LGND - NASDAQ

Good day, and welcome to the Ligand Second Quarter 2025 Earnings Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Melanie Herman, Executive Director of Investor Relations, to begin the conference. Melanie, over to you.

Good morning, everyone, and welcome to Ligand's Second Quarter 2025 Earnings Call. During the call today, we will review the financial results we released earlier today and provide commentary on our partner pipeline and business development activity, followed by a question-and-answer session. Before we get started, I would like to point out that we will be discussing non-GAAP results, which excludes certain items such as stock-based compensation, amortization of intangible assets, amortization or impairment of financial assets, losses from derivative assets and expenses incurred to incubate the Pulpo business, amongst others. I encourage you to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, which can be found in today's release available on our website. We believe these adjusted measures provide valuable insight into our core operating performance, both historically and moving forward. 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; Chief Financial Officer, Octavio Espinoza; SVP of Investments and Business Development, Paul Hadden; and Vice President of Strategic Planning and Investment Analytics, Lauren Hay. 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 our 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 files with the Securities and Exchange Commission, or SEC, that can be found on Ligand's website at ligand.com or the SEC's website at sec.gov. With that, I will now turn the call over to Todd.

Thank you, Melanie, and good morning, everyone. Thank you for joining us today. When I took on the role of CEO in the fourth quarter of 2022, we set out a new vision for Ligand. That vision was ambitious, and it required growth as an organization. Today, I am pleased to confirm that our new strategy at Ligand is working and producing tangible outcomes. Our second quarter results reflect strong momentum across our expanding royalty portfolio, evidenced by an increase to our 2025 financial guidance, which Octavio will cover in detail later on the call. Slide 3 highlights our financial and portfolio achievements in the second quarter. Royalty revenue grew 57% over the same quarter last year, and adjusted EPS increased 14%, reflecting strong performance across our portfolio. We ended the quarter with a strong balance sheet, including approximately $450 million in deployable capital, factoring in our undrawn credit facility. I am very proud of our team's execution and our continued commitment to disciplined capital investment. During the quarter, we completed the strategic merger of Pelthos with Channel Therapeutics, which I will go into more detail on in a few slides. As part of a recent $40 million investment commitment, we partnered with Medtronic and Orchestra BioMed to support development of 2 promising cardiovascular therapies. AVIM therapy and Virtu SAB therapy. Notably, Orchestra BioMed has received 4 breakthrough device designations from the FDA across these 2 programs, recognition that underscores the potential of these innovations to address significant unmet needs in cardiovascular care. Paul Hadden will provide additional detail on these investments later in the call. Finally, we are very pleased with Merck's recent announcement of its planned $10 billion acquisition of Verona, and we are optimistic that Merck's global scale and commercial capabilities will further accelerate the launch trajectory of [indiscernible], where we receive a 3% royalty on worldwide net sales. We would like to congratulate Verona on all that they have accomplished to bring this novel product to market and one of the most important advances in the treatment of COPD in history. Moving to the next slide, I'd like to provide some important updates on Ligand's portfolio. Verona's partner in China, Nuance Pharma, announced positive data and completion of its Phase III trial in China. Merck's entry into this arena should further fortify the global commercialization of the asset and continued U.S. launch, which has been the strongest COPD launch in history. Stating the obvious, one of the benefits of royalty investing is as the equity investors in Verona are cashed out in the acquisition, we as royalty investors continue to participate in what we hope will be the outperformance of O2vir as Merck continues to launch this product globally. Turning to Filspari. There are a few upcoming catalysts, including the REMS modification PDUFA date of August 28, which will determine if IgA nephropathy patients can change from monthly to quarterly REMS monitoring. In Filspari's second indication, FSGS, there is an upcoming advisory committee meeting in the second half of 2025 to discuss the application. The FDA has assigned a PDUFA date of January 13, 2026, to the FSGS indication. This approval has the potential to double the sales potential for this product. Record ID reported sales of Qarziba grew 12% in the first half of 2025, reaching EUR 78.5 million. Ligand earns a high teens royalty on Qarziba sales. In addition, the FDA granted Recordati orphan drug designation for Qarziba in Ewing sarcoma and a clinical trial was initiated in the second quarter to evaluate safety, dosing and early signs of efficacy. Thus far, Qarziba is significantly outperforming our initial underwriting assumptions from when we purchased this just 1 year ago. In future development stage catalysts, Agenus announced that they've aligned with the FDA on their Phase III trial design and have stated publicly that they anticipate they will initiate their Phase III study in the fourth quarter of 2025. They also entered into a partnership with

Thank you, Todd. In the first half of 2025, we continue to execute on our strategy of partnering with companies, both public and private, to provide creative nondilutive capital solutions. In the first half of this year, we saw record-setting origination activity. We remain focused and disciplined, deprioritizing investments that lack sufficient return potential or strategic portfolio fit. We currently have approximately 25 active investment opportunities under review, representing an even balance between accretive and pre-approval transactions. Since the start of the year, we closed 4 new investments, including Castle Creek, the final O2vir vendor buyout, the merger of Pelthos Therapeutics and Channel Therapeutics and our most recent investment with Orchestra Biomed. I would note that all 4 investments exemplified our flexible investment strategy, including royalty monetization, project finance and special situations investments. I'd like to highlight our most recent investment with Orchestra Biomed, a NASDAQ-listed company. Last week, we announced a $40 million tranche investment in 2 of Orchestra's innovative FDA breakthrough designated medical device programs, AVIM therapy and Virtu Sirolimus angioinfusion Balloon, or SAB for short. Medtronic, Orchestra's development and commercial partner for the AVIM program, also committed $31 million in new capital. Orchestra also raised $40 million in the public offering, bringing the total committed capital to $111 million, one of the largest medical device capital raises this year. Our investment helps fund the development of these 2 breakthrough technologies, which are in late-stage development. The first program, AVM Therapy, is partnered with cardiac pacemaker leader, Medtronic and has already begun its pivotal trial. It was granted FDA breakthrough designation just this past April. AVIM therapy, a simple firmware upgrade is designed specifically to leverage the pacemaker's existing capabilities to manage blood pressure without additional hardware changes. As a result, AVIM therapy occupies a specialized niche in treating hypertension in patients already indicated for a pacemaker. The second program, VirtuSAB, is partnered with Japanese medical technology company, Terumo, and is nearing pivotal study initiation. As mentioned, it too received FDA breakthrough designation. Virtu is an innovative first-in-class medical device designed for the treatment of arterial diseases, particularly coronary in-stent restenosis. It represents a significant advancement over traditional drug-coated balloons and stents because it does not rely on a surface drug coating. Instead, Virtu uses a proprietary non-coated MicroPorce balloon to deliver the drug. Our $40 million investment consists of a $20 million payment at closing, an additional $15 million to be funded at the 9-month anniversary from closing, and we also invested an additional $5 million to purchase shares of Orchestra common stock. In exchange, we will receive a high teens royalty on the first $100 million of Orchestra revenues annually from these 2 licenses and also a mid-single-digit royalty on Orchestra's license revenues greater than $100 million per year. Our strategic collaboration with Orchestra reflects our commitment to investing in innovative, derisked late-stage therapies. This partnership expands our diversified portfolio of potential royalty-generating assets into the medical device space and moves us closer to our goal of delivering innovative therapies to patients. With that, I'll turn the call over to Octavio.

Thank you, Paul. I'm pleased to report another strong quarter of financial performance. Total revenue for Q2 '25 grew 15% year-over- year to $47.6 million. Adjusted EPS rose 14% to $1.60 per share, reflecting solid execution and continued operating leverage. Royalty revenue was robust, increasing 57% from the prior year to $36.4 million, underscoring the strength and momentum of our partnered programs. We ended the quarter with $245 million in cash and investments. When factoring in our undrawn credit facility, we have approximately $450 million in deployable capital to support our growth initiatives. Based on our performance year-to-date and the impact of the Pelthos transaction, we raised full year 2025 revenue and adjusted EPS guidance. I'll walk through the details later in the presentation. Moving to the next slide. Key drivers of royalty revenue growth include strong performance from Varonis' Ohtuvayre, Travere, Filspari, Recordati's QAR

Thank you, Tavo. Last year, we saw an unprecedented number of new approvals across our portfolio, including

[Operator Instructions] And your first question comes from the line of Trevor Allred of Oppenheimer.

What can you tell us about your expectations for the Pelthos launch? Are these most severe kids seen at pediatric dermatologists? Can you say anything about your prior market research that might suggest initial market demand?

Yes. Thanks for the question, Trevor. And we're very optimistic about the launch here around

And can you also share some expectations for what you think the Filspari removal might do to improve uptake? Have you guys done any internal diligence there to see what the potential step-up in revenue could be?

Yes. Trevor, this is Lauren. Thanks for the question. I think it's a very timely one. So Travere has not shared a quantitative estimate for their expectations for increased uptake, but I can give you sort of a directional sense for where we see this headed. As we know, Filspari is really expanding its usage in earlier-stage patients. As a reminder, when Filspari was under accelerated approval, the treatment could only be used in 30% of IgAN patients due to label restrictions that limited its use to patients with proteinuria over 1.5 grams per gram. And with full approval, Filspari is now kind of moving into the full spectrum of IgAN patient severity and kind of moving into earlier lines of treatment. So Travere has recently shared that over half of patients who are now starting Filspari have proteinuria in the less than 1 gram per gram -- less than 1.5 grams per gram segment. So it is moving earlier in the treatment paradigm. And with that, what we see is that the REMS modification should help to remove a barrier to utilization in that kind of earlier-stage patient segment. The quarterly monitoring aligns pretty well with the kind of routine monitoring frequency of visits to the office, anyway. So we're optimistic about the opportunity in this earlier stage segment that sort of aligns with the natural progression of usage of Filspari with the full approval.

And your next question comes from the line of Doug Meem from RBC Capital Markets.

[indiscernible], when you think about the guidance that you provided, where it looks like at the middle of the range, we're up both around 12% for revenue and EPS. Can you tell us why we're not seeing, perhaps maybe a little bit more operating leverage in the model? The products are doing better than anticipated. And I'm just curious why this isn't falling more down to the bottom line and to cash flow.

Yes. Thanks, Doug. Appreciate the question. A couple of factors driving that dynamic, if you will. One, on the operating expense side, we're just being a bit cautious as we spin off the Pelthos operation. On top of that, we are looking to make some investments in our business development function given the richness of the funnel there, if you will. Separately and probably more impactful here are the tax rate. We're getting more revenue coming in from foreign operations in the U.K. for O2ir. That's a U.K. legal entity that we have to pay taxes into that country, and then also for the Pyiron acquisition, which is an Austrian company. The tax rate that we pay into Austria is also a little bit higher than our statutory rate, and the mix of revenue there has come in a little bit higher, given the outperformance of those 2 products. And then separately, the share count, as our stock price goes up, our forecasted dilution as a result has moved up. And so that's also causing a little bit of a drag towards the bottom line.

Okay. That's really helpful. And then, Todd, the O2vir situation is very attractive, obviously. But we have seen some cases in this market of royalty ownership where we've seen an acquisition by a big pharma company that the big pharma company has also approached the royalty holder. Have you been approached by Merck to buy back the royalty on this asset?

The answer to that is no. And we tend to be long-term royalty holders here. We don't really have an intention of selling any of our royalties at this point. So it's just not core to our strategy.

And your next question comes from the line of Matt Hewitt of Craig-Hallum.

Congratulations on the strong quarter. Maybe first up, a little more higher level, but given all of the changes and nuances coming out of Washington, how is that impacting your pipeline? How are you looking at opportunities given the constant news flow regarding various products and markets?

Well, I think our view on that, Matt, is very macro in that there's been descending price pressure on the pharmaceutical industry that's been pretty heavy for the last 15 years, and we expect that to continue. And maybe over the next 10 years, we'll even get to kind of pricing parity with Europe and other markets here in the U.S. market. And that's just our long-term view. That's what we put in our models. And the best position to be in, in that kind of environment, regardless of how it comes down specifically, is to be investing in drugs that really deliver very high clinical value and solve big problems because ultimately, that puts you in the best position to negotiate with payers. And so that's one of the reasons we're very focused on investing in things like Palvella's products, the Pelthos product. Both of those are 0 to 1, 0 treatments, first treatments in categories. We like those kinds of opportunities. And that's really the best position you can be in, in what will be a challenging payer market for the entire industry going forward.

Got it. And then maybe a question for Octavio. But with the increase in contract guidance here for the rest of the year, roughly $15 million, how should we be thinking about the cadence? It sounds like the bulk of that will hit in Q3 with the Pelthos transaction, but how should we split up that $15 million of incremental revenues there?

Yes, Matt, what you can expect in Q3 is that out-license component, that's the main driver of the increase to that category or that line item, if you will, in the guidance. We also earned a $5 million milestone on the commercial launch of

And your next question comes from the line of Larry Solow of CJS Securities.

Joined a little late. Just a follow-up on the guidance question. In terms of the bottom-line increase, are you changing anything in terms of operating expenses? I know you guys have been investing more in the business development team. But it looks like just if I do the math, actually, the revenue increase, if I kind of flow that through the normalized tax rate, it should be about $0.75. So it looks like maybe that's all pretty much flowing to the bottom line, right? It doesn't look like there's much change on the expense assumption. Is that fair?

There some incremental increase in operating expenses. But yes, it's just incremental. And then there's also some movement, as I mentioned earlier, some movement on the shares outstanding that impacts the EPS. But in terms of just the net income, it's going to be the operating expenses and the tax rate that's moving up a little bit.

Got you. And on the

Yes. Now, I think launches are hard, even though we're very confident in this team. So we have pretty small expectations for this year as they're just getting out of the blocks, but view it as a very good long-term contributor, Larry, as you pointed out.

Got you. And just lastly, just on M&A and business development. Obviously, you guys have been super active in the last couple of years, and kudos to you on that, and an interesting recent deal as well. Just how is the pipeline looking? Obviously, your balance sheet remains really strong. Just curious if lots of opportunities in front of you. Any thoughts on that?

Yes. Thanks for the question, Larry. Pipeline looks strong. I think we've been pretty consistent this entire year, that's been robust. The mix of both accretive and pre-approval opportunities, and the team remains hard at work. So thanks for the compliment, but we definitely are working through that pipeline and looking to bring in attractive assets for the balance of the year.

And your next question comes from the line of John Vandermosten of

And I appreciate all the detail on the movement there in the income statement coming up in the future. I wanted to ask a question about Merck's ownership of Verona and how it will add to O2vir's potential? And specifically, what can they do to expand the market given their dominance is one of the largest pharmas?

Well, I think what we're really seeing there is kind of their global capabilities. Obviously, Verona was a smaller company. I think in general, the expectations around a smaller company's ability to execute globally is obviously a slower rollout. And in the hands of Merck, I think as well as Verona did, by the way, we think they did an amazing/outstanding job. Globally, Merck is very strong, and so we expect the rollout globally to accelerate in their hands.

Okay. And a question on Orchestra BioMed. Is it, I guess, assumed that Medtronic is going to provide the commercialization pathway for their pipeline therapies?

So yes, correct. Medtronic is the commercial partner on the AVIM technology. And then Terumo is a commercial partner on the Virtu SAB balloon. So, there's 2 partners involved there.