Marlborough, Mass., August 14, 2014—Lemelson Capital Management, a private investment management firm, today released a research note and audio interview by the firm’s Chief Investment Officer Emmanuel Lemelson, raising new and escalated concerns about the going concern risk and bankruptcy prospects of the troubled drug delivery company Ligand Pharmaceuticals Inc. (NASDAQ:LGND). The new concerns, raised in Lemelson’s August 13, 2014 interview with the financial media outlet Benzinga, follow Ligand’s August 11, 2014 announcement that it would issue $225 million of convertible senior debt, a portion of which would be used to repurchase shares in private transactions from shareholders.
Audio of the August 13, 2014 interview can be heard here:
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Lemelson Capital’s August 14, 2014 research note on Ligand can be read here:
Ligand’s forward revenues in danger due to Kyprolis’ trial failure
In today’s research note, Lemelson Capital amended previous research reports on Ligand Pharmaceuticals Inc. (NASDAQ:LGND) with even deeper concerns about the company’s projected forward revenues based on yesterday’s announcement by Amgen, Inc. (NASDAQ:AMGN) that the Phase 3 clinical trial for Kyprolis® has failed to demonstrate improved overall survival in use with relapsed multiple mylenoma patients. The failure of Kyprolis® in this clinical trial will almost certainly severely impair Ligand’s already declining revenues.
“Ligand’s announcements this week are ominous for many reasons,” Lemelson said today. “First, Ligand Pharmaceuticals Inc. (NASDAQ:LGND)’s debt issuance appears necessitated by the fact that large institutional shareholders are expressing their intention to get out of the stock, which is understandable given the company’s rapidly deteriorating financial condition,” he said. “Second, the company has nominal tangible equity of just $21,000 against an astounding market capitalization of about $1.1 billion and is now assuming vast and costly debt at a 15 percent upfront premium, which they appear to wrongly represent as being offered at exclusively a very low 0.75% coupon,” he added. “And finally,” Lemelson said, “Ligand has traded at an extraordinarily overvalued multiple based largely on speculation that Kyprolis® would show promise as a second-line therapy in multiple mylenoma treatment, which now appears highly unlikely to materialize.”
Lemelson addresses Ligand’s insolvency
In the interview with Benzinga and today’s accompanying research note, Lemelson addresses Ligand Pharmaceuticals Inc. (NASDAQ:LGND)’s insolvency, the details of its remarkably costly debt offering, and the mounting prospect for the company’s bankruptcy.
Disclosure: Lemelson Capital is currently short shares of LGND for its clients. About Lemelson Capital Management: Lemelson Capital Management, LLC is a private investment management firm focused on deep value and special situation investments. The firm’s flagship fund, The Amvona Fund, has been named repeatedly one of the world’s top performing hedge funds. For more information, see: http://www.lemelsoncapital.com.
Chief Investment Officer
Lemelson Capital Management, LLC
Five key points for Lingand’s bond offering
Lemelson Capital today raises several new points and concerns regarding Ligand Pharmaceuticals Inc. (NASDAQ:LGND)’s recently announced issuance of $225 million in convertible senior debt, including:
1. July 17, 2014 announcement: On July 17, Ligand announced that the company had authorized a $10 million share repurchase. At that time, the company’s cash position was a mere $12.98 million and its current portion of long term debt totaled $5.77 million. When Ligand announced its Q2 2014 earnings on August 4, however, the company had not repurchased any shares under this authorization.
2. Debt issuance and large shareholders’ sale of stock: Less than four weeks later, on August 14, 2014, the company announced it intended to assume $225 million in convertible notes to purchase, with proceeds from the debt, roughly $200 million of shares of its stock. Included in the release was the following statement:
“Ligand announces proposed offering of $225 million of convertible senior notes and announces $200 million share repurchase program,” August 12, 2014
3. Tangible equity: On August 4, 2014, Ligand Pharmaceuticals Inc. (NASDAQ:LGND) released their Q2 earnings report and financial statements in which the company boasted that it was debt free. Prior to this August 4 release, the company’s liabilities exceeded tangible assets, meaning the company was insolvent. With the August 4, 2014 earnings release and its updated financials, the company presented tangible equity of just $21,000 upon which rested an extraordinary market capitalization of approximately $1.1 billion.
4. Debt service expense and prospective dilution likely to increase exponentially: On August 11, the company announced that they would be taking on $225 million in new debt, vis–à–vis a new convertible debt offering. If the bond offering succeeds, the company’s liabilities will again far exceed its assets, and the company will be technically insolvent once more. This means that the debt-free financial condition that Ligand boasted on August 4 will have lasted, according to its publicly-available financial reports, less than two weeks.
- Hypothetically, a reasonable coupon on the bond would be 5.5 percent, meaning debt service on the proposed notes should be roughly $12 million. Under this hypothetical scenario, the addition of $12 million in interest payments would be payable with the company’s average net earnings from continuing operations over the last ten years of minus $23.74 million. During the last twelve month alone, the company’s EPS has declined some 76 percent. Trailing twelve month EPS through June was just $7.52 million. The increased debt service will dramatically intensify going concern risk, which the company discussed at length in its 2013 annual report, and its prospects for bankruptcy.
5. Real cost of debt disguised in up-front derivative hedge: On August 13, two days after its announcement that it intended to assume $225 million in convertible note debt to repurchase $200 million worth of its shares, the company announced that merely $40 million of the debt proceeds would be used to repurchase shares. It announced further that the convertible notes had been priced at 0.75 percent interest. However, this pricing is misleading because (as the company had failed to note in its August 11 release) the company has been further required to insure the $225 million debt offering with $33.5 million in convertible hedge transactions, apparently in order to insure the debt issuers.
See full Five key points for Lingand’s bond offering in PDF format here.