San Diego’s Ligand Takes Advantage of the Great Recession to Build New Drug Pipeline
Aside from the name, there isn’t much at Ligand Pharmaceuticals (NASDAQ: LGND) that resembles the San Diego biotech that went public in 1992.
During the 15 years that followed its IPO, Ligand brought five drugs to market, reported 2005 sales of more than $176 million, and once employed 650 people. The same company posted annual revenue of just $23.5 million in 2010 and now has only 26 employees.
Ligand came of age during the golden years of biotech. None other than Brook Byers of Silicon Valley’s renowned venture capital firm Kleiner Perkins Caufield & Byers founded the biotech in 1987. The first CEO, Howard Birndorf, and his successor, David Robinson, built the company on breakthrough research in nuclear orphan receptors—a class of proteins found within cells that are triggered by certain hormones. The idea was to develop drugs that targeted such receptors, triggering specific biochemical reactions that would combat cancers, hormone-related diseases, and metabolic disorders, among other things.
In all that time, however, Ligand has never reported a profit.
“They actually hit it better than most,” says Rob McKay, who joined Ligand as a senior director for business development and investor relations after a tumultuous shareholder revolt pushed Robinson to resign in 2006. “They developed drug candidates and got them approved. The problem was that the company was run by scientists—they over-promised and under-delivered year after year after year.”
Today, Ligand is pursuing a fundamentally different strategy under John Higgins, a onetime investment banker who was named CEO in January 2007. Instead of swinging for the fences—and consuming extensive corporate resources on drug discovery, development, and sales and marketing—Higgins has focused on generating more chances at bat by acquiring dozens of new drug candidates, on keeping costs low, and on forming drug development partnerships as soon as possible.
Higgins, who was brought in by dissident shareholders (including Dan Loeb of New York-based Third Point Management) from Palo Alto, CA-based Connetics, says Ligand had some “good assets” in its drug pipeline, but there had been “a shameful waste of assets in terms of overfunding programs.” He also voiced dismay that Ligand never made money in the years that Robinson headed Ligand—”with a veteran board and management team who were too caught up in their own expectations or egos to change course.”
And then there is a nearly three-year period—from 2002 through most of 2004—that Higgins described as “a miserable period from an accounting and financial reporting point of view.” With revenue in four consecutive quarters overstated by $100 million, Ligand’s restatement of its financial reports came with a massive investigation by the Securities and Exchange Commission. The SEC ultimately terminated its probe of Ligand with no enforcement action, but “it was a very, very messy, ugly investigation,” Higgins says. “This was a broken company. The shareholders wanted to get this thing focused and disciplined, and that’s why they hired me.”
Higgins was fortunate in one respect. Before he took over, Ligand already had begun cleaning house under then-chairman and CEO Henry F. Blissenbach. It was Blissenbach who carried out many of the unpleasant tasks, in terms of shedding employees and divesting unwanted assets to raise cash. The company raised $470 million in cash in late 2006 by selling all its commercial operations to two separate drug companies in Tennessee and Japan. About half of that was routed to stockholders in the form of dividends and share repurchases, Higgins says.
“We went from near-insolvency in 2006 to flush,” Higgins says, adding that the company built a cash stockpile of $150 million by 2008. As a result, Ligand was unusually well prepared when the Great Recession hit during the last three months of 2008. “It created a unique opportunity to consolidate,” Higgins said. “We began to look for distressed, quality companies, where we could come in and cut costs, rebuild the business, just keep a couple of high-value programs with no burn.”
In the case of Neurogen, acquired in late 2009, Higgins said Ligand did not have to draw on its available cash to close the deal. Rather, Ligand offered about $7 million in equity for the Branford, CT, biotech, which had just two employees, no debt, and about $8 million on their balance sheet. Neurogen had been developing small-molecule drugs to improve the lives of patients suffering from psychiatric and neurological disorders. “We only chose to run two out of their eight or 10 (drug development) programs,” Higgins said. “We got $180 million in net loss carry forwards (i.e. tax deductions) and a partnership with Merck.”
In other deals in recent years, Ligand:
—Acquired Pharmacopeia in a stock-for-stock exchange valued at $70 million, with “contingent value rights” that offered all Pharmacopeia shareholders additional payments that could total as much as $15 million. In exchange, Ligand got numerous deals with nine pharmaceutical companies, with $400 million in potential R&D and milestone payments, 15 drug development programs in various stages, and more than $350 million in potential net operating loss carry-forwards.
—Acquired San Diego-based Metabasis Therapeutics in late 2009, gaining a fully funded partnership with Roche, a number of new drug candidates, and drug discovery technologies and resources. Ligand paid $1.6 million in cash with additional contingent cash payments based on the future performance of the Roche partnership. (Roche later terminated the program and returned the asset to Ligand.)
—Acquired CyDex Pharmaceuticals of Lenexa, KS, in late 2009, paying $31.2 million in upfront cash, a $4.3 million cash payment on the one year anniversary of closing, and other contingent cash payments related to certain transactions and a revenue sharing plan. In exchange, Ligand gained four revenue-generating drug products CyDex was marketing, a large portfolio of partnered drug development programs, an internal pipeline of proprietary drugs, and its proprietary Captisol drug formulation technology, used to improve the solubility, stability, preservation, and controlled release of insoluble drugs.
“It is breathtaking, what we have done,” Higgins says. For about $60 million in cash and about 15 percent of Ligand’s stock, the San Diego biotech has amassed over 60 new drug candidates, pharmaceutical partnerships, and other assets with a cumulative value that Higgins says is close to $2 billion. Of the 60 drug candidates, Higgins says 50 are fully partnered with pharmaceutical companies, and most are in human clinical trials.
The company says it now generates most of its revenues from payments made by Ligand’s partners for royalties, milestones, license fees, and other related charges. Its partners include some of the industry’s biggest names—GlaxoSmithKline, Merck, Pfizer, Bristol-Myers Squibb, Onyx Pharmaceuticals, and AstraZeneca. And Ligand’s programs address a broad spectrum of diseases, including hepatitis, Alzheimer’s disease, diabetes, rheumatoid arthritis, and cancer.
Meanwhile Ligand is generating royalty revenue on seven drugs, and funding drug development for three of its own internal programs. It’s still not profitable on an annual basis, but the losses are far narrower than they once were. And if some of those milestone payments start kicking in, it’s entirely possible Ligand in its current form could be profitable for years to come.
“There is no other biotech company that has this story,” Higgins says. “No other company has been as creative or as shrewd as Ligand has in bolting on these other companies. And it’s really come into focus in just the last six to 12 months.”