Washington Editor

Looking to increase long-term revenue opportunities, Ligand Pharmaceuticals Inc. restructured a pair of licensing agreements.

In one case, the San Diego company will receive $32.5 million after amending a royalty agreement with Royalty Pharma Management LLC for three selective estrogen receptor modulator (SERM) products nearing final stages of development. In exchange, New York-based Royalty Pharma will gain an additional 1.625 percent of the SERM products' net sales.

That reflects an acceleration of the previous option timetable and an increase in the royalty amount and aggregate purchase price. Previously, two options were exercisable as new drug application acceptance and approval milestones were achieved this year and next for a total of $26.5 million in two equal payments for 0.8 percent of the SERM products' net sales.

A recent new drug application filed by New York-based Pfizer Inc. for lasofoxifene for osteoporosis triggered the first of two previous options during the quarter.

The transaction allows Ligand to complete a royalty buy-down and restructuring agreement with Eli Lilly and Co. related to Ontak (denileukin diftitox). That is expected to be accretive next year and beyond, without significant reductions in Ligand's operating cash reserves, the company said.

Officials at Ligand did not immediately return calls seeking comment.

Last year, the company recorded sales of $34.3 million for Ontak, which is approved for patients with persistent or recurrent cutaneous T-cell lymphoma whose malignant cells express the p55 (CD25) component of the interleukin-2 receptor.

Under the revised agreement, Ligand and Indianapolis-based Lilly will each have two options. Ligand will have an independent option exercisable in January, and another independent option exercisable in April, to buy down a portion of the Ontak royalty stream on net U.S. sales for $33 million. Lilly will have options next year to trigger the same royalty buy-down on Ligand's part for up to $37 million, dependent on whether Ligand has exercised one or both of its options and Ontak has achieved certain sales levels.

Ligand's first option provides for it to make a one-time cash payment of $20 million to Lilly in exchange for elimination of the Ontak royalties due to Lilly on net U.S. sales next year, and a reduced reverse-tiered royalty scale on net U.S. sales thereafter. The second option in April provides that Ligand will make a one-time cash payment of $13 million in exchange for the elimination of the Ontak royalties due to Lilly on net U.S. sales in 2006 and a reduced reverse-tiered royalty scale thereafter. If both Ligand options are exercised, Ligand's payments would eliminate all royalty payments due on U.S. sales through year-end 2006 and eliminate all royalties on U.S. sales of $38 million or less going forward. Thereafter, beginning in 2007, Ligand would pay royalties to Lilly from 20 percent to 10 percent only on annual U.S. sales in excess of $38 million for the minimum tier and in excess of $72 million for the maximum tier threshold for the remaining patent life, through 2014. If Ontak is approved in other geographies, sales outside the U.S. would be excluded from the restructured agreement and would continue at the previous non-tiered contract royalty rate of 20 percent.

Ligand said neither party is obligated to exercise the options. They will expire if not exercised by the specified dates.

On Tuesday, Ligand's shares (NASDAQ:LGND) rose 1 cent to close at $9.51.