Ligand Pharmaceuticals (NASDAQ:LGND) reported earnings this morning, and the numbers for lead drug Avinza appear solid. However, despite what appears to be strong sales growth, the stock has taken a 30% hit. In this unusual situation, the stock took a pasting because Q2 earnings missed the consensus estimate by a wide margin and the company's auditor, Deloitte & Touche LLP, has ended the relationship. While these are the two issues at work, I also think this sharp decline can be viewed to some extent as a vote of no confidence in management.

These issues have to be taken in the context of events of the past few years. Management has very little credibility with some investors. This goes all the way back to the initial failed Avinza launch in 2002. Since that time, the company has repeatedly missed revenue guidance, often by a substantial margin. I don't think it's the easiest thing in the world to forecast drug sales, but when a pattern of overestimates emerges, the market loses all confidence in management's projections.

When the market doesn't trust what management says, the impact of major events such as Deloitte & Touche's exit is exacerbated. The uncertainty surrounding this departure becomes a very big deal. According to both Ligand and Deloitte, there have been no disagreements relating to financial matters that have not been resolved. If there were, Deloitte would have to disclose them. At the same time, exactly why Deloitte is ending this relationship remains unclear. This matters a lot, and that is a point that seems to escape management; during the conference call, it didn't feel that the exact reason was all that important to shareholders. To me that suggests that it is out of touch with what shareholders want to know.

Because there are no outstanding issues on the financial statements, the reported numbers are probably OK. Yet until Ligand brings in another auditing firm, there is going to be some uneasiness about this issue.

A major concern is that Ligand is again giving very aggressive revenue estimates. The company is going to need very robust performance out of Avinza if it wants to hit the guided numbers. Understandably, many investors are going to be skeptical about whether the guidance will be met.

This is a crucial time for management. Two things need to happen for it to regain credibility. The company must reach the $235 million to $255 million in total revenue projected for 2004, with $195 million to $210 million in product sales. If revenue again falls short of projections, shareholders are going to be outraged, and rightfully so. The second step is to sign up a new independent auditor that confirms that all is OK with the stated numbers through the first half of the year. That will go a long way toward reassuring the market that nothing funny has been going on.

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Fool contributor Charly Travers does not own shares of any company mentioned in this article.