Ligand Pharmaceuticals Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2015. The filing was signed August 5, 2015. Ligand’s business model centers on royalties, licenses, milestones and Captisol material sales, with development and commercialization largely conducted through partners.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $18.4 million | $10.6 million | $33.0 million | $26.6 million |
| Operating income | $4.4 million | $1.4 million | $7.7 million | $6.5 million |
| Net income attributable to Ligand | $23.6 million | $1.6 million | $24.3 million | $3.7 million |
| Diluted EPS | $1.11 | $0.07 | $1.16 | $0.17 |
| Operating margin | 23.7% | 12.8% | 23.4% | 24.3% |
- Q2 revenue growth reflected higher Captisol material sales ($10.7 million versus $3.5 million) and royalties ($6.6 million versus $5.2 million). For the first half, material sales were $14.4 million versus $9.2 million, and royalties were $16.9 million versus $13.1 million. Collaborative and other revenue declined to $1.7 million from $4.3 million for the six-month period, mainly because of prior-year milestones and upfront fees.
- Reported earnings included a $28.2 million gain on deconsolidating Viking Therapeutics. They were also affected by a $7.3 million increase in contingent-liability expense for the first half, including a $6.4 million Q2 increase in Metabasis CVR liabilities. Reported net income therefore substantially reflects non-operating and unusual items, rather than operating performance alone.
- Operating cash flow was $17.6 million for the first half, compared with $6.6 million a year earlier. Investing activities used $75.0 million, principally for short-term investments ($60.4 million), Viking shares ($9.0 million), commercial license rights ($4.0 million) and contingent payments ($3.7 million). Cash and cash equivalents declined to $108.2 million from $160.2 million at year-end.
- At June 30, cash, cash equivalents and marketable securities totaled $182.2 million, and working capital was $178.8 million, per management. Long-term convertible debt, net, was $200.6 million; its $245.0 million principal is due in 2019 and bears 0.75% interest. The notes’ estimated fair value was $353.6 million, above carrying value.
- Total assets were $304.8 million and total liabilities were $235.7 million. Current assets were $196.7 million and current liabilities $17.9 million.
Material changes and developments
- Viking’s May IPO ended its VIE status, and Ligand deconsolidated Viking and began equity-method accounting. Ligand held 48.8% of Viking’s outstanding common stock, including related-party holdings, and reported a $34.0 million carrying value for its investment. The quarter included $0.9 million of equity-method losses from Viking.
- Ligand received approximately 3.7 million Viking shares under its amended license agreement and separately bought 1.1 million shares for $9.0 million. A Viking convertible note receivable was valued at $5.5 million. The filing says Ligand may elect cash repayment equal to 200% of principal plus accrued interest or Viking shares, subject to specified financing or timing events.
- Ligand acquired commercial rights to potential milestones and royalties on more than 15 Selexis biologic development programs, for $4.0 million. It also reported new or advancing programs and partner developments, including an agreement with Sanofi and a clinical-stage agreement with AiCuris; terms were not disclosed.
- At June 30, accounts receivable were $5.5 million, of which 88% was due from one customer, compared with $12.6 million at year-end, when 64% was due from two customers.
Outlook, risks and contingencies
- Management said available funds, operating cash generation and financing access should be sufficient for anticipated operating, capital and debt-service needs, and expected cash to build as royalties and Captisol sales grow. It stated that capital resources were expected to fund current operations for at least 12 months. These are forward-looking statements, not specific revenue or earnings guidance.
- Key revenue exposures include Promacta and Kyprolis royalties and Captisol sales. The company identifies reliance on a sole Captisol supplier, Hovione, as a risk; supply disruption could interrupt sales. Partner decisions, product approvals, safety, reimbursement, competition and patent protection also could affect results.
- Contingent liabilities were $18.8 million at June 30, including CyDex-related and Metabasis CVRs. Their fair values depend on estimates and market inputs and may fluctuate; actual payments may differ materially. Ligand expected an approximately $2.6 million Metabasis CVR payment in January 2016.
- A securities class action and derivative lawsuit remained pending; Ligand intended to defend the claims, and the outcome was not determinable. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Other material risks include possible conversion-related cash requirements or dilution from the 2019 notes, partner termination or underperformance, clinical and regulatory setbacks, customer concentration, and potential loss or limitation of tax net operating losses.
Most important facts for investors to verify
- How much of reported earnings and EPS depends on the Viking deconsolidation gain, and how underlying operating performance compares after unusual items.
- Whether royalty growth and Captisol demand continue, particularly for Promacta and Kyprolis, and whether Ligand can maintain reliable Captisol supply.
- Viking’s ability to repay or otherwise settle the convertible note, its operating performance, and the value and liquidity of Ligand’s investment.
- The assumptions behind CyDex and Metabasis CVR valuations, the timing and amount of future payments, and the litigation outcome.
- Liquidity and potential dilution or cash settlement obligations associated with the 2019 convertible notes and their conversion terms.