On July 29, 2016 Merck (NYSE:MRK), known as MSD outside the United States and Canada, reported financial results for the second quarter of 2016 (Press release, Merck & Co, JUL 29, 2016, View Source [SID:1234514120]).

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"Our results this quarter reflect our strategic focus on key launches, including KEYTRUDA and ZEPATIER, as well as our priority inline programs," said Kenneth C. Frazier, chairman and chief executive officer, Merck. "We remain committed to advancing our pipeline, delivering a balanced and differentiated portfolio, and achieving long-term, sustainable growth."


Financial Summary

$ in millions, except EPS amounts Second Quarter
2016 2015

Sales $9,844 $9,785
GAAP EPS 0.43 0.24
Non-GAAP EPS that excludes items listed below1
0.93 0.86
GAAP net income2
1,205 687
Non-GAAP net income that excludes items listed below1,2
2,587 2,441

Worldwide sales were $9.8 billion for the second quarter of 2016, an increase of 1 percent compared with the second quarter of 2015, including a 2 percent negative impact from foreign exchange.

GAAP (generally accepted accounting principles) earnings per share (EPS) were $0.43 for the second quarter. Non-GAAP EPS of $0.93 for the second quarter excludes acquisition- and divestiture-related costs and restructuring costs.

Pipeline Highlights

In the second quarter of 2016, the company advanced its late-stage pipeline in multiple priority areas and executed on key launches, including KEYTRUDA (pembrolizumab), an anti-PD-1 therapy for the treatment of metastatic NSCLC in previously treated patients whose tumors express PD-L1, as well as advanced melanoma; and ZEPATIER (elbasvir and grazoprevir), a once-daily, fixed-dose combination tablet for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with or without ribavirin.

The company advanced its clinical development program for KEYTRUDA.
The company announced topline results from the KEYNOTE-024 trial investigating the use of KEYTRUDA in patients with previously untreated advanced NSCLC whose tumors expressed high levels of PD-L1 (tumor proportion score of 50 percent or more).
In this study, KEYTRUDA was superior compared to chemotherapy for the primary endpoint of progression-free survival and the secondary endpoint of overall survival.

Based on these results, an independent Data Monitoring Committee recommended that the trial be stopped and that patients receiving chemotherapy in KEYNOTE-024 be offered the opportunity to receive KEYTRUDA.

The U.S. Food and Drug Administration (FDA) accepted for review a supplemental Biologics License Application for KEYTRUDA for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. The FDA granted Priority Review with a PDUFA action date of Aug. 9, 2016.

The Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending approval of KEYTRUDA for the treatment of locally advanced or metastatic NSCLC in adults whose tumors express PD-L1 and who have received at least one prior chemotherapy regimen.

At the 52nd Annual Meeting of the American Society of Clinical Oncology (ASCO) (Free ASCO Whitepaper) in June, data were presented evaluating the use of KEYTRUDA as a monotherapy and in combination with other therapies in more than 15 different cancers, including melanoma, NSCLC, head and neck cancer, classical Hodgkin lymphoma, multiple myeloma, colorectal cancer and esophageal cancer. Data evaluating KEYTRUDA in new tumor types were presented for the first time in cervical, endometrial, pancreatic, salivary and thyroid cancers.

The KEYTRUDA research program includes more than 300 clinical trials evaluating KEYTRUDA across more than 30 tumor types. To date, clinical activity has been shown in more than 20 tumor types.

Last week, the European Commission approved ZEPATIER for the treatment of chronic HCV in adult patients, allowing marketing of ZEPATIER in all 28 European Union (EU) member states. The company continues to work to supply the EU market, with product launches estimated to begin between the fourth quarter of 2016 and the first quarter of 2017. Product launches are expected to continue across the EU through 2017.

At the 76th Scientific Sessions of the American Diabetes Association in June, Merck and Pfizer announced that two pivotal Phase 3 studies of ertugliflozin, an investigational oral SGLT-2 inhibitor for the treatment of patients with type 2 diabetes, met their primary endpoints, showing significant reductions in A1C (a measure of average blood glucose). The companies continue to expect to submit New Drug Applications to the FDA for ertugliflozin as a monotherapy and two fixed-dose combination tablets (ertugliflozin plus JANUVIA [sitagliptin], and ertugliflozin plus metformin) by the end of 2016.
Business Development Highlights

Business development remains a critical component of Merck’s strategy, and the company is actively engaged in seeking external opportunities to complement and strengthen its pipeline and portfolio. The company recently engaged in the following scientific collaborations and acquisitions:

Earlier this week, the company completed its acquisition of Afferent Pharmaceuticals, a leader in the development of investigational therapeutic candidates for the treatment of common, poorly managed, neurogenic conditions, such as chronic cough.
The company announced a new collaboration with Moderna Therapeutics to develop and commercialize personalized cancer vaccines, combining KEYTRUDA and Moderna’s messenger-RNA technology.

Merck Animal Health announced it will acquire a controlling interest in Vallée S.A., a privately held producer of animal health products in Brazil with a portfolio of more than 100 products for livestock, horses and companion animals.
Second-Quarter Revenue Performance

The following table reflects sales of the company’s top pharmaceutical products, as well as total sales of Animal Health products.


$ in millions Second Quarter Change Change
Ex-Exchange
2016 2015

Total Sales $9,844 $9,785 1% 3%
Pharmaceutical 8,700 8,564 2% 2%
JANUVIA / JANUMET 1,634 1,598 2% 2%
ZETIA / VYTORIN 994 955 4% 4%
GARDASIL / GARDASIL 9 393 427 -8% -7%
PROQUAD / M-M-R II / VARIVAX 383 358 7% 10%
CUBICIN 357 293 22% 22%
REMICADE 339 455 -26% -26%
ISENTRESS 338 375 -10% -9%
KEYTRUDA 314 110 * *
Animal Health 898 840 7% 10%
Other Revenues 246 381 -36% -2%
* >100%
Pharmaceutical Revenue

Second-quarter pharmaceutical sales increased 2 percent to $8.7 billion, reflecting higher sales in oncology, hospital acute care, the cardiovascular franchise and vaccines.

Growth in oncology was driven by higher sales of KEYTRUDA as the company continues to launch the product with new indications globally.

Growth in hospital acute care reflects higher sales of CUBICIN (daptomycin for injection), an I.V. antibiotic, partially due to price increases in the United States, and the U.S. launch of BRIDION (sugammadex) Injection 100 mg/mL, an agent for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery. In June 2016, the company lost U.S. patent protection for CUBICIN, and, going forward, the company anticipates a significant decline in CUBICIN sales.

Higher sales in the cardiovascular portfolio were primarily driven by an increase in sales of ZETIA (ezetimibe), a medicine for lowering LDL cholesterol, largely due to price increases in the United States, and ADEMPAS (riociguat), a medicine for treating pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension, which the company is now promoting and distributing in Europe.

Growth in vaccines resulted largely from higher sales of pediatric vaccines, partially offset by lower sales in the franchise of GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16, and 18) Vaccine, Recombinant], vaccines to prevent cancers and other diseases caused by HPV, due to the timing of public sector purchases.

Pharmaceutical sales growth also reflects the launch of ZEPATIER, which had sales of $112 million in the quarter.

Second-quarter pharmaceutical sales reflect a decline in REMICADE (infliximab), a treatment for inflammatory diseases, due to the impact of biosimilar competition in the company’s marketing territories in Europe. Pharmaceutical sales also reflect a decrease in sales of NASONEX (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, due to loss of exclusivity in the United States.

Animal Health Revenue

Animal Health sales totaled $898 million for the second quarter of 2016, an increase of 7 percent compared with the second quarter of 2015, including a 3 percent negative impact from foreign exchange. Excluding the impact of exchange, sales across all species grew, particularly in products for companion animals, led by BRAVECTO (fluralaner), a chewable tablet that kills fleas and ticks in dogs for up to 12 weeks.

In the second quarter, the company received marketing approval from the EMA for BRAVECTO Spot-On Solution for cats and dogs; last week, the company received approval in the United States to market the product under the tradename BRAVECTO Topical (fluralaner topical solution) for cats and dogs.

Second-Quarter Expense, EPS and Related Information

The tables below present selected expense information.


$ in millions

GAAP

Acquisition-
and Divestiture-
Related Costs 3

Restructuring
Costs


Non-GAAP 1
Second-Quarter 2016
Materials and production $3,578 $1,120 $66 $2,392
Marketing and administrative 2,458 18 87 2,353
Research and development 2,151 207 64 1,880
Restructuring costs 134 – 134 –

Second-Quarter 2015
Materials and production $3,754 $1,241 $105 $2,408
Marketing and administrative 2,624 136 17 2,471
Research and development 1,670 71 15 1,584
Restructuring costs 191 – 191 –

GAAP Expense, EPS and Related Information

On a GAAP basis, the gross margin was 63.7 percent for the second quarter of 2016 compared to 61.6 percent for the second quarter of 2015. The increase for the second quarter of 2016 reflects the favorable impacts of foreign exchange; product mix; lower acquisition- and divestiture-related costs; and lower restructuring costs. Acquisition- and divestiture-related costs and restructuring costs negatively affected gross margin by 12.0 and 13.8 percentage points for the second quarters of 2016 and 2015, respectively.

Marketing and administrative expenses were $2.5 billion in the second quarter of 2016, a 6 percent decrease compared to the second quarter of 2015. The decline reflects lower acquisition- and divestiture-related costs, as well as lower administrative costs, such as legal defense reserves, partially offset by higher restructuring costs.

Research and development (R&D) expenses were $2.2 billion in the second quarter of 2016, a 29 percent increase compared to the second quarter of 2015. The increase primarily reflects higher licensing costs, increased clinical development spending and intangible asset impairment charges.

Other (income) expense, net, was $19 million of expense in the second quarter of 2016 compared to $739 million of expense in the second quarter of 2015. The second quarter of 2015 includes foreign exchange losses of $715 million related to the devaluation of the company’s net monetary assets in Venezuela.

GAAP EPS was $0.43 for the second quarter of 2016 compared with $0.24 for the second quarter of 2015.

Non-GAAP Expense, EPS and Related Information

The non-GAAP gross margin was 75.7 percent for the second quarter of 2016 compared to 75.4 percent for the second quarter of 2015. The increase for the second quarter of 2016 reflects the favorable impacts of foreign exchange and product mix.

Non-GAAP marketing and administrative expenses were $2.4 billion in the second quarter of 2016, a 5 percent decline compared to the second quarter of 2015. The decline reflects lower administrative costs, such as legal defense reserves.

Non-GAAP R&D expenses were $1.9 billion in the second quarter of 2016, a 19 percent increase compared to the second quarter of 2015. The increase primarily reflects higher licensing costs and increased clinical development spending.

Non-GAAP EPS was $0.93 for the second quarter of 2016 compared with $0.86 for the second quarter of 2015.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in the table that follows. Year-to-date results can be found in the attached tables.


$ in millions, except EPS amounts Second Quarter
2016 2015
EPS
GAAP EPS $0.43 $0.24
Difference4
0.50 0.62
Non-GAAP EPS that excludes items listed below1
$0.93 $0.86

Net Income
GAAP net income2 $1,205 $687
Difference 1,382 1,754
Non-GAAP net income that excludes items listed below1,2 $2,587 $2,441

Decrease (Increase) in Net Income Due to Excluded Items:
Acquisition- and divestiture-related costs3 $ 1,345 $1,448
Restructuring costs 351 328
Foreign exchange losses related to Venezuela – 715
Net decrease (increase) in income before taxes 1,696 2,491
Income tax (benefit) expense5
(314) (737)
Decrease (increase) in net income $ 1,382 $1,754

Financial Outlook

Merck has lowered its full-year 2016 GAAP EPS range to be between $1.98 and $2.08, reflecting the impact of intangible asset impairment charges and higher restructuring costs incurred in the second quarter of 2016. The company has raised the bottom end of its full-year 2016 non-GAAP EPS range and is now targeting a range of $3.67 to $3.77, including an approximately 1 percent negative impact from foreign exchange at current exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs and costs related to restructuring programs.

Merck has narrowed its full-year 2016 revenue range to be between $39.1 billion and $40.1 billion, including an approximately 2 percent negative impact from foreign exchange at current exchange rates.

The following table summarizes the company’s 2016 financial guidance.


GAAP Non-GAAP 1
Revenue $39.1 to $40.1 billion $39.1 to $40.1 billion**
Marketing and administrative expenses Lower than 2015 Lower than 2015
R&D expenses Higher than 2015 Higher than 2015
Effective tax rate 26.0% to 27.0% 21.5% to 22.5%
EPS $1.98 to $2.08 $3.67 to $3.77
** The company does not have any non-GAAP adjustments to revenue.

A reconciliation of anticipated 2016 GAAP EPS to non-GAAP EPS and the items excluded from non-GAAP EPS are provided in the table below.


$ in millions, except EPS amounts
Full-Year 2016
GAAP EPS $1.98 to $2.08
Difference4 1.69
Non-GAAP EPS that excludes items listed below1 $3.67 to $3.77

Acquisition- and divestiture-related costs $4,750
Restructuring costs 900
Net decrease (increase) in income before taxes 5,650
Estimated income tax (benefit) expense (955)
Decrease (increase) in net income $4,695

The expected full-year 2016 GAAP effective tax rate of 26.0 to 27.0 percent reflects an unfavorable impact of approximately 4.5 percentage points from the above items.

Total Employees

As of June 30, 2016, Merck had approximately 68,000 employees worldwide.

On July 29, 2016 Neon Therapeutics, an immuno-oncology company developing neoantigen-based therapeutic vaccines and T cell therapies to treat cancer, reported that the U.S. Food and Drug Administration (FDA) has accepted the company’s Investigational New Drug (IND) application for its lead program, NEO-PV-01 (Press release, Neon Therapeutics, JUL 29, 2016, View Source [SID:1234514147]). NEO-PV-01 is a personalized vaccine designed specifically for each patient based on the neoantigen mutations unique to that patient’s tumor DNA.

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The IND enables Neon Therapeutics to initiate its first clinical study, which is a multicenter Phase 1b clinical trial evaluating the safety, tolerability and efficacy of NEO-PV-01 with Opdivo (nivolumab), a PD-1 immune checkpoint inhibitor from Bristol-Myers Squibb, in melanoma, non-small cell lung cancer and bladder cancer. The trial will evaluate immune responses in serial samples of peripheral blood and tumor tissue through a comprehensive immune monitoring program.

"We are in the midst of tremendous momentum for neoantigen biology in the field of cancer immunotherapy," said Cary Pfeffer, M.D., interim chief executive officer of Neon Therapeutics. "This IND filing acceptance brings us one step closer to deliver on the promise of neoantigen science to bring truly personalized cancer therapies to patients living with this devastating disease."

This clinical trial is expected to begin in 2016, and is anticipated to enroll a total of 90 patients from multiple clinical sites in the U.S. More information about the trial will be available at www.clinicaltrials.gov.

On July 29, 2016 Tokai Pharmaceuticals Inc. (NASDAQ: TKAI), a biopharmaceutical company focused on developing and commercializing innovative therapies for prostate cancer and other hormonally driven diseases, reported that it is reducing its workforce by approximately 60 percent, to a total of 10 full-time equivalent employees, under a plan expected to be largely completed by the end of the third quarter of 2016 (Press release, Tokai Pharmaceuticals, JUL 29, 2016, View Source [SID:1234514136]). This workforce reduction is designed to reduce operating expenses while the company conducts a comprehensive evaluation of strategic options for galeterone and its pipeline. Affected employees are being offered severance and outplacement assistance.

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Tokai expects the reduction in force to result in approximately $4.2 million in reduced annualized operating expenses once the plan is fully implemented. The company also expects to incur a charge in the third quarter of 2016 of approximately $1.3 million related to the reduction, including severance, benefits and related costs.

"A reduction in force is a very difficult yet necessary step in light of the recent discontinuation of the ARMOR3-SV trial of galeterone in mCRPC," said Jodie Morrison, President and Chief Executive Officer of Tokai. "I would like to personally express my appreciation to each of the employees impacted by this decision for their commitment to the development of galeterone, as well as for their meaningful contributions to a program that has expanded the dialogue among the medical and patient communities about AR-V7 and advanced prostate cancer treatment options."

About Galeterone
Galeterone is an oral small molecule that utilizes the mechanistic pathways of current second-generation hormonal therapies, including abiraterone and enzalutamide, while also introducing a unique third mechanism – androgen receptor degradation – that impairs the function of androgen receptors, decreasing their sensitivity to androgen activity and reducing tumor growth. Tokai is developing galeterone for the treatment of patients with metastatic castration-resistant prostate cancer. Tokai has worldwide development and commercialization rights to galeterone.

On July 29, 2016 Takeda Pharmaceutical Company Limited (TSE: 4502) reported plans to accelerate the research & development (R&D) organization transformation by refocusing on three key therapeutic areas – Oncology, Gastroenterology (GI) and Central Nervous System (CNS), plus Vaccines, and concentrating R&D activities in Japan and the U.S (Press release, Takeda, JUL 29, 2016, View Source [SID:1234514135]). This transformation is critical to provide the company with the necessary organizational and financial flexibility to drive innovation, enhance partnerships, and improve R&D productivity for long-term, sustainable growth. Takeda will optimize its R&D sites globally to build a world-leading R&D organization and pipeline.

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"Our goal is to become the best R&D organization in our industry, but to deliver on this, we need to first build new capabilities and embrace new ways of working," said Andy Plump, Takeda’s Chief Medical and Scientific Officer. "Our near-term priority continues to be the development of our exciting recently launched medicines such as ENTYVIO and NINLARO. We need to ensure we have the capabilities, culture and agility necessary to deliver innovative new medicines for tomorrow. Through this transformation, we will develop a more robust and competitive global R&D organization based on Takeda’s strong Japanese heritage and expertise in our core areas of research."

To accomplish this R&D transformation, Takeda will focus on enhancing operational efficiency and ensuring the needed capabilities are in the right areas, which will include evaluating the need to reduce and concentrate our R&D presence and optimize the interfaces between R&D, business and corporate functions. The number of impacted positions may fluctuate depending on the progress of implementing these programs and the transformation.

"Takeda’s aim is to become a leading, global innovative pharmaceutical company, which is why we are always looking ten or more years ahead," said Christophe Weber, President and CEO of Takeda. "We are dedicated to bringing therapies to patients, physicians and payers that offer genuine innovation over today’s standards of care. We recognize the impact this transformation will have on our people and are committed to creating unique, innovative business solutions that will offer a variety of opportunities for our R&D employees wherever possible."

Takeda estimates one-time P/L implementation costs for the transformation of approximately 75 billion yen and the annual cost savings of approximately 18 billion yen after the implementation. Takeda intends to re-invest these savings into an innovative pipeline over time. FY2016 implementation costs of up to 25 billion yen are covered within the general placeholder budget for efficiency initiatives in the consolidated financial forecast for FY2016 announced on May 10, with the remainder of 50 billion yen mostly in FY2017. These costs and timing might be updated to reflect the results of the negotiations with the labor unions, partners, and other stakeholders, and options taken by employees. Dividend payments by Takeda will not be affected.

On July 29, 2016 Ligand Pharmaceuticals Incorporated (NASDAQ: LGND) reported the signing of a license agreement for three programs utilizing Ligand’s LTP (Liver Targeting Prodrug) technology with Nucorion Pharmaceuticals, Inc., a venture-funded biotechnology company focused on developing anti-cancer and anti-viral agents initially directed to China (Press release, Ligand, JUL 29, 2016, View Source [SID:1234514127]).

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Ligand’s LTP technology is a novel prodrug technology platform designed to selectively deliver a range of active pharmaceutical agents to the liver. By directly targeting the liver, the goal is to maximize efficacy and minimize off-target drug toxicities.
The preclinical programs under this license include: NUC-202, a targeted anti-cancer analog for the treatment of hepatocellular carcinoma; NUC-404, a targeted nucleotide analog for the treatment of hepatitis B; and NUC-101, a targeted nucleotide analog for the treatment of hepatitis C.
Ligand is eligible to receive milestone payments as well as royalties ranging from 5% to 9% on net sales of products developed by Nucorion under this agreement.
Ligand was a co-founder of Nucorion along with Dr. Zucai Suo, Professor of Chemistry and Biochemistry at The Ohio State University and a recognized academic leader in the fields of nucleic acid enzymology, viral replication and rational drug design.
Nucorion was funded with $5 million in a Series A funding round led by Silver River International Investment Ltd. Ligand invested $1 million in the venture financing.
"LTP is a promising technology platform developed by Ligand with applicability in a range of hepatic and hepatic-mediated indications. Given the increased focus on liver-related health by drug companies and the substantial medical need in China for liver-related medicines, we are pleased to participate in this new venture and be partners with highly respected Chinese venture investors affiliated with multi-billion dollar funds," said John Higgins, Chief Executive Officer of Ligand. "Along with Captisol and OmniAb, LTP has the potential to contribute to the growth of Ligand’s portfolio and technology offerings."

James Gu, Partner at Silver River, stated, "The LTP technology is especially well-suited for pursuing these diseases in China. Liver disease is a growing and major cause of death in China. The LTP technology targets the liver and creates a key differentiating factor for Nucorion and provides us with a promising product pipeline."

About Liver Disease in China

Liver disease is a growing and major cause of death in China, and has a substantial impact on the global burden of diseases. There are more than 90 million chronic carriers of hepatitis B virus (HBV) in China, accounting for about one-third of all HBV chronic carriers in the world1. It is estimated that 40 million people in China are infected with the hepatitis C virus2, and that 85% of the carriers may be unaware of their infection status3. Nearly 400,000 people die from liver cancer every year in China, which accounts for more than half of the deaths from liver cancer worldwide4.

About the LTP Technology Platform

Ligand’s LTP technology is a novel prodrug technology platform designed to selectively deliver a range of active pharmaceutical agents to the liver. It works by chemically modifying a biologically active molecule into an inactive prodrug form that will be administered and later activated in the liver by certain enzymes mainly expressed in the liver. The technology can be used to improve activity and/or safety of an existing drug or to develop new agents to treat liver diseases or diseases caused by homeostasis imbalance of circulating biomolecules controlled by the liver such as lipids and glucose, and is especially applicable to metabolic and cardiovascular diseases. Ligand’s LTP technology has expanded chemical class applicability and also removes certain by-products as compared to other targeting technologies.