By Lisa Seachrist

Washington Editor

Ligand Pharmaceuticals Inc. raised $40 million by issuing strategic alliance partner Elan Corp. plc zero coupon convertible notes, and plans to use the money to satisfy merger obligations due Aug. 5 to Seragen Inc. and Marathon BioPharmaceuticals LLC.

The notes are convertible into Ligand common stock at $14 per share, a premium of about 27 percent to Wednesday's closing price of $11. Ligand's stock (NASDAQ:LGND) closed Friday at $10.812, down 18.75 cents per share.

Paul Maier, chief financial officer and senior vice president for San Diego-based Ligand, noted that the cash will give the company more options in deciding whether to provide cash, stock or a combination for the payments due Aug. 5.

"Under the terms of the agreement with Elan, they made available to us convertible notes for product or company acquisitions," Maier said. "We made a provision for the Seragen and Marathon payment. Because of the market conditions recently, it would be less dilutive to use [the convertible notes], which could become shares at a higher price than we're currently trading."

The notes issued in this transaction are due in November 2008 and accrue interest at 8 percent per year compounded semi-annually. Because these are zero coupon notes, the interest isn't paid in cash, but is added to the principal. The notes are convertible at $14 per share and callable at accreted value beginning in November 2001.

Under the Elan agreement, which was announced in September 1998, Ligand received the exclusive U.S. and Canadian license for Dublin, Ireland-based Elan's once-daily oral morphine formulation, Morphelan. Ligand agreed to pay license fees and milestones to Elan, which shoulders the development responsibilities. In return, Elan agreed to purchase $20 million in Ligand stock and provide up to $110 million in zero coupon convertible senior notes. Elan purchased $30 million of those notes upon regulatory clearance of the deal.

Should the notes all be converted to Ligand common stock, Elan would own approximately 13 percent of Ligand's fully diluted shares outstanding.

Ligand purchased Hopkinton, Mass.-based Seragen and the assets of Marathon for $67 million last year to gain the rights to Ontak, a diphtheria toxin fragment A-fragment B fused to human IL-2 and aimed at cutaneous T cell lymphoma. At the time of the deal, Ligand paid Seragen $30 million in cash and stock, while Marathon received $5 million.

The approval of Ontak in February 1999 triggered a six-month clock that, when it winds down, will result in Ligand paying Seragen stockholders an additional $37 million, with Marathon receiving $3 million. Ligand has discretion over whether to make that payment in stock or cash.

"Our pricing window for the Seragen and Marathon payment is the 10 trading days prior to August 5," Maier said. "We will soon enter that window of time."