Ligand Pharmaceuticals Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company develops and licenses pharmaceutical technologies and earns royalties, license and milestone revenue, and Captisol material sales.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $45.7 | $33.4 | $191.9 | $90.6 |
| Income from operations | $23.4 | $16.5 | $130.6 | $39.7 |
| Net income | $67.4 | $8.4 | $185.8 | $19.6 |
| Diluted earnings per share | $2.80 | $0.36 | $7.61 | $0.84 |
| Operating cash flow | — | $161.5 | $57.3 |
Q3 operating margin was approximately 51% of revenue, compared with 49% a year earlier; nine-month operating margin was approximately 68%, compared with 44%. The nine-month comparison reflects unusually large 2018 license fees, including significant upfront platform and licensing payments.
- Revenue mix: Q3 royalties were $36.1 million, Captisol material sales $7.0 million, and license fees, milestones and other revenue $2.5 million. Nine-month amounts were $88.3 million, $19.0 million and $84.5 million, respectively.
- Cash and investments: At September 30, cash and cash equivalents were $115.6 million, restricted cash $43.6 million, short-term investments $891.1 million and Viking investment $105.2 million. The company reported these resources, including marketable securities and Viking investment, at approximately $1.2 billion, and working capital of $951.9 million.
- Debt: Principal outstanding was $223.2 million on 0.75% convertible notes due 2019 and $750.0 million on 0.75% convertible notes due 2023. Net carrying amounts were $213.1 million and $602.8 million, respectively. The 2019 notes were classified as current; the 2023 notes as long-term.
- Cash flows and financing: Nine-month investing cash flow was negative $698.6 million, largely reflecting net purchases of short-term investments; financing cash flow was positive $675.7 million, principally reflecting the 2023 notes issuance and related transactions. The company repurchased $52.7 million of shares during the period.
Changes versus prior comparable periods
- Q3 revenue rose 37% and nine-month revenue rose 112%. Q3 royalty growth was driven mainly by Promacta and Kyprolis; nine-month growth also reflected a $47.0 million OmniAb platform license fee from WuXi and $20.0 million from the Roivant GRA license agreement.
- Comparisons of 2018 royalties with 2017 are affected by adoption of ASC 606 on January 1, 2018. Ligand now estimates and records royalties in the quarter the underlying partner sales occur, rather than one quarter later. Under the prior standard, Q3 2018 royalties would have been $31.6 million instead of $36.1 million; the filing reports Q3 2017 royalties of $21.9 million. Adoption also reduced opening accumulated deficit by $25.4 million.
- Net income includes substantial gains from Viking: $62.4 million in Q3 and $124.2 million for the first nine months, primarily reflecting fair-value increases in Viking shares and warrants. Thus, reported net income materially exceeds operating income and includes market-sensitive, non-operating gains.
- Operating costs increased year over year, including higher amortization following the Crystal acquisition and higher general and administrative expenses. Nine-month interest expense rose to $28.1 million, mainly due to the 2023 notes and debt-discount accretion.
Outlook, commentary and risks
- Management said available funds, operating cash generation and financing access are expected to cover anticipated operating, capital and debt-service needs, while cautioning that future funding and cash generation are not assured. The filing provides no specific revenue or earnings guidance.
- In October 2018, after the reporting date, Ligand acquired Vernalis for $43.0 million in cash. Management said the acquisition adds partnered programs, an R&D team and business-development opportunities; accounting treatment was still under evaluation.
- Key business risks include reliance on partner products—particularly Promacta and Kyprolis—and Captisol sales; partner decisions and product development or regulatory outcomes; generic competition and intellectual-property challenges; and reliance on a sole-source Captisol supplier.
- Litigation includes a Delaware action challenging a supplemental indenture related to the notes; Ligand moved to dismiss and said it would vigorously defend the case. Separately, Teva challenges Captisol-related patents associated with Evomela; claim-construction proceedings and a 2020 bench trial were scheduled.
- Convertible-note conversion and settlement obligations create cash, dilution and share-price risks. The 2019 notes require cash settlement of principal and, for conversion notices received on or after May 22, 2018, any conversion premium. Ligand disclosed that $195.9 million of 2019-note principal received conversion notices in Q3 and was settled in Q4.
- Fair-value changes in Viking securities and convertible-note-related derivatives can cause significant earnings volatility. Management also identified uncertainty in finalizing accounting for the Tax Act; its provisional estimates remained subject to refinement.
Most important facts to verify
- Separate recurring operating performance from Viking fair-value gains and large one-time license fees when assessing earnings quality.
- Check the ASC 606 timing effect and royalty estimates against partner-reported product sales; the filing notes that partner sales data may be estimated.
- Confirm cash requirements and settlement outcomes for the 2019 notes, including the Q4 conversion notices, and assess the 2023 notes’ potential conversion and dilution terms.
- Monitor Promacta, Kyprolis and Captisol sales, partner concentration, generic challenges and the Teva patent litigation.
- Review Vernalis integration, purchase accounting and post-acquisition financial contribution, along with the status of the indenture lawsuit and Tax Act estimates.