September 27, 2015 - 11:55pm EST by
2015 2016
Price: 91.73 EPS 1.75 0
Shares Out. (in M): 20 P/E 52.41 0
Market Cap (in $M): 1,812 P/FCF 50 0
Net Debt (in $M): 63 EBIT 35 50
TEV (in $M): 1,885 TEV/EBIT 54 30
Borrow Cost: General Collateral

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  • Healthcare
  • Biotech
  • Pharmaceuticals


Ligand Pharmaceuticals has come along way since Aggie1111’s excellent long pitch in March 2013 when LGND was just shy of $25.  Two and a half years and a massive biotechnology rally later, LGND is nose-bleed expensive.   At $91.7, LGND currently trades at over 30x EBIT figures that we do not believe.


Ligand will eventually re-rate downward as

1)   Growth in Promacta slows

2)   Growth in Kyprolis slows

3)   When Promacta goes generic

4)   As Captisol sales decline as capital for drug trials becomes more expensive

5)   When a generic Captisol is launched

6)   As new partnered products get approved, are launched and have very little impact on the income statement.

7)   When Amgen replaces the Captisol formulation of Kyprolis with a oral formulation

8)   As investors realize earnings will eventually become fully taxed.


Management is highly promotional.  Management gives long-term guidance for the business, including revenue projections through 2017.  This guidance is pulled directly from the midpoint of sell side research analyst revenue projections for currently marketed drugs and drugs in the pipeline.  They apply average industry approval statistics to their pipeline to predict how many products will be on the market in the future.  Sell Side analysts are remarkably poor in making long term predictions and have proven overly optimistic with regard to Promacta and Kyprolis, so far.


Ligand’s Market Cap is $1.82 billion dollars, holds $181.6 million in cash and in August of 2014 sold $245 million of convertible notes (strike price of $125.08) for an approximate enterprise value of $1.9 billion.  The EV is about $1.5 billion when you give them credit for the value of the tax shield and certain publicly traded equity securities.  Supporting this valuation is about $50 million of operating income, or 30x EBIT.  Given the significant exposure Ligand has to Promacta and Kyprolis, either the market expects significant growth from these products or


Concentration of revenue:  In 2014, 43% of revenues were concentrated in royalties from two products (Promacta and Kyprolis).  The concentration of revenue from theses two products is actually significantly higher because Ligand also generates material sales from selling Captisol to Amgen for Kyprolis.    While not specifically disclosed, given the 103% jump in material sales in 2013 (Kyprolis’ first full year on the market), it is easy to believe that Captisol sales for Kyprolis account for ~20% of LGND’s revenues.  This would imply that in 2014 Promacta and Kyprolis accounted for about two thirds of revenue and 100% of profitability.  Despite the launch of Duavee in 2015, we believe the exposure to these two drugs is similar.   While Promacta and Kyprolis are currently growing at a decent clip, they have significantly underperformed projections from just a short time ago and are likely to continue to disappoint.


LGND is not a typical pharmaceutical company.  It is really a hybrid between a Pharma IP vehicle, drug delivery company, and niche early stage bio-tech start-up.  The business model is actually quite compelling as a platform for hype and the highly promotional management team has spun a grand story. 


As previously mentioned most of the revenues and profits are royalties from two products: Novartis’ Promacta (acquired earlier this year from GSK) and Amgen’s Kyprolis (acquired in 2014 via the questionable Onyx acquisition).

Promacta, while currently growing is likely to slow considerably in the near future.  Most of the sales growth is coming from expansion into new countries and one of Promacta's three approved indications is "to treat low blood platelet counts in people with chronic hepatitis C virus (HCV) infection before and during treatment with interferon."  As I think even casual observers of the hepatitus C space should know by now is that GILD's Sovaldi and other new oral Hep C treatments are cures, and are replacing interferon treatment. Even the cost arguement does not appy as Promacta is not cheap either.  The market of Hep C patients with liver damage should decline in the future, and Hep C patients are going to go on Sovaldi or its oral competitors rather than Interferon coupled with Promacta.  There will be new indications for Promacta, but the total size of the drug's opportunity is subject to considerable uncertainty.  If in fact Promacta was obviously going to be a >$1 billion drug, would GSK have sold its entire oncology franchise (including Promacta) for $14.5 billion?  Interestingly, a Paragraph IV filing was made against Promacta earlier this year, despite Ligand’s claim that patents extend their royalties through 2027.

Kyprolis’ potential growth is a hotly debated topic in the biotech space.  Ligand management vigorously points out Kyprolis’ doubling of Progression Free Survival (PFS) versus Velcade in the ENDEAVOR Phase III trial released earlier this year, and Velcade’s $3.1 billion in annual sales.  In fact, it is the release of this data that started Ligand’s 35% stock ramp in earnest this past spring.  Amgen’s same stock performance over the same period?  Up single digits.  Immediately after the data was released Amgen did nothing.  Kyprolis is reported to have serious cardiovascular side effects and may have trouble making serious inroads in earlier lines of treatment against a tried and true product like Velcade expected to go generic in May 2017.  Regardless, management is touting about $1.25 billion in topline revenue for Kyprolis in 2017 (the midpoint of sell side analyst projections).  The low analyst estimate is 40% lower, with step-ups in royalty rates on higher annual revenues; the impact to Ligand’s guidance could be more than that. Finally, Onyx Pharmaceuticals before it was acquired by Amgen was developing an oral formulation of Kyprolis that would cut Ligand out of the picture in the long term.

With long term revenue growth from Promacta and Kyprolis suspect, one turns to Ligand’s pipeline for the approximately $1 billion in equity value over what might be reasonable.


The “Shots on Goal” primarily come from Ligand’s drug delivery technology, Captisol, which it licenses out to other pharmaceutical and bio-tech firms looking to better deliver their drugs intravenously or simply to develop a differentiated delivery mechanism for pre-existing therapies.  In a hot biotech market, where venture capital dollars are flowing freely, start-ups are throwing any new (and many old) molecules that can be thought of against the wall hoping they stick.  Ligand is a direct beneficiary of this.  The CEO likes to tout that they have 120 products under development through their partners (i.e. Captisol customers) who are spending a combined $1.1 billion to research and develop products utilizing Captisol technology.  What the market does not focus on is that the royalty rates from many of these new products are small Duavee or the total drug opportunity is small.


With 120 pipeline products, one cannot hope to go through them all.  But as an example, management is telling the sell side that the peak revenue opportunity (on a 20% royalty rate) for Ligand for CE-Melphalan is >$30 million.  Spectrum, which has over $100MM in cash, had $187MM in 2014 revenues, owns the other 80% of the economics to CE Melphalan, and has two other pipeline products disclosed has a market cap of less than $450 million.  The market for SPPI’s stock does not agree that the revenue opportunity for CE-Melphalan (which should get approved) is $100-$150 million.


A smaller amount of the shots on goal come from Ligand’s own internal research and development effort, which was $12 million in 2014 and expected to be about $13 million in 2015.  Brilliantly, the company focuses on very early stage molecules, which it licenses out to third parties or affiliated companies when it deems appropriate.  Conveniently, this is usually just after Phase I trials before any problems are likely to surface.  Recenlty, LGND has made a big deal about its Glugagon receptor antagonist for Diabetes; however the target is old and mostly been abandoned by other companies and Phase II data will not be available until 2017.

Viking Therapeutics

Ligand carved off several development products, created a new company that is located in the same building and recognized $28 million in the second quarter for gains in the value of the stock on the IPO.  We find it interesting that in a red hot IPO market, Viking's first attempt to go public failed and Ligand purchased a significant amount of the stock in the 2nd attempt to get the deal done.  Its not Enron, but potentially if you cannot partner the products, then why not take them public?


A summary of “near term” potentially significant royalty products is listed below:


Product candidate (Partner)



Potential launch

Economics to LGND

Mgmt peak revenue


CE-Melphalan (Spectrum Pharmaceuticals)


NDA filed (PDUFA 10/23/15)


20% royalty rate >$50mn of milestones


-Captisol-enabled formulation of melphalan that avoids the use of the co-solvent propylene glycol, which is used in currently available injectable versions of melphalan and is associated with renal and cardiac side effects -LGND licensed CE-Melphalan to Spectrum relatively late in development (Phase III)

Delafloxacin IV (Melinta Therapeutics)


Phase III


Undisclosed royalty rate


-Captisol-enabled formulation of the fluoroquinolone antibiotic delafloxacin -Melinta announced positive top-line Phase III results for ABSSSI in Jan-15 -Melinta expects top-line results from a second Phase III study in 2H15

MK-8931 (Merck)

Alzheimer's disease (AD)

Phase III


Undisclosed royalty rate


-BACE (beta-secretase) inhibitor that LGND acquired via its acquisition of Pharmacopeia in 2008 -First BACE inhibitor to demonstrate a reduction in beta amyloid in the CSF of Alzheimer’s patients in a Phase Ib study -MRK is currently running a large Phase III program; Phase II/III for mild-to-moderate AD expected to complete in Jul-17 (primary efficacy endpoint); Phase III for prodromal AD expected to complete in Mar-18 (per

Sparsentan (Retrophin)

Focal segmental glomerulosclerosis (FSGS)

Phase II


9% royalty rate


-Endothelin receptor antagonist (ERA) and angiotensin receptor blocker (ARB) -FSGS is an Orphan indication with significant unmet need -Retrophin expects to complete Phase II enrollment by end-2015

SAGE-547 (SAGE Therapeutics)

Super-refractory status epilepticus (SRSE)

Phase II


Undisclosed royalty rate


-Captisol-enabled formulation of allopregnanolone -SRSE is an Orphan indication with significant unmet need -SAGE reported positive Phase I/II data in Nov-14 -SAGE plans to initiate a pivotal trial by mid-2015

IRAK-4 inhibitors (TG Therapeutics)




6-9.5% royalty rate $207mn of milestones


-Orally available IRAK-4 (Interleukin-1 Receptor Associated Kinase 4) inhibitors developed by LGND -Licensed to TG Therapeutics in Jun-14 -TG plans to start clinical development in oncology in 2H15



($ in mn) 2011 2012 2013A Mar-14A Jun-14A Sep-14A Dec-14A 2014A Mar-15A Jun-15A
Royalties  9.2  14.1  23.6  7.9  5.2  7.5  9.4  30.0  10.3  6.6
Material Sales  12.1  9.4  19.1  5.7  3.5  6.3  13.0  28.5  3.7  10.7
Collaberative R&D & Other  8.7  7.9  6.3  2.4  1.9  1.2  0.6  6.1  0.6  1.1
Total Revenue      49.0  16.0  10.6  15.0  23.0  64.5  14.6  18.4
COGS      5.7  2.5  1.2  1.5  4.0  9.1  1.1  2.6
Gross Profit      43.3  13.5  9.4  13.5  19.0  55.4  13.5  15.8
G&A      18.0  5.1  5.2  6.7  5.6  22.7  6.0  7.2
R&D      9.3  3.1  2.7  3.0  3.2  12.0  4.0  4.0
Other      0.6  0.2  0.1  0.2  0.6  1.1  0.2  0.2
Operating Income      15.4  5.1  1.4  3.5  9.6  19.6  3.3  4.4
Interest and Other      (1.8)  0.2  0.4  -    0.3  1.0  (0.2)  (2.0)
Pre-tax Income      13.6  5.3  1.8  3.5  9.9  20.6  3.1  2.4
Income Tax      0.4  0.1  -    0.1  0.3  0.4  -    0.2
Tax Rate     2.94% 1.00% -2.60% 3.50% 2.80% 2.00% 0.50% 3.00%
Minority Interest      -    -    (0.3)  (0.5)  (0.3)  (1.1)  (0.8)  -  
Net Income      13.2  5.3  2.1  3.9  10.0  21.3  4.0  4.9
Adjusted EPS     $0.64 $0.25 $0.10 $0.18 $0.48 $0.99 $0.19 $0.24
Diluted Shares      20.7  21.2  21.8  21.3  20.8  21.4  20.6  20.6
GAAP EPS     $0.43 $0.10 $0.07 $0.06 $0.34 $0.56 $0.04 $1.45



The main risk in the long term is that one of their products actually does become a blockbuster, and the product is either big enough despite a small royalty, or their royalty is significant enough that one product alone justifies the $500 million to $1 billion over valuation here in our view.

On a day to day basis the main risks are a very volatile stock, with high retail ownership base, and a constant news flow that does not move the needle fundamentally but tends to create significant price changes.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Biotech bubble bursts

Promacta goes generic

Hep C cures shrink market for Promacta significantly

Kyprolis does not make meaningful inroads into earlier lines of MM therapy due to safety issues

Captisol goes generic

Quality of pipleline products (i.e approval rate) ends up much lower than indutry averages.

Revenue growth fails to materialize according to management hype.

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