LIGAND PHARMACEUTICALS INCORPORATED 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 Part II, 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 revenues and manufacturing capacity, our Kyprolis, and other product royalty revenues, the impact of COVID-19, 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 Kyprolis, 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, or that the closing conditions of the transaction to divest the Vernalis business will be satisfied. Ligand may not achieve the growth prospects and synergies expected from its acquisitions ofPfenex , xCella and Taurus, and may experience delays, challenges and expenses associated with integrating the related businesses. 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 make any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our trademarks, trade names and service marks referenced herein include Ligand. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner. References to "Ligand Pharmaceuticals Incorporated ," "Ligand," the "Company," "we" or "our" includeLigand Pharmaceuticals Incorporated and our wholly owned subsidiaries. Overview We are a revenue generating biopharmaceutical company focused on developing and acquiring technologies that help pharmaceutical companies discover and develop medicines. We employ research technologies such as antibody discovery technologies, structure-based drug design, formulation science and liver targeted pro-drug technologies to assist companies in their work toward securing prescription drug and biologic approvals. We currently have partnerships and license agreements with over 120 pharmaceutical and biotechnology companies. Over 200 different programs are in various stages of commercialization and development and fully funded by our collaboration partners and licensees. We have contributed novel research and technologies for approved medicines that treat cancer, osteoporosis, fungal infections and postpartum depression, among others. Our collaboration partners and licensees have programs currently in clinical development targeting cancer, seizure, diabetes, cardiovascular disease, muscle wasting, liver disease, and kidney disease, among others. We have over 1,400 issued patents worldwide. We have assembled our large portfolio of fully-funded programs either by licensing our own proprietary drug development programs, licensing our platform technologies such as Captisol or OmniAb to partners for use with their proprietary programs, or acquiring existing partnered programs from other companies. Fully-funded programs, which we refer to as "shots on goal," are those for which our partners pay all of the development and commercialization costs. For our internal programs, we generally plan to advance drug candidates through early-stage drug development or clinical proof-of-concept and then seek partners to continue development and potential commercialization. Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners' development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development. Our revenue is generated primarily from: royalties on sales of products commercialized by our partners, sale of Captisol material, and contract revenue which consists of service revenue for contracted R&D services performed for our customers over 28 -------------------------------------------------------------------------------- time, license fees, contingent milestone payments and other payments. In addition to discovering and developing our own proprietary drugs, we selectively pursue acquisitions to bring in new assets, pipelines, and technologies to aid in generating additional potential new revenue streams.
Impact of COVID-19 Pandemic
Please see impact of COVID-19 pandemic described in Item 1. Condensed Consolidated Financial Statements - Note 1, "Basis of Presentation and Summary of Significant Accounting Policies". For additional information on the various risks posed by COVID-19 pandemic, please read Item 1A. Risk Factors included in this report. Portfolio Program Updates OmniAb® Platform Updates OmniAb is our multi-species antibody platform for the discovery of mono- and bi-specific therapeutic human antibodies. As of the third quarter of 2020, more than 8,500 clinical subjects have been or are planned to be treated by partners in clinical trials with OmniAb-derived antibodies. New clinical programs are pending at Johnson & Johnson and Merck, among others. Ligand expects the first regulatory submission for OmniAb-derived antibodies in 2021, with potential for as many as 10 approvals expected by 2025.
As part of the OmniAb platform, we recently announced OmniTaur™, featuring Ultralong CDR-H3 humanized binding domains recently acquired from Taurus Biosciences. The OmniAb platform also includes the ultra-high resolution, high-speed automated antibody selection technology acquired from xCella Biosciences.
Multiple OmniAb partners reported clinical or regulatory progression with OmniAb-derived antibodies during the third quarter of 2020. Additionally, three of our partners (Takeda , Immunoprecise and Genovac) are pursuing development of therapeutic antibodies for the treatment of COVID-19 that were discovered with OmniAb.CStone Pharmaceuticals announced the formation of a$480 million strategic collaboration that encompasses a$200 million equity investment by Pfizer Hong Kong in CStone, collaboration between CStone andPfizer Investment for the development and commercialization of CStone's PD-L1 antibody sugemalimab (CS1001) in mainlandChina and a framework between CStone andPfizer Investment to bring additional oncology assets to theGreater China market. CStone announced updated results from two clinical studies of sugemalimab at the 2020Chinese Society of Clinical Oncology Annual Meeting. CStone announced that sugemalimab met the primary endpoint as first-line treatment in stage IV squamous and non-squamous non-small cell lung cancer.
Immunovant announced positive topline results from a multicenter, placebo-controlled Phase 2a trial (ASCEND MG) of IMVT-1401, a novel investigational anti-FcRn antibody delivered by subcutaneous injection, in patients with myasthenia gravis (MG). A registration-enabling Phase 3 MG trial is expected to initiate in the first half of 2021.
Captisol® Business Updates
To date in 2020, we have entered into more than 120 Captisol research use agreements and eight clinical and/or commercial license agreements. This is the highest number of use agreements to be signed in a single year since the invention of Captisol.
Captisol is utilized in the formulation of Gilead Sciences' Veklury® (remdesivir), which onOctober 22, 2020 receivedU.S. FDA approval for the treatment of patients with COVID-19 requiring hospitalization. The product has regulatory approvals for the treatment of moderate or severe COVID-19 in over 50 countries and is included in more than 30 ongoing clinical trials. We are supplying Captisol to Gilead under a recently signed 10-year supply agreement. We are also supplying Captisol to Gilead's voluntary licensing generic partners who are manufacturing remdesivir for 127 low- and middle-income countries. Partner Marinus was recently awarded a BARDA contract by theU.S. government to develop Captisol-enabled IV ganaxolone for the treatment of refractory status epilepticus (RSE) caused by nerve agent exposure. Marinus also announced it had satisfied the FDA protocol-specific questions for the registrational Phase 3 trial (the RAISE trial) in RSE, allowing the company to begin patient enrollment in October. Topline data are anticipated in the first half of 2022. 29 --------------------------------------------------------------------------------
We plan to initiate a potentially pivotal trial for CE-Iohexol in
Protein Expression Technology Platform Updates
OnOctober 1, 2020 , we closed the previously announced acquisition ofPfenex, Inc. Pfenex brings to us a proprietary protein expression technology, as well as major collaborations with Jazz Pharmaceuticals, Merck,Serum Institute of India andAlvogen , each of which has potential to contribute meaningfully to our royalty revenue. Our partner Merck announced positive data from two Phase 3 studies with V114, which uses the protein expression technology, evaluating the safety, tolerability and immunogenicity of the investigational 15-valent pneumococcal conjugate vaccine with plans for global regulatory licensure applications in the fourth quarter 2020. Also using the platform, Jazz Pharmaceutical's Erwinaze supply challenges due to issues with their manufacturer were solved, resulting in a robust process showing manufacturing consistency and efficiency. The program was completed from commencement to projected first BLA filing in approximately four years.
We entered into a new 10-year CRM197 supply agreement with a global multi-national pharmaceutical partner focused on vaccine development.
Other Business Updates
We announced the sale of our Vernalis research operations and internal programs to HitGen Inc. for$25 million in cash. Under the terms of the agreement, we will retain economic rights on completed collaboration licenses as well as a share of the economic rights on current research collaboration contracts. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions. Several partners also had significant regulatory, financing and business updates during the third quarter of 2020:Verona Pharma announced initiation of its ENHANCE Phase 3 trials, Retrophin announced enrollment of the first 280 patients in the pivotal Phase 3 PROTECT study of sparsentan in IgA nephropathy, andSermonix Pharmaceuticals announced a collaboration with Eli Lilly to study lasofoxifene in combination with Lilly's CDK 4 and 6 inhibitor abemaciclib in metastatic breast cancer. Results of Operations Revenue (Dollars in thousands) Q3 2020 Q3 2019 Change % Change YTD 2020 YTD 2019 Change % Change Royalties$ 9,005 $ 9,767 $ (762) (8) %$ 22,751 $ 35,931 $ (13,180) (37) % Captisol 23,389 6,849 16,540 241 % 68,966 24,357 44,609 183 % Contract revenue 9,454 8,192 1,262 15 % 24,712 32,991 (8,279) (25) % Total revenue$ 41,848 $ 24,808 $ 17,040 69 %$ 116,429 $ 93,279 $ 23,150 25 % Royalty revenue is a function of our partners' product sales and the applicable royalty rate. Kyprolis royalty rates are under a tiered royalty rate structure with the highest tier being 3.0%. Evomela has a fixed royalty rate of 20%. OnMarch 6, 2019 , we sold all of our rights, title and interest in and to the Promacta license to Royalty Pharma; therefore, the royalty revenue for Promacta only reflected the revenue prior to the sale. Subsequent toMarch 6, 2019 , we no longer recognize revenue related to Promacta. Contract revenue includes service revenue, license fees and development, regulatory and sales based milestone payments.
The following tables represent royalty revenue by program:
Q3 2020 Estimated Q3 2019
Partner Product Effective Q3 2020 Royalty Q3 2019 Partner Effective Royalty
(in millions) Sales Royalty Rate Revenue Product Sales Royalty Rate Revenue
Kyprolis $ 277.2 2.5 % $ 6.9 $ 279.0 2.7 % $ 7.6
Evomela 9.0 20.0 % 1.8 7.5 20.0 % 1.5
Other 45.6 0.6 % 0.3 50.7 1.3 % 0.7
Total $ 331.8 $ 9.0 $ 337.2 $ 9.8
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YTD 2020 Estimated YTD 2020 YTD 2019
Partner Product Effective Royalty Royalty Partner Product Effective Royalty YTD 2019 Royalty
(in millions) Sales Rate Revenue Sales Rate Revenue
Kyprolis $ 832.3 2.0 % $ 16.8 $ 778.0 2.1 % $ 16.3
Evomela 22.9 20.0 % 4.6 17.7 20.0 % 3.5
Other 132.2 1.0 % 1.4 142.8 1.3 % 1.9
Promacta N/A N/A N/A 225.1 6.3 % 14.2
Total $ 987.4 $ 22.8 $ 1,163.6 $ 35.9
Q3 2020 vs. Q3 2019
Total revenue increased by $17.0 million , or 69%, to $41.8 million in Q3 2020
compared to $24.8 million in Q3 2019 mainly driven by an increase in Captisol
material sales during Q3 2020 attributable to an increased demand from Gilead
for remdesivir. See additional remdesivir updates in the Portfolio Program
Updates section above.
YTD 2020 vs. YTD 2019
Total revenue increased by$23.2 million , or 25%, to$116.4 million in the YTD 2020 compared to$93.3 million in the same period last year mainly driven by an increase in Captisol material sales during the YTD 2020 attributable to an increased demand from Gilead for remdesivir as mentioned above. The increases were partially offset by our no longer recognizing royalties related to Promacta since the sale of Promacta inMarch 2019 and the decreased contract revenue due to the disruption from COVID-19 as some partners delay starting clinical trials or paused patient enrollment in ongoing trials. Operating Costs and Expenses (Dollars in thousands) Q3 2020 % of Revenue Q3 2019 % of Revenue YTD 2020 % of Revenue YTD 2019 % of Revenue Costs of Captisol$ 6,353 $ 3,147 18,680
9,410
Amortization of intangibles 3,875 3,552 11,285 10,560 Research and development 12,853 13,742 37,476 37,244 General and administrative 15,020 9,525 34,353
31,607
Total operating costs and expenses$ 38,101 91%$ 29,966 121%$ 101,794 87%$ 88,821 95% Q3 2020 vs. Q3 2019 Total operating costs and expenses increased by$8.1 million or 27%. Cost of Captisol increased primarily due to higher Captisol sales during Q3 2020 as mentioned above. General and administrative expenses increased primarily due to acquisition integration related costs as well as additional expenses from theIcagen acquisition inApril 2020 .
YTD 2020 vs. YTD 2019
Total operating costs and expenses increased by$13.0 million or 15%. Cost of Captisol increased primarily due to higher Captisol sales during the YTD 2020 as mentioned above. General and administrative expenses increased primarily due to acquisition integration related costs as well as additional expenses from theIcagen acquisition inApril 2020 . Other Income (Expense) (Dollars in thousands) Q3 2020 Q3 2019 Change YTD 2020 YTD 2019 Change Loss from short-term investments$ (9,862) $ (13,297) $ 3,435 $ (17,143) $ (8,524) $ (8,619) Interest income 991 7,396 (6,405) 7,690 22,590 (14,900) Interest expense (6,269) (8,993) 2,724 (21,030) (26,911) 5,881 Other income (expense), net (219) 181 (400) 1,940 404 1,536 Total other income (expense), net$ (15,359) $ (14,713) $ (646) $ (28,543) $ (12,441) $ (16,102)
The fluctuation in the gain (loss) from short-term investments is primarily driven by the changes in the fair value of our ownership in Viking common stock and warrants.
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Interest income consists primarily of interest earned on our short-term
investments. The decreases over the prior periods were due to the decrease in
our short-term investment balance resulting from the proceeds used in share
repurchases, the 2023 Notes repurchase during the second quarter of 2020 and the
acquisition of Icagen , xCella and Taurus during the nine months ended
September 30, 2020 .
Interest expense includes the 0.75% coupon cash interest expense in addition to
the non-cash accretion of discount (including the amortization of debt issuance
cost) on our 2023 Notes for the three and nine months ended September 30, 2020 .
The decreases over the prior periods were primarily due to lower average debt
outstanding balance during the current periods as compared to the prior periods.
The 2019 Notes were paid off upon the maturity date in August 2019 . In March
2020 , we repurchased $234.4 million in principal of the 2023 Notes for
$203.8 million in cash, including accrued interest of $0.6 million . See Note 4 -
Convertible Senior Notes.
Other income, net, for the nine months ended September 30, 2020 increased as
compared to the same period last year. The increases were primarily due to a
$1.9 million gain on an asset sale during the nine months ended September 30,
2020 .
Income Tax Benefit (Expense)
(Dollars in thousands) Q3 2020 Q3 2019 Change YTD 2020 YTD 2019 Change
Income (loss) before income
taxes $ (11,612) $ (19,871) $ 8,259 $ (13,908) $ 804,814 $ (818,722)
Income tax benefit (expense) 4,911 4,620 291 5,162 (168,147) 173,309
Income (loss) from operations $ (6,701) $ (15,251) $ 8,550 $ (8,746) $ 636,667 $ (645,413)
Effective tax rate 42.3 % 23.2 % 37.1 % 20.9 %
We compute our income tax provision by applying the estimated annual effective
tax rate to income from operations and adding the effects of any discrete income
tax items specific to the period. The effective tax rate for the three and nine
months ended September 30, 2020 was 42.3% and 37.1%, respectively. The variances
from the U.S. federal statutory tax rate of 21% for the three and nine months
ended September 30, 2020 were primarily attributable to the mix of earnings in
the jurisdictions with higher statutory rates than the U.S. and tax deductions
related to stock award activities, offset by tax deductions related to foreign
derived intangible income tax credits. The effective tax rate for the three and
nine months ended September 30, 2019 was 23.2% and 20.9%, respectively. The
variances from the U.S. federal statutory tax rate of 21% for the three months
ended September 30, 2019 were primarily attributable to the mix of earnings in
the jurisdictions with lower statutory tax rates than the U.S. Liquidity and Capital Resources
As ofSeptember 30, 2020 , our cash, cash equivalents, and marketable securities totaled$795.1 million , which were decreased by$274.8 million from the end of last year, due to factors described in the "Cash Flow Summary" below. This amount excludes our cash payment of$437.5 million million at the closing of our acquisition ofPfenex onOctober 1, 2020 . Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs. Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. Our short-term investments includeU.S. government debt securities, investment-grade corporate debt securities, mutual funds and certificates of deposit. We have established guidelines relative to diversification and maturities of our investments in order to provide both safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Additionally, we own certain securities which are classified as short-term investments that we received as a result of a milestone and an upfront license payment as well as 5.8 million shares of common stock in Viking. InMay 2018 , we issued an aggregate principal amount of$750.0 million of the 2023 Notes. In conjunction of the 2023 Notes offering, we used a portion of the proceeds from such issuance totaling$49.7 million to repurchase 260,000 shares of our common stock. InMarch 2020 , we repurchased$234.4 million in principal of the 2023 Notes for$203.8 million in cash, including accrued interest of$0.6 million . After the repurchases,$515.6 million in principal amount of the 2023 Notes remain outstanding. We may continue to use cash on hand to repurchase additional 2023 Notes through open-market transactions, including through Rule 10b5-1 trading plan to facilitate open-market repurchases, or otherwise, from time to time. The timing and amount of repurchase transactions will be determined by management based on the evaluation of market conditions, trading 32 -------------------------------------------------------------------------------- price of the 2023 Notes, legal requirements and other factors. The 2023 Notes were not convertible as ofSeptember 30, 2020 . It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. See Note 4 - Convertible Senior Notes. InSeptember 2019 , our Board of Directors approved a stock repurchase program authorizing, but not obligating, the repurchase of up to$500.0 million of our common stock from time to time over the next three years. We expect to acquire shares primarily through open-market transactions and may enter into Rule 10b5-1 trading plans to facilitate open-market repurchases. The timing and amount of repurchase transactions will be determined by management based on our evaluation of market conditions, share price, legal requirements and other factors. During the first quarter of 2020, we repurchased$73.3 million of our common stock under our stock repurchase programs as discussed below. We did not have any share repurchases during the second and third quarter of 2020. Authorization to repurchase$253.5 million of our common stock remained available as ofSeptember 30, 2020 . We believe that our existing funds, cash generated from operations and existing sources of and access to financing are adequate to fund our need for working capital, capital expenditures, debt service requirements, continued advancement of research and development efforts, potential stock repurchases and other business initiatives we plan to strategically pursue, including acquisitions and strategic investments.
As of
Leases and Off-Balance Sheet Arrangements
We lease our office facilities under operating lease arrangements with varying terms throughSeptember 2026 . The agreements provide for increases in annual rents based on changes in the Consumer Price Index or fixed percentage increases of 3.0%. See further information in Note 8, Leases. We had no off-balance sheet arrangements atSeptember 30, 2020 andDecember 31, 2019 .
Cash Flow Summary
(Dollars in thousands) YTD 2020 YTD 2019
Net cash provided by (used in):
Operating activities $ 54,049 $ (21,997)
Investing activities $ 613,850 $ 530,097
Financing activities $ (283,016) $ (401,479)
During the nine months ended September 30, 2020 , we repurchased $234.4 million
in principal of the 2023 Notes for $203.8 million in cash, including accrued
interest of $0.6 million ; paid $15.1 million in cash for the Icagen acquisition,
$11.6 million in cash for xCella and Taurus acquisitions, and used $73.3 million
to repurchase our common stock. During the nine months ended September 30, 2019 ,
we generated $827 million from the sale of Promacta license (including $14.2
million recorded to revenue related to the Promacta royalty for the period
between January 1, 2019 and March 6, 2019 ), used cash for net purchases of
short-term investments, used $371.1 million to repurchase our common stock, used
$93.8 million to pay federal and state estimated income taxes, paid off the
remaining balance of the 2019 Notes in the amount of $27.3 million , paid $12.0
million for the purchase of Novan economic rights and paid $11.8 million for the
Ab Initio acquisition (net of cash acquired).
Contractual Obligations
There have been no material changes outside the ordinary course of business to the "Contractual Obligations" table set forth in our 2019 Annual Report, other than our purchase obligations under our agreements with Hovione for Captisol purchases and equipment investment increased by approximately$69 million .
Critical Accounting Policies
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Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ materially from the estimates made. There have been no material changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 Annual Report, other than the adoption of the Accounting Standards Updates described in Item 1. Condensed Consolidated Financial Statements - Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," related to allowance for credit losses.
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