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LGND > SEC Filings for LGND > Form 10-K/A on 14-Nov-2012All Recent SEC Filings

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Form 10-K/A for LIGAND PHARMACEUTICALS INC


14-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Caution: This discussion and analysis may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in Item 1A. "Risk Factors." This outlook represents our current judgment on the future direction of our business. These statements include those related to our CAPTISOL related revenue, our AVINZA, PROMACTA and other product royalty revenues, product returns, and product development. Actual events or results may differ materially from our expectations. For example, there can be no assurance that our revenues or expenses will meet any expectations or follow any trend(s), that we will be able to retain our key employees or that we will be able to enter into any strategic partnerships or other transactions. We cannot assure you that we will receive expected AVINZA, PROMACTA, CAPTISOL and other product revenues to support our ongoing business or that our internal or partnered pipeline products will progress in their development, gain marketing approval or achieve success in the market.In addition, ongoing or future arbitration, or litigation or disputes with third parties may have a material adverse effect on us. Such risks and uncertainties, and others, could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this annual report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.

Our trademarks, trade names and service marks referenced herein include Ligand. Each other trademark, trade name or service mark appearing in this annual report belongs to its owner.

References to "Ligand Pharmaceuticals Incorporated", "Ligand", the "Company", "we" or "our" include our wholly owned subsidiaries-Ligand JVR, Allergan Ligand Retinoid Therapeutics, Seragen, Inc., or Seragen; Pharmacopeia, LLC; Neurogen Corporation, CyDex Pharmaceuticals, Inc., Metabasis Therapeutics, and Nexus Equity VI LLC, or Nexus.

Overview

We are a biotechnology company that operates with a business model focused on developing or acquiring revenue generating assets and coupling them to a lean corporate cost structure. Our goal is to create a sustainably profitable business and generate meaningful value for our stockholders. Since a portion of our business model is based on the goal of partnering with other pharmaceutical companies to commercialize and market our assets, a significant amount of our revenue is based largely on payments made to us by partners for royalties, milestones and license fees. We recognized the important role of the drug reformulation segment in the pharmaceutical industry and in 2011 added CAPTISOL ® to our technology portfolio. CAPTISOL is a powerful formulation technology that has enabled five FDA approved products, including Pfizer's VFEND® IV and Baxter International's Nexterone ® and is currently being used in a number of clinical-stage partner programs. In comparison to our peers, we believe we have assembled one of the largest and most diversified asset portfolios in the industry with the potential to generate significant revenue in the future. In addition, therapies in development address the unmet medical needs of patients for a broad spectrum of diseases including hepatitis, muscle wasting, Alzheimer's disease, dyslipidemia, diabetes, anemia, asthma, rheumatoid arthritis and osteoporosis. We have established multiple alliances with the world's leading pharmaceutical companies including GlaxoSmithKline, Merck, Pfizer, Baxter International, Bristol-Myers Squibb, Celgene, Onyx Pharmaceuticals, Lundbeck Inc., Eli Lilly & Co., and The Medicines Company.

In January 2011, we completed the acquisition of CyDex Pharmaceuticals, Inc., or CyDex. As a result, we gained revenue from four currently marketed products, a large portfolio of partnered drug development programs, an internal pipeline of proprietary drugs, and the CAPTISOL drug formulation platform technology. CyDex is now a wholly owned subsidiary of Ligand.

In July 2011, we executed a patent license agreement for the exclusive license to make, have made, import, use, sell or offer for sale the compound associated with Fablyn. Fablyn is a selective estrogen receptor modulator product candidate that resulted from a collaboration between Pfizer and us formed to develop therapies for


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osteoporosis. In February 2009, Pfizer received approval from the European Commission for Fablyn tablets. In October 2011, we entered into a license agreement with Chiva Pharmaceuticals, Inc. for Fablyn. Under the License Agreement, we granted Chiva an exclusive worldwide license, with sub-license rights, to our intellectual property rights related to Fablyn. Chiva is obligated to pay us a non-refundable license issuance fee of $4.0 million on or before June 1, 2012, of which $2.5 million was received in 2011. We are also eligible to receive, under the License Agreement, both milestones and royalty payments on worldwide net sales of Fablyn.

In October 2011, we entered into a License Agreement with privately-held SAGE Therapeutics, Inc. granting SAGE an exclusive right to use CAPTISOL® in SAGE's development and commercialization of therapeutic drugs formulating certain allosteric receptor modulators with CAPTISOL against identified central nervous system disorders. Under the License Agreement, we will receive upfront and research support payments, and potentially can receive additional payments if SAGE exercises certain product commercialization options. Upon commercialization, we could potentially receive milestone payments for CAPTISOL-enabled programs, plus tiered royalties on net sales for products that use the CAPTISOL technology. We are also eligible to receive commercial revenue from the shipment of CAPTISOL to SAGE for clinical and commercial activities.

In December 2011, we entered into a License and Supply Agreement with Eli Lilly ("Lilly") and Company. Under the License Agreement, we granted to Lilly an exclusive, nontransferable license to such intellectual property rights that will enable Lilly to develop and potentially commercialize CAPTISOL-enabled® intravenous oncology therapeutics. Additionally, Lilly paid us a non-refundable license issuance fee of $1 million. We are also eligible to receive royalty payments on worldwide net sales of any products that are successfully commercialized.

Under the Supply Agreement, Lilly agreed to purchase from us its CAPTISOL requirements for the development of the compounds contemplated by the License Agreement, as well as any CAPTISOL required for any product that is successfully commercialized.

In December 2011, we entered into a License and Supply Agreement with Hospira, Inc. Under the Agreement, we granted a license in specified territories, with sub-license rights, to such intellectual property rights that will enable the manufacture and sale of certain finished drug products of which CAPTISOL® is a component. The terms of the Agreement call for us to receive a non-refundable license fee of $0.5 million. In addition, we received a pre-payment of $2.5 million, to be applied as a credit toward the first $2.5 million of CAPTISOL supplied under the Agreement. In the event of a termination prior to us supplying $2.5 million of CAPTISOL, we will refund the difference of the value of CAPTISOL supplied and the $2.5 million pre-payment. We are also eligible to receive milestone payments upon the occurrence of certain specified sales goals.

In December 2011, our partner Onyx Pharmaceuticals, Inc., or Onyx, announced that the U.S. Food and Drug Administration, or FDA, had granted Standard Review designation to the New Drug Application, or NDA, for carfilzomib for the potential treatment of patients with relapsed and refractory multiple myeloma. The Prescription Drug User Fee Act, or PDUFA, date for completion of review by the FDA of the NDA is July 27, 2012. Carfilzomib is also currently being evaluated in two Phase 3 clinical trials. Under our agreement with Onyx, we are entitled to milestones, royalties and revenue from CAPTISOL material sales.

Metabasis Contingent Value Rights

In January 2010, we completed our acquisition of Metabasis. In addition to cash consideration, we issued four tradable Contingent Value Rights ("CVRs"), one CVR from each of four respective series of CVRs, for each Metabasis share. The CVRs will entitle the holder to cash payments as frequently as every six months as cash is received by us from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. We have also committed to spend at least $7 million within 30 months and $8 million within 42 months, in new research and development funding on the Metabasis programs. Through December 31, 2011, we estimate that we have spent approximately $5.1 million of the committed amount.


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In January 2011, we entered into a strategic relationship with Chiva Pharmaceuticals, Inc. to develop multiple assets and technology in China and potentially worldwide. Chiva was granted licenses to begin immediate development in China of two clinical-stage HepDirect programs, Pradefovir for hepatitis B and MB01733 for hepatocellular carcinoma. Additionally, we granted Chiva a non-exclusive HepDirect technology license for the discovery, development and worldwide commercialization of new compounds in hepatitis B (HepB), hepatitis C (HepC) and hepatocellular carcinoma (HCC). Under the terms of the agreement, we are entitled to milestones and royalties on potential sales. In addition, we are entitled to receive a portion of any sublicensing revenue generated from sublicensing of collaboration compounds to third parties in a major world market. We received a $0.5 million license payment in March 2011, of which $0.1 million was remitted to CVR holders.

In August 2011, we entered into an amendment to the license agreement which required that the second $0.5 million licensing fee be paid in September 2011. In addition, the amendment increased royalty rates which we may receive under the license agreement to 6% of net sales of products (other than Pradefovir) and 9% of net sales for Pradefovir. In addition, the amendment removed from the license agreement the provision that we could potentially earn a 10% equity position in Chiva as a milestone payment. The amendment's second $0.5 million licensing fee payment was received by us from Chiva in September 2011, of which $0.1 million was remitted to CVR holders.

Results of Operations

Total revenues for 2011 were $30.0 million, compared to $23.5 million in 2010 and $38.9 million in 2009. Our income from continuing operations for 2011 was $9.7 million, or $0.49 per share, compared to losses from continuing operations of $12.8 million, or $0.65 per share in 2010 and $8.3 million, or $0.44 per share, in 2009.

Royalty Revenue

Royalty revenues were $9.2 million in 2011 compared to $7.3 million in 2010 and $8.3 million in 2009. The increase in royalty revenue of $1.9 million for the year ended December 31, 2011 is primarily due to an increase in PROMACTA sales. The decrease in royalty revenue of $1.0 million for the year ended December 31, 2010 is primarily due to lower AVINZA sales, partially offset by an increase in PROMACTA sales.

Collaborative Research and Development and Other Revenue

Collaborative research and development and other revenues for 2011 were $8.7 million compared to $16.3 million in 2010 and $30.6 million in 2009. Collaborative research and development and other revenues include reimbursement for ongoing research activities, earned milestones, and recognition of prior years' up-front fees previously deferred.

A comparison of collaborative research and development and other revenues is as follows (in thousands):

                                                      Year Ended December 31,
                                                  2011         2010         2009
        Collaborative research and development   $   601     $  7,734     $ 23,316
        License fees                               5,889        6,250          525
        Milestones and other                       2,211        2,275        6,765

                                                 $ 8,701     $ 16,259     $ 30,606

Collaborative research and development. The decrease of $7.1 million for the year ended December 31, 2011 is due to the termination of research collaboration agreements. The decrease of $15.6 million for the year ended December 31, 2010 is primarily due to the termination of our research collaboration agreements throughout the year.


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License fees. License fees in 2011 reflect $2.5 million for the license of Fablyn to Chiva, $1.3 million related to a CAPTISOL platform license, and $2 million related to licenses for internally developed programs. License fees in 2010 reflect the licensing of several compounds upon the termination of research collaborations. License fees in 2009 reflect licenses for internally developed programs.

Milestones and Other. Milestones and other revenue in 2011 primarily reflect milestones earned from CAPTISOL related programs, as well as $1.2 million relating to the sale of future royalty rights which had previously been deferred. Milestones in 2010 reflect $2.3 million received from Roche related to the initiation of a Phase I clinical trial under an agreement acquired from Metabasis. Milestones in 2009 reflect $4.0 million received from Merck in connection with lead identification and transferred programs, $1.3 million received from GSK for lead identification and $1.5 million from Pfizer related to NDA filings.

Research and Development Expenses

Research and development expenses were $10.3 million in 2011 compared to $22.1
million in 2010 and $39.9 million in 2009. The major components of research and
development expenses are as follows (in thousands):



                                                           Years Ended December 31,
                                                        2011         2010         2009
  Research performed under collaboration agreements   $      0     $  8,670     $ 21,194
  Internal research programs                             8,741       10,877       12,963

  Total research                                      $  8,741     $ 19,547     $ 34,157
  Development costs                                      1,550        2,520        5,713

  Total research and development                      $ 10,291     $ 22,067     $ 39,870

The decrease in research and development expenses of $11.8 million for the year ended December 31, 2011 was primarily due to $8.7 million of costs associated with collaboration agreements that were terminated as well as $3.1 million of other costs associated with internal research programs. The decrease in research and development expenses of $17.8 million for the year ended December 31, 2010 was primarily due to $12.5 million of costs associated with collaboration agreements that were terminated, $3.2 million of costs associated with clinical trials and $1.8 million in reduced headcount related and other costs associated with internal research programs.

As summarized in the table below, we are developing several proprietary products for a variety of indications. These programs represent our future licensing opportunities to expand our partnered asset portfolio.

                                                                       Development
Program                                Disease/Indication              Phase

Selective Androgen Receptor            Muscle wasting and frailty      Phase I
Modulators (SARMs)
(agonists)

CAPTISOL-Enabled Melphalan             Oncology
I                                                                      Phase II

CAPTISOL-Enabled Topiramate            Epilepsy/Seizures
IV                                                                     Preclinical

Glucagon receptor                      Diabetes
antagonists                                                            Preclinical

IRAK4 inhibitor                        Inflammation/Oncology           Research

We do not provide forward-looking estimates of costs and time to complete our ongoing research and development projects, as such estimates would involve a high degree of uncertainty. Uncertainties include our inability to predict the outcome of complex research, our inability to predict the results of clinical studies,


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regulatory requirements placed upon us by regulatory authorities such as the FDA and EMEA, our inability to predict the decisions of our collaborative partners, our ability to fund research and development programs, competition from other entities of which we may become aware of in future periods, predictions of market potential from products that may be derived from our research and development efforts, and our ability to recruit and retain personnel or third-party research organizations with the necessary knowledge and skills to perform certain research. Refer to "Item 1A. Risks Factors" for additional discussion of the uncertainties surrounding our research and development initiatives.

General and Administrative Expenses

General and administrative expenses were $15.0 million for 2011, compared to $12.8 million for 2010 and $15.2 million for 2009. The increase in general and administrative expenses in 2011 is primarily due to costs to operate the CyDex business and an increase in non-cash stock based compensation expenses.

The decrease in general and administrative expenses of $2.4 million for the year ended December 31, 2010 was primarily due to $0.9 million of lower headcount related costs as a result of staff reductions, $3.9 million of lower facilities costs as a result of our lease termination in 2009 and $1.4 million of lower legal costs, partially offset by lower allocations to research and development of $3.5 million.

Lease Exit and Termination Costs

In September 2010, we ceased use of our facility located in Cranbury, New Jersey. As a result, we recorded lease exit costs of $9.7 million for costs related to the difference between the remaining lease obligations of the abandoned operating leases, which run through August 2016, and management's estimate of potential future sublease income, discounted to present value. Actual future sublease income may differ materially from our estimate, which would result in us recording additional expense or reductions in expense. In addition, we wrote-off approximately $5.4 million of property and equipment related to the facility closure. We also recorded approximately $1.8 million of severance related costs.

In August 2009, we entered into a lease termination agreement for our corporate facility in San Diego. Under the terms of the agreement, we paid a termination fee of $14.3 million as follows: $4.5 million was paid upon signing, $4.5 million was paid in July 2010 and $5.3 million was paid in April 2011. As a result, during the year ended December 31, 2009, we recorded lease termination costs of $15.2 million, which includes the net present value of the lease termination payments of $14.3 million and $0.9 million of other costs associated with the lease termination.

Write-off of in-process research and development

In 2011, we recorded a non-cash impairment charge of $1.1 million for the write-off of intellectual property and interests in future milestones and royalties for MEDI-528, an IL-9 antibody program by AstraZeneca's subsidiary, MedImmune. The asset was impaired upon receipt of notice from MedImmune that it was exercising its right to terminate the collaboration and license agreement.

Additionally, in 2011, we recorded a non-cash impairment charge of $1.2 million for the write-off of interests in future milestones for TRPV1, a collaborative research and licensing program between us and Merck, related to the physiology, pharmacology, chemistry and potential therapeutic applications and potential clinical utilities related to Vanilloid Receptors, subtype 1. The asset was impaired upon receipt of notice from Merck in October 2011 that it was exercising its right to terminate the collaboration and license agreement.

In November 2010, Roche notified us that they were exercising their right to terminate the collaboration and license agreement with our subsidiary, Metabasis. As a result, we reviewed the carrying amount of the intangible asset related to this agreement. Based on our analysis of available information, we determined that the asset


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would not generate any future cash flow. Therefore, we wrote-off the $2.8 million of acquired in-process research and development associated with the agreement during the year ended December 31, 2010.

As a result of adjustments to our purchase price allocation related to our acquisition of Pharmacopeia in December 2008, we wrote-off an additional $0.4 million of acquired in-process research and development during the year ended December 31, 2009.

Accretion of Deferred Gain on Sale Leaseback

In October 2006, we entered into an agreement for the sale of our real property located in San Diego, California for a purchase price of $47.6 million. This property, with a net book value of $14.5 million, included one building totaling approximately 82,500 square feet, the land on which the building is situated, and two adjacent vacant lots. As part of the sale transaction, we agreed to lease back the building for a period of 15 years.

We recognized an immediate pre-tax gain on the sale transaction of $3.1 million in 2006 and deferred a gain of $29.5 million on the sale of the building. The deferred gain was being recognized as an offset to operating expense on a straight-line basis over the 15 year term of the lease at a rate of approximately $2.0 million per year.

In August 2009, we entered into a lease termination agreement for this building. As a result, we recognized an additional $20.4 million of accretion of deferred gain during the quarter ended September 30, 2009, and recognized the remaining balance of the deferred gain of $3.1 million through the term of our new building lease, which expired in December 2011. The amount of the deferred gain recognized for the years ended December 31, 2011, 2010 and 2009 was $1.7 million, $1.7 million and $21.9 million, respectively.

Interest Income

Interest income was $42,000 for 2011, compared to $0.4 million for 2010 and $0.6 million for 2009. The decreases from 2011 to 2010 and from 2010 to 2009 are due to lower invested balances and lower interest rates.

Change in Contingent Liabilities

We recorded an increase in contingent liabilities of $1.0 million for 2011, compared to a decrease of $9.1 million for 2010. The change relates to our liability for amounts potentially due to holders of CVRs and other former license holders associated with our Metabasis and CyDex acquisitions. The Metabasis CVR liability is marked-to-market at each reporting period based upon the quoted market prices of the underlying CVR. The CyDex contingent liabilities are marked-to-market at each reporting period based upon a discounted cash flow analysis. The change in fair value is recorded in our consolidated statements of operations. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially different than the carrying amount of the liability.

Other, net

We recorded other income of $0.7 million for 2011, compared to other income of $4.4 million for 2010 and other expense of $0.2 million for 2009. Other income for 2011 primarily relates to income related to the gain on the sale of property and equipment. Other income for 2010 primarily relates to grants totaling $2.0 million in response to applications submitted for qualified investments in a qualifying therapeutic discovery project under section 48D of the Internal Revenue Code, $1.5 million in realized gains on investments, $0.5 million reduction in warrant liability and $0.4 million of gain on the sale of property and equipment. Other expense for 2009 relates to losses from abandoning property and equipment.


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Income Taxes

During 2011, we recorded an income tax benefit of $13.3 million related to the release of a portion of our valuation allowance against deferred tax assets which can be used to offset deferred tax liabilities recorded in connection with our acquisition of CyDex in January 2011.

During 2010, we recorded an income tax benefit of $2.6 million related to the reversal of estimated interest for a proposed substantial underpayment of tax in fiscal 2007. During 2009, the IRS issued to us a Notice of Proposed Adjustment, or NOPA, seeking an increase to our taxable income for the 2007 fiscal year of $71.5 million and a $4.1 million penalty for substantial underpayment of tax in fiscal 2007. We recorded a liability for uncertain tax positions of $25.1 million related to the income tax effect of the NOPA and $3.0 million related to estimated interest due on the proposed underpayment of tax. We also recorded deferred income tax assets of $25.1 million associated with the ability to carry back losses from 2008 and 2009 to offset the NOPA. In addition, we recorded an income tax receivable of $4.5 million associated with changes in income tax law in relation to prior AMT taxes paid on carry back periods. In November 2010, the IRS granted us an extension of time to make a closing-of-the-books election with respect to an ownership change, within the meaning of section 382 of the Internal Revenue Code, for the 2007 tax year. We filed an amended 2007 federal tax return in the fourth quarter of 2010. In addition, in January 2011, we were notified by the IRS that they had completed their examination resulting in no changes to the taxes for our 2007 tax year.

During 2009, we recorded an income tax benefit of $1.5 million as a result of the NOPA discussed above. We recorded an income tax receivable of $4.5 million associated with changes in income tax law in relation to prior AMT taxes paid on carry back periods partially offset by $3.0 million of interest for the proposed substantial underpayment of tax in fiscal 2007.

At December 31, 2011, we had federal net operating loss carryforwards set to expire through 2031 of $456.0 million and $165.9 million of state net operating loss carryforwards. We also had $16.4 million of federal research and development credit carryforwards, $1.2 million of which expired at the beginning of 2011, with the remainder expiring through 2027, leaving $15.2 million remaining going into 2012. We have $10.3 million of California and New Jersey research and development credit carryforwards that have no expiration date.

Pursuant to Internal Revenue Code Sections 382 and 383, use of net operating loss and credit carryforwards may be limited if there were changes in ownership of more than 50%. As a result of ownership changes, utilization of our net operating losses and credits are subject to limitations under Internal Revenue Code Sections 382 and 383.

Discontinued Operations . . .

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