategy is to develop new drugs using its IR and STATs
technologies through both internal and collaborative programs. Ligand's internal
programs focus on the discovery, development and marketing of small-molecule
drugs that address cancer, gynecological diseases and male hormonal imbalances,
which are generally treated by medical specialists. An outgrowth of these
programs has led to a development program in metabolic disease. Ligand also
seeks to in-license or acquire products in these medical specialty markets which
are in late-stage clinical development or which have been previously approved by
regulatory authorities. Ligand's collaborative programs focus on building a
royalty-based business through partnerships with large pharmaceutical companies
that apply Ligand's technologies to discover drugs for primary care markets,
such as markets for certain cardiovascular, inflammatory, metabolic and other
diseases, as well as broad applications for women's and men's health.
Ligand's internal efforts have been focused primarily on the discovery and
development of improved retinoids, sex steroid receptor agonists and antagonists
and cytokine agonists for use in specialty market applications, principally
cancer, gynecological disorders and male hormonal imbalances. Products for these
specialty markets typically require less resource-intensive clinical trials and
can be marketed by a targeted sales force. Ligand has initiated human clinical
trials for five products: the retinoids Panretin Capsules, Panretin Gel, LGD1550
Capsules, Targretin Capsules and Targretin Gel.
Externally, Ligand is collaborating with large pharmaceutical companies,
with the goal of building a royalty-based business through the application of
its technologies to primary care markets, broad aspects of women's and men's
health, such as cardiovascular, inflammatory, metabolic and other diseases.
Ligand has established eight major collaborative arrangements to discover and
develop drugs that address disorders principally treated by primary care
physicians, specifically hematopoiesis with SmithKline Beecham, women's health
disorders with AHP, inflammatory diseases with Abbott, cardiovascular diseases
with Glaxo, osteoporosis with Pfizer, oncology and dermatology with Allergan,
metabolic disease with Lilly, and inherited a collaboration through the Glycomed
merger, with Sankyo in inflammation based on cell adhesion research. Ligand
believes its collaborators have the significant resources, including clinical
and regulatory experience, manufacturing capabilities and marketing
infrastructure, needed to develop and commercialize drugs for these markets.
Each of these arrangements provides 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, with Ligand receiving research revenue during the drug
discovery stage, additional milestone revenue for successful compounds moving
through clinical development and milestone revenue as well as royalty revenue on
sales of drugs marketed by its collaborators.
SCIENTIFIC BACKGROUND AND DRUG DISCOVERY OPPORTUNITIES
INTRACELLULAR RECEPTORS ("IRS")
Hormones are natural chemicals within the body that control important
physiological processes, including reproduction and cell growth and
differentiation. The known non-peptide hormones are the retinoids, the sex
steroids (estrogens, progesterones and androgens), the adrenal steroids
(glucocorticoids and mineralocorticoids), vitamin D and thyroid hormone. The
understanding of hormones and their actions has increased substantially in the
last 10 years. Driving this rapid expansion of knowledge has been the discovery
of the family of IRs through which all the known small-molecule (i.e.,
non-peptide) hormones act. Dr. Ronald Evans at The Salk Institute of Biological
Studies ("the Salk Institute"), Ligand's scientific co-founder and exclusive
consultant, was the first to clone and characterize an IR in 1985. Since that
time, approximately 75 IRs have been defined and characterized, many by Ligand's
scientists or its exclusive collaborators. IRs play key roles in a variety of
diseases, including certain cancers, gynecological disorders, and
cardiovascular, metabolic, inflammatory and skin diseases.
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 which mimic or block hormone action may be useful
in the
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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 has been demonstrated by
currently available drugs acting through IRs for many of these 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),
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 psoriasis).
Ligand's early recognition of the drug discovery opportunities inherent in
emerging IR research has enabled it to build a strong proprietary position and
accumulate substantial expertise in IRs applicable to drug discovery and
development. Building on its recent scientific findings about the molecular
basis of hormone action, Ligand has created proprietary new tools to explore and
manipulate non-peptide hormone action for potential therapeutic benefit. The
Company has exclusive relationships in the field of IRs with Dr. Ronald Evans, a
professor in the Gene Epresion Laboratory of The Salk Institute, and Dr. Bert
O'Malley, Professor and Chairman of the Center for Reproductive Biology at
Baylor College of Medicine ("Baylor"), where many of the core discoveries in IR
research have been made. The Company has exclusively licensed most of these
discoveries. Ligand has also developed proprietary IR assays that it believes
can rapidly and accurately predict the probable therapeutic and side effect
profiles of compounds with potential as drugs. The Company believes that its IR
expertise will enable it to discover and develop drugs that have equal or
greater therapeutic efficacy and reduced incidence and severity of side effects
compared to existing drugs acting through IRs. The Company also believes these
drugs will be orally bioavailable.
In many diseases, there is an imbalance of cytokine action. For example,
some inflammatory conditions may represent excessive actions of certain
interleukins or interferons. 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, resulting in
anemia. Recombinant human EPO protein (Epogen(R)) can be administered to
effectively correct this anemia, but must be injected. Many other cytokines are
useful as injected protein medicines, including interferons (Intron-A(R),
Roferon(R), Betaseron(R)) interleukins (Proleukin(R), which Ligand markets in
Canada), hematopoietic growth factors (Epogen(R), Neupogen(R)) and others. Each
of these and many other cytokines appears to exert their actions through
JAK/STAT signal transduction pathways. Ligand is utilizing JAK/STAT technology
to seek low molecular weight compounds which can 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 are small molecules, whereas the cytokines themselves are proteins, they
offer potential significant advantages over current cytokine-based compounds,
including oral activity and greater ease of manufacture and improved stability.
LIGAND'S IR DRUG DISCOVERY OPPORTUNITIES
Ligand and its collaborators have made major discoveries pertaining to IRs
and small molecule hormones and compounds which interact with these IRs. These
discoveries include: (i) the identification of the IR superfamily, (ii) the
recognition of IR subtypes, (iii) the discovery of orphan IRs and (iv) the
heterodimer biology of RXR selective compounds. Ligand believes 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. The IRs are similar
in both structure and mechanisms of action. Human IRs for all of the known
non-peptide hormones have now been cloned, primarily by Ligand's scientists or
its collaborators, building an understanding of the similar underlying
mechanisms of action shared by the non-peptide hormones.
Ligand believes that the relatedness of the IRs for the non-peptide
hormones has major implications for drug discovery. IRs share a common mechanism
of action, which often enables drug discovery insights about
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one IR to be directly applied to other members of the IR superfamily, bringing
synergy to Ligand's 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, resulting in often significant side effects. The understanding
that the IRs are structurally similar has enabled Ligand 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 and four subtypes of the IRs for thyroid
hormone. Patent applications covering most of these IR subtypes have been
exclusively licensed by Ligand. Ligand believes that drugs that activate a
subset of IR subtypes will allow more specific pharmacological intervention
better matched to therapeutic need. Ligand's clinical candidate Targretin was
discovered as a result of Ligand's understanding of retinoid receptor subtypes.
Orphan IRs. Over 50 additional members of the IR superfamily which do not
interact with the known non-peptide hormones or vitamin derivatives have been
discovered. Ligand has an exclusive license to patent applications covering many
of these orphan IRs. Ligand believes 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. Ligand has devised strategies
to isolate small molecules that interact with orphan IRs and is working to
identify new orphan IRs as drug targets and to identify their natural and
synthetic modulators as possible drug candidates. For example, the RXRs, one
subfamily of IRs activated by certain retinoids, were orphan IRs when initially
discovered. Panretin was discovered by virtue of its activation of the RXR
retinoid receptors.
RXR Heterodimer Biology. Retinoids that bind to the RXR family deliver
their therapeutic effects through partnered IRs. Recently scientists have
discovered that RXRs are obligate partners in these IR pairs through all
tissues. These IR pairs consist of one RXR and one of a variety of other IRs,
such as RARs, PPARs or thyroid hormone receptors. While RXRs are widely
expressed, their IR partners are more discreet, being expressed in selective
tissues, such as liver, fat or muscle. As a result, compounds that bind RXRs
offer the unique potential to be broadly active compounds that can treat a
variety of diseases, including metabolic diseases.
In animal 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.
Ligand has established collaborations with major pharmaceutical companies
to discover and characterize small molecules to modulate specific IR pathways.
LIGAND'S STAT DRUG DISCOVERY OPPORTUNITIES
SIGNAL TRANSDUCERS AND ACTIVATORS OF TRANSCRIPTION ("STATS")
STATs are a recently discovered family of proteins that are a key part of
the signal transduction pathway for a variety of biologically important peptide
hormones (e.g., interferons, interleukins, leptin and hematopoietic growth
factors) collectively termed Extracellular Signaling Proteins ("ESPs"). STATs
play a role in the biology of ESPs functionally analogous to that played by IRs
in the biology of the non-peptide hormones: both STATs and IRs are families of
transcription factors which change cell function by selectively turning on
particular genes in response to circulating signals which impinge on cells. When
various cytokines 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 increase their expression, thereby modulating physiologic or
pathophysiologic processes.
In many diseases, there is an imbalance of cytokine action. For example,
some inflammatory conditions may represent excessive actions of certain
interleukins or interferons. In these conditions it may prove
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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, EPO release by the damaged kidneys results
in the inadequate production of red blood cells, causing anemia. Recombinant
human EPO protein (Epogen) 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, Roferon, Betaseron),
interleukins (e.g., Proleukin, which Ligand markets in Canada), hematopoietic
growth factors (Epogen, Neupogen) and others. Each of these and many other
cytokines appear to exert their actions through JAK/STAT signal transduction
pathways.
Ligand believes that its JAK/STAT technologies may lead to the discovery of
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, whereas the cytokines themselves are proteins,
they offer potentially significant advantages over current cytokine-based
compounds, including oral bioavailability, greater ease of manufacture and
improved stability.
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 Ligand's exclusive collaborators, Dr. James Darnell at
Rockefeller University and Dr. David Levy at New York University ("NYU"), and
were described initially in August 1992. Since then, over half a dozen members
of the STAT family have been identified and a large number of ESPs in addition
to interferons have also been shown to utilize STAT signal transduction. Among
the ESPs which have been shown to use STAT signaling pathways are the
interferons (alpha, beta and gamma), the hematopoietic colony stimulating
factors (interleukin-3, EPO, G-CSF, GM-CSF and thrombopoietin), many of the
interleukins (including IL-2, IL-4, IL-6, IL-12 and IL-13, the related ESPs
Oncostatin M and Leukemia Inhibitory Factor), the cytokine leptin and several
protein hormones (growth hormone and prolactin).
Based on insights into JAK/STAT signal transduction and the generation of
the necessary reagents, Ligand has developed STAT technologies for drug
discovery which include cell culture-based high throughput screens to identify
small molecule drugs and biochemical assays that define where in the JAK/STAT
signal transduction pathways the small molecules act. Ligand believes that its
JAK/STAT drug discovery technology can produce drug candidates to control gene
expression to address a broad range of uses, including treating cancer,
providing hematopoietic support for cancer patients undergoing chemotherapy or
bone marrow transplantation, combating inflammation and viral or other
infections, treating anemia in chronically ill patients (e.g., those with renal
failure), treating dwarfism and related disorders of stature and enhancing
immune function.
Ligand is using its high throughput screening assays to discover small
molecule drugs to act as interferon agonists for potential application in
various cancers and viral diseases. Ligand has 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. Ligand has additional
assays under development to allow high throughput screening for and subsequent
optimization of small molecule drugs to act through JAK/STAT signaling pathways
to block or mimic other medically significant ESPs.
GLYCOMED'S COMPLEX CARBOHYDRATES
Ligand, through its wholly owned subsidiary Glycomed, is seeking drugs that
modulate processes involving complex carbohydrates and other components of the
extracellular matrix. The cells in the body are in many cases embedded in
various gelatinous or fibrous background substances such as proteins (e.g.,
collagen) or glycoproteins and mucopolysaccharides (various complex biological
polymers containing amino acid and sugar building blocks). This background
substance, termed extracellular matrix, can exert important effects on cells,
modifying their function and controlling their migration. Additionally, related
complex carbohydrates, glycoproteins and mucopolysaccharides are located on the
surfaces of cells, where they can
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play important roles in controlling interactions among various cells, including,
for example, the attachment of white blood cells to the inner linings of blood
vessels, a necessary part of some inflammatory responses.
Glycomed has expertise and core technology relating to the biology and
chemistry of complex carbohydrates and related components of the extracellular
matrix. Ligand is focusing Glycomed's expertise and core technologies to seek
small molecule, potentially orally active drugs to modulate the biological
processes involving complex carbohydrates and other cell surface and
extracellular matrix components for the treatment of inflammation and cancer.
One Glycomed compound is Galardin(TM), a matrix metaloproteinase inhibitor
in-licensed by Glycomed prior to the Merger. In Phase II/III trials,
Galardin(TM) treated patients had significantly lower incidence of corneal
perforation. Since the Merger, the Company has sought a partner to further
develop the product. Sankyo has Galardin(TM) under development in Phase II
trials in Japan for ophthalmic indications.
LIGAND'S DRUG DISCOVERY AND DEVELOPMENT PROCESS
Ligand's advanced molecular-based IR research focuses on analyzing the
biological systems regulated by IRs to choose the most promising molecular
targets for drug discovery. After selecting a target, the next critical step in
drug discovery is the identification of suitable lead compounds (chemical
structures suitable as starting points for optimization as drugs by the
application of medicinal chemistry). Traditional drug discovery generally uses
animal models or biochemical screening systems for lead compound identification.
Animal models are relatively slow, complicated and expensive; and results in
animals do not always correlate to those obtained in humans. Biochemical assays
are fast and inexpensive, but give limited information and frequently identify
poor lead compounds. Ligand has developed a hybrid approach to lead compound
identification that retains the best features and avoids the pitfalls of
traditional methods to discover leads.
Ligand has developed a proprietary cell-culture based assay system for
IR-modulating small molecules, referred to as the co-transfection assay, that
simulates the actual cellular processes controlled by IRs. The system is (i)
fast, compared to animal models; (ii) capable of cost-effective, high throughput
screening of thousands of compounds per week; (iii) highly predictive of in vivo
pharmacology of both agonists and antagonists; (iv) able to separate complex
targets, such as receptor subtypes; and (v) conducted using the actual human
receptors which are the ultimate drug targets. Ligand's co-transfection assay is
a key component of Ligand's IR drug discovery and development programs, and
facilitates both the identification of lead compounds and their optimization as
clinical candidates.
The co-transfection assay is able to preclinically detect both agonists and
antagonists of specific IRs. It determines not only whether a compound interacts
with a particular human IR, but also whether this interaction mimics or blocks
the effects of the natural regulatory molecules on target gene expression. The
Company's assays also enable the Company to detect useful lead compounds which
could be missed by alternative biochemical screens or animal models. Ligand has
successfully automated its co-transfection assays for high throughput screening
of thousands of compounds per week. Ligand's screening in co-transfection assays
has resulted in the identification of lead compounds for novel estrogen
agonists, non-steroidal progestins and antiprogestins, non-steroidal
antiandrogens, non-steroidal glucocorticoid agonists, new retinoid analogues and
PPAR agonists that are now undergoing further investigation.
Ligand has developed similar automated high throughput assays to identify
lead compounds acting as agonists or antagonists of selected JAK/STAT signaling
pathways for particular ESPs such as interferons, certain interleukins and
selected hematopoietic growth factors. Additional STAT-based screening assays
are under development.
Once Ligand verifies a lead compound for a particular target, the next
critical process is optimization of the compound to achieve specificity and
appropriate properties as a drug. Specificity is achieved when the compound
interacts only with the intended target molecule and not with related but
unintended molecules. Ligand's unique and comprehensive ability to assess
compounds preclinically for interactions with all the known human IRs or in
various STAT pathways is a significant advantage in obtaining specificity in a
lead compound. Optimization of a lead compound is an iterative process in which
analogues of the lead compound, designed and synthesized by medicinal chemists,
are assayed for activity. The results obtained with each set of
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analogues guide the medicinal chemists in the design of compounds with greater
specificity. The co-transfection assay produces results which enhance the
accuracy and efficiency of this iterative optimization process. Ligand believes
the STAT-based assays may have similar advantages.
Ligand believes that its combination of modern molecular and traditional
approaches to drug discovery will accelerate its progress to develop new drug
candidates. To that end, Ligand has built a strong multidisciplinary team,
consisting of molecular biologists, medicinal chemists, pharmacologists and
specialists in drug metabolism and distribution, and other pharmaceutical
scientists. Ligand believes the similarities between hormone and cytokine
mechanisms of action allow it to leverage its drug discovery resources
efficiently in the IR and STATs areas.
PRODUCT DEVELOPMENT PROGRAM
Ligand, as part of its overall business strategy, is developing new drugs
through a combination of internal and collaborative programs: (i) internally, by
focusing on the discovery, development and marketing of small-molecule drugs
that address diseases, such as cancer, gynecological disorders and male hormonal
imbalances, treated by medical specialists, and by seeking to in-license or
acquire later-stage products in these medical specialties; and (ii) by
collaborating with large pharmaceutical companies, with the goal of building a
royalty-based business through the application of its technologies to primary
care markets, such as markets for certain cardiovascular, inflammatory,
metabolic and other diseases, as well as broad applications for women's and
men's health.
Ligand is currently pursuing five major internally-funded and collaborative
drug discovery programs: four are based on specific IRs (the retinoid, sex
steroid and glucocorticod receptor programs for cancer, skin and eye disease,
metabolic disease, men's and women's health, and inflammatory disease); one is
based on STATs; and one is based on Glycomed's inhibitors of cell adhesion
technology. Additionally, Ligand has in-licensed and is distributing two
anticancer products in Canada for which further indications are being sought.
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The following table summarizes the current status of Ligand's product
research, development and marketing programs:
DEVELOPMENT MARKETING
PROGRAM DISEASE INDICATION PHASE(1) RIGHTS
- ---------------------------------------------------------------------------------------------------------
RETINOIDS
Panretin Gel (LGD1057)(2) KS Phase III Ligand worldwide
Panretin Capsules(2) Cancers, including., KS, MDS, Phase II Ligand worldwide
Psoriasis Phase II Ligand worldwide
LGD1550 Capsules(2) Cancer Phase I/IIA Ligand worldwide
Targretin Gel (LGD1069)(3) CTCL Phase III Ligand worldwide
Actinic keratoses Phase II Ligand worldwide
Targretin Capsules(4) CTCL Phase II/III Ligand worldwide
Lung cancer, breast cancer Phase II/III Ligand worldwide
Cancers, including, kidney, Phase II Ligand worldwide
prostate, ovarian, KS
Psoriasis Phase II Ligand worldwide
AGN4310(2) Skin Disorders Development Allergan
candidate
DIABETES AND METABOLIC DISEASE
Targretin Capsules(3) Type II diabetes Phase II Lilly
LGD1268 and LGD1324(3) Type II diabetes Development Lilly
candidate
AGN 4204 and AGN4326 Type II diabetes Preclinical Allergan
PPAR Modulators(3) Metabolic and cardiovascular Research Lilly
diseases
HNF4(3) Metabolic and cardiovascular Research Lilly
diseases
Ob gene Pathway(3) Metabolic and cardiovascular Research Lilly
diseases
SEX STEROIDS
Droloxifene(5) Breast cancer prevention Phase II Pfizer
Osteoporosis Phase II Pfizer
Estrogen agonist Osteoporosis Phase II Pfizer
(CP336,156)(6)
Estrogen antagonist Breast cancer Lead compounds AHP/Ligand(7)
selected
Progesterone antagonists Cancer, endometriosis, uterine Lead compounds AHP/Ligand(7)
(LG1447 series) fibroids selected
Progesterone agonists Breast cancer, hormone Lead compounds Ligand
(LG2527/2716 series) replacement therapy selected
Estrogen agonists Osteoporosis Phase I AHP
(TSE424)
Tissue selective estrogen or Gynecological disease, Lead compounds AHP/Ligand(7)
progesterone agonists and antagonists cardiovascular disease, hormone selected
replacement therapy
Androgen antagonists Prostate cancer, BPH and Development Ligand worldwide
(LGD1331 series) hirsutism candidate
Androgen agonists Male hormone replacement Lead compounds Ligand worldwide
therapy, osteoporosis selected
CARDIOVASCULAR DISEASE
Lipid regulators - LDL lowering Atherosclerosis Lead compounds Glaxo
selected
PPAR modulators Atherosclerosis and other Lead compounds Glaxo
disorders affecting the selected
cardiovascular system
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DEVELOPMENT MARKETING
PROGRAM DISEASE INDICATION PHASE(1) RIGHTS
- ---------------------------------------------------------------------------------------------------------
INFLAMMATORY DISEASE
Glucocorticoid agonists Rheumatoid arthritis, Preclinical Abbott/Ligand(7)
inflammatory bowel disease,
asthma, dermatitis
GLYCOMED INFLAMMATORY
DISEASE
Galardin (TM) MMPI (GM6001) Ophthalmic inflammation Phase II/III Ligand; Sankyo
Matrix metalloproteinase completed in Far East
inhibitor ("MMPI")(8) Phase II(9) (opthalmic
indications)
GM1998 Acute and chronic inflammation Lead compounds Ligand; Sankyo
Cell adhesion inhibitors selected in Far East
GM1925, GM2296, GM1380 & analogues Acute and chronic inflammation Lead compounds Ligand; Sankyo
selected in Far East
GM1892 Reperfusion injury Lead compounds Ligand worldwide
Endothelial protective agent selected
GLYCOMED CANCER
GM1474, GM1306 Cancer Lead compounds Ligand worldwide
Growth factor modulators selected
GM6001 & analogues Cancer Lead compounds Ligand worldwide
Matrix metalloproteinase inhibitors selected
GM1603 & analogues Cancer Lead compounds Ligand worldwide
Heparinase inhibitors selected
STATS
Interferon agonists Cancer, infectious disease Lead compounds Ligand worldwide
identified
Interferon antagonists Rheumatoid arthritis, Lead compounds Ligand worldwide
inflammatory bowel disease, selected
asthma, dermatitis
Hematopoietic growth factors Oncological uses, anemia Lead compounds SmithKline
selected Beecham/Ligand(7)
Other cytokine agonists and Cancer, immunology, growth Lead Compounds Ligand worldwide
antagonists control identified
IN-LICENSED
PHOTOFRIN(R) Esophageal cancer, superficial Market Ligand
bladder cancer (Canada only)
Proleukin(R) Kidney cancer Market Ligand
(Canada only)
- ---------------
(1) "Development Phase" refers to the current stage of development of the most
advanced indication.
"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
preselected 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 lead compound is selected, chemical modification of the
compound is then undertaken to create the best drug candidate.
"Preclinical" 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 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
healthy human volunteers, the emphasis is on testing for
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safety (adverse effects), dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. "Phase II" involves studies in a
limited patient population to determine the efficacy of the pharmaceutical
for specific targeted indications, to determine dosage tolerance and optimal
dosage and to identify possible 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 within an expanded
patient population at multiple clinical study sites. Sometimes Phase I and
II trials or Phase II and III trials are combined. 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.
(2) In connection with the exercise of the buyback of ALRT and the exclusive
licensing arrangement with Allergan (See "Strategic Alliances -- Allergan,
Inc."), Ligand acquired the exclusive right to develop and commercialize
Panretin Capsules and Panretin Gel, LGD1550, LGD1268 and LGD1324. In
addition, Ligand and Allergan participated in a lottery for each of the
approximately 2,000 retinoid compounds existing in the ALRT compound
library, with each party acquiring exclusive, worldwide development,
commercialization and sublicense rights to the compounds which they
selected. Allergan acquired rights to ALRT4310, ALRT4204, ALRT4326 and
acquired rights to selected RARa agonists.
(3) In connection with the strategic alliance with Lilly described in "Strategic
Alliance -- Eli Lilly and Company," Lilly will receive worldwide, exclusive
rights to Targretin (LGD1069), other Ligand compounds and technology
associated with the RXR receptor, HNF4, PPAR modulators and the ob gene
pathway in all fields other than cancer and dermatology.
(4) Targretin Capsules entered Phase II human clinical trials in diabetes in
March 1997 in Europe.
(5) Droloxifene is a Pfizer compound. Ligand performed work on droloxifene at
Pfizer's request. Ligand and Pfizer entered into a settlement agreement with
respect to a lawsuit in April 1996. Under the terms of the settlement
agreement, the Company is entitled to receive milestones if Pfizer continues
development and royalties if Pfizer commercializes the product. See
"Strategic Alliances -- Pfizer Inc"
(6) A compound discovered through the Company's collaborative relationship with
Pfizer to which Pfizer has retained marketing rights. Ligand is awaiting
confirmation from Pfizer. There can be no assurance that clinical trials
will proceed as planned or that any new drugs will be successfully
developed. See "Strategic Alliance -- Pfizer Inc" and "Government
Regulation."
(7) Ligand has retained certain compound rights. See "Strategic
Alliances -- American Home Products Corporation."
(8) Ligand is seeking a partner to further the development and commercialization
of Galardin for ophthalmic use. See "Inflammatory Disease."
(9) Phase II trials ongoing in Japan.
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RETINOIDS
Retinoic acid, a derivative of Vitamin A, is one of the body's natural
regulatory hormones and has a broad range of biological actions, influencing
cell growth, differentiation, apoptosis and embryonic development. Many chemical
analogues of retinoic acid, also 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
("ATRA") has been approved by the FDA for the treatment of acute promyelocytic
leukemia ("APL"). 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. Recent
scientific articles by Ligand researchers have described the potential of RXR
selective retinods in metabolic disease.
Despite the therapeutic benefits of currently marketed retinoids, their use
to date has been limited by their propensity to cause significant side effects,
such as severe birth defects if fetal exposure occurs, severe irritation of the
skin and mucosal surfaces, elevation of plasma lipids, headache and skeletal
abnormalities. Currently marketed retinoids were developed and commercialized
for their therapeutic benefits prior to the discovery of retinoid-responsive IRs
("RRs"), and were developed with suboptimal tools.
The six RRs that have been identified to date can be grouped in two
subfamilies: Retinoic Acid Receptors ("RARs") and RXRs. Patent applications
covering members of both families of RRs have been licensed exclusively to
Ligand 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 studies and from 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. Ligand, is developing chemically synthesized retinoids which,
by selectively activating RR subtypes, may preserve desired therapeutic effects
while reducing side effects. Because of their subtype selectivity or other
desirable activities, Ligand's retinoid agonists are expected to have more
specific pharmacological effects and fewer side effects, thus providing a better
therapeutic index than currently used retinoids, many of which are not RR
subtype specific or are suboptimal for other reasons.
Ligand, has five retinoid products in clinical trials, Panretin Gel,
Panretin Capsules and LGD1550 Capsules, Targretin Gel and Targretin Capsules,
and five retinoid compounds in advanced preclinical evaluation through its
corporate partners. Ligand and Allergan also participated in a lottery for each
of the approximately 2,000 retinoid compounds existing in the ALRT compound
library with each party acquiring exclusive, worldwide development,
commercialization and sublicense rights to the compounds selected. In September
1997, Ligand and Allergan agreed to restructure the terms and conditions
relating to research, development, commercialization and sublicense rights for
the ALRT compounds in the period following the closing of the exercise of
Ligand's Stock Purchase Option and Allergan's Asset Purchase Option. See
"Strategic Alliances -- Allergan, Inc."
In November 1997, Ligand and Lilly entered into a strategic alliance for
the discovery and development of products based on Ligand's IR technology. See
"Strategic Alliances -- Eli Lilly and Company, Inc."
Panretin Gel. 9-cis-Retinoic acid (Panretin) is a non-peptide hormone
isolated and characterized by Ligand in 1991 in collaboration with scientists at
The Salk Institute and Baylor. This 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. 9-cis-Retinoic acid has pharmacological
properties which Ligand believes give it therapeutic utility.
In June 1994, Ligand initiated a Phase I/II human clinical trial for
Panretin Gel in AIDS-related, cutaneous KS. Interim results of this Phase I/II
clinical trial reported in January 1996 showed that, when evaluated at 12 weeks
after the start of each patient's therapy, Panretin Gel induced a partial or
complete
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clinical response in 30% of 43 patients with AIDS-related, cutaneous KS
evaluated by AIDS Clinical Trial Group ("ACTG") criteria as applied to topical
therapy, compared with 9% of patients with untreated control lesions. This
interim assessment supported results of an earlier assessment reported in
September 1995. Final results of this Phase I/II clinical trial involving 115
patients were reported in December 1996 and were consistent with the interim
data.
Following positive Phase I/II interim results and a meeting with the FDA in
November 1995, Ligand launched of 1996, a pivotal Phase III study in North
America to evaluate Panretin Gel in over 200 patients with AIDS-related,
cutaneous KS in the second quarter. In addition, Panretin Gel began
international Phase III trials for KS in the third quarter of 1996. In January
1997, the Company reported an interim assessment of the control (placebo)
response. Based on the first 100 patients, the control response was equal to or
below 10% which would permit the statistical power of the study to be maintained
without expanding the patient sample size. However, the Company decided to
enroll an additional 35 patients which will add time to the accrual process but
should not impact the targeted NDA filing date.
In August 1997, the Company reported that the international Phase III trial
of Panretin Gel was stopped early in August 1997 at 82 KS patients because an
interim analysis specified in the protocol revealed a 42% (15 of 36 patients)
response in patients treated with Panretin Gel compared with a 7% (3 of 46
patients) response of patients treated with a placebo. The trial conducted at
approximately 30 centers internationally and, permitted its early conclusion if
a significant number of patients were receiving clear benefit from Panretin Gel
treatment.
In December 1997, the company reported that the North American Phase III
pivotal trial for Panretin Gel in KS patients showed a 35.1% (47 of 134
patients) response in patients treated topically with Panretin Gel compared to
17.9% (24 of 134 patients) using a placebo gel with no active drug. The North
American study, which began in April 1996, included more than 30 sites with 269
patients -- 135 in the Panretin Gel group and 134 in the placebo group. Patients
in the Panretin Gel group had the option of continuing treatment after the
blinded portion of the study was complete. For patients initially assigned to
Panretin Gel and then continuing on the drug therapy, the response rate
increased to 49.3% (66 of 134 patients). Of the 85 patients who initially
received placebo and then elected to use Panretin Gel after the blinded phase,
29.4% (25 of 85) showed a complete or partial response. The Company believes
that these two Phase III trials should be sufficient to support a favorable
clinical review of the NDA targeted for submission early in 1998.
Panretin Capsules. In completed Phase I/IIA human clinical trials, Panretin
Capsules were well tolerated at doses as high as 140 mg/m(2)/day (milligram per
square meter of body surface, per day), the maximum tolerated dose ("MTD"). At
the MTD level, side effects, including headaches, elevated triglyceride levels,
hypercalcemia and mucocutaneous irritation, were dose limiting toxicities.
Memorial Sloan-Kettering Cancer Center ("Sloan-Kettering") interim data indicate
that nine of 39 patients with advanced or otherwise untreatable cancer treated
with Panretin Capsules experienced no disease progression for periods ranging
from 14 to 28 weeks. The Phase I/IIA clinical data also indicate that Panretin
Capsules have good bioavailability. Patient exposure to Panretin Capsules is
proportional to the administered dose of the compound over a broad range of
doses.
United States and international Phase II trials have been launched with
Panretin Capsules in a number of cancer indications, including kidney cancer (in
combination with interferon alpha), ovarian cancer (with cis-platin), KS,
prostate cancer, non-Hodgkin's lymphoma and multiple myeloma. In June 1997,
kidney cancer, non-Hodgkin's lymphoma and multiple myeloma trials were
discontinued due to insufficient activity. A Phase III trial with Panretin
Capsules at a dose of 140 mg/m(2)/day in APL was initiated in the fourth quarter
of 1996. In September 1997, the final analysis of a Phase I/IIA trial of
Panretin Capsules in APL showed that 4 of 5 newly diagnosed patients achieved
complete remission and 4 of 12 relapsed patients also experienced complete
remission. The FDA approved an application by Ligand, to have Panretin Capsules
designated an "Orphan Drug" for the treatment of APL. In February 1998, the
Company announced the restructure of the slowly accruing APL program by
terminating the ongoing Phase III studies. Panretin Capsules entered a Phase II
trial for psoriasis in the United States in September 1995, a Phase II trial for
myelodysplastic syndrome in Europe in the second quarter of 1996 and a Phase II
trial for proliferative vitreo-retinopathy,
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which was discontinued in July 1997 due to inability to accrue patients in this
small patient population. In July 1997, the Company reported interim results of
a Phase II study for Panretin Capsules in KS showing that Panretin Capsules has
an acceptable safety profile and a sufficient number of positive responders to
continue full accrual of the trial by the Aids Malignancy Consortium.
In February 1998, Ligand announced favorable results in two Phase II trials
with Panretin Capsules in patients with KS. The two studies were similar in
design, with one conducted by the AIDS Malignancy Consortium ("AMC") sponsored
by the National Cancer Institute ("NCI") and the other conducted directly by
Ligand. In the studies, Panretin Capsules were administered once daily at doses
increasing from 60 mg/m(2) to 100 mg/m(2)/day. Study participants had to have
biopsy proven KS associated with AIDS and at least five to six skin lesions that
were assessed every two weeks for response. Response was determined by applying
standard ACTG criteria for complete and partial response based on the indicator
lesions. The protocol-defined evaluation period was 16 weeks.
The study conducted by the AMC has enrolled 66 patients at eight sites. The
overall response rate at final analysis through the 16-week evaluation period
for patients meeting the criteria for evaluation was 38% (19 of 50) including
one complete responder. Drug side effects were generally manageable, with some
patients requiring dose reductions with headache, dry skin, rash, alopecia,
peeling/flaking and hyperlipidemia as the most common events.
The study conducted by Ligand enrolled 57 patients at five study centers.
The overall response rate for all patients (21 of 57) was 37%, and for patients
who met the protocol defined criteria for evaluation, the overall response rate
was 57% (21 of 37). One patient demonstrated a complete response. Almost all
patients were on highly active antiretroviral therapy (HAART), including at
least one protease inhibitor, prior to the start of Panretin Capsules therapy.
The side effect profile was similar to that in the AMC study.
A 50-patient Phase II trial of Panretin Capsules in psoriasis has been
completed and Panretin Capsules appear to be well-tolerated in patients with
moderate to severe plaque psoriasis. In this study, 50% (5 of 10 patients) who
received the optimal dose level of 0.9 mg/kg administered daily, achieved a 50%
or greater improvement based on the Physician's Global Evaluation.
There is currently substantial interest among oncologists in the potential
of retinoids, as evidenced by the existence of over 60 open protocols at the NCI
to examine the effects of retinoids on a variety of cancers. A Phase I/II study
is currently being conducted by the NCI to evaluate the safety and efficacy of
Panretin Capsules in children with malignancies, and the Phase II trials are
underway sponsored by the NCI to evaluate the safety and efficacy of Panretin
Capsules in patients with lung cancer, cervical cancer and those with breast
cancer.
LGD1550 Capsules. A very potent RAR agonist, LGD1550 Capsules strongly
inhibits growth of several human cancer cell lines. In the fourth quarter of
1996, Ligand submitted an IND. Phase I/IIA Clinical Trials in advanced cancer
began at Sloan-Kettering and Lombardi Comprehensive Cancer Center at Georgetown
University ("Lombardi Cancer Center") in the first quarter of 1997.
Other former ALRT Compounds. ALRT's drug development pipeline included
seven additional retinoid compounds in preclinical evaluation. These included:
(i) ALRT4310 and analogues, RAR antagonists for topical use to ameliorate
mucocutaneous irritation accompanying therapy for cancer or skin disease with
systemic retinoids such as Accutane, Vesanoid and Oral Panretin, (ii) ALRT1455
and analogues, RAR-alpha-selective retinoids for possible use in treating
leukemias, lymphoma, and breast cancer; (iii) RXR-selective retinoids, including
ALRT268 and ALRT324 with possible utilities in various metabolic disorders such
as diabetes mellitus; and (iv) four additional retinoid receptor selective
compounds with possible utilities in various cancers and skin disease. Ligand
and Allergan participated in a lottery for each of the approximately 2,000
retinoid compounds in the ALRT compound library with each party acquiring
exclusive, worldwide development, commercialization and sublicense rights to
compounds selected.
Targretin Topical Gel and Targretin Capsules. Ligand has created synthetic
retinoids that show distinctive patterns of RR subtype selectivity. Ligand's
research indicates that one of these retinoids, Targretin, has a beneficial
effect in squamous epithelial growth, showing activity with human skin cells in
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culture and in a preclinical model of psoriasis. Targretin , which is the first
RXR-selective retinoid in clinical development, has shown anti-cancer activity
in vitro and in vivo preclinically. Because Targretin has attractive preclinical
effects to induce programmed cell death (apoptosis) in cancer cell lines, Ligand
believes it may have utility in solid tumors, such as breast, colon or lung
cancer, which grow relatively slowly and therefore respond poorly to
conventional cytotoxic chemotherapeutic agents. In vivo preclinical data
indicate that Targretin is orally and topically active and well tolerated.
Ligand's research indicates that Targretin has a pattern of RR subtype
activation distinct from that of Panretin.
In June 1994, Ligand initiated Phase I/II clinical trials in patients with
a form of skin lymphoma or with cutaneous KS with Targretin Gel. In interim data
presented by investigations from the University of Cincinnati in March 1997,
Targretin Gel induced responses in 43% of 48 evaluable patients with cutaneous
T-cell lymphoma ("CTCL"). In January 1996, the Company presented interim data
which showed that Targretin Gel induced responses in 15% of 46 patients with
AIDS-related KS, a result which confirmed earlier interim results presented in
September 1995. The Company met with the FDA on trial design and in late 1996
and early 1997 initiated three Phase II/III and pivotal Phase III clinical
trials in CTCL; two studies with Targretin Capsules and one with Targretin Gel.
In September 1997, researchers from the University of Texas M.D. Anderson Cancer
Center reported on interim findings with respect to two Phase II/III pivotal
trials of Targretin Capsules. Forty-one percent of early and advanced stage CTCL
patients who had been refractory or intolerant to prior therapy and then
received higher dose Targretin capsules achieved a complete or partial response
compared to none of a group of early stage patients who received a lower dose of
Targretin capsules.
Ligand initiated clinical trials for Targretin Capsules for cancer
indications in January 1994. Phase I/IIA trials in patients with advanced cancer
were conducted at centers including Sloan-Kettering and the Lombardi Cancer
Center. These studies were designed to gather human safety data and to determine
the maximum tolerated dose of Targretin Capsules to facilitate design of Phase
IIB and later studies. Phase I/IIA interim trial results of Targretin Capsules
were presented by Sloan-Kettering investigators at ASCO in May 1995. The
Sloan-Kettering team reported on 33 patients with various cancers treated at
oral daily doses up to 140 mg/m(2)/day. No dose limiting toxicities were
reported in the study and investigators reported that the bioavailability of the
drug is excellent. In April 1996, clinical investigators reported stabilization
of disease in many of their patients with non-small cell lung cancer ("NSCLC").
Investigators from the Lombardi Cancer Center reported eight of 15 lung cancer
patients with stable disease in excess of three months. Investigators at
Sloan-Kettering reported that eight of 20 lung patients demonstrated
stabilization of disease for three to eight-plus months. Lombardi Cancer Center
investigators reported results of an ongoing Phase I-IIa human clinical trial on
Targretin Capsules at the annual meeting of the American Association for Cancer
Research and investigators from Sloan-Kettering reported results of a closed
Phase I-IIa human clinical trial of Targretin Capsules at the NCI and European
Organization for Research and Treatment of Cancer Symposium on New Drugs in
Cancer Therapy. In September 1997, the Company announced that 41% of early and
advanced stage CTCL patients who had been refractory or intolerant to prior
therapy and then received higher dose Targretin Capsules achieved a complete or
partial response. For the group of early stage CTCL patients, 37% who received
higher dose Targretin Capsules achieved complete or partial response compared to
none of the patients who received a lower dose of Targretin Capsules. Findings
for patients with advanced stage CTCL who received higher dose Targretin
Capsules showed 43% response. None of the advanced stage patients received lower
dosed Targretin Capsules. The interim findings of the first 35 patients enrolled
in these two multicenter Phase II/III trails were based on the Physicians'
Global Assessment of Response provided in the protocol. CTCL is a debilitating
cancer characterized initially by skin lesions that can affect more than 50% of
a person's skin surface, making day-to-day living painful and difficult.
Eventually, the disease becomes visceral and life threatening. The safety
profile of Targretin Capsules remains favorable. The drug also has displayed
milder side effects than those often seen with other retinoids, and it appears
to be well-tolerated at doses which are clinically active. Phase I/IIA studies
are continuing. A Phase II/III clinical trial has begun in lung cancer, Phase II
clinical trials have begun in KS, ovarian cancer, head and neck and prostate
cancer, and a Phase II clinical trial has begun in kidney cancer (in combination
therapy with interferon alpha).
Preclinical studies conducted with RXR-selective retinoids such as
Targretin Capsules indicate possible utilities in breast cancer and metabolic
disorders such as diabetes mellitus. Preclinical studies conducted in
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1996 in mouse models of human type II diabetes, a subset of diabetes mellitus,
and obesity demonstrated the ability of Targretin to decrease blood glucose,
triglyceride and insulin levels. In a rat model of breast cancer prevention
conducted in 1996, Targretin reduced incidence and tumor frequency at least as
well as an estrogen antagonist compared to control, without the undesirable
reduction in mean body weight produced by the estrogen antagonist. In February
1998, the Company announced that Targretin caused complete regression in 72% of
established breast cancer tumors in one of the most commonly used rat models of
this disease, according to a study published by scientists from Ligand in the
journal Cancer Research. The study is the first to compare the treatment
potential of Targretin and tamoxifen both individually and in combination
therapy. The use of tamoxifen alone resulted in complete regression in 33.3% of
tumors, compared to Targretin's rate of regression in 72% of tumors. Tamoxifen
is currently the most widely prescribed breast cancer therapy.
A Phase II multicenter trial in type II diabetes in Europe was initiated
with Targretin Capsules in the first quarter of 1997. The clinical studies have
two main objectives: to study the safety and tolerability of different dose
levels of Targretin in type II diabetic patients and to determine the potential
for this RXR agonist to have positive metabolic effects on carbohydrate and/or
lipid metabolism in this population. Ligand initiated a significant
collaboration in metabolic disease, including type II diabetes, in November 1997
with Lilly and future development of Targretin in metabolic disease is now a
part of that collaboration.
In addition, as part of the restructured Ligand-Allergan arrangement,
Ligand will pay to Allergan a royalty based on Ligand's net sales of Targretin
for uses other than oncology and dermatology indications; in the event that
Ligand licenses commercialization rights to Targretin to a third party, Ligand
will pay to Allergan a percentage of royalties payable to Ligand with respect to
sales of Targretin other than in oncology and dermatology indications.
SEX STEROIDS
The primary objective of Ligand's sex steroid program is to define
agonists, partial agonists and antagonists of the sex steroid receptors as 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. Ligand's programs in the sex
steroid areas target (i) development of tissue-selective modulators of the
progesterone receptor ("PR") and estrogen receptor ("ER") for uses including
various chronic disease indications and (ii) the development of androgen
receptor ("AR") agonists and antagonists for use in cancer and other
indications. Lead compounds have been identified in each of these project areas.
Substantial medicinal chemistry efforts have yielded compounds active in animals
as PR and AR modulators. Ligand is pursuing these programs alone and in
collaboration with certain partners. In the research phase of a collaboration
with Pfizer, an advanced clinical compound in breast cancer and osteoporosis was
evaluated and potentially attractive ER modulators were identified as
development candidates and backup candidates. In a collaboration with AHP,
several advanced sex hormone receptor modulators are progressing in preclinical
evaluation with one scheduled for an IND in the first quarter of 1998. Ligand
has filed a patent application on fundamental advances made in understanding sex
steroid receptor function with significant drug discovery implications.
Progesterone Receptor Antagonists and Agonists. The objective of this
program is to develop novel PR antagonists, partial agonists and agonists for
chronic therapies. As part of this program, Ligand is also pursuing PR agonists
and partial agonists with related chemical structures for use in hormone
replacement therapy, breast cancer, contraception and other applications in
women's health.
Exploratory clinical research indicates that PR antagonists may have
utility in a variety of chronic diseases, including endometriosis and cancer.
Although PR antagonists currently are used clinically for acute 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 chronic administration. Ligand believes that more selective PR
antagonists will 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.
Because of the very close structural similarity of the IRs for progesterone and
glucocorticoids, it has proven difficult to find noncross-reactive compounds.
This has been made even
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more difficult because medicinal chemists have been largely constrained to
steroid structures as lead compounds.
Ligand believes that it has an opportunity, based on its proprietary tools
and approaches, to develop a specific PR antagonist that does not cross-react
with the IR for glucocorticoids. Ligand has discovered several nonsteroidal lead
compounds that are PR antagonists. Ligand has also discovered closely related
compounds that are full agonists of the PR, which may be useful in breast
cancer, contraception and hormone replacement therapy. These lead compounds were
detected in Ligand's natural product and defined chemical screening programs
using the co-transfection assay and the cloned human PR. Medicinal chemistry
efforts at Ligand based on one of these non-steroidal antiprogestin leads have
yielded potent, selective compounds with demonstrable antiprogestin
pharmacological effects both in vitro in human breast cancer cells and in vivo
in rodents.
In January 1996, AHP exercised its option to include compounds that Ligand
had discovered that modulate PRs and to expand the collaboration to encompass
the treatment or prevention of osteoporosis through the ER. Ligand's proprietary
PR modulators added to the collaboration include three series: LG1447 PR
antagonists, and LG2527 and LG2716 PR agonists. In 1997, Ligand regained rights
to progesterone agonists (LG2527 and LG2716) in the AHP collaboration. In May
1996, AHP expanded the collaboration further to include four advanced chemical
compound series from the Wyeth-Ayerst internal ER-osteoporosis program. See
"Tissue Selective Estrogen and Progesterone Agonists."
Estrogen Agonists. Osteoporosis is a disease characterized by significant
loss of bone mass. The disease, which predominantly affects post-menopausal
women, leads to a greater susceptibility to traumatic bone fractures and can
lead to curved spine ("dowager's hump") or hip fractures in elderly women. The
disease is ordinarily treated by giving women therapeutic doses of estrogen or
other steroidal analogues of estrogen. Estrogen therapy is a suboptimal
treatment of the disease because of significant side effects, including an
increased risk of developing uterine cancer. Estrogen therapy is not well
tolerated, and over 60% of women abandon the therapy within the first year.
Nevertheless, the market for estrogen therapy in the United States alone exceeds
$850 million annually and is estimated by Ligand to approximate $1.4 billion
worldwide.
The objective of the collaboration between Ligand and Pfizer was to
discover and develop novel therapies for osteoporosis acting through IRs. The
program focused on estrogen agonists that have greater tissue specificity for
bone than current forms of estrogen replacement therapy. In November 1993,
Ligand and Pfizer announced the successful completion of the research phase of
their 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
(stabilization of bone mineral density and skeletal integrity) and have an
impact on serum lipids often associated with cardioprotection without increasing
uterine or breast tissue proliferation.
Tissue Selective Estrogen and Progesterone Agonists. In addition to the
effects of estrogens and progesterones on the reproductive system, estrogens
exert a number of other influences in the body, including beneficial effects on
the cardiovascular and skeletal systems. After menopause, replacement of lost
estrogens is effective but not well tolerated due to adverse side effects.
Building on insights emerging from its research, Ligand believes that it has
developed a novel approach to achieving tissue selective estrogen or
progesterone agonist action. Ligand's approach is not dependent on the existence
of receptor subtypes, although subtypes have been demonstrated for the ER and PR
which may offer other drug discovery opportunities. Ligand has designed and
implemented novel screens which Ligand believes will detect sex steroid receptor
agonists with desirable pharmacological profiles. Ligand believes that these
compounds will be useful in treating a variety of hormone-responsive diseases,
such as endometriosis, uterine fibroids and cancers of the uterus and breast.
Additionally, Ligand believes that the compounds emerging from this program can
be used in reproductive medicine and hormone replacement therapy.
In September 1994, Ligand entered into a collaboration with AHP in the area
of ER and PR modulators for use in women's health. The objective of this
collaborative program is to discover and develop drugs which interact with the
ER or PR to produce tissue-selective actions. An important additional aspect of
this collaboration is Ligand's right to assay AHP's extensive chemical library
for activity against a selected set of
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targets of Ligand's internal programs. Ligand may select up to 24 lead compounds
for internal development to which Ligand has worldwide rights. AHP has agreed to
provide up to $21.5 million in research funding to support up to 18 Ligand
scientists during the term of the collaboration.
The first potential clinical product of the AHP collaboration is a tissue
selective estrogen modulator called TSE424. In 1997, AHP announced its intention
to file an investigational new application (IND) and begin clinical trials for
this selective estrogen agonist in osteoporosis in the first quarter of 1998. A
second potential clinical candidate may be designated for an IND track for
reproductive cancer in early 1998.
Androgen Receptor Agonists and Antagonists. The primary objective of this
project is to develop novel AR agonists or antagonists for male hormone
replacement therapy and the treatment of skin disorders, osteoporosis, prostate
cancer and other diseases. The growth of most prostate cancers appears to be
stimulated by or dependent upon androgens. The use of androgen antagonists has
shown efficacy in the treatment of prostate cancer. Currently, the FDA has
approved two androgen antagonists for use in the treatment of prostate cancer
and a third is in clinical development. None of these are Ligand compounds.
These agents appear to have significant side effects. Ligand believes that there
is a substantial medical need for improved androgen modulators for use in the
treatment of prostate cancer.
AR agonists and antagonists with an improved side effect profile may also
provide utility in the treatment of benign prostatic hypertrophy, acne,
hirsutism, male-pattern baldness and cachexia associated with chronic disease
(e.g., cancer, auto-immune disorders and AIDS). Ligand has exclusively licensed
patent applications for the cloned human AR and is employing it to identify
novel AR agonists and antagonists. Ligand has identified non-steroidal lead
compounds from its internal screening programs. An internally directed medicinal
chemistry effort has produced potent, selective, patentable AR agonists and
antagonists which show pharmacological activity in vivo in rodents. Compounds
from these series are being optimized and will be further evaluated as potential
preclinical candidates. Ligand intends to pursue the specialty applications
emerging from these projects internally, but may seek a collaboration with a
pharmaceutical company to exploit broader clinical applications.
Ligand researchers have identified an orally available, non-steroidal
androgen receptor antagonist, LGD1331, which preclinical studies indicate may
have utility for treating hirsutism, a disorder that affects a significant
number of women, prostate cancer, balding in men and benign prostatic
hyperplasia. In vivo studies of LGD1331 have revealed very favorable
characteristics, including dramatically diminished effects on the central
nervous system, compared with currently marketed drugs of this type for the
treatment of these conditions. This antagonist is also being evaluated for its
systemic and topical utility in the treatment of acne.
CARDIOVASCULAR/METABOLIC DISEASE
Ligand scientists are exploring the role of certain orphan IRs in disorders
affecting the cardiovascular system. Data suggest that these receptors regulate
the expression of apolipoprotein A1 ("ApoA1"). ApoA1 is the major protein
constituent of high-density lipoprotein ("HDL"), and recent data link increased
levels of ApoA1 to prevention of atherosclerosis.
Another subfamily of orphan IRs, PPARs, have been implicated in lowering
plasma levels of very low density lipoproteins and triglycerides. Data implicate
PPARs in the mechanism of action of lipid lowering drugs such as Lopid(R).
Ligand has discovered three subtypes of this PPAR class and defined novel
aspects of their action. The subtype PPAR alpha appears to regulate the
metabolism of certain lipids. PPAR alpha agonists may be useful to treat
atherosclerosis and diabetes mellitus. PPAR gamma plays roles in fat cell
differentiation and cellular responses to insulin. Modulators of PPAR gamma
activity (e.g., the glitazone class of insulin sensitizers) may have utilities
in the management of diabetes mellitus and/or obesity.
PPARs function in cells with RXRs as partner proteins. In addition to
compounds that act directly on PPARs, which may have utility in various
cardiovascular and metabolic disorders, certain retinoids able to activate RXRs
(e.g., Targretin Capsules and LGD1268) and indirectly activate PPARs may also
have utilities in these disorders. Preclinical animal studies have demonstrated
that Targretin Capsules have beneficial effects in animal models of diabetes.
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Ligand has established sophisticated high throughput assays to screen for
drug selectivity associated with structural classes of thyroid hormone receptors
to identify compounds which could selectively mimic the thyroid hormone's
cardioprotective lipid lowering effects without its impact on heart rate and
nervous system activity.
In September 1992, Ligand entered into a collaboration with Glaxo to
discover and develop drugs for the prevention or treatment of atherosclerosis
and other disorders affecting the cardiovascular system. In collaboration with
Glaxo, Ligand worked to discover drugs which produce beneficial alterations in
lipid and lipoprotein metabolism in projects focused on (i) regulation of
cholesterol biosynthesis and expression of a receptor which removes cholesterol
from the blood stream, (ii) the IRs influencing circulating ADL levels, and
(iii) PPARs, the subfamily of IRs activated by the clofibrate class of lipid
lowering drugs, Lopid and Atromid-S. The collaboration with Glaxo has also
identified a novel lead structure that activates selected PPAR subfamily
members.
Ligand and Glaxo have screened compounds to identify potential lead
compounds. A lead compound showing in vivo activity in rodents has been selected
for lowering low-density lipoprotein ("LDL") cholesterol by up-regulating LDL
receptor gene expression in liver cells. Once leads are identified, Glaxo has
primary responsibility for pharmacology, medicinal chemistry to optimize the
drug candidates, preclinical testing and for conducting clinical trials of the
drug candidates for marketing approval by the FDA and certain other regulatory
agencies. The research phase of the collaborative research agreement was
completed in September 1997.
In November 1997, the Company and Lilly entered into a strategic alliance
for the discovery and development of products based upon Ligand's IR technology.
The collaboration focuses on products with broad applications across metabolic
diseases, including diabetes, obesity, dislipidemia, insulin resistance and
cardiovascular diseases associated with insulin resistance and obesity. Under
the alliance Lilly received worldwide, exclusive rights to Targretin and other
Ligand compounds and technology associated with the RXR receptor. Lilly received
additional rights to use Ligand technology to develop an RXR compound in
combination with a SERM in cancer. Ligand retains exclusive rights to
independently research, develop and commercialize Targretin and other RXR
compounds in the fields of cancer and dermatology. Lilly also received
worldwide, exclusive rights in certain areas to Ligand's PPAR technology, along
with rights to use PPAR research technology with the RXR technology. Lilly and
Ligand also intend to begin research programs aimed at discovering novel
compounds which therapeutically activate PPAR subtypes for treatment of
cardiovascular disease. Finally, Lilly received exclusive rights to Ligand's
HNF4 receptor and the obesity gene promoter technology. Ligand has the option to
obtain selected rights to one Lilly specialty pharmaceutical product. The
product would fit into a current area of strategic focus for Ligand. Should
Ligand elect to obtain selected rights to the product, Lilly could receive
milestones of up to $20 million in Ligand stock. In the event that Ligand does
not exercise this product option, Ligand could sell an additional $20 million in
equity to Lilly at a 20% premium to the then market price, and Ligand would
qualify for certain additional royalties of up to 1.5% on net sales of Ligand's
choice of Targretin, LGD1268 or LGD1324. Ligand will receive double-digit
royalties on net sales of the most advanced products and single-digit royalties
on net sales of earlier compounds. Ligand will also 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.
INFLAMMATORY DISEASE
Ligand is utilizing three innovative approaches to discover drugs for the
treatment of inflammation. One approach is being pursued in partnership with
Abbott, one approach is being pursued internally and a third approach is being
pursued in collaboration with Sankyo. These programs and approaches target
diseases such as rheumatoid arthritis, asthma and reperfusion injury.
In collaboration with Abbott, Ligand is seeking novel small molecule
anti-inflammatory drugs. The collaborative program includes several approaches
to discovering modulators of glucocorticoid receptor activity that are better
than currently known anti-inflammatory steroids such as hydrocortisone and
dexamethasone. Internally, Ligand scientists are pursuing approaches to the
discovery of blockers of the actions of
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the inflammation-promoting cytokines, interferon alpha and interferon gamma,
through inhibition of their STAT-mediated signal transduction. A number of lead
compounds have been identified and are currently being optimized for further
drug development.
In collaboration with Sankyo, Glycomed scientists are synthesizing and
testing compounds that block the adhesion of white blood cells to tissue. Some
forms of inflammation are thought to be maintained by continued accumulation of
white blood cells at sites of tissue injury. This accumulation is caused by
adhesion of the white cells to the endothelial linings of blood vessels in the
injured tissue. Research suggests the inflammatory process can be blocked by
interfering with white blood cell adhesion, thus reducing tissue localization of
the white cells. Inhibiting this process at its early stages by blocking the
action of selectins (cell surface proteins mediating adhesion) may provide
potent treatments for a variety of acute and chronic inflammatory diseases such
as rheumatoid arthritis and asthma. Two lead compound series show improved
potency over the natural adhesion Ligand's and a potential third lead series is
currently under evaluation.
Galardin(TM) (GM6001). MMPIs are also potent inhibitors of a class of
enzymes involved in the degradation of proteoglycans and collagen. Galardin, a
metalloproteinase inhibitor, is a small, easily-synthesizable molecule that has
demonstrated effectiveness at very low concentrations in the prevention of
corneal ulceration in animals following alkali injury to the eye. The MMPI
Galardin was the first compound for which Glycomed filed an IND. Glycomed
received Orphan Drug designation for Galardin in December 1991 and completed
enrollment for the Phase II/III clinical trials in July 1994. The study,
involving over 500 patients with corneal injury, produced the statistically
significant finding that Galardin treatment reduced the number of patients in
which perforation of the cornea developed in the period after injury. In
contrast, the results of this Phase II/III study of Galardin in corneal injury
did not demonstrate a statistically significant impact of Galardin, applied
topically in the eye, on the rate of healing of corneal ulcers, the principal
intended study endpoint. Perforation is caused by destruction of the full
thickness of the cornea. It is one of the most serious complications associated
with corneal ulcers and can lead to blindness. Corneal perforation is a
significant risk for an estimated 120,000 of the patients with corneal ulcers in
the United States each year. Sankyo has Galardin in Phase II trials in Japan and
Ligand is seeking a partner to further the development and commercialization of
Galardin for ophthalmic use. Composition of matter and use patents (in corneal
ulceration) have been issued in the United States.
In February 1994, Glycomed signed a License Agreement with Sankyo for all
ophthalmic indications in the Far East for Galardin and analogues, while
Glycomed retained rights in the rest of the world.
STATS
The recent discovery of the role of STATs and JAKs explains the mechanism
through which many cytokines modulate gene expression and cellular function. The
cytokines that produce cellular responses through the JAK/STAT pathway include
the interferons, most of the interleukins, the hematopoietic growth factors,
growth hormone and leptin.
Ligand's JAK/STAT signaling programs are focused on applications for
inflammation, infection, transplant rejection, allergy and blood cell
deficiencies induced in patients receiving chemotherapy. Ligand's first
collaborative effort to utilize the JAK/STAT approach to drug discovery was with
Abbott in the field of inflammation. Screening in this program led to the
selection of a lead compound for interferon antagonist activity which Ligand is
developing internally.
Ligand's second collaboration in the JAK/STAT area is with SmithKline
Beecham to discover and characterize small molecule, orally bioavailable drugs
to enhance the formation and development of blood cells (hematopoiesis). Working
together, Ligand and SmithKline Beecham scientists were able to validate a
JAK/STAT-based high throughput screen for hematopoietic growth factors, thus
achieving the first milestone of the collaboration in under nine months. Based
on this and additional collaborative work, the research teams of SmithKline
Beecham and Ligand are exploiting recent insights into the roles of JAKs and
STATs in mediating hematopoietic growth factor signal transduction and blood
cell formation. The Company's goal is to discover orally active compounds that
effectively enhance blood cell formation in a variety of anemias and after
cancer therapy. Several lead compounds have been identified. In January 1997,
SmithKline Beecham
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and Ligand expanded the collaboration to include screens aimed at discovering
small molecule mimics of thrombopoietin to stimulate blood platelet production.
In March of 1998, Ligand and SmithKline Beecham agreed, subject to
regulatory approval, to initiate a new collaboration 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.
Ligand's internal STATs research group is focused on the discovery of new
leads with potential utility as cancer therapeutics and the development of high
throughput screens for agonists and/or antagonists of therapeutically relevant
cytokines that use the JAK/STAT pathway. Additional screening efforts have led
to the selection of a lead compound for interferon activity in inflammation.
Current efforts have allowed the Company to identify the components required for
high throughput screening for IL-4 antagonists to treat allergy and asthma and
IL-12 antagonists to treat transplant rejections and autoimmine diseases such as
rheumatoid arthritis.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $72.4 million, $59.5 million and
$41.6 million in fiscal 1997, 1996 and 1995, respectively, of which
approximately 29%, 38% and 41%, respectively, was sponsored by the Company and
the remainder of which was funded pursuant to product development collaboration
arrangements. See "Strategic Alliances."
IN-LICENSED PRODUCTS
PHOTOFRIN. In March 1995, Ligand acquired from QLT PhotoTherapeutics, Inc.
("QLT") exclusive Canadian marketing rights to PHOTOFRIN, porfimer sodium, a
laser-activated drug for use in photodynamic therapy for esophageal and
superficial bladder cancer. In July 1995, Ligand, through its wholly-owned
Canadian subsidiary, Ligand (Canada) Inc. ("Ligand Canada") began distribution
of PHOTOFRIN. There are over 3,500 new cases of superficial bladder cancer and
1,200 new cases of esophageal cancer diagnosed each year in Canada. Ligand
Canada also has rights to sell the product for any other approved indications in
Canada. PHOTOFRIN has been approved in the United States in esophageal cancer,
in the Netherlands for lung and esophageal cancers and in Japan for early-stage
lung, esophageal, gastric and cervical cancers. In August 1997, QLT filed a
supplemental new drug submission with the Canadian Health Protection Branch for
PHOTOFRIN in renal cell carcinoma.
Proleukin. In September 1994, Ligand entered into an agreement with Cetus
Oncology Corporation ("Cetus Oncology"), a subsidiary of Chiron Corporation, to
exclusively market in Canada, Proleukin, its recombinant human Interleukin-2
(aldesleukin) for the treatment of kidney cancer. In April 1995, Ligand Canada
began distribution of Proleukin. It is also being tested with alpha interferon
to determine if additional indications are feasible. There are nearly 5,000 new
cases of kidney cancer reported in Canada each year. In August 1997, Chiron
Corporation filed a supplemental new drug submission with the Canadian Health
Protection Branch for Proleukin in malignant melanoma.
The Company has initiated Phase IV trials in Canada with both Proleukin and
PHOTOFRIN to further characterize the drugs clinically and facilitate broader
acceptance of both products.
STRATEGIC ALLIANCES
Eli Lilly and Company. In November 1997, the Company and Lilly entered into
a strategic alliance for the discovery and development of products based upon
Ligand's IR technology. The collaboration focuses on products with broad
applications across metabolic diseases, including diabetes, obesity,
dislipidemia, insulin resistance and cardiovascular diseases associated with
insulin resistance and obesity. Under the alliance Lilly received worldwide,
exclusive rights to Targretin and other Ligand compounds and technology
associated with the RXR receptor. Lilly received additional rights to use Ligand
technology to develop an RXR compound in combination with a SERM in cancer.
Ligand retains exclusive rights to independently research, develop and
commercialize Targretin and other RXR compounds in the fields of cancer and
dermatology. Lilly also
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received worldwide, exclusive rights in certain areas to Ligand's PPAR
technology, along with rights to use PPAR research technology with the RXR
technology. Lilly and Ligand also intend to begin research programs aimed at
discovering novel compounds which therapeutically activate PPAR subtypes for
treatment of cardiovascular disease. Finally, Lilly received exclusive rights to
Ligand's HNF4 receptor and the obesity gene promoter technology. Ligand has the
option to obtain selected rights to one Lilly specialty pharmaceutical product.
The product would fit into a current area of strategic focus for Ligand. Should
Ligand elect to obtain selected rights to the product, Lilly could receive
milestones of up to $20 million in Ligand stock. In the event that Ligand does
not exercise this product option, Ligand could sell an additional $20 million in
equity to Lilly at a 20% premium to the then market price, and Ligand would
qualify for certain additional royalties of up to 1.5% on net sales of Ligand's
choice of Targretin, LGD1268 or LGD1324. Ligand will receive double-digit
royalties on net sales of the most advanced products and single-digit royalties
on net sales of earlier compounds. Ligand will also 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. Lilly has the
right to terminate the development of compounds under the agreements, with
Ligand receiving 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. In addition, either party may terminate the agreements following a
material breach remains uncured for 90 days. Lilly also has the right to
terminate the agreement regarding development of Targretin at any time on or
before December 15, 1998 if it decides not to proceed with the development of
Targretin; Lilly has the right to terminate development of Targretin following
December 15, 1998 in certain other instances.
In connection with the alliance, Lilly made a $31.2 million equity
investment in the Company's Common Stock, provided an upfront non-refundable
milestone payment of $12.5 million and could provide the Company with up to $49
million in research funding over five years. As of December 31, 1997, Lilly had
funded approximately $1.0 million of the total $49 million in potential research
funding under the agreements.
SmithKline Beecham Corporation. In February 1995, Ligand entered into a
collaborative agreement with SmithKline Beecham providing for a three-year
research program (with an option to extend the program for two years at
SmithKline Beecham's election) to utilize Ligand's proprietary STATs technology
to discover and characterize small molecule, orally bioavailable drugs to
control hematopoiesis (the formation and development of blood cells). Under the
terms of the agreement, SmithKline Beecham has been granted exclusive worldwide
rights for products resulting from the collaboration in certain targeted areas.
In exchange, SmithKline Beecham has agreed to provide Ligand up to $9.0 million
in research funding and up to $12.5 million in equity investments. This amount
includes an initial equity investment of $5.0 million in Common Stock. In
November 1995, a second equity investment of $2.5 million in Ligand's Common
Stock was provided upon the achievement of certain milestones. In January 1997,
a third equity investment of $2.5 million in Ligand's Common Stock was provided
upon SmithKline Beecham's election to include screens aimed at discovering small
molecule mimics of thrombopoietin. The final installment of $2.5 million was
provided in October 1997 as a convertible note as a result of SmithKline
Beecham's election to extend the collaboration and provide an additional $3.1
million in research funding. SmithKline Beecham will make additional milestone
payments to Ligand as compounds progress in clinical development and will also
make royalty payments on product sales. Ligand has 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
Ligand in North America and to develop and market them outside North America.
SmithKline Beecham can terminate the research program upon 60 days notice in the
event of any breach by Ligand or upon six months notice at any time after August
1996. In March of 1998, Ligand and SmithKline Beecham agreed, subject to
regulatory approval, to initiate a new collaboration 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. As
part of the leptin-obesity collaboration, SmithKline Beecham will purchase
274,423 shares of Ligand Common Stock for $5.0 million ($18.22 per share, a 20%
premium over a 15-day trading average of stock prior to execution agreement and
will also purchase for $1 million a warrant under certain circumstances after
three years. SmithKline Beecham will also purchase additional Ligand Common
Stock at 20% premium if a research milestone is achieved. The agreement also
provides for cash
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payments if subsequent milestones are met. Under the new agreement, SmithKline
Beecham will obtain exclusive worldwide rights to products resulting from the
obesity collaboration and has agreed to make milestone payments to Ligand as
compounds progress through preclinical and clinical development, and royalty
payments on sales, if products result from the research. As of December 31,
1997, SmithKline Beecham had funded approximately $7.7 million of the total of
$10.9 million in potential research funding under the agreement.
American Home Products Corporation. In September 1994, Ligand entered into
a collaborative research agreement with AHP providing for a three-year research
program (with an option to extend the program for two years at AHP's election)
to discover and develop drugs which 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. AHP has been granted exclusive worldwide rights
to all products discovered in the collaboration that are agonists or antagonists
to the PRs and ERs for application in the fields of women's health and cancer
therapy. Under the agreement, AHP agreed to provide up to $21.5 million in
research funding and up to $25.0 million in equity and convertible notes, in
addition to milestone and royalty payments to Ligand for such products. An
important additional aspect of this collaboration is Ligand's right to assay
AHP's extensive chemical library for activity against a selected set of targets
of Ligand's internal programs. Ligand may select up to 24 lead compounds for
internal development to which Ligand has worldwide rights. AHP made a $5.0
million equity investment in Ligand and provided $10.0 million to Ligand in the
form of a convertible note. In the second quarter of 1995, Ligand had achieved
certain milestones which qualified the Company to receive the second installment
of a $5.0 million convertible note which the Company elected to receive in
December 1996. A final convertible note installment of $5.0 million will be
provided if AHP exercises its option to extend the period of collaboration from
three to five years. In September 1997, the research program was extended for
one year. The first two notes issued to AHP are convertible into the Company's
Common Stock at $10.01 per share and the final note is convertible at $10.88 per
share. The conversion prices are subject to adjustment if certain dilutive
events occur to outstanding Common Stock. In August 1996, February 1997, July
1997 and again in December 1997, the Company converted $3.8 million, $3.8
million, $2.5 million and $1.3 million, respectively of the convertible notes
outstanding into 374,626, 374,626, 249,749 and 124,875 shares of Common Stock at
a $10.01 conversion price.
In January 1996, AHP exercised its option to include compounds discovered
by Ligand that modulate PRs and to expand the collaboration to encompass the
treatment or prevention of osteoporosis through the ER. In connection with the
exercise of the option, the Company received $2.5 million in additional research
revenue and funding commitments. Ligand's proprietary PR modulators added to the
collaboration include three series: LG1447 PR antagonists, LG2527 and LG2716 PR
agonists. In May 1996, AHP expanded the collaboration to include four advanced
chemical compound series from its internal ER-osteoporosis program. As of
December 31, 1997, AHP had funded approximately $16.5 million of the total of
$21.5 million in potential research funding under the agreement.
Abbott Laboratories. In July 1994, Ligand entered into a collaborative
research agreement with Abbott providing for a five-year research program to
discover and develop small molecule compounds for the prevention or treatment of
inflammatory diseases. Under the agreement, research funding provided by Abbott
may total up to approximately $16.0 million. Abbott has also committed
significant internal resources to the collaboration. Abbott was granted
exclusive worldwide rights for all products discovered in the collaboration for
use in inflammation. Ligand was granted 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 Ligand 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. Abbott made an initial $5.0 million equity
investment in Ligand and purchased an additional $5.0 million of equity in
August 1995. Abbott can terminate the research program at any time upon 90 days
notice in the event of any breach by Ligand or upon four months notice at any
time. As of December 31, 1997, Abbott had funded approximately $8.0 million of
the total of $16.0 million in potential research funding under the agreement.
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Sankyo Company Limited. As part of the Glycomed acquisition, the Company
acquired a collaborative research agreement with Sankyo which Glycomed had
entered into in June 1994 providing for a three-year research program. Under the
agreement, Sankyo reimburses a portion of the Company's research expenses
related to the collaboration up to an aggregate of $8.9 million. The agreement
also provides that upon being presented with a target compound arising from the
research collaboration with the Company, Sankyo will notify the Company whether
it wishes to pursue development of the compound. If Sankyo exercises its option
to develop the compound, the Company and Sankyo will negotiate in good faith the
terms and conditions for an option and license agreement and Sankyo will make
additional milestone payments. In connection with the collaborative research
agreement, in September 1995, Sankyo purchased $1.5 million of the Company's
Common Stock. In June 1997, the research program was extended through October
1997, at which time the research program terminated. Sankyo funded the total
potential research funding of $8.9 million, of which $6.5 million was funded
since the Merger.
Glaxo-Wellcome plc. In September 1992, Ligand entered into a five-year
collaborative research agreement with Glaxo to develop drugs for the prevention
or treatment of cardiovascular disease. The collaboration significantly enhances
Ligand's pharmacological, medicinal chemistry and clinical development resources
related to cardiovascular disease. Glaxo has committed significant internal
resources to the collaboration and will fund one-half of Ligand's research
expenses to support 18 Ligand scientists assigned to the collaboration. Ligand
and Glaxo will screen compounds to identify potential lead compounds. Once leads
have been identified, Glaxo will have primary responsibility for pharmacology,
medicinal chemistry to optimize the drug candidates and preclinical testing.
Glaxo also has responsibility for conducting clinical trials of the drug
candidates for marketing approval by the FDA and certain other regulatory
agencies. Ligand will receive milestone payments as compounds progress through
the development cycle and a royalty on any commercialized products. Ligand has
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. Glaxo has made a total of $10.0 million in
equity investments in Ligand. In connection with the agreement, Glaxo purchased
$7.5 million of the Company's Common Stock. Glaxo also purchased $2.5 million of
the Company's Common Stock as part of the Company's initial public offering. The
collaborative research program was completed in September 1997. Glaxo funded
approximately $9.2 million of the total of $10.0 million in potential research
funding under the agreement.
Allergan, Inc. In June 1992, Ligand and Allergan formed Allergan-Ligand
Joint Venture ("the Joint Venture"), owned 50% by each party, to discover,
develop and commercialize retinoid drugs. In December 1994, the Company and
Allergan formed Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue
the research and development activities previously conducted by the Joint
Venture. In June 1995, the Company and ALRT completed a public offering of
3,250,000 units (the "Units") with aggregate proceeds of $32.5 million ("the
ALRT Offering") and cash contributions by Allergan and Ligand of $50.0 million
and $17.5 million, respectively, providing for net proceeds of $94.3 million for
retinoid product research and development. Each Unit consisted of one share of
ALRT's Callable Common Stock and two warrants, each warrant entitling the holder
to purchase one share of Common Stock of the Company. Immediately prior to the
consummation of the ALRT Offering, Allergan Pharmaceuticals (Ireland) Ltd., Inc.
("Allergan Ireland") made a $6.0 million investment in the Company's Common
Stock. Since 1992, Allergan Ireland, a wholly owned subsidiary of Allergan, has
made $30.0 million in equity investments in Ligand. As part of the ALRT
Offering, all rights held by the Joint Venture were licensed to ALRT. The
Company, Allergan and ALRT entered into certain other various agreements in
connection with the funding of ALRT, including a Technology License Agreement, a
Research and Development Agreement, a Commercialization Agreement, and a
Services and Administrative Agreements. Ligand's $17.5 million in cash
contribution, as well as warrants were in exchange for (i) a right to acquire
all of the Callable Common Stock at specified future dates and amounts (the
"Stock Purchase Plan") and (ii) a right to acquire all rights to the Panretin
(ALRT 1057) product, jointly with Allergan (the "1057 Option"). Allergan's $50.0
million cash contribution to ALRT was in exchange for (i) the right to acquire
onehalf of technologies and other assets in the event Ligand exercises its right
to acquire all of the Callable Common Stock (the "Asset Purchase Option"), (ii)
a similar right to acquire all of the Callable Common Stock if Ligand does not
exercise its right and (iii) a right to acquire all rights to Panretin (ALRT
1057) product, jointly with Ligand.
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In September 1997, Ligand and Allergan announced that they had exercised
their respective Stock Purchase Option and Asset Purchase Option at the original
prices provided by the agreements. Ligand's notice of exercise of the Stock
Purchase Option included a stock purchase option exercise price of $21.97 per
share of outstanding Callable Common Stock, the original exercise price
designated for the exercise of the Stock Purchase Option at any time prior to
June 3, 1998. Allergan's notice of exercise of its Asset Purchase Option
included the aggregate Asset Purchase Option exercise price of $8.9 million, the
original exercise price designated for the exercise of the Asset Purchase Option
at any time prior to June 3, 1998. The Asset Purchase Option exercise price was
paid in cash to ALRT concurrently with the payment to holders of ALRT Callable
Common Stock of the Stock Purchase Option exercise price and was used to pay a
portion of such Stock Purchase Option exercise price.
Ligand and Allergan also agreed to restructure the terms and conditions
relating to research, development, commercialization and sublicense rights for
the ALRT compounds in the period following the closing of the exercise of
Ligand's Stock Purchase Option and Allergan's Asset Purchase Option. Prior to
the restructuring and following the exercise of the Stock Purchase Option and
Asset Purchase Option, Ligand and Allergan would have had equal, co-exclusive
development, commercialization and sublicense rights in the compounds and assets
developed by ALRT. Ligand would have owned all of the outstanding Callable
Common Stock of ALRT and Allergan would have acquired (i) a co-exclusive (with
ALRT) right to ALRT technology as of the date of the acquisition and (ii) 50% of
all tangible assets related to ALRT's activities in the retinoid program. Under
the restructured arrangement, however, Ligand received exclusive, worldwide
development, commercialization and sublicense rights to Panretin Capsules and
Panretin Gel, LGD1550, LGD268 and LGD324. Allergan received exclusive, worldwide
development, commercialization and sublicense rights to LGD4310, an RAR
antagonist being developed for topical application against mucocutaneous
toxicity associated with currently marketed retinoids as well as for psoriasis.
Allergan also received LGD326 and LGD4204 (two advanced preclinical RXR
selective compounds). In addition, Ligand and Allergan participated in a lottery
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 select.
Ligand and Allergan will each pay the other a royalty based on net sales of
products developed from (i) the compounds selected by each in the lottery and
(ii) the other ALRT compounds to which each acquires exclusive rights. Ligand
will also pay to Allergan a royalty based on Ligand's net sales of Targretin for
uses other than oncology and dermatology indications; in the event that Ligand
licenses commercialization rights to Targretin to a third party, Ligand will pay
to Allergan a percentage of royalties payable to Ligand with respect to sales of
Targretin other than in oncology and dermatology indications. Under the
restructured arrangement, on the closing of the exercise of the Stock Purchase
Option and the Asset Purchase Option, Ligand paid Allergan a non-refundable cash
payment in the amount of $4.5 million.
ALRT had provided approximately $52.0 million in research funding to Ligand
under the Research and Development Agreement.
Pfizer Inc. In May 1991, Ligand entered into a five-year collaborative
research and development and license agreement with Pfizer to develop better
alternative therapies for osteoporosis. Pfizer agreed to provide up to $3.0
million per year in research funding to Ligand in addition to committing
significant internal resources. In November 1993, Ligand and Pfizer announced
the successful completion of the research phase of their 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. Under the terms of the collaboration,
Pfizer has primary responsibility for pharmacology, medicinal chemistry to
optimize the drug candidates, preclinical testing, and clinical trials of drug
candidates for marketing approval by the FDA and certain other regulatory
agencies. Ligand has granted Pfizer exclusive worldwide rights to manufacture
and market any compounds jointly developed for osteoporosis. Ligand is to
receive up to $7.5 million in milestone payments as development objectives are
achieved, in addition to royalties on sales of successful drugs that emerge from
the alliance. As
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of December 31, 1993, Pfizer had made a total of $7.5 million of equity
investments in Ligand and had funded approximately $9.4 million in research
funding.
In December 1994, Ligand filed suit against Pfizer in the Superior Court of
California in San Diego County for breach of contract and for a declaration of
future rights as they relate to droloxifene, a compound upon which Ligand
performed work at Pfizer's request during the collaboration between Pfizer and
Ligand to develop drugs in the field of osteoporosis. Droloxifene is an estrogen
antagonist/partial agonist with potential indications in the treatment of
osteoporosis and breast cancer as well as other applications. Ligand and Pfizer
entered into a settlement agreement with respect to the lawsuit in April 1996.
Under the terms of the settlement agreement, Ligand is entitled to receive
milestone payments if Pfizer continues development and royalties if Pfizer
commercializes droloxifene. At the option of either party, milestone and royalty
payments owed Ligand can be satisfied by Pfizer transferring to Ligand shares of
Common Stock at an exchange ratio of $12.375 per share. To date, Ligand has
received approximately $1.3 million in milestone payments from Pfizer as a
result of the continued development of droloxifene. These milestones were paid
in the form of an aggregate of 101,011 shares of Common Stock, which were
subsequently retired from treasury stock in September 1996. According to
announcements by Pfizer, droloxifene has entered Phase II clinical trials for
osteoporosis.
The Salk Institute of Biological Studies. In October 1988, Ligand
established an exclusive relationship with The Salk Institute which is one of
the research centers in the area of IR technology. Dr. Ronald Evans, who cloned
and characterized the first IR in 1985 and who invented the co-transfection
assay used by Ligand, is a professor in the Gene Expression Laboratory of The
Salk Institute and an Investigator of the Howard Hughes Medical Institute. Under
the agreement, Ligand has an exclusive, worldwide license to the IR technology
developed by Dr. Evans' laboratory at The Salk Institute. Subject to compliance
with the terms of the agreement, the term of the license extends for the life of
the patents covering such developments.
Under the agreement, Ligand made an initial payment to The Salk Institute
and issued shares of Common Stock as partial consideration for the license.
Ligand is also 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.
Ligand also entered into exclusive consulting agreements with Dr. Evans
that continue through July 1998. Under these agreements, Dr. Evans has purchased
Common Stock and has been granted options to purchase Common Stock. As a
consultant, Dr. Evans meets on a regular basis with Company personnel to review
ongoing research and to assist Ligand in defining the technical objectives of
future research. Dr. Evans is also involved in identifying new developments made
in other leading academic laboratories which relate to Ligand's research
interests. Dr. Evans serves as Chairman of Ligand's Scientific Advisory Board.
Baylor College of Medicine. In January 1990, Ligand established an
exclusive relationship with Baylor, which is a center of IR technology. Dr. Bert
W. O'Malley is a professor and the Chairman of the Center for Reproductive
Biology at Baylor and leads IR research at that institution. Important features
of Ligand's co-transfection assay were developed in Dr. O'Malley's laboratory
and are exclusively licensed by Ligand. Ligand has entered into a series of
agreements with Baylor under which it has an exclusive, worldwide license to IR
technology developed at Baylor and to future improvements made in Dr. O'Malley's
laboratory through September 1999. Subject to compliance with the terms of the
agreements, the term of the license may extend for the life of the patents
covering such developments.
Ligand works closely with Dr. O'Malley and Baylor in scientific IR
research, particularly in the area of sex steroids and orphan IRs. Under the
agreement, Ligand is obligated to make payments to Baylor College of Medicine in
support of research done in Dr. O'Malley's laboratory for the period from April
1992 through March 1997. Ligand is also obligated to make certain royalty
payments based on the sales of products developed using the licensed technology.
Ligand also entered into an exclusive consulting agreement with Dr. O'Malley
through September 1997. Discussions are under way to extend such agreement;
there can be no assurance such an extension will be negotiated. Dr. O'Malley is
a member of Ligand's Scientific Advisory Board. Dr. O'Malley has purchased
Common Stock and has been granted options to purchase Common Stock.
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Rockefeller University. In September 1992, Ligand 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 (i)
payments upon the transfer of the technology to Ligand and upon the first four
anniversary dates of the agreement, (ii) a royalty on any commercialized
products and (iii) subject to a vesting schedule, shares of Common Stock and
warrants to purchase shares of Common Stock. In consideration of related
technology assigned by NYU to Rockefeller University and covered by the license
agreement with Ligand, NYU received, subject to a vesting schedule, shares of
Common Stock and warrants to purchase shares of Common Stock. Subject to a
vesting schedule tied to their consulting agreements, Dr. Darnell and Dr. Levy
received shares of Common Stock. In addition, in October 1994 Ligand granted Dr.
Darnell options to purchase shares of Common Stock.
In addition to the collaborations discussed above, the Company also has a
number of other consulting, licensing, development and academic agreements by
which it strives to advance its technology.
PATENTS AND PROPRIETARY RIGHTS
Ligand believes that patents and other proprietary rights are important to
its business. Ligand'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. Ligand also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
To date, Ligand has filed or participated as licensee in the filing of
approximately 150 currently pending patent applications in the United States
relating to Ligand's technology, as well as foreign counterparts of certain of
these applications in many countries. In addition, Ligand is the exclusive
licensee to rights covered by approximately 200 patents issued or allowed
worldwide to The Salk Institute, Baylor and other licensors. Subject to
compliance with the terms of the respective agreements, Ligand's rights under
its license with The Salk Institute and other exclusive licensors extend for the
life of the patents covering such developments.
The patent positions of pharmaceutical and biotechnology firms, including
Ligand, are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. In addition, the coverage
claimed in a patent application can be significantly reduced before or after a
patent is issued. The situation is also affected by the fact that the patent law
of the United States is changed from time to time. For example, during 1995, the
patent term was changed from 17 years from patent grant to 20 years from the
filing date of the application for patent. Since a patent has no effect until
granted, and because the time during which a patent application spends before
the Patent Office cannot be predicted, the actual term of a patent cannot be
known until it is granted and that term may be substantially less than the 17
years allowed under former law. Also during 1995, certain advantages of U.S.
inventors over foreign inventors were eliminated from the patent law. There are
currently pending before the Congress other changes to the patent law which may
adversely affect pharmaceutical and biotechnology firms. The extent to which the
changes made in 1995 and changes which might occur if pending legislation is
adopted would affect the operations of Ligand cannot be ascertained. There can
be no assurance that any patent applications will result in the issuance of
patents or, if any patents are issued, that they will provide significant
proprietary protection or, instead, will be circumvented or invalidated. Since
under current law patent applications in the United States are maintained in
secrecy until foreign counterparts, if any, publish or patents issue and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, Ligand cannot be certain that it or any licensor was
the first creator of inventions covered by pending patent applications or that
it or such licensor was the first to file patent applications for such
inventions. Moreover, Ligand might have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention, which could result in substantial cost to Ligand, even if
the eventual outcome were favorable to Ligand. There can be no assurance that
Ligand's patents or those of its licensors, if issued, would be held valid by a
court or that a competitor's technology or product would be found to infringe
such patents.
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A number of pharmaceutical and biotechnology companies, and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to Ligand's
business. Some of these technologies, applications or patents may conflict with
Ligand's technologies or patent applications. Such conflict could limit the
scope of the patents (if any) that Ligand may be able to obtain or result in the
denial of Ligand's patent applications. In addition, if patents that cover
Ligand's activities are issued to other companies, there can be no assurance
that Ligand would be able to obtain licenses to these patents at a reasonable
cost or be able to develop or obtain alternative technology.
Ligand also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Ligand's trade secrets or disclose such
technology or that Ligand can meaningfully protect its trade secrets.
It is Ligand's policy to require its employees, consultants, members of the
Scientific Advisory Board and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or a collaboration with Ligand. These agreements provide that all
confidential information developed or made known during the course of the
relationship with Ligand is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions resulting from work performed for Ligand,
utilizing property of Ligand or relating to Ligand's business and conceived or
completed by the individual during employment shall be the exclusive property of
Ligand to the extent permitted by applicable law. There can be no assurance,
however, that these agreements will provide meaningful protection of Ligand's
trade secrets or adequate remedies in the event of unauthorized use or
disclosure of such information.
SALES AND MARKETING
The creation of infrastructure to commercialize products is a difficult,
expensive and time-consuming process. Ligand currently has no sales and only
limited marketing capability outside Canada. To market any of its products
directly, the Company will need to develop a marketing and sales force with
technical expertise and distribution capability or contract with other
pharmaceutical and/or health care companies with distributions systems and
direct sales forces. There can be no assurance that the Company will be able to
establish direct or indirect sales and distribution capabilities or be
successful in gaining market acceptance for proprietary products or for other
products. To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties, and there can be no assurance that any such efforts
will be successful.
In September 1994, Ligand was appointed by Cetus Oncology as the sole
distributor of Proleukin, an oncology product, within Canada for a five-year
period beginning on the date of the first sale of Proleukin by Ligand in Canada.
Ligand paid Cetus Oncology $250,000 upon execution of the agreement and made an
additional milestone payment of $250,000 to Cetus Oncology upon the receipt of
government approval for the sale of Proleukin in Canada. In accordance with the
agreement, Ligand initially hired three sales representatives to market
Proleukin in Canada.
In March 1995, Ligand was also appointed by QLT as the sole distributor
within Canada of PHOTOFRIN, a product for the treatment of esophageal and
superficial bladder cancer. The agreement covers an initial 10 year period
beginning on the date of the first sale of PHOTOFRIN by Ligand in Canada. Ligand
paid QLT $180,800 upon execution of the agreement with future payments based on
sales volume.
MANUFACTURING
Ligand currently has no manufacturing facilities, and accordingly relies on
third parties, including its collaborative partners, for clinical or commercial
production of any compounds under consideration as products. Ligand is currently
constructing and validating a current Good Manufacturing Practices ("cGMP")
pilot manufacturing capability in order to produce sufficient quantities of
products for preclinical testing and initial clinical trials. If Ligand is
unable to develop or contract on acceptable terms for manufacturing services,
Ligand's ability to conduct preclinical testing and human clinical trials will
be adversely affected, resulting in
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the delay of submission of products for regulatory approval and delay of
initiation of new development programs, which in turn could materially impair
Ligand's competitive position. Although drugs acting through IRs and STATs have
been manufactured on a commercial scale by other companies, there can be no
assurance that Ligand will be able to manufacture its products on a commercial
scale or that such products can be manufactured by Ligand or any other party on
behalf of Ligand at costs or in quantities to make commercially viable products.
GOVERNMENT REGULATION
The manufacturing and marketing of Ligand's products and its ongoing
research and development activities 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 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 Ligand's 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 (i) preclinical laboratory and animal tests, (ii) the
submission to the FDA of an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug, (iv) the submission of
an NDA to the FDA and (v) 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 preapproved inspections by the FDA
prior to marketing approval and then to biennial inspections and must comply
with cGMP. To supply products for use in the United 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.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are conducted
in accordance with protocols previously submitted to the FDA as part of the IND
that detail the objectives of the study, the parameters used to monitor safety
and the efficacy criteria that are being evaluated. Each clinical study is
conducted under the auspices of an Institutional Review Board ("IRB") at the
institution at which the study is conducted. The IRB considers, among other
things, ethical factors, the safety of the human subjects and the possible
liability risk for the institution.
Clinical trials are typically conducted in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into healthy
human volunteers, the emphasis is on testing for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and clinical pharmacology.
Phase II involves studies in a limited patient population to determine the
efficacy of the pharmaceutical for specific targeted indications, to determine
dosage tolerance and optimal dosage and to identify possible 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
within an expanded patient population at multiple clinical study sites. The FDA
reviews both the
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clinical plans and the results of the trials and may discontinue the trials at
any time if there are significant safety issues.
The results of the preclinical and clinical trials are submitted to the FDA
in the form of an NDA for marketing approval. The testing and approval process
is likely to require substantial time and effort and there can be no assurance
that any approval will be granted on a timely basis, if at all. The approval
process is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials. Additional animal studies or clinical trials
may be requested during the FDA review process and may delay marketing approval.
After FDA approval for the initial indications, further clinical trials would be
necessary to gain approval for the use of the product for any additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense.
The results of preclinical studies and initial clinical trials are not
necessarily predictive of results that will be obtained from large-scale
clinical trials, and there can be no assurance that clinical trials of any
product under development will demonstrate the safety and efficacy of such
product or will result in a marketable product. The safety and efficacy of a
therapeutic product under development by the Company must be supported by
extensive data from clinical trials. A number of companies have suffered
significant setbacks in advanced clinical trials, despite promising results in
earlier trials. The failure to demonstrate adequately the safety and efficacy of
a therapeutic drug under development would delay or prevent regulatory approval
of the product and could have a material adverse effect on the Company. In
addition, the FDA may require additional clinical trials, which could result in
increased costs and significant development delays.
The rate of completion of clinical trials of the Company's products is
dependent upon, among other factors, obtaining adequate clinical supplies and
the rate of patient accrual. Patient accrual 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 planned
patient enrollment in clinical trials may result in increased costs, program
delays or both, which could have a material adverse effect on the Company. In
addition, some of the Company's current corporate partners have certain rights
to control the planning and execution of product development and clinical
programs, and there can be no assurance that such corporate partners' rights to
control aspects of such programs will not impede the Company's ability to
conduct such programs in accordance with the schedules and in the manner
currently contemplated by the Company for such programs. There can be no
assurance that, if clinical trials are completed, the Company will submit an NDA
with respect to any potential products or that any such application will be
reviewed and approved by the FDA in a timely manner, if at all.
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 on Ligand.
A drug that receives Orphan Drug designation by the FDA and is the first
product to receive FDA marketing approval for its product claim is currently
entitled to a seven-year exclusive marketing period in the United States for
that product claim. A drug that is considered by the FDA to be different than a
particular Orphan Drug, however, is not barred from sale in the United States
during such seven-year exclusive marketing period. The FDA approved an
application by Ligand to have Panretin Capsules designated an "Orphan Drug" for
the treatment of APL. Ligand is preparing additional applications for Orphan
Drug designations in other indications. Congress is currently considering
significant changes to the Orphan Drug Act, including a reduction in the
exclusive marketing period from seven years to four years, with the possibility
of a three-year extension for certain drugs.
For marketing outside the United States before FDA approval to market, the
Company must submit an export permit application to the FDA. The Company 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 the Company or
any of its partners will meet and sustain any such requirements.
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COMPETITION
Some of the drugs which Ligand is 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 Ligand is 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 competitors of Ligand.
Many of Ligand's existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than Ligand and may be better equipped to develop, manufacture
and market products. In addition, many of these companies have extensive
experience in preclinical testing and human clinical trials. These companies may
develop and introduce products and processes competitive with or superior to
those of Ligand. The development by others of new treatment methods for those
indications for which Ligand is developing pharmaceuticals could render these
pharmaceuticals noncompetitive or obsolete.
Ligand's products under development are expected to address a broad range
of markets. Ligand's competition will be determined in part by the potential
indications for which Ligand's products are developed and ultimately approved by
regulatory authorities. For certain of Ligand's potential products, an important
factor in competition may be the timing of market introduction of Ligand's or
competitors' products. Accordingly, the relative speed at which Ligand or its
existing or its future corporate partners can develop products, complete the
clinical trials and regulatory approval processes, and supply commercial
quantities of the products to the market are expected to be important
competitive factors. Ligand expects that competition among products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price and patent position.
Ligand's competitive position also depends upon its 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.
PRODUCT LIABILITY AND INSURANCE
Ligand's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. Ligand currently has limited product liability insurance; however,
there can be no assurance that Ligand will be able to maintain such insurance on
acceptable terms or that such insurance will provide adequate coverage against
potential liabilities. The Company expects to procure additional insurance when
its products progress to a later stage of development and if any rights to
later-stage products are in-licensed in the future. To the extent that product
liability insurance, if available, does not cover potential claims, the Company
will be required to self-insure the risks associated with such claims. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on the Company.
HUMAN RESOURCES
As of December 31, 1997, Ligand had 345 full-time employees, of whom 266
were involved directly in scientific research and development activities. Of
these employees, approximately 76 hold Ph.D. or M.D. degrees.
RISKS AND UNCERTAINTIES
In addition to the other business information contained herein, the
following are among the factors that should also be considered carefully in
evaluating Ligand, its wholly-owned subsidiaries, Glycomed Inc., Ligand (Canada)
Inc. and Allergan Ligand Retinoid Therapeutics, Inc. and its business.
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Early Stage of Product Development; Technological Uncertainty. Ligand was
founded in 1987 and has not generated any revenues from the sale of products
developed by Ligand or its collaborative partners. To achieve profitable
operations, the Company, alone or with others, must successfully develop,
clinically test, market and sell its products. Any products resulting from the
Company's or its collaborative partners' product development efforts are not
expected to be available for sale for at least several years, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that potential products are
found during preclinical testing or clinical trials to be ineffective or to
cause harmful side effects, that they fail to receive necessary regulatory
approvals, are difficult or uneconomical to manufacture on a large scale, fail
to achieve market acceptance or are precluded from commercialization by
proprietary rights of third parties. To date, Ligand's resources have been
substantially dedicated to the research and development of potential
pharmaceutical products based upon its expertise in IR and STATs technologies.
Even though certain pharmaceutical products act through IRs, some aspects of the
Company's IR technologies have not been used to produce marketed products. In
addition, the Company is 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. Most of the
Company's potential products will require extensive additional development,
including preclinical testing and clinical trials, as well as regulatory
approvals, prior to commercialization. No assurance can be given that the
Company's product development efforts will be successful, that required
regulatory approvals from the FDA or equivalent foreign authorities for any
indication will be obtained or that any products, if introduced, will be capable
of being produced in commercial quantities at reasonable costs or will be
successfully marketed. Further, the Company has no sales and only limited
marketing capabilities outside Canada, and even if the Company's products in
internal development are approved for marketing, there can be no assurance that
the Company will be able to develop such capabilities or successfully market
such products.
History of Operating Losses; Accumulated Deficit; Future Capital Needs;
Uncertainty of Additional Funding. Ligand has experienced significant operating
losses since its inception in 1987. As of December 31, 1997, Ligand had an
accumulated deficit of approximately $278 million. To date, substantially all of
Ligand's revenues have consisted of amounts received under collaborative
arrangements. The Company expects to incur additional losses at least over the
next several years and expects losses to increase as the Company's research and
development efforts and clinical trials progress.
The discovery and development of products will require the commitment of
substantial resources to conduct research, preclinical testing and clinical
trials, to establish pilot scale and commercial scale manufacturing processes
and facilities, and to establish and develop quality control, regulatory,
marketing, sales and administrative capabilities. The future capital
requirements of the Company will depend on many factors, including the pace of
scientific progress in its 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, changes in existing collaborations, the
cost of manufacturing scale-up and the effectiveness of the Company's
commercialization activities. To date, Ligand has not generated any revenue from
the sales of products developed by Ligand or its collaborative partners. There
can be no assurance that Ligand independently or through its collaborations will
successfully develop, manufacture or market any products or ever achieve or
sustain revenues or profitability from the commercialization of such products.
Moreover, even if profitability is achieved, the level of that profitability
cannot be accurately predicted. Ligand expects that operating results will
fluctuate from quarter to quarter as a result of differences in the timing of
expenses incurred and the revenues received from collaborative arrangements and
other sources. Some of these fluctuations may be significant. The Company
believes that its available cash, cash equivalents, marketable securities and
existing sources of funding will be adequate to satisfy its anticipated capital
requirements through 1999.
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Glycomed's outstanding indebtedness includes $50 million principal amount
of 7 1/2% Convertible Subordinated Debentures Due 2003 (the "Debentures"). There
can be no assurance that Glycomed will have the funds necessary to pay the
interest on and the principal of the Debentures or, if not, that it will be able
to refinance the Debentures.
The Company expects that it will seek any additional capital needed to fund
its operations through new collaborations, the extension of existing
collaborations, or through public or private equity or debt financings. There
can be no assurance that additional financing will be available on acceptable
terms, if at all. Any inability of the Company to obtain additional financing or
of Glycomed to service its obligations under the Debentures could have a
material adverse effect on the Company.
Uncertainties Related to Clinical Trials. Before obtaining required
regulatory approvals for the commercial sale of each product under development,
the Company and its collaborators must demonstrate through preclinical studies
and clinical trials that such product is safe and efficacious for use. The
results of preclinical studies and initial clinical trials are not necessarily
predictive of results that will be obtained from large-scale clinical trials,
and there can be no assurance that clinical trials of any product under
development will demonstrate the safety and efficacy of such product or will
result in a marketable product. The safety and efficacy of a therapeutic product
under development by the Company must be supported by extensive data from
clinical trials. A number of companies have suffered significant setbacks in
advanced clinical trials, despite promising results in earlier trials. The
failure to demonstrate adequately the safety and efficacy of a therapeutic drug
under development would delay or prevent regulatory approval of the product and
could have a material adverse effect on the Company. In addition, the FDA may
require additional clinical trials, which could result in increased costs and
significant development delays.
The rate of completion of clinical trials of the Company's potential
products is dependent upon, among other factors, obtaining adequate clinical
supplies and the rate of patient accrual. Patient accrual 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 planned
patient enrollment in clinical trials may result in increased costs, program
delays or both, which could have a material adverse effect on the Company. In
addition, some of the Company's current collaborative partners have certain
rights to control the planning and execution of product development and clinical
programs, and there can be no assurance that such corporate partners' rights to
control aspects of such programs will not impede the Company's ability to
conduct such programs in accordance with the schedules and in the manner
currently contemplated by the Company for such programs. There can be no
assurance that, if clinical trials are completed, the Company or its
collaborative partners will submit an NDA with respect to any potential products
or that any such application will be reviewed and approved by the FDA in a
timely manner, if at all.
Reliance on Collaborative Relationships. The Company's strategy for the
development, clinical testing, manufacturing and commercialization of certain of
its potential products includes entering into collaborations with corporate
partners, licensors, licensees and others. To date, Ligand has entered into drug
discovery and development collaborations with Lilly, SmithKline Beecham, AHP,
Abbott, Sankyo, Glaxo, Allergan and Pfizer. These collaborations provide Ligand
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, respectively. The Company's collaborative agreements allow its
collaborative partners significant discretion in electing to pursue or not to
pursue any development program. There can be no assurance that the Company's
collaborations will continue or that the collaborations will be successful. In
addition, there can be no assurance that Ligand's collaborators will not pursue
alternative technologies either on their own or in collaboration with others as
a means of developing drugs competitive with the types of drugs currently being
developed in collaboration with Ligand, and any such action may result in the
withdrawal of support and increased competition for the Company's programs. In
addition, if products are approved for marketing under these programs, any
revenues to Ligand from these products will be dependent on the manufacturing,
marketing and sales efforts of its collaborators, which generally retain
commercialization rights under the collaborative agreements. Ligand's current
collaborators also generally have the right to terminate their respective
collaborations under certain circumstances. If any of the Company's
collaborative partners were to breach or terminate its agreements with the
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Company or otherwise fail to conduct its collaborative activities successfully,
the development of the Company's products under such agreements would be delayed
or terminated. The delay or termination of any of the collaborations could have
a material adverse effect on Ligand.
There can be no assurance that disputes will not arise in the future with
Ligand's collaborators, including with respect to the ownership of rights to any
technology developed. For example, the Company was involved in litigation with
Pfizer, which was settled in April 1996, with respect to Ligand's rights to
receive milestones and royalties based on the development and commercialization
of droloxifene. These and other possible disagreements between collaborators and
the Company could lead to delays in the achievement of milestones or receipt of
milestone payments or research revenue, to delays or interruptions in, or
termination of, collaborative research, development and commercialization of
certain potential products, or could require or result in litigation or
arbitration, which could be time consuming and expensive and could have a
material adverse effect on the Company.
Uncertainty of Patent Protection; Dependence on Proprietary Technology. The
patent positions of pharmaceutical and biopharmaceutical firms, including
Ligand, are uncertain and involve complex legal and technical questions for
which important legal principles are largely unresolved. In addition, the
coverage sought in a patent application can be significantly reduced before or
after a patent is issued. This uncertain situation is also affected by revisions
to the United States patent law adopted in recent years to give effect to
international accords to which the United States has become a party. The extent
to which such changes in law will affect the operations of Ligand cannot be
ascertained. In addition, there is currently pending before Congress legislation
providing for other changes to the patent law which may adversely affect
pharmaceutical and biopharmaceutical firms. If such pending legislation is
adopted, the extent to which such changes would affect the operations of the
Company cannot be ascertained.
Ligand's success will depend in part on its ability to obtain patent
protection for its technology both in the United States and other countries. A
number of pharmaceutical and biotechnology companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to Ligand's business. Some
of these patent applications, patents or technologies may conflict with Ligand's
technologies or patent applications. Any such conflict could limit the scope of
the patents, if any, that Ligand may be able to obtain or result in the denial
of Ligand's patent applications. In addition, if patents that cover Ligand's
activities are issued to other companies, there can be no assurance that Ligand
would be able to obtain licenses to such patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology. The Company has
from time to time had, continues to have and may have in the future discussions
with its current and potential collaborators regarding the scope and validity of
the Company's patent and other proprietary rights to its technologies, including
the Company's cotransfection assay. If a collaborator or other party were
successful in having substantial patent rights of the Company determined to be
invalid, it could adversely affect the ability of the Company to retain existing
collaborations beyond their expiration or, where contractually permitted,
encourage their termination. Such a determination could also adversely affect
the Company's ability to enter into new collaborations. If any disputes should
arise in the future with respect to the rights in any technology developed with
a collaborator or with respect to other matters involving the collaboration,
there could be delays in the achievement of milestones or receipt of milestone
payments or research revenues, or interruptions or termination of collaborative
research, development and commercialization of certain potential products, and
litigation or arbitration could result. Any of the foregoing matters could be
time consuming and expensive and could have a material adverse effect on the
Company.
Ligand owns or has exclusively licensed over 150 currently pending patent
applications in the United States relating to Ligand's technology, as well as
foreign counterparts of certain of these applications in many countries. There
can be no assurance that patents will issue from any of these applications or,
if patents do issue, that claims allowed will be sufficient to protect Ligand's
technology. In addition, Ligand is the owner or exclusive licensee of rights
covered by approximately 200 worldwide patents issued or allowed to it or to The
Salk Institute, Baylor and other licensors. Further, there can be no assurance
that any patents issued to Ligand or to licensors of Ligand's technology will
not be challenged, invalidated, circumvented or rendered unenforceable based on,
among other things, subsequently discovered prior art, lack of entitlement to
the
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priority of an earlier, related application, or failure to comply with the
written description, best mode, enablement or other applicable requirements, or
that the rights granted under any such patents will provide significant
proprietary protection or commercial advantage to Ligand. The invalidation,
circumvention or unenforceability of any of Ligand's patent protection could
have a material adverse effect on the Company.
The commercial success of Ligand will also depend in part on Ligand's not
infringing patents issued to competitors and not breaching technology licenses
that cover technology used in Ligand's products. It is uncertain whether any
thirdparty patents will require Ligand to develop alternative technology or to
alter its products or processes, obtain licenses or cease certain activities. If
any such licenses are required, there can be no assurance that Ligand will be
able to obtain such licenses on commercially favorable terms, if at all. Failure
by Ligand to obtain a license to any technology that it may require to
commercialize its products could have a material adverse effect on Ligand.
Litigation, which could result in substantial cost to Ligand, may also be
necessary to enforce any patents issued or licensed to Ligand or to determine
the scope and validity of third-party proprietary rights. There can be no
assurance that Ligand's patents or those of its licensors, if issued, would be
held valid by a court or that a competitor's technology or product would be
found to infringe such patents. If any of its competitors have filed patent
applications in the United States which claim technology also invented by
Ligand, Ligand may be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office ("PTO") in order to determine
priority of invention and, thus, the right to a patent for the technology, which
could result in substantial cost to Ligand to determine its rights.
Ligand has learned that a United States patent has been issued to, and
foreign counterparts have been filed by, Hoffman LaRoche ("Roche") that include
claims to a formulation of 9-cis-Retinoic acid (Panretin) and use of that
compound to treat epithelial cancers. Ligand had previously filed an application
which has an earlier filing date than the Roche patent and which has claims that
the Company believes are broader than but overlap in part with claims under the
Roche patent. Ligand's rights under its patent application have been exclusively
licensed to ALRT. Ligand acquired the exclusive right to develop and
commercialize Panretin Capsules and Gel. Ligand is currently investigating the
scope and validity of this patent to determine its impact upon the Panretin
Capsules and Gel products. The PTO has informed Ligand that the overlapping
claims are patentable to Ligand and initiated an interference proceeding to
determine whether Ligand or Roche is entitled to a patent by having been first
to invent the common subject matter. The Company cannot be assured of a
favorable outcome in the interference proceeding because of factors not known at
this time upon which the outcome may depend. In addition, the interference
proceeding may delay the decision of the PTO regarding the Company's application
with claims covering the Panretin Capsules and Gel products. While the Company
believes that the Roche patent does not cover the use of Panretin Capsules and
Gel to treat leukemias such as APL and sarcomas such as KS, or the treatment of
skin diseases such as psoriasis, if the Company and ALRT do not prevail in the
interference proceeding, the Roche patent might block the Company's use of
Panretin Capsules and Gel in certain cancers, and the Company may not be able to
obtain patent protection for the Panretin Capsules and Gel products.
Ligand also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. There can be no assurance that others will not independently develop
substantially equivalent proprietary information or otherwise gain access to or
disclose such information regarding Ligand. It is Ligand's policy to require its
employees, certain contractors, consultants, members of its Scientific Advisory
Board and parties to collaborative agreements to execute confidentiality
agreements upon the commencement of employment or consulting relationships or a
collaboration with Ligand. There can be no assurance that these agreements will
not be breached, that they will provide meaningful protection of Ligand's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information or that Ligand's trade secrets will not otherwise become known
or be independently discovered by its competitors.
Lack of Manufacturing Capability; Reliance on Third-Party
Manufacturers. Ligand currently has no manufacturing facilities and,
accordingly, relies on third parties, including its collaborative partners, for
clinical or commercial production of any compounds under consideration as
products. Ligand is currently constructing and validating a cGMP pilot
manufacturing capability in order to produce sufficient quantities of products
for preclinical testing and initial clinical trials. If Ligand is unable to
develop or contract on
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acceptable terms for manufacturing services, Ligand's ability to conduct
preclinical testing and human clinical trials will be adversely affected,
resulting in the delay of submission of products for regulatory approval and
delay of initiation of new development programs, which in turn could materially
impair Ligand's competitive position. Although drugs acting through IRs and
STATs have been manufactured on a commercial scale by other companies, there can
be no assurance that Ligand will be able to manufacture its products on a
commercial scale or that such products can be manufactured by Ligand or any
other party on behalf of Ligand at costs or in quantities to make commercially
viable products.
Limited Sales and Marketing Capability. The creation of infrastructure to
commercialize pharmaceutical products is a difficult, expensive and
time-consuming process. Ligand currently has no sales and only limited marketing
capability outside Canada. In Canada, Ligand has been appointed as the sole
distributor of two oncology products, Proleukin, which was developed by Cetus
Oncology Corporation and PHOTOFRIN, which was developed by QLT
PhotoTherapeutics, Inc. To market any of its products directly, the Company will
need to develop a marketing and sales force with technical expertise and
distribution capability or contract with other pharmaceutical and/or health care
companies with distribution systems and direct sales forces. There can be no
assurance that the Company will be able to establish direct or indirect sales
and distribution capabilities or be successful in gaining market acceptance for
proprietary products or for other products. To the extent the Company enters
into co-promotion or other licensing arrangements, any revenues received by the
Company will be dependent on the efforts of third parties, and there can be no
assurance that any such efforts will be successful.
Substantial Competition; Risk of Technological Obsolescence. Some of the
drugs which Ligand is 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 Ligand is targeting as well
as IR-related, STAT-related and complex carbohydrate-related approaches to drug
discovery and development. Many of Ligand's existing or potential competitors,
particularly large pharmaceutical companies, have substantially greater
financial, technical and human resources than Ligand and may be better equipped
to develop, manufacture and market products. In addition, many of these
companies have extensive experience in preclinical testing and human clinical
trials, obtaining FDA and other regulatory approvals and manufacturing and
marketing pharmaceutical products. Academic institutions, governmental agencies
and other public and private research organizations are conducting research to
develop technologies and products that may compete with those under development
by the Company. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for the use of
technology that they have developed. These institutions also may market
competitive commercial products on their own or through joint ventures and will
compete with the Company in recruiting highly qualified scientific personnel.
Any of these companies, academic institutions, government agencies or research
organizations may develop and introduce products and processes competitive with
or superior to those of Ligand. The development by others of new treatment
methods for those indications for which Ligand is developing products could
render Ligand's products noncompetitive or obsolete.
Ligand's products under development target a broad range of markets.
Ligand's competition will be determined in part by the potential indications for
which Ligand's products are developed and ultimately approved by regulatory
authorities. For certain of Ligand's potential products, an important factor in
competition may be the timing of market introduction of Ligand's or competitors'
products. Accordingly, the relative speed at which Ligand or its existing or
future corporate partners can develop products, complete the clinical trials and
regulatory approval processes, and supply commercial quantities of the products
to the market is expected to be an important competitive factor. Ligand expects
that competition among products approved for sale will be based, among other
things, on product efficacy, safety, reliability, availability, price and patent
position.
Ligand's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, and secure sufficient capital resources.
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Extensive Government Regulation; No Assurance of Regulatory Approval. The
manufacturing and marketing of Ligand's products and its ongoing research and
development activities are subject to and regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries.
Prior to marketing, any drug developed by the Company must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
mandated by the FDA and equivalent foreign authorities. These processes can take
a number of years and require the expenditure of substantial resources.
The time required for completing such testing and obtaining such approvals
is uncertain, and there is no assurance that any such approval will be obtained.
The Company or its collaborative partners may decide to replace a compound in
testing with a modified or optimized compound, thus extending the test period.
In addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development and FDA review of each submitted
new drug application or product license application. Similar delays may also be
encountered in other countries. There can be no assurance that even after such
time and expenditures, regulatory approval will be obtained for any products
developed by the Company. Moreover, prior to receiving FDA or equivalent foreign
authority approval to market its products, the Company may be required to
demonstrate that its products represent improved forms of treatment over
existing therapies. If regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which the product may
be marketed. Further, even if such regulatory approval is obtained, a marketed
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections, and subsequent discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market.
Dependence on Third-Party Reimbursement and Health Care Reform. Ligand's
commercial success will be heavily dependent upon the availability of
reimbursement for the use of any products developed by the Company or its
collaborative partners. There can be no assurance that Medicare and third-party
payors will authorize or otherwise budget reimbursement for the prescription of
any of Ligand's potential products. Additionally, third-party payors, including
Medicare, are increasingly challenging the prices charged for medical products
and services and may require additional cost-benefit analysis data from the
Company in order to demonstrate the cost-effectiveness of its products. There
can be no assurance that the Company will be able to provide such data in order
to gain market acceptance of its products with respect to pricing and
reimbursement.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement government control of pricing
and profitability of prescription pharmaceuticals. In addition, increasing
emphasis on managed health care will continue to put pressure on such pricing.
Cost control initiatives could decrease the price that the Company or any of its
collaborative partners or other licensees receives for any drugs it or they may
discover or develop in the future and, by preventing the recovery of development
costs, which could be substantial, and an appropriate profit margin, could have
a material adverse effect on the Company. Further, to the extent that cost
control initiatives have a material adverse effect on the Company's
collaborative partners, the Company's ability to commercialize its products and
to realize royalties may be adversely affected. Furthermore, federal and state
regulations govern or influence the reimbursement to health care providers of
fees and capital equipment costs in connection with medical treatment of certain
patients. If any actions are taken by federal and/or state governments, such
actions could adversely affect the prospects for sales of the Company's
products. There can be no assurance that action taken by federal and/or state
governments, if any, with regard to health care reform will not have a material
adverse effect on the Company.
Product Liability and Insurance Risks. Ligand's business exposes it to
potential product liability risks which are inherent in the testing,
manufacturing and marketing of human therapeutic products. Certain of the
compounds the Company is investigating could be injurious to humans. For
example, retinoids as a class are known to contain compounds which can cause
birth defects. Ligand currently has limited product liability insurance;
however, there can be no assurance that Ligand will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. The Company expects to procure
additional insurance when its products progress to a later stage of development
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and if any rights to later-stage products are in-licensed in the future. To the
extent that product liability insurance, if available, does not cover potential
claims, the Company will be required to self-insure the risks associated with
such claims. A successful product liability claim or series of claims brought
against the Company could have a material adverse effect on the Company.
Dependence on Key Employees. Ligand is highly dependent on the principal
members of its scientific and management staff, the loss of whose services might
impede the achievement of development objectives. Furthermore, Ligand is
currently experiencing a period of rapid growth which requires the hiring of
significant numbers of scientific, management and operational personnel.
Accordingly, recruiting and retaining qualified management, operations and
scientific personnel to perform research and development work in the future will
also be critical to Ligand's success. Although Ligand believes it will be
successful in attracting and retaining skilled and experienced management,
operational and scientific personnel, there can be no assurance that Ligand will
be able to attract and retain such personnel on acceptable terms given the
competition among numerous pharmaceutical and biotechnology companies,
universities and other research institutions for such personnel.
Use of Hazardous Materials. Ligand's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. For example, retinoids as a class are known to contain compounds
which can cause birth defects. Although the Company believes that its current
safety procedures for handling and disposing of such materials, chemicals and
compounds, comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of any accident, the Company could
be held liable for any damages that result and any such liability could be
significant. The Company may incur substantial costs to comply with
environmental regulations. Any such event could have a material adverse effect
on the Company.
Volatility of Stock Price. The market prices and trading volumes for
securities of emerging companies, like Ligand, have historically been highly
volatile and have experienced significant fluctuations unrelated to the
operating performance of such companies. Future announcements concerning the
Company or its competitors may have a significant impact on the market price of
the Common Stock. Such announcements might include the results of research,
development testing, technological innovations, new commercial products,
government regulation, developments concerning proprietary rights, litigation or
public concern as to the safety of the products.
Absence of Cash Dividends. No cash dividends have been paid on the
Company's Common Stock to date, and Ligand does not anticipate paying cash
dividends in the foreseeable future.
Effect of Shareholder Rights Plan and Certain Anti-Takeover Provisions. In
September 1996, the Company's Board of Directors adopted a preferred shares
rights plan (the "Shareholder Rights Plan") 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 acquisition of 20% or more of the Company's 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 Company's 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 Company's Common Stock and September 13, 2006.
Ligand's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") includes a provision that requires the approval
of the holders of 66 2/3% of Ligand's voting stock as a condition to a merger or
certain other business transactions with, or proposed by, a holder of 15% or
more of Ligand's voting stock, except in cases where certain directors approve
the transaction or certain minimum price criteria and other procedural
requirements are met (the "Fair Price Provision"). The Certificate of
Incorporation also requires that any action required or permitted to be taken by
stockholders of Ligand must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent
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41
in writing. In addition, special meetings of the stockholders of Ligand may be
called only by the Board of Directors, the Chairman of the Board or the
President of Ligand or by any person or persons holding shares representing at
least 10% of the outstanding Common Stock of the Company. The Shareholder Rights
Plan, the Fair Price Provision and other charter provisions may discourage
certain types of transactions involving an actual or potential change in control
of Ligand, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the stockholders to approve transactions that they may deem
to be in their best interests. In addition, the Board of Directors has the
authority to fix the rights and preferences of and issue shares of preferred
stock, which may have the effect of delaying or preventing a change in control
of Ligand without action by the stockholders.
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ITEM 2. PROPERTIES
Ligand currently leases and occupies three facilities in San Diego,
California.
In July 1994, the Company entered into a 20-year lease related to the
construction of a new build-to-suit laboratory facility. This 52,800 square foot
facility was completed and occupied in August 1995. In March 1997, the Company
entered into a long term lease for laboratory and administrative office space
related to a second build-to-suit facility. This 82,000 square foot facility was
completed and occupied in December 1997. The third facility in San Diego is
occupied under a lease of approximately 7,500 square feet of laboratory space
which continues through February 1999.
The Company believes these facilities will be adequate to meet the
Company's near-term space requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to other litigation arising in the
normal course of business. As of the date of the filing, the Company is not a
party to any litigation which would have a material effect on its financial
position or business operations taken as a whole.
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, 1997.
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43
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's 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 the Company's Common Stock on the Nasdaq National
Market for the periods indicated.
PRICE RANGE
---------------
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996:
Quarter..............................................
1st $13 3/4 $ 9 3/4
Quarter..............................................
2nd 19 3/4 11 1/8
Quarter..............................................
3rd 16 1/8 10 3/8
Quarter..............................................
4th 15 11/16 11 1/4
YEAR ENDING DECEMBER 31, 1997:
Quarter..............................................
1st $17 $10 1/4
Quarter..............................................
2nd 14 1/2 9 1/8
Quarter..............................................
3rd 17 3/4 11 5/8
Quarter..............................................
4th 18 3/8 11 1/4
(B) HOLDERS
As of February 28, 1998, there were approximately 1,539 holders of record
of the Common Stock.
(C) DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not intend to pay any cash dividends in the foreseeable future.
The Company currently intends to retain its earnings, if any, to finance future
growth.
(D) RECENT SALES OF UNREGISTERED SECURITIES
In November 1997, the Company issued to Eli Lilly and Company 2,176,279
shares of the Company's Common Stock at $17.23 per share for a total purchase
price of $37.5 million in cash under an exemption from registration pursuant to
Section 4(2) of Securities Act of 1933, as amended (the "Securities Act"). In
December 1997, Wyeth-Ayerst Laboratories, the pharmaceutical division of
American Home Products converted $1.3 million of convertible notes outstanding
into 124,875 shares of the Company's Common Stock, at a predetermined conversion
rate of $10.01 in a transaction exempt from registration of Section 4(2) of the
Securities Act.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
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 Company's consolidated financial statements and related
notes included elsewhere in this filing.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERA-
TIONS DATA:
Revenues:
Collaborative research and
development
Related parties.......... $ 18,997 $ 18,641 $ 11,972 $ 8,342 $ 9,974
Unrelated parties........ 32,284 17,994 12,424 4,893 6,138
Other...................... 418 207 120 74 150
----------- ----------- ----------- ----------- -----------
Total revenues........ 51,699 36,842 24,516 13,309 16,262
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Research and development... 72,426 59,494 41,636 27,205 24,301
Selling, general and
administrative........... 10,108 10,205 8,181 6,957 6,192
Write-off of acquired
in-process technology.... 64,970 -- 19,564 -- --
ALRT contribution.......... -- -- 17,500 -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 147,504 69,699 86,881 34,162 30,493
----------- ----------- ----------- ----------- -----------
Loss from operations............ (95,805) (32,857) (62,365) (20,853) (14,231)
Interest income................. 3,743 3,704 3,603 1,298 2,005
Interest expense................ (8,088) (8,160) (5,410) (679) (353)
Equity in operations of Joint
Venture....................... -- -- -- (6,845) (6,879)
----------- ----------- ----------- ----------- -----------
Net loss........................ $ (100,150) $ (37,313) $ (64,172) $ (27,079) $ (19,458)
=========== =========== =========== =========== ===========
Basic and diluted net loss per
share......................... $ (3.02) $ (1.30) $ (2.70) $ (1.57) $ (1.19)
=========== =========== =========== =========== ===========
Shares used in computing net
loss per share................ 33,128,372 28,780,914 23,791,542 17,240,535 16,356,656
=========== =========== =========== =========== ===========
AT DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short term
investments and restricted cash........ $ 86,287 $ 84,179 $ 76,903 $ 38,403 $ 42,354
Working capital.......................... 62,399 71,680 57,349 33,567 40,588
Total assets............................. 107,423 102,140 93,594 46,696 50,790
Long-term debt........................... 14,751 19,961 18,585 12,285 2,324
Convertible subordinated debentures...... 36,628 33,953 31,279 -- --
Accumulated deficit...................... (277,744) (177,594) (140,281) (76,108) (49,029)
Total stockholders' equity............... 34,349 34,461 28,071 26,335 42,934
43
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report on Form 10-K may contain predictions, estimates and
other forward-looking statements that involve a number of risks and
uncertainties, including those discussed in Item 1 above 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.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
Since January 1989, the Company has devoted substantially all of its
resources to its intracellular receptor ("IR") and Signal Transducers and
Activators of Transcription drug discovery and development programs. The Company
has been unprofitable since its inception and expects to incur substantial
additional operating losses due to continued requirements for research and
development, preclinical testing, clinical trials, regulatory activities,
establishment of manufacturing processes and sales and marketing capabilities
until the approval and commercialization of the Company's products generate
sufficient revenues, expected in 1999. The Company expects that losses will
fluctuate from quarter to quarter as a result of differences in the timing of
expenses incurred and the revenues earned from collaborative arrangements. Some
of these fluctuations may be significant. As of December 31, 1997, the Company's
accumulated deficit was approximately $277.7 million.
In May 1995, Glycomed Incorporated ("Glycomed") was merged into a
wholly-owned subsidiary of the Company ("the Merger"). Glycomed is a
biopharmaceutical company conducting research and development of pharmaceuticals
based on biological activities of complex carbohydrates. The Merger 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 approximately $19.6 million. The results of
operations of Glycomed are included in the Company's consolidated results of
operations from the date of the Merger.
In December 1994, the Company and Allergan, Inc. ("Allergan") formed
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research
and development activities previously conducted by the Allergan Ligand Joint
Venture (the "Joint Venture"). In June 1995, the Company and ALRT completed a
public offering of 3,250,000 units (the "Units") with aggregate proceeds of
$32.5 million (the "ALRT Offering") and cash contributions by Allergan and the
Company of $50.0 million and $17.5 million, respectively, providing for net
proceeds of $94.3 million for retinoid product research and development. Each
Unit consisted of one share of ALRT's callable common stock ("Callable Common
Stock") and two warrants, each warrant entitling the holder to purchase one
share of the Common Stock of the Company. The Company's $17.5 million cash
contribution resulted in a one-time charge to operations. The Company also
recorded a warrant subscription receivable and corresponding increase in paid-in
capital of $5.9 million pursuant to the ALRT Offering. From June 3, 1995,
through September 23, 1997 cash received from ALRT pursuant to Research and
Development Agreement was prorated between contract revenue and warrant
subscription receivable based on their respective values. In September 1997, the
Company and Allergan exercised their respective options to purchase all of 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 $25.0 million, to holders of the Callable
Common Stock in November 1997. Allergen's exercise of the Asset Purchase Option
required a cash payment of $8.9 million to ALRT in November 1997, which was used
by the Company to pay a portion of the Stock Purchase Option. The buyback of
ALRT was accounted for using the purchase method of accounting. The excess of
the purchase price over the fair value of net assets acquired was allocated to
in-process technology and written off, resulting in a one time noncash charge to
results of operations of $65.0 million.
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In November 1997, the Company initiated a strategic alliance with Eli Lilly
and Company ("Lilly") for the discovery and development of products based upon
Ligands' IR technology. The collaboration focuses on products with broad
applications across metabolic diseases, including diabetes, obesity,
dislipidemia, insulin resistance and cardiovascular disease associated with
insulin resistance and obesity. The alliance provided a $31.2 million equity
investment by Lilly in the Company, $7.2 million of research revenue in 1997, an
upfront non-refundable milestone payment of $12.5 million and could provide the
Company with up to $49 million in research funding over five years (the "Lilly
Collaboration").
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ("1997"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
The Company had revenues of $51.7 million for 1997 compared to revenues of
$36.8 million for 1996. The increase in revenues is primarily due to the Lilly
Collaboration revenues offset by decreased revenues from the research and
development collaboration with Wyeth-Ayerst Laboratories, the pharmaceutical
division of American Home Products Corporation ("AHP"), due to a one-time
payment of $1.5 million in 1996, which expanded and amended the research and
development agreement, as well as a $1.3 million milestone payment received from
Pfizer Inc. ("Pfizer") in 1996. Revenues in 1997 were derived from the Company's
research and development agreements with (i) Lilly of $19.7 million, (ii) ALRT
of $19.0 million, (iii) AHP of $4.0 million, (iv) SmithKline Beecham Corporation
("SmithKline Beecham") of $3.2 million, (v) Sankyo Company, Ltd. ("Sankyo") of
$2.3 million, (vi) Abbott Laboratories ("Abbott") of $1.7 million, (vii)
Glaxo-Wellcome plc ("Glaxo") of $1.3 million and product sales of Ligand
(Canada) in-licensed products of $418,000. Revenues for 1996 were derived from
the Company's research and development agreements with (i) ALRT of $18.6
million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million, (iv) Abbott of
$2.5 million, (v) SmithKline Beecham of $2.4 million, (vi) Glaxo of $2.1 million
as well as from a milestone payment received from Pfizer of $1.3 million,
products sales of Ligand (Canada) in-licensed products of $207,000 and revenues
from a National Institutes of Health ("NIH") grant of $99,000.
For 1997, research and development expenses increased to $72.4 million from
$59.5 million in 1996. These expenses increased primarily due to expansion of
the Company's clinical and development activities, as well as related additions
of clinical and development personnel. Selling, general and administrative
expenses decreased to $10.1 million in 1997 from $10.2 million in 1996. The
decrease was primarily attributable to higher legal expenses incurred in 1996
related to the settlement of future product rights litigation offset by
additions to personnel in 1997 to support expanded clinical and development
activities. Interest income was $3.7 million for 1997 and 1996. Interest expense
decreased slightly to $8.1 million for 1997, from $8.2 million in 1996, due to
conversion of $7.5 million convertible notes from AHP to equity in 1997, offset
by the addition of $2.5 million of convertible notes from SmithKline Beecham in
1997 and increases in capital lease obligations used to finance equipment.
A one-time charge of $65.0 million was incurred in 1997 for the write off
of in-process technology related to the exercise of the Stock Purchase Option.
The Company has significant net operating loss carry forwards for federal
and state income taxes. See Note 13 to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1996 ("1996"), AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 ("1995")
The Company had revenues of $36.8 million for 1996 compared to revenues of
$24.5 million for 1995. The increase in revenues is primarily due to increased
collaborative research and development revenues from ALRT, milestone revenues
from Pfizer, increased revenues under an expanded and amended research and
development agreement entered into in January 1996 (which began in September
1994) with AHP, and a full year effect of the collaborative research agreement
with Sankyo (which became effective the date of the Merger). Revenues in 1996
were derived from the Company's research and development agreements with (i)
ALRT of $18.6 million, (ii) AHP of $6.9 million, (iii) Sankyo of $2.7 million,
(iv) Abbott of $2.5 million, (v) SmithKline Beecham of $2.4 million, (vi) Glaxo
of $2.1 million, as well as from milestone revenues from Pfizer of $1.3 million,
product sales of Ligand (Canada) in-licensed products of $207,000 and revenues
from
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an NIH grant of $99,000. Revenues in 1995 were derived from the Company's
research and development agreements with (i) ALRT of $12.0 million, (ii) AHP of
$4.0 million, (iii) Abbott of $2.6 million, (iv) Glaxo of $2.1 million, (v)
SmithKline Beecham of $2.1 million, (vi) Sankyo of $1.7 million, and from
product sales of Ligand (Canada) in-licensed products of $120,000.
For 1996, research and development expenses increased to $59.5 million from
$41.6 million in 1995. These expenses increased due to expansion of the
Company's clinical and development activities, and expanded collaborative
research programs, related additions of clinical, development and research
personnel and inclusion of the cost of Glycomed's operations for a full year in
1996. Selling, general and administrative expenses increased to $10.2 million in
1996 from $8.2 million in 1995. The increase was primarily due to additions to
personnel to support clinical, development and research programs, as well as
expanded sales and marketing activities. Interest income increased slightly to
$3.7 million in 1996 from $3.6 million in 1995. Increases in interest income
were a result of the completion of a public offering of approximately $35.3
million in October 1996, and increased research revenues, offset by usage of
cash to support expansion activities. Interest expense increased to $8.2 million
in 1996 from $5.4 million in 1995. The increase was primarily due to interest
required under Glycomed's Convertible Subordinated Debentures ("Debentures"),
accretion of debt discount under the Debentures and capital lease obligations
used to finance equipment.
One-time charges of $19.6 million and $17.5 million were incurred in 1995
due to the Merger and ALRT offering, respectively.
The Company has significant net operating loss carry forwards for federal
and state income taxes. See Note 13 to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private and public
offerings of its equity securities, collaborative research revenues, capital and
operating lease transactions, issuance of convertible notes, investment income
and product sales. From inception through December 1997, the Company has raised
$195.7 million from sales of equity securities: $78.2 million from the Company's
public offerings and an aggregate of $117.5 million from private placements and
the exercise of options and warrants.
In March 1997, July 1997 and again in December 1997 the Company converted
$3.8 million, $2.5 million and $1.3 million respectively, of the convertible
notes outstanding to AHP into 374,626, 249,749 and 124,875 shares, respectively,
of Common Stock at a $10.01 conversion price, resulting in an outstanding
balance of convertible notes to AHP of $3.8 million.
In February 1997, SmithKline Beecham provided a third installment equity
investment of $2.5 million by purchasing 164,474 shares of Common Stock as a
result of its election to expand the scope of research under its research
agreement with the Company. The final installment of $2.5 million was provided
in October 1997 to the Company as a convertible note as a result of SmithKline
Beecham's election to extend the collaboration. The note is convertible into
Common Stock at $13.56 per share and is due October 2002 unless converted into
Common Stock earlier. The interest rate on the note is payable semi-annually at
prime.
As of December 31, 1997, the Company had acquired an aggregate of $22.0
million in property, laboratory and office equipment, and $4.7 million in tenant
leasehold improvements, substantially all of which has been funded through
capital lease and equipment note obligations and which also includes laboratory
and office equipment acquired in the Merger. In addition, the Company leases its
office and laboratory facilities under operating leases. In July 1994, the
Company entered into a long-term lease related to the construction of a new
laboratory facility, which was completed and occupied in August 1995. In March
1997, the Company entered into a long-term lease, related to a second
build-to-suit facility and loaned the construction partnership $3.7 million at
an interest rate of 8.5% which will be paid back monthly over a 10-year period.
In November 1997, the Company closed its Glycomed facility in Alameda at the
expiration of the leases and Glycomed's assets and programs were integrated into
Ligand's operations. At the end of 1997, one of the Company's main operating
lease agreements for office and research facilities expired, at which time the
Company moved into its second build-to-suit facility. In February 1997, the
Company signed a master lease
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agreement to finance future capital equipment up to $1.5 million, and in July
1997, the master lease agreement was extended to December 1998 to include up to
an additional $4.5 million. Each individual schedule under the extended master
lease agreement will be paid back monthly with interest over a five-year period.
As of December 31, 1997, the Company had $3.6 million available to finance
future capital equipment.
Working capital decreased to $62.4 million as of December 31, 1997, from
$71.7 million at the end of 1996. The decrease in working capital resulted from
an increase in accrued liabilities relating to the increase in operating
expenses, previously described. Cash and cash equivalents, short-term
investments and restricted cash increased to $86.3 million at December 31, 1997
from $84.2 million at December 31, 1996, due to increases in cash related to the
Lilly Collaboration and the issuance of convertible notes to SmithKline Beecham,
offset by increases in operating expenses, as described above, and exercise of
the Stock Purchase Option. The Company primarily invests its cash in United
States government and investment grade corporate debt securities.
The Company believes that its available cash, cash equivalents, marketable
securities and existing sources of funding will be adequate to satisfy its
anticipated capital requirements through 1999. The Company's future capital
requirements will depend on many factors, including the pace of scientific
progress in 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, changes in the existing collaborations, the cost of
manufacturing scale-up and the effectiveness of the Company's commercialization
activities.
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 such "Year 2000"
requirements. Certain of the Company's internal computer systems are not year
2000 compliant, and the Company utilizes third-party equipment and software that
may not be Year 2000 compliant. The Company has commenced taking actions to
correct or convert such internal systems and is in the early stages of
conducting an audit of its third-party suppliers as to the Year 2000 compliance
of their systems. The Company does not believe that the cost of these actions
will have a material adverse affect on the Company's business, financial
condition or operating results. However, there can be no assurance that a
failure of the Company's internal computer systems or of third-party equipment
or software used by the Company, or of systems maintained by the Company's
suppliers, to be Year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or operating results. In addition,
there can be no assurance that adverse changes in the purchasing patterns of the
Company's potential customers as a result of Year 2000 issues affecting such
customers will not have a material adverse effect on the Company's business,
financial condition or results of operations. These expenditures may result in
reduced funds available to purchase the Company's products which could have a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14 (a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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
1998 Annual Meeting of Stockholders are incorporated herein by reference (the
"Proxy Statement").
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.
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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, 1997 and 1996... F-3
Consolidated Statements of Operations for each of the three
years in the period ended
December 31, 1997......................................... F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1997..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997............... F-6
Notes to Consolidated Financial Statements.................. F-7
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) EXHIBITS.
EXHIBIT
NO. DESCRIPTION
------- -----------
# 2.1 Agreement of Merger, dated February 7, 1995 by and among
Ligand Pharmaceuticals Incorporated, LG Acquisition Corp.
and Glycomed Incorporated (other Exhibits omitted, but will
be filed by the Company with the Commission upon request).
# 2.2 Form of Plan of Merger.
# 3.2 Amended and Restated Certificate of Incorporation of the
Company.
& 3.3 Bylaws of the Company, as amended.
x 3.4 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of
Ligand Pharmaceuticals Incorporated. (Exhibit 3.1).
* 4.1 Specimen stock certificate for shares of Common Stock of the
Company.
#10.1 The Company's 1992 Stock Option/Stock Issuance Plan, as
amended.
*10.2 Form of Stock Option Agreement.
*10.3 Form of Stock Issuance Agreement.
*10.7 The Company's 1988 Stock Option Plan, as amended.
*10.8 Form of Incentive Stock Option Agreement (Installment
Vesting).
*10.9 Form of Non-Qualified Stock Option Agreement (Installment
Vesting).
*10.10 Form of Consultant Non-Qualified Stock Option Agreement
(Immediate Vesting).
*10.12 1992 Employee Stock Purchase Plan.
*10.13 Form of Stock Purchase Agreement.
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EXHIBIT
NO. DESCRIPTION
------- -----------
*10.29 Consulting Agreement, dated October 20, 1988, between the
Company and Dr. Ronald M. Evans, as amended by Amendment to
Consulting Agreement, dated August 1, 1991, and Second
Amendment to Consulting Agreement, dated March 6, 1992.
*10.30 Form of Proprietary Information and Inventions Agreement.
Research and License.
*10.31 Agreement, dated March 9, 1992, between the Company and
Baylor College of Medicine (with certain confidential
portions omitted).
*10.33 License Agreement, dated November 14, 1991, between the
Company and Rockefeller University (with certain
confidential portions omitted).
*10.34 License Agreement and Bailment, dated July 22, 1991, between
the Company and the Regents of the University of California
(with certain confidential portions omitted).
*10.35 Agreement, dated May 1, 1991, between the Company and Pfizer
Inc (with certain confidential portions omitted).
*10.36 License Agreement, dated July 3, 1990, between the Company
and the Brigham and Woman's Hospital, Inc. (with certain
confidential portions omitted).
*10.37 Compound Evaluation Agreement, dated May 17, 1990, between
the Company and SRI International (with certain confidential
portions omitted).
*10.38 License Agreement, dated January 5, 1990, between the
Company and the University of North Carolina at Chapel Hill
(with certain confidential portions omitted).
*10.40 License Agreement, dated January 4, 1990, between the
Company and Baylor College of Medicine (with certain
confidential portions omitted).
*10.41 License Agreement, dated October 1, 1989, between the
Company and Institute Pasteur (with certain confidential
portions omitted).
*10.42 Sublicense Agreement, dated September 13, 1989, between the
Company and AndroBio Corporation (with certain confidential
portions omitted).
*10.43 License Agreement, dated June 23, 1989, between the Company
and La Jolla Cancer Research Foundation (with certain
confidential portions omitted).
*10.44 License Agreement, dated October 20, 1988, between the
Company and the Institute for Biological Studies, as amended
by Amendment to License Agreement dated September 15, 1989,
Second Amendment to License Agreement, dated December 1,
1989 and Third Amendment to License Agreement dated October
20, 1990 (with certain confidential portions omitted).
*10.45 Agreement dated June 12, 1989, between the Company and the
Regents of the University of California.
*10.46 Form of Indemnification Agreement between the Company and
each of its directors.
*10.47 Form of Indemnification Agreement between the Company and
each of its officers.
*10.50 Consulting Agreement, dated October 1, 1991, between the
Company and Dr. Bert W. O'Malley.
50
52
EXHIBIT
NO. DESCRIPTION
------- -----------
*10.53 Stock and Warrant Purchase Agreement, dated June 30, 1992
between the Company and Allergan, Inc. and Allergan
Pharmaceuticals (Ireland) Ltd., Inc.
*10.58 Stock Purchase Agreement, dated September 9, 1992, between
the Company and Glaxo, Inc.
*10.59 Research and Development Agreement, dated September 9, 1992,
between the Company and Glaxo, Inc. (with certain
confidential portions omitted).
*10.60 Stock Transfer Agreement, dated September 30, 1992, between
the Company and the Rockefeller University.
*10.61 Stock Transfer Agreement, dated September 30, 1992, between
the Company and New York University.
*10.62 License Agreement, dated September 30, 1992, between the
Company and the Rockefeller University (with certain
confidential portions omitted).
*10.63 Professional Services Agreement, dated September 30, 1992,
between the Company and Dr. James E. Darnell.
*10.64 Letter Agreement, dated August 24, 1992, between the Company
and Dr. Howard T. Holden.
*10.65 Letter Agreement, dated August 20, 1992, between the Company
and Dr. George Gill.
*10.66 Letter Agreement, dated September 3, 1992, between the
Company and Dr. Lloyd E. Flanders.
*10.67 Letter Agreement, dated September 11, 1992, between the
Company and Mr. Paul Maier.
!!10.69 Form of Automatic Grant Option Agreement.
**10.73 Supplementary Agreement, dated October 1, 1993, between the
Company and Pfizer, Inc. to Agreement, dated May 1, 1991.
!10.76 Amended Registration Rights Agreement, dated June 24, 1994,
between the Company and the individuals listed on attached
Schedule A, as amended (Exhibit 4.1).
!10.77 First Addendum to Amended Registration Rights Agreement,
dated July 6, 1994, between Company and Abbott Laboratories.
(Exhibit 4.2).
***10.78 Research, Development and License Agreement, dated July 6,
1994, between the Company and Abbott Laboratories (with
certain confidential portions omitted). (Exhibit 10.75).
***10.79 Stock and Note Purchase Agreement, dated September 2, 1994,
between the Company and American Home Products Corporation
(with certain confidential portions omitted).
***10.80 Unsecured Convertible Promissory Note dated September 2,
1994, in the face amount of $10,000,000 executed by the
Company in favor of American Home Products Corporation (with
certain confidential portions omitted). (Exhibit 10.78).
***10.81 Second Addendum to Amended Registration Rights Agreement,
dated September 2, 1994, between the Company and American
Home Products Corporation.
51
53
EXHIBIT
NO. DESCRIPTION
------- -----------
***10.82 Research, Development and License Agreement, dated September
2, 1994, between the Company and American Home Products
Corporation, as represented by its Wyeth-Ayerst Research
Division (with certain confidential portions omitted).
(Exhibit 10.77).
***10.83 Option Agreement, dated September 2, 1994, between the
Company and American Home Products Corporation, as
represented by its Wyeth-Ayerst Research Division (with
certain confidential portions omitted). (Exhibit 10.80).
***10.84 Distribution and Marketing Agreement, dated September 16,
1994, between the Company and Cetus Oncology Corporation, a
wholly owned subsidiary of the Chiron Corporation (with
certain confidential portions omitted). (Exhibit 10.82).
&10.93 Indemnity Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
&10.94 Tax Allocation Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
&10.95 Stock Purchase Agreement, dated June 3, 1995, between the
Company, Allergan, Inc. and Allergan Pharmaceuticals
(Ireland), Ltd.
&10.97 Research, Development and License Agreement, dated December
29, 1994, between SmithKline Beecham Corporation and the
Company (with certain confidential portions omitted).
&10.98 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 Third Addendum to Amended Registration Rights Agreement,
dated February 3, 1995, between S. R. One, Limited and the
Company.
#10.100 PHOTOFRIN(R) Distribution Agreement, dated March 8, 1995,
between the Company and Quadra Logic Technologies Inc. (with
certain confidential portions omitted).
10.119(1) Option and Development Agreement, dated August 15, 1990,
between Glycomed and Dr. Richard E. Galardy and Dr. Damian
Grobelny with exhibit thereto (with certain portions
omitted). (Exhibit 10 10.20).
10.120(1) Option and Development Agreement, dated November 27, 1989,
between Glycomed and the President and Fellows of Harvard
College with appendices thereto (with certain confidential
portions omitted). (Exhibit 10.21)
10.121(1) Option and Development Agreement, dated January 1, 1991,
between Glycomed and UAB Research Foundation with exhibits
thereto (with certain confidential portions omitted).
(Exhibit 10.22).
10.122(1) Joint Venture Agreement, dated December 18, 1990, among
Glycomed, Glyko, Inc., Millipore Corporation, Astroscan,
Ltd., Astromed, Ltd., Gwynn R. Williams and John Klock,
M.D., with exhibits thereto (with certain confidential
portions omitted). (Exhibit 10.23).
10.127(2) Research and License Agreement, dated April 29, 1992,
between Glycomed and the Alberta Research Council with
Appendix thereto (with certain confidential portions
omitted). (Exhibit 10.28).
10.130(3) Amendment to Research and License Agreement, dated July 12,
1993, (confidential portions omitted). (Exhibit 10.32).
52
54
EXHIBIT
NO. DESCRIPTION
------- -----------
10.131(4) Amendments to Research and License Agreement, dated October
22, 1993, December 16, 19 and May 9, 1994 between Glycomed
and the Alberta Research Council (with certain confidential
portions omitted). (Exhibit 10.33).
10.132(4) License Agreement, dated February 14, 1994 between Glycomed
and Sankyo Company, Ltd., for the Far East marketing rights
of ophthalmic indications of Galardin(TM) MPI and analogs
(with certain confidential portions omitted). (Exhibit
10.34).
10.133(4) Collaborative Technology Research and Development Agreement
between Glycomed and Sankyo Company, Ltd., dated June 27,
1994 (with certain confidential portions omitted). (Exhibit
10.35).
10.136(5) Amendment to Research and License Agreement, dated September
22, 1994 between Glycomed and Alberta Research Council (with
certain confidential portions omitted). (Exhibit 10.38).
#10.137 First Supplemental Indenture among the Company, Glycomed and
Chemical Trust Company of California, Trustee. (Exhibit
10.133).
%%10.140 Promissory Notes, General Security Agreements and a Credit
Terms and Conditions letter dated March 31, 1995, between
the Company and Imperial Bank (Exhibit 10.101).
-10.142 Stock Purchase Agreement, dated June 27, 1995, between the
Company and Sankyo Company, Ltd.
-10.143 Fifth Addendum to Amended Registration Rights Agreement,
dated September 11, 1995 between the Company and Sankyo
Company Limited.
-10.144 Stock Purchase Agreement, dated August 28, 1995, between the
Company and Abbott Laboratories.
-10.145 Sixth Addendum to Amended Registration Rights Agreement,
dated August 31, 1995, between the Company and Abbott
Laboratories.
-10.146 Amendment to Research and Development Agreement, dated
January 16, 1996, between the Company and American Home
Products Corporation, as amended.
-10.147 Amendment to Stock Purchase Agreement, dated January 16,
1996, between the Company and American Home Products
Corporation.
-10.148 Lease, dated July 6, 1994, between the Company and
Chevron/Nexus partnership, First Amendment to lease dated
July 6, 1994.
x10.149 Successor Employment Agreement, signed May 1, 1996, between
the Company and David E. Robinson.
10.150(6) Master Lease Agreement, signed May 30, 1996, between the
Company and USL Capital Corporation.
x10.151 Settlement Agreement and Mutual Release of all Claims,
signed April 20, 1996, between the Company and Pfizer, Inc.
(with certain confidential portions omitted).
x10.152 Letter Amendment to Abbott Agreement, dated March 14, 1996,
between the Company and Abbott Laboratories (with certain
confidential portions omitted).
Xx10.153 Letter Agreement, dated August 8, 1996, between the Company
and Dr. Andres Negro-Vilar.
53
55
EXHIBIT
NO. DESCRIPTION
------- -----------
##10.154 Preferred Shares Rights Agreement, dated as of September 13,
1996, by and between Ligand Pharmaceuticals Incorporated and
Wells Fargo Bank, N.A. (Exhibit 10.1).
10.155(6) Letter Agreement, dated November 4, 1996, between the
Company and William Pettit.
10.156(6) Letter Agreement, dated February 6, 1997, between the
Company and Russell L. Allen.
10.157(6) Master Lease Agreement, signed February 13, 1997, between
the Company and Lease Management Services.
10.158(6) Lease, dated March 7, 1997, between the Company and Nexus
Equity VI LLC.
10.159(6) Eighth Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
February 10, 1997.
10.160(6) Seventh Addendum to amended registration rights agreement,
dated June 24, 1994, as amended between Ligand
Pharmaceuticals and S.R. One, Limited and is effective as of
November 10, 1995.
10.161(7) Settlement Agreement, License and Mutual General Release
between Ligand Pharmaceuticals and SRI/LJCRF, dated August
23, 1995 (with certain confidential portions omitted).
10.162(8) Limited Extension of Collaborative Technology Research,
Option and Development Agreement between Ligand
Pharmaceuticals and Sankyo Company Limited, dated June 24,
1997.
10.163(8) Extension of Master Lease Agreement between Lease Management
Services and Ligand Pharmaceuticals dated July 29, 1997.
10.164(9) Third Amendment to Agreement, dated September 2, 1997,
between the Company and American Home Products Corporation.
10.165 Amended and Restated Technology Cross License Agreement,
dated September 24, 1997, among the Company, Allergan, Inc.
and Allergan Ligand Retinoid Therapeutics, Inc.
10.166 Transition Agreement, dated September 24, 1997, among the
Company, Allergan, Inc. and Allergan Ligand Retinoid
Therapeutics, Inc.
10.167 Development and License Agreement, dated November 25, 1997,
between the Company and Eli Lilly and Company (with certain
confidential portions omitted).
10.168 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 Option and Wholesale Purchase Agreement, dated November 25,
1997, between the Company and Eli Lilly and Company (with
certain confidential portions omitted).
10.170 Stock Purchase Agreement, dated November 25, 1997, between
the Company and Eli Lilly and Company.
10.171 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).
54
56
EXHIBIT
NO. DESCRIPTION
------- -----------
10.172 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).
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See Page 57).
27.1 Financial Data Schedule.
- ---------------
* These exhibits were previously filed as part of, and are 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.
% These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1992.
** These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
*** These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibit (except as
otherwise noted) filed with the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1994.
! These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the exhibit filed with the Company's Form
8-K, filed on July 14, 1994.
!! 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.
& These exhibits were previously filed as part of, and are 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.
# 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. 33-90160) filed on March 9, 1995,
as amended.
%% This exhibit was previously filed as part of, and are hereby incorporated by
reference to the same numbered exhibit filed with the Company's Quarterly
report on Form 10-Q for the period ended September 30, 1995.
- - These exhibits were filed previously, and are hereby incorporated by
reference to the same numbered exhibit filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
x These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly report on Form 10-Q for the period ended June 30, 1996.
Xx This exhibit was previously filed as part of, and are hereby incorporated
by reference at the same numbered exhibit filed with the Company's
Quarterly report on Form 10-Q for the period ended September 30, 1996.
## These exhibits were previously filed as part of, and are hereby incorporated
by reference, the same numbered exhibit filed with the Company's
Registration Statement on Form S-3 (No. 333-12603) filed on September 25,
1996, as amended.
(1) Filed as an exhibit to Glycomed's Registration Statement on Form S-1 (No.
33-39961) filed on or amendments thereto and incorporated herein by
reference.
55
57
(2) Filed as an exhibit to Glycomed's Annual Report on Form 10-K (File No.
0-19161) filed on September 25, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Glycomed's Annual Report on Form 10-K (File No.
0-19161) filed on September 13, 1993 and incorporated herein by reference.
(4) Filed as an amendment to Glycomed's Annual Report on Form 10-K (File No.
0-19161) filed on September 27, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to Glycomed's Quarterly Report on Form 10-Q (File No.
0-19161) filed on February 10, 1995 and incorporated herein by reference.
(6) This exhibit was previously filed as part of, and is hereby incorporated by
reference to the same numbered exhibit filed with the Company's Annual
Report on Form 10-K for the period ended December 31, 1996.
(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 Quarterly
Report on Form 10-Q for the period ended March 31, 1997.
(8) This exhibit was previously filed as part of, and is hereby incorporated by
reference to the same same numbered exhibit filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 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 September 30, 1997.
56
58
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 31, 1998
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 31, 1998
- --------------------------------------- Chief Executive Officer and Director
David E. Robinson (Principal Executive Officer)
/s/ PAUL V. MAIER Senior Vice President, Chief March 31, 1998
- --------------------------------------- Financial Officer and Treasurer
Paul V. Maier (Principal Financial and
Accounting Officer)
Director
- ---------------------------------------
Henry F. Blissenbach
/s/ ALEXANDER D. CROSS Director March 30, 1998
- ---------------------------------------
Alexander D. Cross
/s/ JOHN GROOM Director March 30, 1998
- ---------------------------------------
John Groom
/s/ IRVING S. JOHNSON Director March 30, 1998
- ---------------------------------------
Irving S. Johnson
/s/ CARL C. PECK Director March 30, 1998
- ---------------------------------------
Carl C. Peck
/s/ VICTORIA R. FASH Director March 30, 1998
- ---------------------------------------
Victoria R. Fash
57
59
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............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
60
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
January 30, 1998
F-2
61
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
----------------------
1997 1996
--------- ---------
Current assets:
Cash and cash equivalents................................. $ 62,252 $ 34,830
Short-term investments.................................... 20,978 45,822
Receivable from a related party........................... -- 3,087
Other current assets...................................... 864 1,706
--------- ---------
Total current assets.............................. 84,094 85,445
Restricted short-term investments........................... 3,057 3,527
Property and equipment, net................................. 14,853 11,680
Notes receivable from officers and employees................ 559 534
Other assets................................................ 4,860 954
--------- ---------
$ 107,423 $ 102,140
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,717 $ 4,137
Accrued liabilities....................................... 5,609 4,870
Deferred revenue.......................................... 2,616 2,151
Current portion of obligations under capital leases....... 2,753 2,607
--------- ---------
Total current liabilities......................... 21,695 13,765
Long-term obligations under capital leases.................. 8,501 8,711
Convertible subordinated debentures......................... 36,628 33,953
Convertible note............................................ 6,250 11,250
Commitments
Stockholders' equity:
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, 38,504,459 shares and 31,799,617 shares
issued at December 31, 1997 and 1996, respectively..... 39 32
Paid-in capital........................................... 311,681 214,887
Warrant subscription receivable........................... -- (2,453)
Adjustment for unrealized gains (losses) on
available-for-sale securities.......................... 384 (78)
Accumulated deficit....................................... (277,744) (177,594)
Deferred compensation and consulting...................... -- (322)
--------- ---------
34,360 34,472
Less treasury stock, at cost (1,114 shares in 1997 and
1996).................................................. (11) (11)
--------- ---------
Total stockholders' equity................................ 34,349 34,461
--------- ---------
$ 107,423 $ 102,140
========= =========
See accompanying notes.
F-3
62
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues:
Collaborative research and development:
Related parties................................... $ 18,997 $ 18,641 $ 11,972
Unrelated parties................................. 32,284 17,994 12,424
Other................................................ 418 207 120
---------- ---------- ----------
51,699 36,842 24,516
Costs and expenses:
Research and development............................. 72,426 59,494 41,636
Selling, general and administrative.................. 10,108 10,205 8,181
Write-off of acquired in-process technology.......... 64,970 -- 19,564
ALRT contribution.................................... -- -- 17,500
---------- ---------- ----------
Total operating expenses..................... 147,504 69,699 86,881
---------- ---------- ----------
Loss from operations................................... (95,805) (32,857) (62,365)
Interest income........................................ 3,743 3,704 3,603
Interest expense....................................... (8,088) (8,160) (5,410)
---------- ---------- ----------
Net loss............................................... $ (100,150) $ (37,313) $ (64,172)
========== ========== ==========
Basic and diluted net loss per share................... $ (3.02) $ (1.30) $ (2.70)
========== ========== ==========
Shares used in computing net loss per share............ 33,128,372 28,780,914 23,791,542
========== ========== ==========
See accompanying notes.
F-4
63
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ADJUSTMENT FOR
UNREALIZED GAINS
(LOSSES) ON
COMMON STOCK WARRANT AVAILABLE- DEFERRED
------------------- PAID-IN SUBSCRIPTION FOR-SALE ACCUMULATED COMPENSATION AND
SHARES AMOUNT CAPITAL RECEIVABLE SECURITIES DEFICIT CONSULTING
---------- ------ -------- ------------ ---------------- ----------- ----------------
Balance at December 31, 1994... 17,954,064 $18 $104,684 $ -- $(727) $ (76,109) $(1,530)
Issuance of Common Stock...... 2,903,622 3 20,966 -- -- -- --
Issuance of Common Stock for
merger net of transaction
costs of $1,235,000......... 6,942,911 7 41,952 -- -- -- --
Amortization of deferred
compensation and consulting
fees........................ -- -- -- -- -- -- 711
Adjustment for unrealized
gains (losses) on
available-for-sale
securities.................. -- -- -- -- 944 -- --
Purchase of treasury stock.... -- -- -- -- -- -- --
Warrant subscription
receivable.................. -- -- 5,850 (5,850) -- -- --
Cash received from ALRT and
applied to warrant
subscription receivable..... -- -- -- 1,326 -- -- --
Net loss...................... -- -- -- -- -- (64,172) --
---------- --- -------- ------- ----- --------- -------
Balance at December 31, 1995... 27,800,597 28 173,452 (4,524) 217 (140,281) (819)
Issuance of Common Stock...... 3,999,020 4 41,082 -- -- -- --
Amortization of deferred
compensation and consulting
fees........................ -- -- -- -- -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities.................. -- -- -- -- (295) -- --
Receipt of Common Stock for
milestone revenue........... -- -- -- -- -- -- --
Retirement of shares.......... -- -- -- -- -- -- --
Purchase of treasury shares... -- -- -- -- -- -- --
Issuance of Common Stock held
in Treasury................. -- -- -- -- -- -- --
Option term extension......... -- -- 353 -- -- -- --
Amortization of warrant
subscription receivable..... -- -- -- 2,071 -- -- --
Net loss...................... -- -- -- -- -- (37,313) --
---------- --- -------- ------- ----- --------- -------
Balance at December 31, 1996... 31,799,617 32 214,887 (2,453) (78) (177,594) (322)
Issuance of Common Stock...... 6,704,842 7 96,794 -- -- -- --
Amortization of deferred
compensation and consulting
fees........................ -- -- -- -- -- -- 322
Adjustment of unrealized gains
(losses) on
available-for-sale
securities.................. -- -- -- -- 462 -- --
Amortization of warrant
subscription receivable..... -- -- -- 1,535 -- -- --
Write-off of warrant
subscription receivable..... -- -- -- 918 -- -- --
Net loss...................... (100,150)
---------- --- -------- ------- ----- --------- -------
Balance at December 31, 1997... 38,504,459 $39 $311,681 $ -- $ 384 $(277,744) $ --
========== === ======== ======= ===== ========= =======
TREASURY STOCK TOTAL
------------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
--------- ------- -------------
Balance at December 31, 1994... (4,952) $ (2) $ 26,334
Issuance of Common Stock...... -- -- 20,969
Issuance of Common Stock for
merger net of transaction
costs of $1,235,000......... -- -- 41,959
Amortization of deferred
compensation and consulting
fees........................ -- -- 711
Adjustment for unrealized
gains (losses) on
available-for-sale
securities.................. -- -- 944
Purchase of treasury stock.... (34) -- --
Warrant subscription
receivable.................. -- -- --
Cash received from ALRT and
applied to warrant
subscription receivable..... -- -- 1,326
Net loss...................... -- -- (64,172)
--------- ------- ---------
Balance at December 31, 1995... (4,986) (2) 28,071
Issuance of Common Stock...... -- -- 41,086
Amortization of deferred
compensation and consulting
fees........................ -- -- 497
Adjustment for unrealized
gains (losses) on
available-for-sale
securities.................. -- -- (295)
Receipt of Common Stock for
milestone revenue........... (101,011) (1,320) (1,320)
Retirement of shares.......... 101,011 1,320 1,320
Purchase of treasury shares... (3,164) (23) (23)
Issuance of Common Stock held
in Treasury................. 7,036 14 14
Option term extension......... -- -- 353
Amortization of warrant
subscription receivable..... -- -- 2,071
Net loss...................... -- -- (37,313)
--------- ------- ---------
Balance at December 31, 1996... (1,114) (11) 34,461
Issuance of Common Stock...... -- -- 96,801
Amortization of deferred
compensation and consulting
fees........................ -- -- 322
Adjustment of unrealized gains
(losses) on
available-for-sale
securities.................. -- -- 462
Amortization of warrant
subscription receivable..... -- -- 1,535
Write-off of warrant
subscription receivable..... -- -- 918
Net loss...................... (100,150)
--------- ------- ---------
Balance at December 31, 1997... (1,114) $ (11) $ 34,349
========= ======= =========
See accompanying notes.
F-5
64
LIGAND PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(100,150) $(37,313) $(64,172)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 4,133 3,879 2,687
Amortization of notes receivable from officers and
employees............................................. 230 235 339
Amortization of warrant subscription receivable........ 2,453 2,071 1,326
Write-off of acquired in-process technology............ 64,970 -- 19,564
Amortization of deferred compensation and consulting... 322 497 711
Accretion of debt discount............................. 2,675 2,674 1,654
Company stock received for milestone revenue........... -- (1,320) --
Gain on sale of property and equipment................. (6) -- --
Change in operating assets and liabilities, net of
Glycomed merger:
Other current assets.............................. 856 (1,129) 1,626
Receivable from a related party................... 3,087 (801) (1,128)
Accounts payable and accrued liabilities.......... 7,605 (1,638) 380
Deferred revenue.................................. 465 (457) 465
--------- -------- --------
Net cash used in operating activities....................... (13,360) (33,302) (36,548)
INVESTING ACTIVITIES
Purchases of short-term investments......................... (35,033) (53,123) (17,684)
Proceeds from short-term investments........................ 60,339 61,188 37,205
Purchase of property and equipment.......................... (4,278) (399) (175)
Proceeds from sale of property and equipment................ 109 -- --
Increase in note receivable from officers and employees..... (270) (350) (135)
Payment of notes receivable from officers and employees..... 16 66 --
Increases in deposits and other assets...................... (4,036) (2) (33)
Decreases in deposits and other assets...................... 130 118 60
Investment in joint venture................................. -- -- (822)
Net cash paid for exercise of ALRT stock purchase option.... (12,661) -- --
Net cash acquired in Glycomed acquisition................... -- -- 10,225
--------- -------- --------
Net cash provided by investing activities................... 4,316 7,498 28,641
FINANCING ACTIVITIES
Principal payments on obligations under capital leases...... (3,210) (2,561) (1,448)
Net change in restricted short-term investment.............. 470 3,232 (2,043)
Net proceeds from the issuance of convertible note.......... 2,500 5,000 --
Net proceeds from sale of common stock...................... 36,706 39,000 19,733
--------- -------- --------
Net cash provided by financing activities................... 36,466 44,671 16,242
--------- -------- --------
Net increase in cash and cash equivalents................... 27,422 18,867 8,335
Cash and cash equivalents at beginning of period............ 34,830 15,963 7,628
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 62,252 $ 34,830 $ 15,963
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 5,444 $ 5,559 $ 3,178
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Additions to obligations under capital leases............... $ 3,146 $ 2,888 $ 8,415
Retirement of treasury stock................................ $ -- $ 1,320 $ --
See accompanying notes.
F-6
65
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. THE COMPANY
Ligand Pharmaceuticals Incorporated, a Delaware corporation (the "Company"), is
a biopharmaceutical company primarily committed to the discovery and development
of new drugs that regulate hormone activated intracellular receptors and Signal
Transducers and Activators of Transcription. The Company includes its wholly
owned subsidiaries, Glycomed Incorporated ("Glycomed"), Ligand Pharmaceuticals
(Canada) Incorporated, and Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT").
The Company's 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 product 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 the Company's
product development efforts will be successful, that required regulatory
approvals for any indication will be obtained, or that any products, if
introduced will be capable of being produced in commercial quantities at
reasonable costs or that patient and physician acceptance of these products will
be achieved. There can be no assurance that Ligand will successfully
commercialize, manufacture or market its products or ever achieve or sustain
product revenues or profitability.
The Company faces those risks associated with 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.
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.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist primarily of cash, certificates of deposits,
treasury securities and repurchase agreements with original maturities at the
date of acquisition of less than three months.
F-7
66
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 128, Earnings Per Share, which is
effective for fiscal periods ending after December 15, 1997. SFAS 128 includes a
new computation for earnings per share and presentation of basic and diluted
earnings per share. The Company retroactively adopted SFAS 128 in the fourth
quarter of 1997. Upon adoption, there was no impact on the net loss per share or
presentation of net loss per share for any periods previously reported.
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. In
January 1996, the Company adopted the disclosure requirements of SFAS 123,
Accounting for Stock-Based Compensation (Note 8).
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income and SFAS 131, Segment Information. Both of these
standards are effective for fiscal years beginning after December 15, 1997. SFAS
130 requires that all components of comprehensive income, including net income,
be reported in the financial statements in the period in which they are
recognized. The Company's comprehensive income or loss will not be materially
different than net income or loss as reported. SFAS 131 amends the requirements
for public enterprises to report financial and descriptive information about its
reportable operating segments. The Company currently operates in one business
and operating segment and does not believe adoption of this standard will have a
material impact on the Company's financial statements as reported.
Research and Development Revenues and Expenses
Collaborative research and development revenues are recorded as earned based on
the performance criteria of each contract. Payments received which have not met
the appropriate criteria are recorded as deferred revenue. Research and
development costs are expensed as incurred.
For the years ended December 31, 1997, 1996 and 1995, costs and expenses related
to collaborative research and development agreements were $51.3 million, $36.6
million and $24.4 million, respectively.
F-8
67
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
DECEMBER 31,
--------------------
1997 1996
-------- --------
Property.................................................... $ 2,649 $ --
Equipment and leasehold improvements........................ 26,662 22,674
Less accumulated depreciation and amortization.............. (14,458) (10,994)
-------- --------
Net property and equipment........................ $ 14,853 $ 11,680
======== ========
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.
3. INVESTMENTS
Investments are recorded at estimated fair market value at December 31, 1997 and
1996, and consist principally of United States government debt securities,
investment grade corporate debt securities and certificates of deposit with
maturities at the date of acquisition of three months or longer. The Company has
classified all of its investments as available-for-sale securities. The
following table summarizes the various investment categories at (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- ---------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS ESTIMATED GAINS ESTIMATED
COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE
------- ---------- ---------- ------- ---------- ----------
Available-for-Sale:
U.S. Government Securities.... $11,790 $ 9 $11,799 $18,541 $(52) $18,489
Corporate Obligations......... 7,085 2 7,087 22,005 (16) 21,989
Certificates of Deposit....... 2,093 (1) 2,092 5,354 (10) 5,344
------- ---- ------- ------- ---- -------
20,968 10 20,978 45,900 (78) 45,822
Certificates of Deposit --
restricted................. 3,057 -- 3,057 3,527 -- 3,527
Equity securities............. 440 374 814 440 -- 440
------- ---- ------- ------- ---- -------
$24,465 $384 $24,849 $49,867 $(78) $49,789
======= ==== ======= ======= ==== =======
Equity securities are included in long-term other assets.
The realized gains (losses) on sales of available-for-sale securities for the
years ended December 31, 1997 and 1996 have not been material.
F-9
68
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The amortized cost and estimated fair value of debt and marketable securities at
December 31, 1997 and 1996, 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, 1997 DECEMBER 31, 1996
--------------------- ---------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------- ---------- ------- ----------
Due in one year or less........................... $17,148 $17,151 $15,941 $15,938
Due after one year through three years............ 6,782 6,792 33,388 33,315
Due after three years............................. 94 92 98 96
------- ------- ------- -------
24,025 24,035 49,427 49,349
Equity securities................................. 440 814 440 440
------- ------- ------- -------
$24,465 $24,849 $49,867 $49,789
======= ======= ======= =======
4. MERGER WITH GLYCOMED
In May 1995, Glycomed was merged into a wholly owned subsidiary of the Company
("the Merger"). Glycomed is a biopharmaceutical company conducting research and
development of pharmaceuticals based on biological activities of complex
carbohydrates. The results of operations of Glycomed are included in the
Company's consolidated results of operations with effect from the date of the
Merger. Each outstanding share of Glycomed Common Stock was converted into .5301
shares of the Company's Common Stock, resulting in the issuance of 6,942,911
shares of the Company's Common Stock to Glycomed shareholders. The Merger 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 $19.6 million.
Details of the merger are as follows (in thousands):
Total consideration:
Common stock.............................................. $43,193
Convertible debentures assumed............................ 29,625
Other liabilities assumed................................. 6,897
-------
79,715
Less:
Fair value of assets acquired, including cash, restricted
cash and short-term investments of $46,698................ 49,926
Write-off of in-process technology.......................... 19,564
-------
Net cash acquired........................................... $10,225
=======
The common stock issued as consideration was valued at the market price on the
date the transaction was consummated.
In November 1997, the Company closed Glycomed's Alameda facilities and
Glycomed's assets and research programs were integrated into Ligand's
operations.
F-10
69
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
DECEMBER 31,
--------------------------------
1997 1996
-------------- --------------
Accrued legal......................................... $ 451 $ 463
Accrued interest...................................... 2,088 2,116
Accrued compensation.................................. 1,446 925
Other................................................. 1,624 1,366
------ ------
$5,609 $4,870
====== ======
6. CONVERTIBLE SUBORDINATED DEBENTURES
In conjunction with the Glycomed merger, the Company adjusted the carrying value
of the Glycomed 7 1/2% Convertible Subordinated Debentures due 2003 (the
"Debentures") issued by Glycomed in 1992 in the original amount of $50 million
to $29.6 million, which was their fair market value at the date of the Merger.
The current carrying value approximates fair market value. The Company has
entered into a supplemental indenture which provides for conversion of the
Debentures into the Company's Common Stock at $26.52 per share. The 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 will be
accreted up to the face value over the remaining term of the Debentures and the
accretion is charged to interest expense.
7. COMMITMENTS
Leases and Equipment Notes Payable
The Company has entered into capital lease and equipment note payable agreements
which require monthly payments through December 2002. The carrying value of
equipment under these agreements at December 31, 1997 and 1996 was $16.9 million
and $19.0 million, respectively. At December 31, 1997 and 1996, accumulated
amortization was $6.0 million and $9.7 million, respectively.
The Company has also entered into operating lease agreements for office and
research facilities with varying terms through August 2015. The agreements also
provide for increases in annual rentals based on changes in the Consumer Price
Index or fixed percentage increases varying from three to six percent. 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, 1997, 1996 and 1995 was $3.4
million, $3.1 million and $2.5 million, respectively.
F-11
70
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
At December 31, 1997, 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 OPERATING
NOTES PAYABLE LEASES
-------------------- ---------
1998............................................. $ 3,661 $ 3,055
1999............................................. 3,372 2,910
2000............................................. 3,345 2,920
2001............................................. 2,120 2,760
2002............................................. 882 2,813
Thereafter....................................... -- 37,787
------- -------
Total minimum lease payments..................... 13,380 $52,245
=======
Less amounts representing interest............... 2,126
-------
Present value of minimum lease payments.......... 11,254
Less current portion............................. 2,753
-------
$ 8,501
=======
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 1998, the Company entered into a 17-year lease and the
Company loaned the construction partnership $3.7 million which will be repaid
with interest over a 10-year period.
Royalty Agreements
The Company has entered into royalty agreements requiring payments ranging from
1% to 10% of net sales and 10% to 30% of license and other income for certain
products developed by the Company. Currently, the Company is making minimum
royalty payments under four agreements, which increase annually to a maximum of
$285,000 per year and aggregate $1.4 million through 2002. Royalty expense under
the agreements for the years ended December 31, 1997, 1996 and 1995 was
$276,000, $261,000 and $195,000, respectively.
No royalty payments have been received by the Company.
8. STOCKHOLDERS' EQUITY
Public Offering
In October 1996, the Company completed a secondary public offering of 3,162,500
shares of common stock at a price of $12.00 per share, resulting in net proceeds
of approximately $35.3 million.
Warrants
At December 31, 1997, the Company had outstanding warrants to purchase 6,606,094
shares of the Company's Common Stock, of which 6,497,844 warrants relate to the
ALRT transaction (see Note 10). The ALRT warrants have an exercise price of
$7.12 per share, the additional warrants have exercise prices ranging from $1.80
to $14.00 per share and expire at various dates through September 30, 2001.
F-12
71
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock Plans
The Company's 1992 Stock Option Stock Issuance Plan incorporates all outstanding
stock options and unvested share issuances under a prior plan. In May of years
1993 through 1997 inclusive, the plan was amended to increase the aggregate
shares available for grant or issuance to 7,303,457 shares of Common Stock. The
large majority of the options granted have 10 year terms and vest and become
fully exercisable at the end of four years of continued employment. As part of
this plan, on the date of the Merger, all outstanding in-the-money stock options
from Glycomed's stock option plan were converted into options to purchase
470,008 shares of the Company's Common Stock based on the exchange ratio in
effect. The Company's employee stock purchase plan also provides for the sale of
up to 206,500 shares of the Company's Common Stock.
Pro forma information regarding net loss and loss per share is required by SFAS
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 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 1997, 1996 and
1995:
1997 1996 1995
------------ ------------ ------------
Risk free interest rates......... 6.1% - 6.9% 5.3% - 6.6% 5.7% - 7.6%
Dividend yields.................. -- -- --
Volatility....................... 42.7% 44.40% 44.40%
Weighted average expected life... 5 or 7 years 5 or 7 years 5 or 7 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):
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
Net loss as reported...................... $(100,150) $(37,313) $(64,172)
Net loss pro forma........................ (102,929) (39,210) (65,082)
Net loss per share as reported............ (3.02) (1.30) (2.70)
Net loss per share pro forma.............. (3.11) (1.36) (2.74)
The pro forma effect on net loss for 1997, 1996 and 1995 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.
F-13
72
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Following is a summary of the Company's stock option plans activity and related
information:
WEIGHTED
AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- --------------
Balance at December 31, 1994.......... 2,418,904 $ .22 - 11.59 $ 8.75
Merger options granted.............. 470,008 .68 - 6.37 3.37
Granted............................. 1,077,540 4.68 - 10.00 7.36
Exercised........................... (215,530) .29 - 7.97 4.10
Cancelled........................... (146,816) 3.89 - 11.59 7.57
--------- -------------- ------
Balance at December 31, 1995.......... 3,604,106 .29 - 11.59 7.33
Granted............................. 974,015 10.31 - 16.38 12.85
Exercised........................... (498,456) .22 - 12.75 5.61
Cancelled........................... (282,783) 3.89 - 13.31 7.91
--------- -------------- ------
Balance at December 31, 1996.......... 3,796,882 .22 - 16.38 9.55
Granted............................. 875,339 9.50 - 16.06 12.75
Exercised........................... (384,340) .68 - 14.50 8.59
Cancelled........................... (219,375) 5.50 - 16.06 10.65
--------- -------------- ------
Balance at December 31, 1997.......... 4,068,506 $ .68 - 16.06 $10.26
========= ============== ======
Options exercisable at
December 31, 1997................... 2,442,187 $ .68 - 16.06
========= ==============
Of the total options granted from 1995 through 1997, 3,338,890 were granted at a
price equal to the fair value of the options at the time of grant, and 58,012
were granted at a price below the fair value of the options at the time of
grant.
Following is a further breakdown of the options outstanding as of December 31,
1997:
WEIGHTED AVERAGE
OPTIONS REMAINING LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE
- ------------------------ ----------- ---------------- ----------------
$ 0.68 - $ 0.79 15,287 2.24 $ 0.73
$ 3.89 - $ 4.60 27,962 6.77 $ 4.06
$ 4.68 - $ 9.10 1,594,638 6.55 $ 7.78
$ 9.21 - $12.13 1,604,174 7.56 $10.96
$12.75 - $16.38 826,445 8.91 $14.03
--------- ------
4,068,506 $10.26
========= ======
At December 31, 1997, 642,246 shares were available under the plans for future
grants of stock options or sale of stock.
For certain shares issued under these plans and certain other issuances of
stock, the Company has recognized as compensation and consulting expense the
excess of the deemed value for accounting purposes over the aggregate issue
price for such shares. The compensation expense is amortized ratably over the
vesting period of each share.
Amortization of deferred compensation and consulting for the years ended
December 31, 1997, 1996 and 1995 was $322,000, $497,000 and $711,000,
respectively.
F-14
73
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Shareholder Rights Plan
In September 1996, the Company's Board of Directors adopted a preferred
shareholder rights plan (the "Shareholder Rights Plan") which provides for a
dividend distribution of one preferred share purchase right (a "Right") on each
outstanding share of the common stock. Each Right entitles stockholders to buy
1/1000(th) 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.
9. COLLABORATIVE RESEARCH AGREEMENTS
Eli Lilly and Company
In November 1997, the Company entered into a strategic alliance with Eli Lilly
and Company ("Lilly") for the discovery and development of products based on
Ligand's Intracellular Receptor technology. Lilly made an investment of $37.5
million by purchasing 2,176,279 shares of the Company's Common Stock at $17.23
per share at the inception of the agreement. The price per share included a 20%
premium to the market value as defined in the agreement. The 20% premium was in
recognition of Ligand's past research and development efforts and accordingly,
$6.25 million (the premium) was included in 1997 revenues. Ligand also received
a $12.5 million up-front non-refundable milestone payment following inception of
the agreement. Under the agreement, Lilly also agreed to support up to $49
million in research funding. Revenues for research funding are recognized
ratably over the term of the agreement. Revenues recognized for the year ended
December 31, 1997 were $19.7 million.
The Company also has the option to obtain selected rights to one Lilly specialty
pharmaceutical product. Should the Company elect to obtain selected rights to
the product, Lilly could receive milestone payments of up to $20 million payable
in the Company's Common Stock. In the event that Ligand does not exercise this
product option during the first 120 days after the effective date of the
agreements, the Company will sell an additional $20 million in equity to Lilly
at a 20% premium to the then current market price, and the Company will qualify
for certain additional royalties of up to 1.5% on net sales of the Company's
choice of Targetin (LGD1069), LGD1268 or LGD1324.
SmithKline Beecham Corporation
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 under the
agreement are recognized ratably over the term of the agreement. Revenues
recognized under the agreement for the years ended December 31, 1997, 1996 and
1995 were $3.2 million, $2.4 million and $2.1 million, respectively. SmithKline
Beecham has agreed to provide the Company up to $21.5 million in research
funding and equity investments. SmithKline Beecham made an investment of $5.0
million by purchasing 674,127 shares of the Company's Common Stock at $7.41 per
share at the inception of the agreement. In November 1995, a second equity
investment of $2.5 million by purchasing 260,200 shares of the Company's Common
Stock at $9.60 per share, was provided to the Company upon the achievement of
certain milestones. In January 1997, a third installment of equity investment of
$2.5 million by purchasing 164,474 shares of the Company's Common Stock at
$15.20 per share was provided to the Company as a result of SmithKline Beecham's
election to expand the scope of research as defined. The final installment of
$2.5 million was provided in October 1997 as a convertible note as a result of
SmithKline Beecham's election to extend the collaboration. The note is
convertible into the Company's Common Stock at $13.56 per share
F-15
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LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
and is due October 002 unless converted into the Company's Common Stock earlier.
The interest rate on the note is payable semi-annually at prime.
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 ("AHP"), to discover and develop drugs which interact with the estrogen
or progesterone receptors. AHP agreed to provide up to $19.0 million of the
Company's research activities, to invest $5.0 million by purchasing 574,513
shares of the Company's Common Stock at $8.70 per share, and to provide, in
three installments, up to $20.0 million in convertible notes over the life of
the agreement.
In January 1996, the Company and AHP expanded and amended the research and
development collaboration. The Company received $1.5 million in additional
research revenue from AHP, AHP expanded the research funding by $1.0 million in
years two and three of the agreement, the contract-specified milestone payments
increased, AHP granted rights to the Company to cause the conversion of the
convertible note into Common Stock, and the parties agreed to extend the period
for Ligand to draw down the second convertible note installment until December
1996.
Revenues under the agreement are recognized ratably over the term of the
agreement. Revenues recognized under the agreement for the years ended December
31, 1997, 1996 and 1995 were $4.0 million, $6.9 million and $4.0 million,
respectively. The $5.0 million equity investment plus the initial $10.0 million
convertible note was provided to the Company upon inception of the agreement. In
the second quarter of 1995, the Company achieved certain milestones which
qualified the Company to receive the second installment of a $5.0 million
convertible note, which the Company elected to receive in December 1996. The
final convertible note installment of $5.0 million will be provided if the
collaboration agreement is extended from three to five years. The first two
notes are convertible into the Company's Common Stock at $10.01 per share and
the final note is convertible at $10.88 per share. The conversion prices are
subject to adjustment if certain dilutive events occur to the Company's
outstanding Common Stock. In August 1996, March 1997, July 1997 and again in
December 1997, the Company converted $3.8 million, $3.8 million, $2.5 million
and $1.3 million of the convertible notes outstanding into 374,626, 374,626,
249,749 and 124,875 shares of Common Stock, at the $10.01 conversion price. The
notes bear interest at 7.75% payable semi-annually and are due September 1999
unless converted into the Company's Common Stock. If conversion has not occurred
by September 1999, the Company may extend the due date of the notes to September
2001.
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. Abbott agreed to support
up to $16.0 million of the Company's research activities over a five-year period
in connection with the agreement.
Revenues under the agreement are recognized ratably over the term of the
agreement and for the years ended December 31, 1997, 1996 and 1995 revenues were
$1.7 million, $2.5 million and $2.6 million, respectively. Abbott made an equity
investment of $5.0 million by purchasing 571,305 shares of the Company's Common
Stock at $8.75 per share at the inception of the agreement, and in August 1995
Abbott made another equity investment of $5.0 million by purchasing 516,129
shares of the Company's Common Stock at $9.68 per share, as provided in the
contract.
F-16
75
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Sankyo Company, Limited
As part of the Glycomed acquisition, the Company acquired a collaborative
research agreement with Sankyo Company, Limited ("Sankyo") which Glycomed had
entered into in June 1994. Under the agreement, Sankyo reimburses a portion of
the Company's research expenses related to the collaboration up to an aggregate
of $8.9 million. Revenues under the agreement are recognized ratably over the
term of the agreement. Revenues recognized under the agreement and for the years
ended December 31, 1997 and 1996, and since the date of Merger through December
31, 1995 were $2.3 million, $2.7 million and $1.7 million, respectively. The
agreement also provides that upon being presented with a target compound arising
from the research collaboration by the Company, Sankyo shall notify the Company
whether it wishes to pursue development of the compound. If Sankyo exercises its
option to develop the compound, the Company and Sankyo shall negotiate in good
faith the terms and conditions for an option and license agreement within 180
days of Sankyo's exercise. Sankyo shall pay the Company an initial payment of
$1.0 million within 30 days after execution of each option and license agreement
as a license fee. Sankyo shall make additional payments of license fees as
follows: $1.0 million within 30 days after Sankyo decides to initiate Phase II
clinical trials of the approved compound in Japan; $1.0 million within 30 days
after the filing of an NDA for the approved compound in Japan; and $2.0 million
within 30 days after the date of approval of an NDA for the approved compound in
Japan.
In connection with the collaborative research agreement, in September 1995,
Sankyo purchased 189,274 shares of the Company's Common Stock at $7.92 per share
for net proceeds of $1.5 million. In June 1997, the collaborative research
agreement was extended through October 1997. No further extension of the
research agreement is anticipated.
Glaxo-Wellcome plc
In September 1992 the Company entered into a five-year collaborative research
agreement with Glaxo-Wellcome plc ("Glaxo") to develop drugs for the treatment
of cardiovascular disease. Under the agreement, Glaxo reimburses a portion of
the Company's research expenses related to the collaboration to a maximum of
approximately $2.0 million annually. Revenues under the agreement are recognized
ratably over the term of the agreement. Revenues recognized under the agreement
for the years ended December 31, 1997, 1996 and 1995 were $1.3 million, $2.1
million and $2.1 million, respectively. In connection with the agreement, Glaxo
purchased 662,755 shares of the Company's Common Stock at $11.31 per share for
net proceeds of $7.5 million. Glaxo also purchased 315,465 shares of the
Company's Common Stock at $7.92 per share as part of the Company's initial
public offering for net proceeds of $2.5 million.
Pfizer Inc.
In 1991, the Company entered into a collaborative research and development and
license agreement with Pfizer Inc. ("Pfizer") to perform services related to the
joint development of pharmaceuticals for the treatment of osteoporosis. Due to
the early success in meeting research-stage objectives for drug candidates, the
two companies phased out the ongoing research collaboration by July 1, 1994.
In connection with the collaborative research agreement, Pfizer purchased
1,353,125 shares of the Company's Common Stock for $5.54 per share for net
proceeds of $7.5 million.
In December 1994, the Company filed suit against Pfizer in the Superior Court of
California in San Diego County for breach of contract and for a declaration of
future rights as they relate to droloxifene, a compound upon which the Company
performed work at Pfizer's request during a collaboration between Pfizer and the
Company to develop drugs in the field of osteoporosis. Droloxifene is an
estrogen antagonist/partial agonist with potential indications in the treatment
of osteoporosis and breast cancer as well as other applications. The
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76
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Company and Pfizer entered into a settlement agreement with respect to the
lawsuit in April 1996. Under the terms of the settlement agreement, the Company
is entitled to receive milestone payments if Pfizer continues development and
royalties if Pfizer commercializes droloxifene. At the option of either party,
milestone and royalty payments owed the Company can be satisfied by Pfizer
transferring to the Company shares of Common Stock at an exchange ratio of
$12.375 per share. To date, the Company has received approximately $1.3 million
in milestone payments from Pfizer as a result of the continued development of
droloxifene. These milestones were paid in the form of an aggregate of 101,011
shares of Common Stock, which were subsequently retired from treasury stock in
September 1996. According to recent announcements by Pfizer, droloxifene has
entered Phase II/III clinical trials for osteoporosis.
10. ALLERGAN LIGAND RETINOID THERAPEUTICS , INC. - RELATED PARTY
In December 1994, the Company and Allergan, Inc. ("Allergan") formed Allergan
Ligand Retinoid Therapeutics, Inc. ("ALRT") to continue the research and
development activities previously conducted by Allergan-Ligand Joint Venture
("the Joint Venture"). In June 1995, the Company and ALRT completed a public
offering of 3,250,000 units (the "Units") with aggregate proceeds of $32.5
million (the "ALRT Offering") and cash contributions by Allergan and Ligand of
$50.0 million and $17.5 million, respectively, providing for net proceeds of
$94.3 million for retinoid product research and development. Ligand's $17.5
million in cash contribution, as well as warrants were in exchange for (i) a
right to acquire all of the Callable Common Stock at specified future dates and
amounts and (ii) a right to acquire all rights to the Panretin (ALRT 1057)
product, jointly with Allergan. Allergan's $50.0 million cash contribution to
ALRT was in exchange for (i) the right to acquire one-half of technologies and
other assets in the event Ligand exercises its right to acquire all of the
Callable Common Stock, (ii) a similar right to acquire all of the Callable
Common Stock if Ligand does not exercise its right and (iii) a right to acquire
all rights to the Panretin (ALRT1057) product, jointly with Ligand. Each Unit
consisted of one share of ALRT's callable common stock and two warrants, each
warrant entitling the holder to purchase one share of the Company's Common
Stock. Immediately prior to the consummation of the ALRT Offering, Allergan
Pharmaceuticals (Ireland) Ltd., Inc. made a $6.0 million investment by
purchasing 994,819 shares of the Company's Common Stock at $6.03 per share. The
Company's $17.5 million cash contribution resulted in a one-time charge to
operations. The Company also recorded a warrant subscription receivable and
corresponding increase in paid-in capital of $5.9 million (6,500,000 warrants
valued at $.90 per warrant) pursuant to the ALRT Offering. From June 3, 1995
through September 23, 1997, cash received from ALRT pursuant to a Research and
Development Agreement was prorated between contract revenue and the warrant
subscription receivable based on their respective values.
In 1997, 1996 and 1995, $1.5 million, $2.1 million and $1.3 million,
respectively, of the proceeds received from ALRT were applied to the warrant
subscription receivable. In conjunction with the consummation of the ALRT
Offering, all rights held by the Joint Venture were licensed to ALRT.
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 $25.0 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.
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
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77
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 $65.0
million.
Details of the acquisition are as follows (in thousands):
Total consideration:
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
=======
The following unaudited pro forma data reflects the Company's 1997 and 1996
results of operations as if the ALRT acquisition occurred on January 1, 1996 (in
thousands, except per share data):
1997 1996
------- -------
Revenues.................................................. $32,702 $18,201
Net loss.................................................. (54,177) (83,286)
Loss per share............................................ (1.64) (2.89)
11. LICENSE AGREEMENT
In September 1992, the Company acquired certain licenses and technology rights
from Rockefeller University and New York University in exchange for an initial
cash payment, shares of Common Stock and warrants to purchase Common Stock of
the Company. Under the terms of the agreements, the Company acquired worldwide
licensing rights to certain transcription technology developed by Rockefeller
University. The agreements also provide for certain additional payments if
certain milestones are achieved. In connection with these agreements, the
Company entered into consulting agreements whereby two scientists received
shares of Common Stock from the Company's restricted stock plan. These shares
were issued at par value and resulted in deferred consulting of $2.2 million
which were recognized over the five-year vesting period.
12. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has advanced funds to certain officers and employees in connection
with various employment agreements. The agreements provide for forgiveness of
the advances over four-year and five-year periods. If an individual terminates
the relationship with the Company, the unforgiven portion of the advances and
any accrued interest are due and payable upon termination. The notes are secured
by shares of the Company's Common Stock owned by the individual or second trust
deeds on the personal residences of the respective employees.
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78
LIGAND PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
13. INCOME TAXES
At December 31, 1997, the Company had consolidated federal and combined
California income tax net operating loss carryforwards of approximately $226
million and $36 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 federal tax loss carryforward will begin to expire in 2002, unless
previously utilized. The California tax loss carryforwards began expiring in
1997 (approximately $1,087,000 expired in 1997). The Company also had
consolidated federal and combined California research tax credit carryforwards
of approximately $8 million and $3.1 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 preacquisition tax net operating
and credit carryforwards will also be limited because the acquisition by the
Company represents a change 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,
1997 and 1996 are shown below (in thousands). A valuation allowance has been
recognized to fully offset the deferred tax assets as of December 31, 1997 and
1996 as realization of such assets is uncertain.
1996 1997
--------- --------
Deferred tax liability:
Acquired subordinated debt.......................... $ 5,483 $ 6,579
Deferred tax assets:
Net operating loss carryforwards.................... 82,552 62,615
Research and development credits.................... 9,979 8,260
Capitalized research and development................ 10,252 8,655
Other -- net........................................ 3,472 5,100
--------- --------
Total deferred tax assets............................. 111,738 84,630
Valuation allowance for deferred tax assets........... (106,255) (78,051)
--------- --------
Net deferred tax assets............................... 5,483 6,579
--------- --------
Net deferred taxes.................................... $ -- $ --
========= ========
Approximately $1.9 million of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to paid-in capital.
F-20