LIGAND PHARMACEUTICALS INC quarterly report, Q1 FY2018

Business context and reporting period

Ligand Pharmaceuticals Incorporated’s unaudited Form 10-Q covers the quarter ended March 31, 2018. Ligand is a biopharmaceutical technology and licensing company whose revenue primarily comes from royalties on partner products, Captisol material sales, and license and milestone payments. It reported partnerships with more than 95 companies and over 165 licensed programs.

Financial performance

• Revenue comprised $20.8 million of royalties, $4.4 million of material sales, and $30.9 million of license fees, milestones and other revenue. Reported revenue rose 92%, primarily reflecting a $20 million upfront fee for the Roivant license and higher Captisol sales.
• Operating costs and expenses were $19.1 million, nearly unchanged year over year. Operating margin was approximately 66% (calculated as operating income divided by revenue).
• Net income included a $21.1 million unrealized gain on Ligand’s Viking investment. The reported net margin therefore reflects a significant non-operating, non-cash gain.
• At March 31, cash and cash equivalents were $51.0 million; short-term investments were $213.3 million. Management reported $291.9 million in cash, cash equivalents and marketable securities, and working capital of $102.1 million.
• Operating cash flow was $60.8 million; investing activities used $33.6 million and financing activities provided $3.2 million. The operating cash flow reconciliation includes a $32.7 million ASC 606 adoption adjustment, which complicates comparison with the prior period.
• The company had $245 million principal amount of 0.75% convertible notes due August 2019. Their $227.5 million net carrying amount was classified as current because conversion conditions were met; an additional $16.1 million discount was presented in temporary equity. The notes’ estimated fair value was $536.1 million, which is not their carrying value.
• The effective income tax rate was 18.1%, compared with 18.0% in Q1 2017.

Material changes versus the prior comparable period

• Ligand adopted ASC 606 effective January 1, 2018, using the modified-retrospective method. It recorded a $25.4 million net decrease to accumulated deficit at adoption, mainly from accelerating royalty revenue previously recognized in a later quarter. Q1 2018 reported revenue and operating income were each $11.9 million lower than they would have been under the prior standard. Comparative results were not restated.
• Under ASC 606, Q1 2018 royalty revenue was $20.8 million; under the prior standard, Ligand says it would have reported $32.7 million for the quarter. The 2017 comparison remains under the prior standard, so reported royalty figures are not directly comparable.
• Ligand’s ownership in Viking fell to approximately 12.4% following Viking financing. Ligand discontinued equity-method accounting and recorded Viking as an investment measured at fair value, producing the $21.1 million Q1 gain.
• Net cash increased by $30.4 million during the quarter. Ligand repurchased 13,000 shares for $1.9 million, with $191.6 million remaining under its repurchase authorization.

Outlook, risks and unusual items

• Management provided no specific numerical earnings or revenue guidance. It said available funds, operating cash generation and access to financing should be sufficient for anticipated operating, capital and debt-service needs, and expected cash to build as royalties, licenses, milestones and Captisol sales continue.
• Management highlighted Promacta and Kyprolis sales growth and recent licensing and regulatory developments as potential business drivers. Ligand received a $20 million upfront payment from Roivant for LGD-6972 and is eligible for up to $528.8 million in additional milestones plus tiered royalties; these future payments are contingent.
• Revenue depends materially on partner products, particularly Promacta, Kyprolis and Captisol-enabled products. Risks include product setbacks or generic competition, partner termination or payment disputes, regulatory delays, and reliance on a sole-source Captisol supplier.
• CyDex is litigating against Teva over patents related to Captisol and Evomela. Teva’s counterclaims seek findings of non-infringement and patent invalidity. The filing does not provide a clear estimate of any potential financial outcome.
• The convertible notes may require substantial cash settlement and may dilute shareholders. Ligand received notices in March and April 2018 for conversion of $21.8 million principal; the filing also states notices had been received through May 8, 2018.
• Ligand noted that estimates for contingent liabilities, including Crystal development and regulatory milestones estimated as highly probable in 2018–2019, are sensitive to assumptions. It also said its Tax Act accounting remained provisional and subject to refinement during 2018.

Important facts for investors to verify

1. How ASC 606 changes affect royalty timing and the comparability of reported revenue, earnings and operating cash flow.
2. How much of Q1 earnings and the balance-sheet Viking investment value depend on market prices and fair-value estimates.
3. Promacta, Kyprolis and other partner-product sales, royalty rates, and the progression of the Roivant and other licensed programs.
4. The timing, cash-versus-share settlement and dilution implications of the 2019 convertible notes, including conversions after quarter-end.
5. Developments in the Teva patent litigation, Captisol supply availability, and contingent milestone or CVR obligations.