By Lisa Seachrist

Washington Editor

Faced with a promising technology to which it couldn't devote adequate resources, Ligand Pharmaceuticals Inc. has spun out a privately held company called X-Ceptor Therapeutics Inc. to research and identify therapeutic drug candidates derived from the field of orphan nuclear receptors.

The newly formed company will start with $25 million and the backing of several high-profile investors, including Kevin Kinsella; Domain Associates LLC; A.M. Pappas & Associates; and funds associated with Farallon Capital Management LLC, a major investor in Ligand.

San Diego-based Ligand will contribute enabling technology to X-Ceptor, and will have the right to acquire all capital stock at a pre-specified time and price.

"In order to make headway with this technology, we needed a certain critical mass of resources that we couldn't devote as we move products to market," said Paul Maier, Ligand's senior vice president and chief financial officer. "This is a spin-off that will create an independent operating entity that we retain the right to buy back."

X-Ceptor has received approximately $11.1 million in financing from outside investors and $2.8 million from Ligand. La Jolla, Calif.-based X-Ceptor will raise an additional $11.1 million in the third quarter this year, including an additional $2.2 million from Ligand, for a total of $25 million.

X-Ceptor will focus on orphan nuclear receptors found in the nucleus of cells, for which there are no known endogenous ligands. Because nuclear receptors have served as potent drug targets in the past, the company surmises they will provide new drug targets.

The new firm came into being following conversations between Kinsella and Ronald Evans, a professor in the gene expression laboratory of the Salk Institute, in La Jolla. Kinsella told BioWorld Today Evans was eager to continue the work on orphan nuclear receptors, but the project was on the back burner at Ligand. Intrigued with the potential of the science, Kinsella set about forming X-Ceptor and getting it well-funded and well-staffed.

"It will virtually be a research institute with a commercial focus," said Kinsella, president and CEO of Ancile Pharmaceuticals, and X-Ceptor's chairman and acting CEO. "We'll attract people from all over the world who want to be at the center of action in this field. The clarion call has gone out, and the experts in this field will be assembling shortly in La Jolla."

After securing a deal with Ligand chairman, president and CEO David Robinson, Kinsella enlisted the help of Bert O'Malley, professor and chairman of the department of cell biology at Baylor College of Medicine, in Houston, and leader in the field of orphan nuclear receptors. Evans and O'Malley served as catalysts and scientific advisors for X-Ceptor. Because Baylor had formed a company around some of the orphan nuclear receptor technology, Kinsella arranged for that entity to be absorbed by X-Ceptor.

"I wanted to be the 800-pound gorilla in this field," Kinsella said. "We were very successful in trying to do that."

X-Ceptor was initially funded with $1.1 million, by issuing Series A convertible preferred stock to investors, including Kinsella, Domain and Pappas & Associates. The start-up raised another $10 million from investors other than Ligand in the sale of Series B convertible preferred stock. Ligand then invested $2.8 million in cash in exchange for shares of Series B stock. Ligand granted X-Ceptor an exclusive license to use Ligand's technology for drug discovery with orphan nuclear receptors. X-Ceptor has reimbursed Ligand for prior research to the tune of $2 million.

In the third quarter 1999, X-Ceptor will raise additional funds through the issuance of Series B stock. Ligand will invest up to an additional $2.2 million and issue an aggregate of up to 950,000 warrants to X-Ceptor investors and founders at a 30 percent premium. The warrants will expire five years from the date of issue.

Ligand will have the right, but not the obligation, to acquire all of X-Ceptor's stock at the third anniversary of the closing of the initial Series B financing. For $5 million, Ligand may extend that option by one year. After three years, the purchase price could be as high as $61.4 million; after four years, the price could go as high as $79.8 million. The option price may be paid in either cash or shares of Ligand common stock.

"We needed to exploit this technology," said Maier. "This venture allows us to do that without having to deal with the day to day management and financing of the program. It also keeps the work off of our [profit and loss] sheet."

Ligand's stock (NASDAQ:LGND) closed Thursday at $11, down $0.125.