LGND - NASDAQ

Thank you for standing by. Welcome to Ligand Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Melanie Herman. Please go ahead.

Good morning, everyone, and welcome to Ligand's Third 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 gain from the sale of the Pelthos 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, Tavo Espinoza; 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 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 files 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 now turn the call over to Todd.

Thank you, Melanie, and good morning, everyone. Thank you for joining us today to discuss another exciting quarter for Ligand. This quarter was pivotal. Not only did we deliver another quarter of exceptional financial results, we also successfully completed a convertible debt financing, providing us with additional flexibility to pursue strategic opportunities that support our growth initiatives. We are raising our full year guidance for the second time this year. This increase in guidance is a result of the strength of our commercial royalty portfolio, which has continued to outperform our expectations due to products like Merck's Ohtuvayre and CAPVAXIVE as well as Travere's FILSPARI. Additionally, I'm proud of our deal team's ability to create superior risk-adjusted returns through transactions such as strategic merger of Pelthos with Channel Therapeutics that has driven substantial value creation for our shareholders. When we restructured Ligand in 2022 with the spinout of our antibody operations, we set a new strategic direction for Ligand, one grounded in focus and discipline. Since then, we've stayed true to that plan, scaling our deal team to accelerate growth in the late-stage pipeline and build a diversified portfolio of high-margin royalties designed to deliver superior returns. The strategy has played out exactly as envisioned, and I couldn't be more pleased with the progress we've made over the past few years. Royalty revenue grew 47% over the same quarter last year, and adjusted EPS increased 68%, reflecting strong performance across our portfolio. Key drivers contributing to the 47% growth in our royalty portfolio include the commercial launch of

Thank you, Todd. Turning to a portfolio review, I'd like to provide some important updates on Ligand's key portfolio assets. I will go into more details on Merck's Ohtuvayre, Travere's FILSPARI and Palvella's QTORIN rapamycin program on the subsequent slides, but I'd like to briefly discuss updates on 2 of our key pipeline assets, Sanofi's T

Thank you, Lauren. Before getting into the broader overview, I want to start with the deconsolidation of Pelthos since it provides important context for this quarter's results. The spinout became effective on July 1. And from that date, Pelthos has been deconsolidated from Ligand's financials. Historical operating costs through June 30 remain on Ligand's books, but beginning July 1, Pelthos' expenses are now reflected under the newly merged Pelthos Channel Therapeutics entity, operating independently as a publicly traded company under the ticker symbol PTHS with its own Board and management team. Similar to our equity interest in Viking and Palvella Therapeutics, we hold an equity stake in Pelthos, approximately 50% of its outstanding shares. These are carried on our balance sheet as a long-term investment and remain restricted until the 6-month lockup period expires on December 31, 2025. The current estimated fair value of our holdings in Pelthos is about $180 million as of yesterday's close. On July 1, we recognized a $53 million gain related to the Pelthos transaction, reflecting the difference between the $62 million fair value of the consideration received and the $9 million of net assets sold. As noted on our Q2 call, this gain included value associated with the

Thank you, Tavo. We are very pleased with the strong launch momentum across multiple products, including CAPVAXIVE, Ohtuvayre, FILSPARI and

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

I've got a few. First, we've seen both Pelthos and Palvella generate enormous value over the past year. Is there anything you can share on the available opportunities and special situations?

Thank you, Trevor. This is Todd. And I think the opportunity set there is quite robust. Just to kind of frame this, the special opportunities is when one of the kind of the value components is missing, and we need to be more active in the investment in terms of adding team members, restructuring and things of this nature. When we look at any investment, we're looking at kind of those 3 components, company's financial strength or access to capital. And if that's all they need, then we're usually looking at a royalty investment, a royalty monetization or simply providing capital. The other thing is strong management teams. We really need strong counterparties because we want to have as much operating leverage as possible. So we're partnering with people that have the clinical development capabilities and infrastructure, sales and marketing capabilities and infrastructure, manufacturing capabilities and infrastructure. When those -- when that portion of the component breaks down, then we have to get more involved than just providing capital, and we'll bring other complementary management into the mix. And those are restructurings. So there are many opportunities like that out there. And the last component is just general financial strength aside from our financing because we need companies that have strong access to capital, and we have to exist in this ecosystem and equity is a very important component of what we do. Royalty capital needs to be a portion of the company's capital structure, but certainly can't rely solely on it or even predominantly on it. So when these situations arise, if they just need capital, it's usually not a special situation. The Novan situation where we picked up

Got it. That's helpful. And then my second question is a bit of a 2-parter. Can you comment on how the number of investment opportunities have shifted over the past year? Are you seeing accelerating capital demands? And then can you also comment on how your new cash balance changes either the scope or the size of how you're approaching deal making, if at all?

Sure. Yes. So taking the latter first, I think that our diversification strategy right now has us pegged at about, as we've been saying, we don't want to put any more than $50 million into a binary risk situation. and we're seeking out things that have significant evidence of safety and efficacy and on a relative basis are derisked. But still, we are buying risk, and we don't want to put more than $50 million right now into a potential binary risk situation. That said, we view diversification by asset. So in multiple asset situations, we can size up the deals very significantly. And we also, as you know, we will use equity as a tool here. And this makes us a very good partner. I think the Orchestra example, which Paul led for us is a good one. We got what we think is a very good royalty investment in 2 great product development programs there. But we were also able to facilitate or catalyze, if you will, a broader equity round and get the company into a much greater position overall of financial strength. so that we are, in fact, coexisting with significant amounts of equity in that situation at this point. And we believe the company has a great management team and has now much, much better access to capital in the long term as well. So we can be very good partners because we are able to support companies kind of throughout their capital structure. Getting to the overall kind of deal types and demand, I would just say that royalty capital, for lack of a better term, is really 5% or less of the market. And I would say on the development side, significantly less. And that's where capital is most needed. So I think there's a huge opportunity there. There's way more to do than we can do. So the deal flow does move around a little bit, mostly in style, not in amount. as the capital markets change. For example, when an IPO market opens up, a lot of the late-stage private companies want to get public. So they're more inclined to do that so they can provide liquidity for their equity investors. But still, even in those cases with very strong companies and strong equity syndicates, as was the case with Castle Creek, they want and there is a rationale for having royalty capital be a component of your total capital structure.

[Operator Instructions] Your next question comes from the line of Matt Hewitt with Craig-Hallum.

Congrats on the quarter. This is [indiscernible] on for Matt Hewitt. So last week, the FDA announced it wants to speed up the process of personalized gene therapy. How should we think about the Castle Creek investment and general opportunities in gene therapies going forward?

Yes. I think that's one of the points that Lauren was making earlier in the call here is that there are some concerns around some volatility and changes at the FDA. But we're focused, as we've said many times, on high-value assets targeted towards severe clinical need that can be really impactful. And that's kind of the FDA's core reorientation strategy as well. So we think there's great overlap between just our investment strategy in general, investing in products that will make the most amount of difference for patients and what the FDA is orienting around in that regard. And so I can't say that it will have a specific impact on any individual asset or company, although we know that T

And the next question comes from the line of Jayed Momin with Stifel.

This is Jayed on for Annabel. Congrats on the strong quarter. I have 2 questions. One, is there any additional color you can provide for the

Sure. I'll cover the

Great. Thanks, Todd. So sure, thanks for the question. On AT292 or efdoralprin alfa, we're really excited about that asset. We view it as being highly differentiated versus the standard of care. This is a treatment that is designed for patients with alpha-1 antitrypsin deficiency. It was licensed to Inhibrx and then acquired by Sanofi in 2024 for $1.7 billion. So clearly, they have a lot of conviction around the asset as well. What's differentiated about it is that we're seeing a potential movement from plasma-derived to recombinant treatments and also a much more convenient dosing regimen for patients. And then as Todd mentioned in his remarks, we were really encouraged to see the Phase II potentially pivotal data released by Sanofi, which was very positive just last month. So we're really encouraged by the progress of this asset in the very short time since we've closed this transaction. And then with regards to the royalty exposure here, these are actually technology access fees, and that's what we're able to disclose in terms of what we will receive on this asset. So thanks for the question.

And the next question comes from the line of Sahil Dhingra with RBC.

This is Sahil for Doug. My first question is related to the competition. Have you seen any changes in the competitive landscape for royalty assets as it relates to either on the market products or products that are in clinical stage? And then I have a follow-up.

Sure. Yes. Just not yet. I think there will be people interested in this space because it makes so much sense. I think that this is a very, very logical place for royalty capital to focus on, and I thought that for a long time. But there was a lot of inertia around the initial funds because they were funded mostly by large debt allocators like pension funds that were following debt metrics and wanted debt levels of risk. So you really couldn't go into the development side. So I think that will change over time. Our view is that there will be competition. We haven't seen any yet, frankly. We haven't been competitive in very many deals at all. Most of the folks that do development stage clinical investing are much, much larger than we are. That's one component of it. And then the other component is that in excess of $12 billion of royalty capital that is available, the very significant majority of that is focused on commercial stage assets as opposed to development stage assets.

That is helpful. And then my follow-up question is related to the recent approval of Lasix ONYU, the product where you have royalties. How do you see that product versus the existing products in the market, specifically FUROSCIX that is marketed by scPharma, which was recently acquired by another company, MannKind. And we also saw a recent approval of a nasal spray in the same category. So could you speak to what are your thoughts on the product and peak sales potential for that product?

Sure. Thanks for the question. So yes, we were really encouraged to see the full approval for our partner SQ Innovation. And I think the existing product kind of has validated the potential for moving the treatment from the inpatient setting to the outpatient setting. And there's a lot of kind of macro momentum around trying to get patients out of the hospital more quickly kind of across the health care spectrum. And so we're really encouraged to see patients have another treatment option, and we believe that it's differentiated in several ways, including the size of the device and just sort of the convenience for patients and the commercial rollout strategy. So we'll look forward to seeing more. At this point, there's no information regarding guidance or anything like that, but we view this product as a very positive introduction into the marketplace.