Ligand Pharmaceuticals Inc. is restructuring its Avinza license deal with Elan Corp. plc, eliminating Elan's co-promotion rights in North America and dropping Elan's royalty rate. But to do so, Ligand will pick up $135 million in debt for a product that is not generating revenue as strongly as management had predicted, a scenario that has investors questioning the future.

Ligand released the news of the Avinza restructuring, a convertible debt offering to finance the deal and its third-quarter earnings after the markets closed Tuesday. The company's stock (NASDAQ:LGND) fell $1.89 Wednesday, or 26.5 percent, to close at $5.25.

In the earnings release, the company said "it is unlikely we will achieve our original full-year revenue goals due in part to limited retail pharmacy distribution of Avinza," although it did predict a "solid fourth quarter of growth." That bit of news spurred a sell-off, but the revelation was no shocker to Michael King, analyst with Banc of America Securities.

"We've known for a while," he told BioWorld Today. "If you track the scripts,' you see they are beneath what management has said is achievable. It was no surprise - management said X, but the scripts' didn't show it."

In early October, King and Banc of America released a research note stating analysis of prescriptions indicated a slower-than-expected uptake of the pain drug Avinza, but it still expected Ligand to report third-quarter earnings in line with the firm's 1-cent loss estimate, same as The Street consensus. Ligand missed badly, reporting a net loss of $7 million, or 10 cents per share.

Ligand, of San Diego, had $37.1 million in cash, cash equivalents, short-term investments and restricted cash as of Sept. 30, and it reported total revenues for the third quarter of $25.3 million, an increase of 32 percent over the prior-year period. Its total net product sales were $16.5 million, compared to $11.4 million, an increase the company said was "driven by the launch of Avinza." But the increased numbers weren't enough for analysts and investors, as the company was downgraded not only by Banc of America, but also First Albany and Legg Mason.

"We are lowering our rating from Buy' to Market Performer' based on weak 3Q02 results that in our view highlight a lack of management execution and operational ability," King wrote in his note. "Net loss [was] below both our estimate and consensus due to lower-than-expected revenues. Avinza sales of $6.1 million were below our estimate of $8.2 million. To add insult to injury, FY02 Avinza sales guidance was decreased by $10 million to $12 million."

Ligand said it now expects fourth-quarter revenues between $36 million and $40 million and product sales between $21.5 million and $25 million. It said it expects Avinza to bring in between $8 million and $10 million in the last quarter of the year.

Company Plans $135M Financing, Avinza Growth

Avinza is indicated for the once-daily treatment of moderate to severe pain in patients who require continuous opioid therapy for an extended period of time. The product was developed by Elan and approved in March. Elan licensed U.S. and Canadian rights to Ligand in 1998. (See BioWorld Today, March 22, 2002.)

Ligand will own more of Avinza in the future, at least as far as things stand now. The company amended the terms of its agreement with Elan, of Dublin, Ireland, giving up $100 million up front to get a reduction in the royalty it pays to Elan - 10 percent of net sales now, as opposed to 30 percent to 35 percent previously. Also, Elan will lose co-promotion rights in the U.S. and Canada. The deal will close when Ligand completes a $135 million offering.

The offering is for five-year convertible subordinated notes to qualified institutional buyers. The notes will be convertible into Ligand shares at a price to be determined and the company hopes to complete the offering in the coming weeks.

Proceeds from the financing also will be used to purchase for $9 a share 2.2 million Ligand shares that are owned by an Elan affiliate. The shares will then be retired, and Elan agreed to a six-month lock-up on 11.8 million of the remaining 12.8 million Ligand shares it has.

King isn't bullish on the deal, mainly because of how it was done. He said he thought it would have been a positive move for the company "if it did it in another manner. We think they have overpaid given what we think they can achieve [with Avinza]. It doesn't look like management can execute the way we thought they would."

But as Ligand said in a conference call Wednesday, the company "believes Avinza is an important asset for the next several years and [believes Ligand's] ability to drive stockholder value" around the product is key. To facilitate that, the company has increased its total sales representatives to 85, 50 of them fully dedicated to Avinza and pain specialists. Also, it is aiming to improve its retail distribution: the company estimates Avinza is stocked in 2,000 to 3,000 U.S. pharmacies now but expects to expand distribution to 7,500 to 10,000 pharmacies in the fourth quarter, then take "one or two more quarters" to reach its goal of 20,000.

Debt Could Hurt Partnering Deal

Ligand has said it plans to again hook Avinza to a co-promoter in North America. Although company officials said Ligand has "gone down the road with some potential partners," there are others it would like to investigate. Either way, Ligand hopes to "try and accomplish that in the fourth quarter so that we get a partner out there early next year," it said.

But finding that partner, or the best possible deal, won't be easy, King said.

"I think it will be hard, because now they are a company with $135 million in debt," he said. "I don't think they are in a position to leverage themselves into an economically favorable deal. I think they will be looked at as a company with a lot of debt and struggling."

King would have preferred to see a deal in which Elan was immediately replaced. Looking forward for the company, he sees hurdles.

"I think it will be challenging," King said. "I don't get a warm fuzzy that they have a clear handle on things. We are being asked to go along with the thought that [Avinza] prescriptions can double month over month, going forward. The execution to date has not been that successful. Why should we believe that this will?"