For a small company, Ligand Pharmaceuticals ( LGND) has been making a lot of news lately, much of which hasn't been encouraging.

Delisted by Nasdaq and investigated by the Securities and Exchange Commission, the San Diego-based company has experienced a number of financial and regulatory disappointments in recent months.

The company's travails have prompted its largest shareholder, investment management firm Third Point, to say it will line up eight candidates to challenge Ligand's nominees for the board. The showdown is scheduled for the annual meeting Jan. 31. Third Point owns just under 10% of Ligand's stock.

Ligand cleared up some longtime, nagging issues when it announced Nov. 18 the filing of its 10-K report with the SEC for the 2004 fiscal year. The report contains restated financial results for 2003 and 2002, as well as restatements of selected data for 2001 and 2000.

The formal SEC investigation of the restatements continues, and Ligand says it's cooperating. In addition, the company's independent auditor issued an adverse report on the effectiveness of its internal controls during 2004. Ligand says it's implementing corrective measures.

Ligand also recently issued preliminary revenue estimates for the third quarter that ended Sept. 30, as well as preliminary results for the first and second quarters of 2005. For the first half of 2005, it lost $25.6 million, or 35 cents a share, on revenue of $76.8 million. For the same period last year, it lost $44 million, or 60 cents a share, on revenue of $54.2 million.

Value Proposition

Ligand said it would submit in December formal statements to the SEC for the first three quarters of 2005. When that happens, Ligand will seek reinstatement by Nasdaq. The stock, delisted in September, now trades on the pink sheets.

These developments coincided with Ligand hiring UBS Securities as a financial adviser to explore options. Although "ongoing operational actions should translate into improved shareholder value," Ligand said its directors believe they need to look for other ways to improve the company.

When asked by one analyst during a Nov. 18 conference call if the whole company might be sold, David Robinson, the chairman and CEO, said Ligand is "open to all strategic opportunities to enhance our shareholders value."

The best way to improve shareholder value is to replace the board, says Daniel S. Loeb, chief executive of Third Point in a letter to shareholders.

Third Point issued its challenge just before Ligand announced its own plan to seek alternatives. Loeb says he acted because the company ignored his previous request to add three Third Point nominees to the board to help devise a new strategy.

Meanwhile, Ligand's stock has held up well since it hit a 52-week low of $4.75 in April. It closed Wednesday at $10.40, but prices have bounced between about $4 and $24 during the past three years.

Ligand's revenue comes from a mixture of marketed products and experimental compounds for which it receives royalties and milestone payments through deals with companies including Pfizer ( PFE), Eli Lilly ( LLY), Wyeth ( WYE) and GlaxoSmithKline ( GSK).

Some of those deals have hit a wall either in the lab or at the Food and Drug Administration. In September, the FDA rejected an application from Pfizer for the osteoporosis treatment Oporia. Ligand would get milestone payments if the drug is approved, as well as additional royalties on worldwide sales. Pfizer said it will discuss its application with the agency and consider various possibilities.

Ligand's Robinson told investors on Nov. 18 that while he was disappointed with the FDA's decision, he expects Oporia to be "an important asset going forward."

Pfizer also submitted Oporia for FDA review as a treatment for vaginal atrophy. Pfizer declined to comment on the status of this application. Pfizer continues to work on a version of Oporia for breast cancer.

Ligand and Wyeth are in late-stage clinical trials on an experimental drug for osteoporosis, and Robinson said he expected Wyeth to submit an application to the FDA. Wyeth has stopped trying to develop a related compound as a cancer treatment. Two experimental contraceptives being developed with Wyeth have been put on hold.

Other compounds using Ligand technology that are in mid-stage clinical testing include treatments for diabetes and clogged arteries being developed by Eli Lilly. Research on another diabetes drug has been set aside for now. In addition, GlaxoSmithKline is in mid-stage clinical trials on compounds for heart disease and insufficient blood platelets.

Tales of Royalty

Given the massive financial restatement and the absence of formal 2005 data, it's still hard to get a clear picture of Ligand. The company issued a lengthy Nov. 18 press release on its financials, while its Webcast for investors required 73 slides, and the presentation ran about two hours.

Only a handful of analysts continue following the company. George Farmer of Wachovia Securities suspended coverage in early September, citing the impending delisting by Nasdaq. Before dropping coverage, Farmer said Ligand's research activities are "based on stellar science." The company's marketed and experimental products "should command significant value" if Ligand pursues "strategic options," he said. He had an outperform rating when he last covered the stock.

Jim Reddoch of Friedman Billings Ramsey has an underperform rating on Ligand. "The restated financials show much lower numbers than expected," he wrote in a Nov. 21 research report. He doesn't own shares, but his firm says it seeks to do investment banking with companies mentioned in its reports.

Reddoch says sales of Ligand's biggest product, the painkiller Avinza, were lower than expected. Avinza is an extended-release form of morphine for patients with chronic, moderate to severe pain.

Prescription sales growth for Avinza has been slowing since the third quarter of 2004 but CEO Robinson told investors he believes the drug can be revived, at least through 2007, with an effective sales and marketing effort.

Ligand is fighting with its Avinza marketing partner, the Dutch drug company Organon, saying it has overpaid the Akzo Nobel ( AKZOY) unit. Organon disputes the claim.

Without strong growth from Avinza, Ligand "is a royalty story," says Reddoch. "While one or two of these may be winners for now, potential Ligand acquirers are unlikely to pay up for them because the royalties are small, Ligand has little developmental control and the drugs are higher risk."

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