Ligand Pharmaceuticals Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
Ligand is a biopharmaceutical technology and royalty company. Revenue comes primarily from royalties on partner products, Captisol material sales, contracted research services, and license and milestone payments. Its partners fund most development and commercialization. Ligand reported more than 120 partners and over 200 partnered programs.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $41.4 million | $25.0 million | $74.6 million | $68.5 million |
| Operating income (loss) | $7.1 million | ($4.1 million) | $10.9 million | $822.4 million |
| Net income (loss) | $22.1 million | ($14.4 million) | ($2.0 million) | $651.9 million |
| Diluted earnings (loss) per share | $1.32 | ($0.74) | ($0.13) | $31.34 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $41.3 million | ($15.8 million) |
- Q2 revenue rose 66%, largely on Captisol sales of $24.5 million, up 186%. Ligand said this was its largest quarterly Captisol sales result, driven primarily by increased demand related to Gilead’s remdesivir.
- Q2 royalties were $7.2 million, up 8%; Kyprolis royalties were $5.5 million. Six-month royalties fell 47% to $13.7 million, mainly because Ligand sold its Promacta royalty rights in March 2019 and recorded no Promacta royalties thereafter.
- Six-month Captisol revenue increased 160% to $45.6 million. Contract revenue declined 55% to $7.3 million, which Ligand attributed in part to partners delaying or pausing clinical activity amid COVID-19.
- Operating expenses were $34.3 million in Q2, up 18%, mainly due to higher Captisol costs associated with increased sales. The filing does not state a consolidated gross margin. Operating income was about 17% of Q2 revenue; the 53% Q2 net margin was boosted by investment gains and should not be read as a recurring operating margin.
- Q2 other income included a $23.5 million gain on short-term investments, principally reflecting changes in the fair value of Viking shares and warrants and a reported $4.0 million unrealized gain in other equity investments. Six-month results included a $7.3 million investment loss.
Liquidity, debt, and capital allocation
- At June 30, cash and cash equivalents were $115.2 million and short-term investments were $694.7 million. Ligand reported cash, cash equivalents, and marketable securities of $809.9 million, down $260.0 million from year-end 2019.
- Current assets were $863.6 million versus current liabilities of $29.3 million. Total liabilities were $547.9 million and stockholders’ equity was $695.0 million.
- The 0.75% convertible notes due 2023 had $515.6 million principal outstanding and a $449.7 million net carrying value. In March, Ligand repurchased $234.4 million principal for $203.8 million cash; it reported a $0.7 million extinguishment gain. The notes were not convertible as of June 30.
- Six-month financing cash outflow was $279.3 million, including the note repurchase, $73.3 million of share repurchases, and $1.8 million paid to contingent value right holders. No common shares were repurchased in Q2; $253.5 million remained authorized under the buyback program at June 30.
- Ligand stated its existing funds, operating cash generation, and financing access were adequate for planned working capital, debt service, R&D, potential repurchases, acquisitions, and strategic investments.
Material changes and notable items
- The 2019 comparison is heavily affected by the Promacta license sale: six-month 2019 included an $812.8 million sale gain and $14.2 million in Promacta royalties. Excluding context from that transaction, the year-over-year headline profit comparison is not representative of recurring performance.
- Ligand acquired Icagen assets on April 1 for $15.1 million cash plus contingent earn-out consideration with a reported estimated fair value of $4.8 million; the earn-out may reach $25.0 million based on revenue milestones. Ligand also expanded its Roche collaboration.
- The company recorded a $5.2 million after-tax opening retained-earnings adjustment upon adopting the expected-credit-loss accounting standard and an additional $0.5 million credit-loss reserve during the first half.
- Shares outstanding at June 30 were 16.1 million, down from 16.8 million at December 31, 2019, reflecting share repurchases and other share activity.
Outlook, management commentary, and risks
- Ligand announced plans to invest up to $60 million to expand annual Captisol manufacturing capacity from approximately 60 metric tons to approximately 500 metric tons, with additional final-manufacturing locations planned, including in the United States. It said current facilities remained operational and it did not expect significant supply-chain disruption in the foreseeable future.
- Ligand expected to initiate a potentially pivotal CE-Iohexol trial by year-end 2020. The stated goal is to assess kidney-injury reduction and image quality versus Omnipaque. The filing provides no formal consolidated revenue or earnings guidance.
- COVID-19 may both increase near-term Captisol demand for remdesivir and adversely affect partner product sales, clinical-trial enrollment and timelines, development programs, supply chains, and royalty or contract revenue. Ligand cautioned that remdesivir-related Captisol demand may not persist, including if alternatives emerge or the EUA changes.
- Captisol revenue is exposed to reliance on Hovione as manufacturer, partner concentration and termination rights, possible supply interruptions, and the risk that the capacity expansion does not earn an adequate return. Ligand said it had increased Captisol purchase and equipment obligations by approximately $79 million.
- Other disclosed risks include uncertainty around partner pipeline outcomes and OmniAb commercialization, contingent acquisition obligations, and generic EVOMELA patent litigation. Teva settled its case, permitting generic entry from June 1, 2026 or earlier under specified circumstances; cases involving Alembic and Lupin remained pending.
- Management reported effective disclosure controls as of June 30, 2020 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Captisol demand associated with remdesivir continues, and whether customer orders and partner disclosures support the announced capacity expansion.
- Actual cost, timing, utilization, and return on the planned Captisol investment, including the increased Hovione purchase and equipment commitments.
- Underlying revenue and profitability excluding the large 2019 Promacta-sale effects and volatile investment gains or losses.
- Remaining note principal, potential future repurchases, and cash and investment levels after capital allocation and acquisition commitments.
- COVID-19 effects on partner sales, clinical programs, and contract milestones, as well as outcomes and timing of the pending EVOMELA patent cases.