Staff Writer

San Diego-based Ligand Pharmaceuticals Inc. has agreed to buy Pharmacopeia Inc. in a deal valued up to $70 million, with $15 million of that payment contingent on whether Ligand enters into a deal for Pharmacopeia's DARA program by the end of 2011.

The deal involves $55 million in stock, plus $15 million tied to the DARA program, Pharmacopeia's lead internal development candidate (PS433540) for hypertension, licensed from Bristol-Myers Squibb Co. According to Pharmacopeia, it is the first and only example of a single compound with dual-acting angiotensin and endothelin receptor antagonist (DARA) activity in development. The $15 million contingent payment would be paid in a three-year period in the event of a merger deal.

Under the terms of the agreement, Ligand stockholders would own about 84 percent of the combined company and Pharmacopeia stockholders would own about 16 percent.

The transaction is expected to close by the first quarter of 2009 and is subject to the approval of Pharmacopeia stockholders and antitrust regulatory clearance and other conditions. The transaction is intended to qualify as a tax-free reorganization.

John Higgins, president and CEO of Ligand, told BioWorld Today that both companies have some of the same set of assets - royalty partnerships and a discovery platform - and Pharmacopeia's "fit nicely with ours," he said. The combined company would have nine partnerships, according to Ligand.

There were four main assets that made Pharmacopeia an attractive buy, Higgins said, pointing to that company's royalty partnerships, its drug discovery tool, pipeline of early stage research programs and cash and tax assets.

But the asset that was of the highest value to Ligand was Pharmacopeia's royalty partnerships, Higgins said, noting its deals with six drug companies.

Pharmacopeia's partners are paying the research costs in those deals, with the potential for milestone payments and, if approved, royalty payments as well, Higgins said. In addition, he said, Princeton, N.J.-based Pharmacopeia has about a dozen licensing agreements and more than 15 molecules in development.

Normally, Higgins said, Ligand would have to contract out to get access to the kind of drug discovery tool that Pharmacopeia has. He described it as a chemistry library used to screen against targets for identifying potential new drugs.

Representatives for Pharmacopeia referred questions to Ligand.

Derek Jellinek, analyst with Susquehanna Financial Group, said in a research note that, "At first glance, we believe the transaction is positive for [Ligand]. However, until we better assess the value of the combined pipeline and update partner-based revenue and operating expenditures, we are retaining our FY09 numbers and current $7 price target."

At the close of the deal, Higgins said, Ligand would have more cash as a combined company than as a standalone firm. The combined company is projected to have about $90 million in cash at time of closing, including Ligand's indemnity fund, and after transaction and restructuring-related costs.

In 2009, Ligand expects spending to be higher for the combined company than Ligand would have spent alone. But the projected $20 million cash burn rate of the combined company is not too much more than Ligand's burn rate in 2008, Higgins said

Ligand expects more than $350 million in potential net operating loss carry-forwards.

The company hopes to avoid going back to the equity markets to finance the business, Higgins said.

Ligand receives royalty payments from pain product Avinza, which it used to sell but turned over to King Pharmaceuticals Inc. The company expects to receive $20 million in Avinza revenue this year

It could see potential new royalty revenue next year if the FDA approves the three Ligand products currently under review. The agency is expected to act on those products in the next six months, Higgins said.

In May, an FDA advisory panel voted 16-0 in favor of Promacta (eltrombopag) for the bleeding disorder Idiopathic thrombocytopenic purpura. That product, partnered with GlaxoSmithKline plc., had an FDA action date of Sept. 19. No decision has been announced yet, however, GSK has indicated that the process is going well.

Fablyn (lasofoxifene), partnered with Pfizer Inc., has an FDA action date of October. Earlier this month, an FDA advisory panel voted 9-3 in favor of that product for the treatment of osteoporosis in postmenopausal women.

Viviant (bazedoxifene), a potential osteoporosis treatment partnered with Wyeth, has received three approvable letters, with FDA action expected in 2009. Originally, Ligand had expected an approval decision in the spring of last year.

Asked about the delayed decision, Higgins said, "Our sense is the FDA is being very cautious" and is being very demanding in the current regulatory environment.

Goldman Sachs acted as financial advisor to Ligand, and Cowen and Co. acted as financial advisor to Pharmacopeia. Latham & Watkins LLP served as legal advisors to Ligand, and Dechert LLP served as legal advisors to Pharmacopeia.

Shares in Ligand (NASDAQ:LGND) closed Thursday at $3.04, down 8 cents.

Shares in Pharmacopeia (NASDAQ:PCOP) closed Thursday at $1.48, up 29 cents, or 24.4 percent.