I stumbled upon Ligand Pharmaceuticals (LGND) when a friend mentioned to me that they profit off of remdesivir by providing the solubilizer that remdesivir is packaged in. This substrate is called capitsol and it allows for increased solubility and therefore increased bioavailability of remdesivir and other drugs. This, to me, sounded like an example similar to Buffett’s suggestion to not buy gold when there is a gold rush, sell the shovels.
At first glance, Ligand looks very similar to Royalty Pharma in that a substantial portion of their earnings are resultant from successful royalty partnerships with other pharmaceutical companies. Although there is much more to their story. Their partners and licensees have programs currently in clinical development targeting seizure, coma, cancer, diabetes, cardiovascular disease, muscle wasting, liver disease, and kidney disease, among others. Needless to say, they are diversified.
On October 20th, they held an investors presentation leading up to their earnings reports on the 30th of the month. Yahoo finance published some interesting takeaways. Let’s take a look at some –
Business model and growth drivers
- Management reviewed Ligand’s business model and the ongoing diversification of its portfolio. Leveraging the OmniAb, Captisol and Protein Expression Technology platforms, Ligand’s business model is based on providing drug discovery platforms, completing early stage drug development and partnering.
- Ligand highlighted more than 10 major potential pipeline events expected to take place by the end of 2021, including commercial product approvals and Phase 3 clinical trial data, as well as Phase 2 or Phase 2b clinical trial data.
- Ligand reported that strong demand for Captisol continues and it forecasts higher needs for Captisol for the manufacturing of remdesivir to treat COVID-19 in 2021.
- The company’s growth is expected to be driven by royalty revenue, with projections for a nearly three-fold increase over the next three years, reaching $95 million in royalty revenue in 2023. Approximately two-thirds of 2023 royalty revenue is expected to come from core Ligand royalty programs, and approximately one-third is expected to come from the programs acquired as part of the recent Pfenex transaction.
- Ligand summarized its merger and acquisition history, noting it has made more than 20 acquisitions and investments over the past 12 years deploying approximately $1 billion of capital.
- Ligand reported that more than 8,500 clinical subjects have been or are planned to be treated by partners in clinical trials with OmniAb-derived antibodies. New clinical programs are pending at Johnson & Johnson and Merck, among others.
- Ligand expects the first regulatory approvals for OmniAb-derived antibodies in 2021, with potential for as many as 10 approvals expected by 2025.
- Ligand’s management commented that increased visibility for the Captisol platform has driven new agreements to the highest level ever, with more than 120 new research use agreements and a dozen new clinical/commercial agreements.
- Ligand and its manufacturing partners have completed capacity-expansion activities over the past six months, with cGMP manufacturing now at four sites including one in the U.S.
- In addition to its core role in intravenous formulations, Captisol is also being utilized in other routes of drug delivery including oral, inhalation and subcutaneous.
- Ligand maintains a broad global patent portfolio for Captisol with more than 400 issued patents worldwide relating to the technology with the latest expiration in 2033. Other patent applications covering methods of making Captisol could extend protection to 2040.
Protein Expression Platform
- Ligand reviewed its recently acquired Protein Expression Technology platform, noting it has the biopharmaceutical industry’s most comprehensive prokaryotic protein production platform, protected by 27 issued U.S. patents as well as substantial know-how. This proprietary platform is now validated with two approved products and two more regulatory approvals expected in 2021.
- Among a series of case studies and partnership discussions, management highlighted that the platform solved Jazz Pharmaceutical’s Erwinaze supply challenges due to issues with their manufacturer, resulting in a robust process showing manufacturing consistency and efficiency. The program was completed from commencement to projected first BLA filing in approximately four years.
Internal R&D programs
- Ligand selectively invests in internal R&D to drive partnering events with more robust licensing terms. Management highlighted the Captisol-enabled Iohexol program as a potential participant in the $1.5 billion market for contrast-imaging agents. Ligand is initiating a potential pivotal clinical trial to demonstrate a reduction in the incidence of contrast-induced acute kidney injury and image-quality equivalence to GE’s Omnipaque®. The trial is expected to initiate in December 2020 and, with favorable results, lead to a 505(b)(2) regulatory filing.
- Ligand acquired the PF810 program through its acquisition of Pfenex. PF810 is a next-generation peptide therapeutic program focused on endocrinology that leverages extensive internal experience and know-how, with an IND filing targeted for 2021.
- Ligand also profiled five OmniChicken antibody programs that are primed for future partnering events.
Financial overview and outlook, and investment philosophy
- Management highlighted Ligand’s history of strong revenue growth and its expectations for continued growth in the near- and long-term. Revenue growth has contributed to significant cash flow and per-share earnings.
- Ligand raised 2020 guidance for total revenue to approximately $170 million ($33 million from royalties, $92 million from Captisol sales and $45 million from contract revenue), year-end cash of more than $300 million, gross margin of 80% to 85%, total cash expenses of $73 million to $75 million, a tax rate of 21% to 23%, and adjusted diluted EPS of $3.95. Both revenue and adjusted diluted EPS for 2020 represent growth of more than 55% compared with 2019 (excluding revenues from Q1 2019 Promacta royalty).
- The company provided a preliminary outlook for 2021 to 2023 financials, including introducing 2021 financial guidance as follows:
- Total revenue of $285 million ($45 million from royalties, $45 million from core Captisol customers, $155 million from Captisol related to remdesivir sales and $40 million from contract revenue);
- Q1 2021 Captisol sales of $45 million;
- Gross margin in the range of 75% to 80%;
- Total cash expenses in the range of $80 million to $85 million;
- Tax rate in the range of 21% to 23%; and
- Adjusted diluted EPS of $6.00.
- For 2023, Ligand is expecting total revenue of approximately $220 million, representing a nearly three-fold increase in royalties (with no contribution from Sparsentan or Teriparatide TE approval), approximately 30% Captisol sales growth (does not include potential contribution from remdesivir in 2023) and a nearly two-fold increase in contract revenue, all compared with 2020.
- Ligand also reported that total potential contract payments through 2036 now exceed $4.5 billion. Ligand has booked over $200 million of contract revenue over the past five years and reported more than $400 million in risk adjusted total potential contract payments over the next five years.
- Management reviewed its capital deployment strategy, which is balanced between M&A and returning capital to stockholders. Ligand has deployed over $2 billion of capital since 2007. Ligand’s external investments have focused on corporate M&A, representing 50% of capital deployment over the period, while returning capital to stockholders primarily via share buybacks, special dividends and bond repurchases also represents 50% of capital deployment over the period. Ligand noted that funding cycles and its business model create ample merger & acquisition (M&A) opportunity, and that special and/or regular dividends are potential future forms of capital return.
Should you invest in Ligand Pharmaceuticals (LGND)?
Shares of Ligand Pharmaceuticals (LGND) appear to be a very good investment option, the Money Midnight Indicator is expecting its price to increase considerably in the next of years. The majority of the metrics point to this investment being highly attractive.