Raising prospects for a continued deterioration in the stock price of Ligand Pharmaceuticals Inc. (NASDAQ:LGND), the largest shareholder in the company has moved to unload shares of the troubled company in a private transactions. Earlier this week, on August 19, BVF, Inc., the company’s largest shareholder, offloaded 484,524 shares in a private transaction, the terms of which are both costly and indicative of institutional sentiment.
Lemelson Capital’s short position in Ligand
Lemelson Capital has built a substantial short position in Ligand Pharmaceuticals Inc. (NASDAQ:LGND) since the firm’s original June 16, 2014 research report, which recounted that the company was essentially insolvent, offensively overvalued and facing severe competitive threats to its limited and contracting revenue streams. As predicted in Lemelson Capital’s June 16 and subsequent reports, large institutional shareholders, likely fearing imminent substantial downward corrections in the stock and possible bankruptcy, are moving to sell in non-open market transactions at extraordinary cost to remaining shareholders. The BVF sale is likely only the first of a series of such transactions.
Lemelson Capital’s previous research reports (PDF versions) on Ligand can be found here, here and here.
A Prescient Interview
Last week, on August 13, 2014, Rev. Father Emmanuel Lemelson, Founder and President of the Lantern Foundation and Chief Investment Officer of Lemelson Capital Management, appeared on Benzinga’s Pre-Market Prep show in which he discussed and reiterated the firm’s short position in Ligand Pharmaceuticals Inc. (NASDAQ:LGND), which the firm first announced on June 16, 2014.
In the interview, Lemelson commented:
You read these press releases carefully, and you have to ask yourself, why is the company doing press releases? Do you think it is for institutional holders? I don’t think so. These guys have a direct line to the CEO and the board of directors. Those things are for retail investors. If you read it carefully, it looks a lot like institutional holders trying to get out of the common equity.
– REV. EMMANUEL LEMELSON, CIO OF LEMELSON CAPITAL MANAGEMENT – PRE-MARKET PREP
AUGUST 13, 2014
Lemelson’s August 13 Benzinga interview, including his comments on Ligand Pharmaceuticals Inc. (NASDAQ:LGND), can be heard here.
On August 14, 2014, Lemelson Capital published its report on LGND’s new debt issuance, which concluded that:
The real purpose of the transaction appears to be to enable large institutional Ligand shareholders to unload large numbers of shares in private transactions that will not negatively affect the prices of the shares traded in public markets…
Large, institutional common equity holders are trading in unsecured securities for secured debt instruments, which have an upfront payment of 15 percent.
– “LEMELSON CAPITAL SAYS LIGAND PHARMACEUTICALS’ (NASDAQ: LGND) $225M DEBT ISSUANCE SOLIDIFIES COMPANY’S INSOLVENCY, SUBSTANTIALLY RAISES SPECTER OF BANKRUPTCY”
AUGUST 14, 2014
On August 18, Ligand Pharmaceuticals Inc. (NASDAQ:LGND) filed a form 8-K with the Securities and Exchange Commission (SEC), revealing that the company had issued $245 million in new debt against the company’s tangible equity of just $21,000, giving rise to a debt to tangible equity ratio of 11,667-to-1 (that is to say, $11,667 dollars in debt for every $1 dollar in tangible common shareholder equity).
Six days earlier the company stated:
Ligand intends to use a portion of the net proceeds from the offering of the notes to pay the cost of certain convertible note hedge transactions, taking into account the proceeds to Ligand of certain warrant transactions and to repurchase up to $45 million of shares of Ligand’s common stock in privately negotiated transactions…
– “LIGAND ANNOUNCES PROPOSED OFFERING OF $225 MILLION OF CONVERTIBLE SENIOR NOTES AND ANNOUNCES $200 MILLION SHARE REPURCHASE PROGRAM,”
AUGUST 12, 2014
Ligand Pharmaceuticals’ debt spending
According to Ligand Pharmaceuticals Inc. (NASDAQ:LGND)’s August 18 SEC filing, the company spent $6 million of the $245 Million of debt (approximately 2.4%) on initial purchaser’s discounts and commissions. The company then spent a further $36.5 million of the proceeds (a figure substantially higher than the $32.5 million the company originally reported in its August 12 release on the terms of the debt offering) to pay the cost of privately-negotiated convertible note hedge transactions.
These privately-negotiated convertible note hedge transactions, which represent a stunning expense of approximately 15 percent of the total proceeds, afford no benefit to either the note or common equity holder. When combined with the 2.4 percent in commission and the 0.75 percent annual coupon, they create a sum total transaction cost of the bond offering in the first year of a whopping 18.5 percent.
