In an effort to boost funding for their two-year-old joint venture todevelop retinoid-based drugs, Allergan Inc. and LigandPharmaceuticals Inc. are creating a new research corporation with$100 million in financing .
"The roots of the plan are characteristic of off-balance sheetfinancing, but it's a bit more complicated," said Edmund Debler, ananalyst with Metah & Isaly in New York.
"What they're doing is removing the cost of developing [retinoidcompounds] from their income statements and financing it off thebalance sheets," he added. "They're also creating a new vehicle forfunding."
Allergan, of Irvine, Calif., and Ligand, of San Diego, begancollaborating on retinoid-based drug development in 1992. Theirlead compound, LGD 1057, a 9-cis-retinoic acid, is in early-stageclinical trials as an oral treatment for cancer.
Under the new agreement between the two companies, they willform a research and development corporation, called AllerganLigand Retinoid Therapeutics (ALRT), which will be funded 50-50by the collaborators.
Allergan, a pharmaceutical company specializing in products for eye,skin and neuromuscular disorders, will contribute $50 million in cashupfront.
Ligand will make an upfront contribution of $17.5 million and raisethe balance of $32.5 million through a public offering of 2.9 millionunits at $11.25 per unit. Each unit will consist of one share in ALRTand two five-year warrants to purchase two Ligand common shares.In the public offering, existing Allergan and Ligand shareholderswill be issued rights to purchase the units and will have 30 days toexercise those rights.
Ligand's $17.5 million upfront payment includes $11.5 million incash and $6 million raised through the issuance of new Ligandshares to Allergan.
Ligand's stock (NASDAQ:LGND) closed Wednesday at $7.25, up75 cents. Allergan's stock (NYSE:AGN) was down $1.37, closing at$28.50.
The incentive for ALRT investors is the anticipated buy-back of theshares by Allergan, Ligand or both as the companies move towardcommercialization of the retinoid-based drug candidates.
If the buy-back were to occur on the first option date in three years,investors would more than double their money with the pay-offincreasing as time progresses. The buy-back of ALRT shares iskeyed toward filing a new drug application with the FDA.
Jeffrey D'Eliscu, Allergan's spokesman, estimated the $100 millionwould fund the retinoid program for four or five years. "And that'sabout what it would take to buy [ALRT] back," he added.
The risk for investors, Debler observed, is that the retinoid programfalls short of expectations. If that were to occur, neither Ligand norAllergan has an obligation to buy back ALRT from the shareholders.
The advantage to Allergan and Ligand in creating the newcorporation is that those expenses to fund retinoid development nolonger will be part of their profit and loss statements.
"The new company will contract work back to Ligand and Allerganand it technically has a net zero effect on profit and loss," D'Eliscusaid, adding that both companies also will have more money tospend on other projects.
In the past two years, Ligand officials said, the retinoid joint venturehas cost the two companies $27 million. By forming ALRT, Ligandexpects to reduce its nearly $2 million per month burn rate by athird. But the company also will boost the number of its outstandingshares. At the end of the quarter, Sept. 30, Ligand had about $44million in cash and 17.9 million shares outstanding.
Ligand officials would not estimate how many new shares will beissued, saying that the number depends on the stock's price at thetime the shares are sold.
In addition to LGD 1057, Ligand and Allergan have other retenoidcompounds under development. Retinoids are naturally occurringhormones related to vitamin A. They have biological effects on avariety of cell types, mediated by selective binding to intracellularreceptors. In preclinical studies LGD 1057 was shown to inhibit cellproliferation and induce apoptosis, which is cell death.
Ligand contributed its receptor technology to the joint venture andAllergan provided the compounds. n
-- Charles Craig
(c) 1997 American Health Consultants. All rights reserved.