LGND - NASDAQ

Good morning. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Ligand's Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. With that, I would like to turn our call over to Melanie Herman, Senior Director of Financial Planning and Analysis. Melanie, you may begin.

Good morning, everyone, and welcome to Ligand's third quarter earnings call. During the call today, we will review the financial results we released before today's market open and offer commentary on our partner pipeline and business development activity, followed by a question and answer session. Our earnings release and a link to today's webcast can be found in the Investor Relations section of our website at ligand.com. With me on the call today are CEO, Todd Davis; Senior Vice President of Investments and Head of Clinical Strategy, Dr. Karen Reeves; and Chief Financial Officer, Tavo Espinoza. This call is being recorded and the audio portion will be archived in the Investors section of our website. On today's call, we will make forward-looking statements regarding our financial results and other matters related to the company's business. Please refer to the Safe Harbor statement related to these forward-looking statements, which are subject to risks and uncertainties. We remind you that actual events or results may differ materially from those projected or discussed and that all forward-looking statements are based upon current available information. Ligand assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Ligand filed with the Securities and Exchange Commission or SEC that can be found on Ligand's website at ligand.com or on the SEC's website at sec.gov. With that, I will turn the call over to Todd.

Thank you, Melanie, and welcome to everyone on the call. I'm delighted to report one of the best quarters of performance in Ligand's history. Slide 3 summarizes our strong business momentum in the third quarter. We grew total revenue by 58% over the prior year and we increased guidance for the second time this year. We are well-capitalized with access to over $300 million in capital to continue to execute on our strategy of acquiring high-value royalty-generating assets. Our growing roster of major commercial programs gives us predictable and growing royalty revenue that is the foundation for our strong financial performance this quarter. Tavo will delve more into our financial performance later on the call. I'm extremely proud of our team and the many accomplishments we've achieved in the last 18 months. We have invested almost 300 million since last fall and have added several programs to our pipeline, including QAR

Thank you, Todd. Today, we'd like to highlight a few key commercial products in our portfolio. Turning to Slide 6, I would like to go into more detail on Travere’s FILSPARI, where we are entitled to a 9% royalty on global net product sales. In September this year, the FDA granted full approval for Travere’s FILSPARI, an endothelin and angiotensin II receptor antagonist to slow kidney function decline in adults with primary immunoglobulin A nephropathy, IgAN, who are at risk for disease progression. This is the first and only non-immunosuppressive therapy approved for the treatment of IgAN, a rare kidney disease that leads to diminished kidney filtering, proteinuria, and progressive kidney function loss. The FDA's full approval for FILSPARI expands the indication to include without qualifiers patients with IgAN at risk for disease progression. Moreover, with full approval, FILSPARI is now indicated to slow kidney function decline from the previous only reduced proteinuria. Importantly, the full approval label details the long-term durable benefit of FILSPARI on proteinuria and kidney function in the two-year, PROTECT study, which compared FILSPARI with Irbesartan and angiotensin 2 receptor blocker. Travere estimates that this broader label means that the addressable FILSPARI IgAN patient population could nearly double. We believe full approval will allow for more detailed physician communications regarding FILSPARI, and its sustained proteinuria reduction as well as long-term kidney function preservation should give physicians greater confidence to prescribe the drug. FILSPARI was also recently recommended as a foundational kidney-targeted therapy for IgAN in the draft Kidney Disease Improving Global Outcomes, KDIGO 2024 guidelines, which is a very important positive development that should drive further adoption of the drug. Outside the US, the European Commission granted conditional marketing authorization for FILSPARI for IgAN in April. During the third quarter, Travere announced that their European commercial partner CSL Vifor launched FILSPARI in Germany and Austria and that Switzerland achieved temporary marketing approval in October. Additionally, Travere reported that they have submitted a supplemental NDA requesting modification to the REMS liver monitoring requirement. We are also excited about initial data shared by Travere showing that FILSPARI induced further proteinuria reduction when used with SGLT2 inhibitors supportive of the flexibility to be used in combination with other medicines. Turning to Slide 7, FILSPARI is also being evaluated in a second important indication, focal segmental glomerulosclerosis or FSGS. FSGS is a rare complex kidney disorder and leading cause of kidney failure affecting children and adults. There are currently no FDA-approved pharmacologic treatments for FSGS. Prompted by the urgency of no approved drugs and the need to develop FSGS treatments with alternative proteinuria-based endpoints, a group known as the PARASOL Initiative was formed as an international collaboration of NextCure and other global kidney foundations, patients, nephrologists, academia, scientists and regulators including the FDA. The PARASOL team reported at a scientific workshop with the FDA, announced these existing global databases for more than 1600 children and adults with FSGS. A key finding was that the reduction of proteinuria over 24 months is associated with the reduction in the risk of kidney failure. The goal of PARASOL is to find quantitative relationships between biomarkers and long-term outcomes to support proteinuria endpoints as a basis for accelerated and traditional approval. On their recent earnings call, Travere stated that they have scheduled a Type C meeting with the FDA to discuss a regulatory pathway for FILSPARI and FSGS and that they are preparing a supplemental NDA. There are estimated to be more than 40,000 FSGS patients in the United States and a similar number in Europe. Approximately half of these would be candidates for FILSPARI. Approval of FILSPARI for FSGS would represent the first FDA-approved treatment, an important milestone for the long-waiting FSGS immunity. Turning to Slide 8, I would like to talk about Merck's CAPVAXIVE vaccine. As Todd noted earlier, Merck launched CAPVAXIVE during the third quarter of 2024. CAPVAXIVE is a 21-valent pneumococcal conjugate vaccine for the prevention of invasive pneumococcal disease and pneumococcal pneumonia in the adult population that was approved by the FDA in June. We are entitled to a low-single-digit royalty on worldwide net sales of CAPVAXIVE. Merck is in the early stages of the commercial launch. They mentioned on their Q3 earnings call that the CAPVAXIVE launch is off to an encouraging start and that they expect to get a majority share of the market over time. The other recent and exciting development with CAPVAXIVE is that in October, the CDC's ACIP voted to expand the age-based recommendations for CAPVAXIVE to 50 years of age and older from the previous 65 and older. This will significantly expand the patient population for this vaccine and should accelerate the adoption of CAPVAXIVE over time. Turning to Slide 9, let's look at Verona's Ohtuvayre which was granted FDA approval in June. Ohtuvayre is a dual inhibitor of PD3 and PD4 enzymes that combines bronchodilator and non-steroidal anti-inflammatory effects for the broad indication of maintenance of chronic obstructive pulmonary disease, COPD. Ohtuvayre is the first inhaled product with a novel mechanism of action for the maintenance treatment of COPD in more than 20 years and we believe it has blockbuster commercial potential. We are entitled for a royalty rate of approximately 3% on worldwide sales of Ohtuvayre. From the perspective of product reimbursement, following the end of third quarter, Verona received notification from the Centers for Medicare and Medicaid Services, CMS that its permanent product-specific J-code for Ohtuvayre has been accepted and will be effective January 1, 2025. There is also significant pipeline value in Ohtuvayre to be realized. Verona’s development partner in Greater China Nuance Pharma continues to make great progress and completed enrollment in its pivotal Phase 3 clinical trial evaluating Ohtuvayre for the maintenance treatment of COPD in China. Results from that trial are expected in 2025. At the recent CHEST annual meeting in late October, there were presentations and posters on analyses from Verona's successful Phase 3 ENHANCE studies with Ohtuvayre for the treatment of COPD. The analyses summarize the efficacy and safety of Ohtuvayre in subgroups of COPD patients, including data supporting improvements in lung function, symptoms, and quality of life as well as reductions in the rate of exacerbations regardless of COPD severity, smoking status, and whether or not the patients had chronic bronchitis. Furthermore, an analysis of Ohtuvayre’s impact on reducing exacerbation rates and COPD-related healthcare resource utilization over 48 weeks showed Ohtuvayre decreased the exacerbation rate and healthcare utilization in patients with moderate to severe COPD. Therefore, Ohtuvayre may help decrease the burden of disease for patients and the healthcare system, an estimated cost of $24 billion annually. With that, I will now turn the call over to Tavo for the financial update.

Thanks, Karen. First, I want to highlight that I will be discussing non-GAAP results, which exclude certain items, including stock-based compensation, amortization of intangible assets, amortization or impairment of financial assets or derivatives, and expenses incurred to incubate the Pelthos business amongst others. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release available on our website. We believe that the adjusted measures can assist investors in analyzing and assessing our past and future core operating performance. The third quarter of 2024 delivered exceptional financial results with continued growth in royalty revenue and an increasingly positive outlook for the year. This strength allowed us to revise our guidance upward for the second time this year, underscoring our confidence and sustained momentum. Total revenues for the third quarter reached $51.8 million representing a 58% increase over Q3, 2023. This growth was driven by 33% increase in royalty revenue, which reached $31.7 million up from $23.9 million in the same period last year. We reported adjusted earnings per share of $1.84 which is an 80% increase over Q3 2023, and we ended the quarter with a strong balance sheet with almost $350 million in available investable capital when you consider our cash and investments in our credit facility. Turning to Slide 11, key drivers in royalty revenue growth were the addition of QAR

[Operator Instructions] Our first question from today comes from the line of Matt Hewitt with Craig Hallum.

Hey. Congratulations on a strong quarter, guys. Go ahead. Can you hear me okay?

Hey, Matt. Yes, we can hear you.

Great. Maybe first question is you still have a very strong balance sheet, and I'm just curious what the pipeline looks like. Do the election results this week have any impact on that, on how you think about the market from an investment standpoint? Any update basically on your thoughts regarding adding more shots on goal?

Yes, I think the pipeline remains very robust. There's still very high demand for capital regardless of the election results one way or the other. And the pharmaceutical industry performance in terms of revenue is generally uncorrelated with market volatility even around elections. That's kind of one of the beauties of having royalties in pharmaceutical products is it's non-correlated with capital markets volatility typically. So the demand for capital continues on that, and we continue to look at each asset that's presented to us in the form of a deal opportunity and analyze those the best we can and we're constantly calling that pipeline to pursue what we think are the very best opportunities and that activity is now pretty continuously at a very high level, and I think the business development machine is pretty well-honed here at this point.

Our next question is from the line of Douglas Miehm with RBC Capital Markets. Your line is live.

Yes. Thank you. My first question just has to do -- delve a little deeper into those 25 potential investments that you are looking at. When you think about whether they're well- the size number one, is there a range that you can provide, what's the mix of let's say royalties versus structured deals versus any acquisitions at this point?

Okay. That's a great question, Doug. I think that about half of what we're looking at right now is what we call the project finance. That's often also called synthetic royalties. That's where you're providing capital to small and mid-cap companies that need capital to develop their assets and in return to that, you're creating a royalty as a form of financing. Those deals are really creative. They're not made, they're not shopped. You proactively are identifying companies and products you're interested in, approaching them, and making those deals happen as an alternative form of capital that's available to them. On the M&A front, we continue to scour opportunities on that front as well. That's a little chunkier. We've got one of those we're looking at now, amongst the many deals we're looking at. And on the passive royalty front, we are actively engaged in academic and venture community as well as the corporate community looking at royalties that are currently held in the form of license agreements by those institutions and that's probably another third of our pipeline that we're looking at any given time. Oh, yes, excuse me, and the size, Doug, I didn't answer that. But right now at our current size to maintain kind of our diversity limits that we're trying to achieve, we're targeting 30 to 40 or so per product if it's on the development side. If something is significantly lower risk or commercial, for example, we will size up and we view diversification by product, not necessarily investment. So if we're doing a basket of products, those deals may be sized up too. But at our current size, we think kind of $30 million to $40 million per asset is appropriate for us, and that's how we're structuring most of the deals in that range. As we grow over time, we will inevitably kind of size that up a little bit on a proportionate basis.

Great. Okay. The follow-up question has to do with FILSPARI, which is going to be an important backbone of the company going forward. And I was just wondering if you'd be able to talk a little bit about how you see that competitive environment. I know you touched on –

Yes. [Technical Difficulty]

Bear with me one second.

Go ahead with your question, sorry.

Yes. I just wanted to expand a little bit on the competitive environment you see for Travere FILSPARI. It seems to be quite attractive, but maybe you could provide a bit more context. Thank you.

Sure. Why don't we have Karen address this, I think, in IgAN as a monotherapy in combination and then, of course, in FSGS where there's currently no other treatment.

Yes. Thank you for the question. We believe that that FILSPARI will be in foundational treatment for the treatment of IgAN and the guidelines that are -- and the draft guidelines have recently come out, really talk about hitting two aspects of this disease. So it is going to be important that FILSPARI can be seen as a primary treatment and in addition, along with other concomitant therapies. And recently Travere actually showed some very good data, which I mentioned, regarding SGLT-2 inhibitors that they are doing a study of using both of them and you can see that when you add FILSPARI, the reduction in proteinuria goes up, which is good news, because the guidelines now are saying you should be lowering your proteinuria at the best mark would be less than 0.3 grams per day. So that is good news. In addition, some initial data was shown using FILSPARI as the primary drug in patients who have no treatment, and that also is showing excellent results. So we're confident that FILSPARI is going to really only grow in what is able to do in IgAN. And in addition, we just reported on the outcome from the PARASOL initiative and FSGS. This is a huge area of unmet need, there's never been an FDA-approved drug for this illness. And Travere is going to the FDA to discuss what is needed now to submit an F&DA for that drug now that the PARASOL initiative has come up with proteinuria-related endpoint.

Thank you for your questions. Our next question comes from the line of Dr. Joseph Pantginis with Wainwright. Your line is live.

First, a couple of logistical questions, if you don't mind. So, Todd, when you look at obviously the number of opportunities that you're currently looking at, how do we view that with regard to your ability to look at even more? And it really correlates to my question of is Ligand rightsized right now?

I think, we're -- if I understand your question, Joe, when you say right-sized, do you mean in terms of access to capital relative to our current market cap, or how are you thinking about that?

Inside the employee base and the number of people to look at…

Oh, yeah. Yeah, I think, we've made a number of senior hires over the past a year and a half as we put this strategy in place. We have this year kind of tweaked that with executives at the Vice President level that come in with significant skill sets to back that up as well and I think we're pretty set on the team and that's kind of one of the things about this business model is that it offers very high operating leverage on the investment side and we don't really need to add a lot to our team at this point, even if the size of the company grows dramatically over the next 2 to 4 years. So, we're just under 40 employees now. I'd be surprised that we're over 50 employees 3 years from now. That's just the way this business model works and we like it that way.

That's very helpful. Thanks. And then just a quick logistical question before I ask my usual question is, what is the status, don't think you'd really be doing it right now, but what's the status of your buyback program?

Well-, we just have that in place as a matter of general, I'd say, corporate hygiene. If there are any significant dislocations in the market, they have nothing to do with what we view as the inherent value of our business. We may take advantage of that. We have no immediate plans to use it right now.

No, that's helpful. And then as I alluded to my usual question, focuses on Captisol. It's typical volatility that you alluded to earlier with regard to the timing of payments and customer orders. So I guess the concept I want to look at is the mix here. Obviously, you have growing revenues from Kyprolis, I'm sorry, from Captisol used products or Captisol formulated products. So I guess how should we view the mix right now and view it going forward with regard to, say, research requests versus, say, early clinical study requests?

Yeah. Joe, Todd here. Thanks for the question. It's a similar answer. Nothing has really changed here. It's in the 80/20 rule, we get 80% of our revenue from 20% of our customer base to commercial customers and then a long tail of smaller research clinical use only customers and that tail we're encouraged by the activity there. We expect that some of those smaller customers will be successful in their development and eventually become some of the join the roster of the larger commercial. But the business is doing well-, and like I implied with our updated guidance, it's exceeded our guidance for the year. So the business continues to perform.

Thank you for your question. Our next question is from the line of Dr. Balaji Prasad with Barclays. Your line is live.

Good morning. This is Shao on for Balaji. Thanks for taking our question. And just a follow-up question on FILSPARI. So as Paver is preparing supplemental NDA for FSGS, wondering if FSGS is already factored into the 18% CAGR that's like you highlighted earlier, all the only like the current indication, IgAN is already factored in? Thank you.

Yeah. No, no. This is Tavo. Good question. So when we came out with our long term outlook at Investor Day last December 23, we had significantly discounted very small contribution allocated to the pipeline from FSGS. We will update our view here coming up in December 10.

Thank you for your question. Our next question comes from the line of Trevor Allred with Oppenheimer. Your line is live.

Can you guys talk about some of the recent changes with the Agenus royalty assets? Have you had any interactions with them? And do you have any expectations for those royalties going forward?

Yes. I think for the Agenus acquisition overall, I think that they did have some programs return. The BMS was a bit of a surprise to us. As you know, just for the general audience here, there were seven assets overall. The main asset underlying the deal is Agenus (indiscernible). Our investment thesis around that is primarily driven by the (indiscernible) asset. And that particular asset, we reviewed the 6-month data in an ongoing study that they have underway, which we viewed as very promising. And in the next few months, there should be 12-month data available, which is what we are really focused on. And if that is consistent with the 6-month data, I think we're in good shape and Agenus is in good shape in that regard. So that's what's kind of driving our thinking around the Agenus deal, and we will wait for that data to unfold.

Okay. And can you also talk about some of the things that give you confidence on the commercial launch for Pelthos in first quarter 2025?

Yes. We would be happy to. So Pelthos is a company we formed to commercialize

Thank you for your question. [Operator Instructions] Our next call is from the line of

Great. Thank you and good morning. So we like to look at M&A to get a sense of where things are going and I took a quick look at some of the over $1 billion transactions that have taken place and they've been in neuro cancer and dermatology. Do you look at these at all to get a sense of kind of where the next trend will be in terms of good investments and where products may have a good end market?

We do, but our primary driver, because we're very product focused is high unmet clinical need. And so even on the commercial side when we come across commercial products, we're looking at things like QAR

Okay. Yes. Thanks, Todd. And a couple of questions on Captisol. I think that the company had indicated that there might be some lifecycle management-type of efforts that could take place. And then secondly, what is the competitive environment like for a solubility and instability agent out there? And do you guys control, I guess, I'm just wondering, how much of the market do you have a handle on, there and who are some of the others that might come up? When somebody's looking for an agent like that?

Sure. Yeah. There remains very high demand for solubility, enhancing molecules or excipients that can enhance the solubility of the chemical entities that are active. Solubility and permeability are the two biggest drug delivery issues. Solubility being the third, and Captisol itself has probably the strongest position amongst the solubilizers. There are other ways to do that, obviously with nano crystals and things like that. So there's diff there are different technological approaches. So why is Captisol, why does it have 16 approved products historically, that's probably, I don't know because I haven't done the historical analysis. That's probably the most prolific single drug delivery platform in history to have 16 approved products on one. Maybe there's a gel cap technology or something that's similar but in terms of solubilization, that's pretty dominant. And the reason why it's dominant is because it works so well-, it works broadly and it's very easy to work with. So our customers can basically get samples from us. Any chemist in the pharmaceutical industry can work with it very easily. If it works on their molecules, they come back to us and they take a license. So we make it easy to work with, and it solves a lot of the solubility problems that our customers face with the chemicals they're trying to formulate. So I hope that helps answer that question.

Thank you for your question. And with that, ladies and gentlemen, that will conclude our Q&A session for today. And to wrap up, I'd like to turn the call back over to Todd.