Ligand(LGND) - 2019 Q4 - Annual Report

Part I Business The company develops and acquires technologies to aid pharmaceutical partners in drug discovery and development - Ligand's business model focuses on drug discovery, early-stage development, and partnering, leveraging over 120 collaborations to fund more than 200 programs, creating a diversified portfolio with a low corporate cost structure[27][28][29] - In a major strategic shift, the company sold its royalty rights for Promacta to Royalty Pharma for $827 million in 2019; prior to the sale, Promacta accounted for nearly 50% of total revenue[31][64] - The company expanded its technology platforms through the $12 million acquisition of Ab Initio and an agreement to acquire assets from Icagen for $15 million[31][32] - Gilead Sciences is utilizing Ligand's Captisol technology in the formulation of remdesivir (GS-5734), an experimental drug being tested as a potential treatment for COVID-19[40] Technologies The company's core technology platforms, including OmniAb and Captisol, form the basis of its partnered programs Key Technology Platforms and Partnerships | Technology Platform | Description | Partner/Program Count (as of Dec 31, 2019) | | :--- | :--- | :--- | | OmniAb | Genetically-engineered animals for discovering fully human antibodies | >40 collaboration partners, ~180 active programs | | Captisol | Patented cyclodextrin improving solubility, stability, and bioavailability | >40 partners with drugs in development; marketed in >70 countries | | Vernalis Design Platform (VDP) | Structure-guided drug discovery integrating protein structure, screening, and chemistry | 10 partners, 17 active research programs | | HepDirect/LTP | Liver-targeting prodrug technology | 6 partners with active programs | | SUREtechnology Platform | Economic rights to Selexis's technology for recombinant protein manufacturing | 14 partners, 23 programs | Commercial and Development Portfolio The portfolio includes key commercial assets like Kyprolis and a diversified pipeline of over 200 partnered programs - Kyprolis, an Amgen product for multiple myeloma formulated with Captisol, is a key revenue driver with tiered royalties of 1.5% to 3.0% on global net sales[65][66] - The development pipeline includes several noteworthy late-stage assets, such as Retrophin's Sparsentan in a pivotal Phase 3 trial and Viking's VK2809 for NASH[82][84] - The company has a significant number of programs utilizing its OmniAb platform in clinical trials through partners like Janssen and WuXi[95][96][103] Royalties and Contract Payments The revenue model relies on tiered royalties from partnered products and a potential milestone payment pipeline exceeding $3.3 billion Selected Royalty Rate Agreements | Program | Licensee | Royalty Rate | | :--- | :--- | :--- | | Kyprolis | Amgen | 1.5% - 3.0% (Tiered) | | Evomela | Acrotech/CASI | 20% (Fixed) | | Zulresso | SAGE | 3% (Fixed) | | Sparsentan | Retrophin | 9% (Fixed) | | TR Beta (VK2809/VK0214) | Viking | 3.5% - 7.5% (Tiered) | | SARM (VK5211) | Viking | 7.25% - 9.25% (Tiered) | - Ligand has a potential milestone payment pipeline valued at over $3.3 billion, contingent on partners achieving specific development, regulatory, and commercial targets[118] Patents and Proprietary Rights The company maintains a strong intellectual property portfolio protecting its core technologies like Captisol and OmniAb - Patents related to the Captisol component of Kyprolis are not expected to expire until 2033[133] - The Captisol product itself is covered by patents with the latest expiration date not expected until 2033, and other patent applications could extend terms to 2040[136] - The OmniAb platform has patent protection in 30 countries with patents expected to expire between 2028 and 2034[139] Risk Factors The company faces risks from reliance on key partners, sole-source suppliers, and intellectual property challenges - A substantial portion of royalty revenue is dependent on sales of Kyprolis by Amgen and Evomela by Acrotech, creating vulnerability to product-specific setbacks[146] - The company relies on a sole source supplier for Captisol, and any supply interruption could significantly impact revenue and customer relationships[149] - The collaboration-dependent model means partners have significant discretion, and program terminations could reduce future revenue[153] - Third parties have challenged patents, and a settlement will permit a generic version of Evomela in the U.S. on June 1, 2026, or earlier under certain circumstances[164] Unresolved Staff Comments The company reports no unresolved staff comments - None[206] Properties The company's principal leased facilities are located in California and the United Kingdom Principal Leased Facilities | Location | Size (Approx. Sq. Ft.) | Use | Lease Expiration | | :--- | :--- | :--- | :--- | | San Diego, CA | 7,000 | Corporate headquarters | June 2023 | | Emeryville, CA | 13,000 | Office and laboratory | August 2021 | | Cambridge, UK | 28,000 | Office and laboratory | September 2026 | Legal Proceedings This section refers to Note 10 in the Consolidated Financial Statements for details on legal proceedings - Information regarding legal proceedings is detailed in Note 10 of the financial statements[209] Mine Safety Disclosures This item is not applicable to the company - Not applicable[209] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, and a new $500 million share repurchase program was initiated in 2019 - The company does not currently expect to pay cash dividends, planning to retain earnings for operations, debt repayment, and share repurchases[212] Q4 2019 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | Maximum Value Remaining Under Program (in thousands) | | :--- | :--- | :--- | :--- | | Oct 2019 | — | $ — | $408,730 | | Nov 2019 | 625,409 | $107.74 | $341,351 | | Dec 2019 | 135,519 | $107.47 | $326,786 | | Total Q4 | 760,928 | $107.69 | $326,786 | Selected Consolidated Financial Data Five-year data shows revenue decline in 2019 due to the Promacta sale, which drove exceptionally high net income Selected Consolidated Financial Data (2017-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $120,282 | $251,453 | $141,102 | | Gain from sale of Promacta license | $812,797 | $— | $— | | Income from operations | $807,076 | $163,727 | $68,076 | | Net income (loss) | $629,302 | $143,321 | $12,556 | | Diluted net income (loss) per share | $31.85 | $5.96 | $0.53 | | Total assets | $1,494,915 | $1,260,803 | $671,021 | | Total stockholders' equity | $767,232 | $560,914 | $399,788 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased 52% in 2019 due to the Promacta sale, while liquidity remains strong with over $1 billion in cash Results of Operations Total revenue decreased 52% to $120.3 million in 2019, driven by a 63% drop in royalty revenue post-Promacta sale Revenue Comparison (2019 vs. 2018) | Revenue Type | 2019 (in thousands) | 2018 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Royalty Revenue | $46,976 | $128,556 | $(81,580) | (63)% | | Material Sales | $31,489 | $29,123 | $2,366 | 8% | | License fees, milestones, etc. | $41,817 | $93,774 | $(51,957) | (55)% | | Total revenue | $120,282 | $251,453 | $(131,171) | (52)% | - The decrease in royalty revenue was primarily driven by the sale of the Promacta license; Promacta royalties were $14.2 million in 2019 compared to $99.3 million in 2018[230][231] Operating Costs and Expenses (2019 vs. 2018) | Expense Type | 2019 (in thousands) | 2018 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of material sales | $11,347 | $6,337 | $5,010 | 79% | | Amortization of intangibles | $16,864 | $15,792 | $1,072 | 7% | | Research and development | $55,908 | $27,863 | $28,045 | 101% | | General and administrative | $41,884 | $37,734 | $4,150 | 11% | | Total operating costs | $126,003 | $87,726 | $38,277 | 44% | Liquidity and Capital Resources The company maintained a strong liquidity position with $1.01 billion in cash, bolstered by the Promacta sale - Cash, cash equivalents, and short-term investments stood at approximately $1.01 billion at year-end, significantly boosted by proceeds from the Promacta license sale[239] - The company fully paid off the remaining $26.3 million principal of its 2019 Convertible Notes upon maturity in August 2019[241] - A new $500 million stock repurchase program was approved in September 2019, with $326.8 million remaining available as of December 31, 2019[243] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, equity prices, and foreign currency - The investment portfolio, totaling over $998 million, is subject to market and credit risks, including potential declines in value based on market conditions[269] - The 2023 Convertible Notes and outstanding warrants expose the company to equity price risk, as their value is tied to Ligand's common stock price[270][271] - Foreign currency risk exists due to international business operations and royalty payments, but the company does not currently hedge these exposures[271] Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and accompanying notes for the past three fiscal years Note 2. Sale of Promacta License The company sold its Promacta rights to Royalty Pharma for $827.0 million, resulting in an $812.8 million gain - The company sold its Promacta-related intellectual property and royalty stream for $827.0 million in cash to Royalty Pharma[374] - The transaction resulted in a pre-tax gain of $812.8 million, recorded in income from operations, with an additional $14.2 million recognized as royalty revenue[374] Note 4. Business Combinations The company completed several acquisitions, including Ab Initio for $12.0 million and Vernalis for $43.0 million - Acquired Ab Initio on July 23, 2019, for $12.0 million in cash, adding a patented antigen technology that resulted in $7.4 million of intangible assets and $6.3 million of goodwill[379][381] - Acquired Vernalis in October 2018 for $43.0 million, adding a structure-based drug discovery platform and portfolio of programs[383] Note 7. Convertible Senior Notes The 2019 Convertible Notes were fully paid off, while the $750.0 million 2023 Convertible Notes remain outstanding - On August 15, 2019, the 2019 Notes matured, and the company paid the remaining $26.3 million principal amount and $11.9 million bond premium in cash, fully extinguishing this debt[408] - The 2023 Notes with a principal amount of $750.0 million remain outstanding, with a carrying value of $639.0 million and a fair value of $647.3 million as of December 31, 2019[414][425] Note 10. Commitment and Contingencies: Legal Proceedings The company is involved in patent litigation concerning EVOMELA®, including a settlement with Teva for a 2026 generic entry - The company settled patent litigation with Teva, allowing for a generic version of EVOMELA® to be marketed in the U.S. starting June 1, 2026[451] - Ligand has filed patent infringement complaints against Alembic and Lupin in response to their ANDA filings for generic versions of EVOMELA®[452][454] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[473] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[474] - Based on the 2013 COSO framework, management concluded that internal controls over financial reporting were effective as of December 31, 2019[477] Other Information The company reports no other information - None[489] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's upcoming Definitive Proxy Statement - This section is incorporated by reference from the company's upcoming Proxy Statement[492] Executive Compensation Information is incorporated by reference from the company's upcoming Definitive Proxy Statement - This section is incorporated by reference from the company's upcoming Proxy Statement[493] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the company's upcoming Definitive Proxy Statement - This section is incorporated by reference from the company's upcoming Proxy Statement[494] Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's upcoming Definitive Proxy Statement - This section is incorporated by reference from the company's upcoming Proxy Statement[495] Principal Accountant Fees and Services Information is incorporated by reference from the company's upcoming Definitive Proxy Statement - This section is incorporated by reference from the company's upcoming Proxy Statement[496] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - This section contains an index of all financial statements and exhibits filed with the annual report[499] Form 10-K - Summary The company reports no summary for Form 10-K - None[508]