Ligand Pharmaceuticals Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Ligand is a biopharmaceutical company that earns royalties, Captisol material sales, and license and milestone revenue through a portfolio of partner programs. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $43.5 million | $56.2 million |
| Operating costs and expenses | $29.7 million | $19.1 million |
| Operating income | $826.5 million | $37.0 million |
| Net income | $666.3 million | $45.3 million |
| Diluted earnings per share | $31.32 | $1.83 |
| Cash from operations | $45.3 million | $60.8 million |
Q1 2019 operating income and net income were dominated by the $812.8 million gain from the Promacta license sale; the reported results therefore do not reflect recurring operating performance. Revenue declined 23%. Royalties fell 6% to $19.5 million, material sales increased 104% to $9.0 million, and license, milestone and other revenue declined 52% to $15.0 million. The filing attributes the revenue decline mainly to a $20 million Roivant GRA license payment in Q1 2018 and the Promacta sale in Q1 2019, partly offset by higher Captisol sales.
Operating expenses rose 56%, driven by higher material costs, R&D spending and G&A. R&D and G&A increases included timing, the Vernalis acquisition and higher headcount-related costs. The effective tax rate was 20.9%, versus 18.1% a year earlier.
At March 31, cash and cash equivalents were $105.1 million and short-term investments were $1.324 billion; Ligand also reported a $72.7 million investment in Viking. Management reported cash, cash equivalents and marketable securities, including its Viking investment, of approximately $1.5 billion. Total liabilities were $834.0 million. Convertible notes had $777.3 million aggregate principal outstanding: $27.3 million due in 2019 and $750.0 million due in 2023. Management expected to pay the 2019 Notes in cash at maturity and said available liquidity and operating cash flow should fund near-term needs for at least 12 months.
Investing cash flow was $94.8 million, including $812.8 million of Promacta sale proceeds and substantial purchases of short-term investments. Financing cash flow was negative $152.6 million, including $151.6 million of share repurchases. Ligand repurchased approximately 1.24 million shares and had $124 million remaining under its repurchase authorization at quarter-end.
Material changes and notable items
- Ligand sold all rights to Promacta to Royalty Pharma for $827 million cash, closing March 6, 2019. The company recognized $14.2 million of pre-sale royalty revenue and a $812.8 million gain; it will receive no Promacta royalties after the sale.
- Kyprolis royalty revenue increased to $3.8 million from $3.3 million. Amgen subsequently reported Q1 2019 Kyprolis sales of $245 million, up 10% year over year.
- The fair-value gain from Viking was $17.3 million, down from $21.1 million. Higher interest income reflected the larger investment balance, while interest expense increased primarily due to the 2023 Notes issuance.
- Ligand adopted the new lease accounting standard on January 1, 2019, recording approximately $5.2 million of right-of-use assets and $5.9 million of lease liabilities, with no material income-statement impact.
- After quarter-end, Ligand paid Novan $12 million under a development funding and royalty agreement. The arrangement provides for up to $20 million in milestones and tiered royalties of 7% to 10% on specified future North American sales; no additional development funding is required.
Outlook, risks and contingencies
No formal financial guidance is provided in the filing. Management highlighted its diversified portfolio and more than 200 partnered programs, but future revenue depends on partner development, regulatory approval and product commercialization. It specifically noted uncertainty around Kyprolis, Captisol and other product revenues. Metavant deferred its planned RVT-1502 clinical proof-of-concept trial after the FDA requested additional nonclinical studies; the partner was evaluating next steps. Ligand expected top-line data from its internal Captisol-enabled Iohexol Phase 1 trial in Q3 2019.
Key risks include investment-portfolio market and credit losses, dependence on partner products and potential generic competition. Litigation includes a Delaware action challenging a supplemental indenture, with Ligand’s motion to dismiss pending, and a Teva patent dispute concerning Evomela; a trial in the latter matter could begin in January 2020. Ligand said there were no material changes to its previously disclosed risk factors other than the added investment-risk and product-revenue disclosures. It reported no off-balance-sheet arrangements and no impairment indicators for goodwill or long-lived assets during the quarter.
Important facts for investors to verify
- How recurring revenue, earnings and cash generation are expected to change after the loss of Promacta royalties.
- The use, duration and investment risks of the approximately $1.5 billion liquidity position, and the timing and cash impact of the 2019 Notes repayment.
- Whether Captisol sales and royalties from Kyprolis, Evomela and other partner products can offset the Promacta revenue exit.
- Progress and potential economics of partner programs, including the delayed RVT-1502 trial and the post-quarter Novan agreement.
- Developments in the indenture and Teva litigation, and any resulting financial exposure.