Aug 13 2020 - Ligand Pharmaceuticals - Still, Many Moving Parts

Summary

LIgand Pharmaceuticals is a business with many moving parts.

The company sold its royalty cash cow last year, as it spent most of this money on a deal for Pfenex and share buybacks.

With many parts uncertain, including a Captisol Covid-19 boost, the investment story remains uncertainty but intriguing.

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Ligand Pharmaceuticals (LGND) is a company with an interesting business model, one which I have provided coverage on at various occasions in the past. The last update on the company and the investment thesis dates March 2019 as I concluded that uncertainty prevails.

This uncertainty came as there were heightened expectations, while there were doubts on pipeline conversion, a bearish research report from Citron arrived and the company sold its top-selling royalty drug at a price which did not impress me that much.

The Thesis, Back To 2019

Ligand has a very distinctive business model as it notes that despite the many blockbusters seen throughout the biopharmaceutical industry, not all research programs are created equal in terms of risk-reward, and most of these breakthroughs occur as a result of collaborations. The company aims to operate successful by connecting patents, data and know-how, getting a piece of the cake of many successes through a royalty stream, creating (in potential) a very diversified operation.

For the year 2018 the company had an underlying portfolio of drugs with product sales of .3 billion, a 5 times increase compared to just five years ago, as well as 178 potential drugs in development, of which undoubtedly a few would become future drugs, with royalty payments ranging typically at a few percent of sales.

Success of the business model made that shares rallied from just in 2010 as an unstoppable momentum run nearly pushed shares up to 0 late in 2018, to end the year around 0 following a violent reversal in its share price.

The 2018 results revealed revenues of 1 million, comprised out of 9 million in royalty revenues (quite recurring), million in material sales and million in lumpy license and milestone payments. Adjusted earnings of 7 million, or per share were reported. The company guided for 2019 sales of 4 million, of which a growing 4 million royalty component, flattish million in material sales and license and milestone fees set to drop to million, with adjusted earnings seen around per share.

Shares traded around 5 when I looked at the company in March 2019 which resulted in market multiples based on the earnings power, and this is despite a sold balance sheet which includes a strong net cash position to the tune of nearly 0 million and an investment in Viking (VKTX).

The reason why I looked at the shares in March 2019 was that two noteworthy events took place. For starters was a deal to sell IP rights of Promacta to Royalty Pharma in a 7 million cash deal. That was a huge sum of money given the shares count of 21-24 million (depending on the share price level and convertible debt), yet full year revenues were seen at just 8 million following that deal. Royalty payments were set to fall from 4 million to million as more than a 0 million in very lucrative revenues left the door, and that is even with Promacta contributing 2 months to 2019 results.

Hence, I wondered if the very low royalties on Kyprolis, Evomela and some other drugs, as well as pipeline, materials, and license payments would justify a remaining .3 billion enterprise valuation.

I furthermore was a bit cautious given the bearish Citron report released earlier in 2019, yet with that report slamming just a price target on the stock and Ligand taking in per share for Promacta, I noted that the report was too aggressive on the downside, yet there were interesting parts of the thesis and hence I did not buy any shares despite the interesting business model and the fact that expectations came down a lot.

What Happened?

Since the announcement of the sale of royalties of Promacta a few interesting developments took place. A few smaller licensing and royalty deals were announced throughout 2019 as well as an important collaboration deal with Sanofi. In February of this year the company reported its 2019 results which were largely in line with expectations as sales came in at 0 million, with royalty sales of million being a touch light, offset by higher material sales. Adjusted earnings were reported at million, or .09 per share, or closer to per share if little over a dollar in stock-based compensation is adjusted for.

Net cash was pegged at 0 million which based on a share count of 17 million, works down to per share in cash, as the company has aggressively bought back shares. With shares around in February, this valued operating assets at and thus resulted in a high earnings multiples with realistic earnings power pegged around dollar, although there is a real pipeline component as well of course.

The company guided for 2020 sales of 1 million, comprised out of million in royalty revenues, million in material sales and the remainder in licensing and milestone fees. While these results are flattish, note that if Promacta was sold for entire year of 2019, revenues only came in at 6 million, as the remaining business is thus showing real growth.

Good news arrived later in February as the company hiked the sales 2020 guidance to 3 million thanks to higher material sales (Captisol) used in remdesivir by Gilead Sciences (GILD). Upon the release of the first quarter results it hiked the guidance towards 0 million in annual sales, and even 5 million based on the second quarter results. This is entirely the result of greater demand for Captisol whose revenues tripled in the second quarter to million. Net cash stood at 0 million as the company reduced the share count to 16 million and change amidst more buyback activity.

On the back of this optimism shares recently recovered to 0 yet that is before a deal was announced. The company is acquiring publicly traded company Pfenex (PFNX) in a 8 million deal at per share, as contingent value rights could boost the deal value to 6 million, which basically means that the net cash position tuns into a very modest net debt load. The trouble with this deal is that is about future promises as well with no meaningful revenue contribution seen by now, while operating losses run at million a year, basically ''eating'' all the operating profits generated by the own business.

Pfenex has developed a recombinant protein production platform, used for complex and large scale production issues. I must say that there are many moving parts with this company as I am not familiar with the company, yet management of Ligand claims that despite the current losses a modest contribution to adjusted earnings in 2021 is seen. Furthermore, synergies should result in accretion to the tune of .50 per share in 2023!

Investors are not really convinced with shares down from 0 to 2, resulting in about 0 million value destruction on the back of a deal with a value of 3 times that amount, as investors fear the premium being paid.

What Now?

Nearly one and half year after the last write-up I am still leaning cautious with shares at the same level as they were about at the time. The company has sold a real royalty revenue cash cow, yet no real progress has been made on growing (royalty) revenues from either the existing products or new products.

Furthermore, all the net cash proceeds have been used on dealmaking and share buybacks already and while current momentum related to Covid-19 results in earnings guidance of > per share, on an adjusted basis, the questions is how much earnings will fall back if demand for Captisol reverts. That being said, the counterargument can be made as well and that is just how great potential is if the company could be a major supplier to Gilead of some time to come, resulting in not just a greater but perhaps prolonged boom as well, as we furthermore have a wildcard with regard to Pfenex' future contribution.

Right here and now, Ligand remains a show me story as I look forward to learning more on the Pfenex deal in the coming quarters, as this deal is quite substantial at roughly per share in terms of Ligand's value. I furthermore look anxious towards trends at Captisol and other developments in the pipeline. For now, I remain still cautious, yet if share unexpected fall further and or good news arrives in the second half of the year, looking to pick up a few shares if shares fall to the double digits.