LIGAND PHARMACEUTICALS INC quarterly report, Q2 FY2016

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Ligand Pharmaceuticals Incorporated — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. Ligand operates a royalty-, licensing- and asset-based biopharmaceutical business with a lean cost structure. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Financial performance and position

  • Q2 revenue: $19.5 million, up 6% from $18.4 million. Royalties rose to $9.8 million from $6.6 million; material sales fell to $3.9 million from $10.7 million; license fees, milestones and other revenue increased to $5.9 million from $1.1 million.
  • First-half revenue: $49.2 million, up 49% from $33.0 million. Royalties were $24.1 million versus $16.9 million; material sales were $9.2 million versus $14.4 million; license fees, milestones and other revenue were $15.8 million versus $1.7 million.
  • Profitability: Q2 operating income was $4.4 million, approximately 22% of revenue, compared with $4.4 million in Q2 2015. Q2 net loss was $5.8 million, or $0.28 per diluted share, versus net income of $23.6 million, or $1.11 per diluted share. First-half operating income was $19.5 million; net income was $0.8 million, or $0.04 per diluted share, versus $24.3 million, or $1.16 per diluted share, in the prior-year period. The filing does not present a single overall margin measure.
  • Drivers of reported earnings: Q2 included an $11.1 million loss from Viking Therapeutics. First-half results included a $12.7 million Viking loss and a $0.7 million after-tax gain from discontinued operations. Q2 also included a $3.9 million income tax benefit. Q2 2015 results benefited from a $28.2 million gain on Viking deconsolidation.
  • Cash flow: First-half operating cash flow was $23.5 million, up from $17.6 million. Investing activities used $61.5 million, including $92.5 million cash paid for the OMT acquisition, net of cash acquired, and $17.7 million for commercial license rights; investment maturities and sales partially offset investment outlays. Financing provided $2.0 million. Cash and cash equivalents declined $36.1 million to $61.4 million.
  • Liquidity: Cash, cash equivalents and short-term investments totaled $107.0 million at June 30, versus $200.2 million at year-end 2015. Working capital was negative $93.8 million, largely reflecting classification of the convertible notes as current. Management said available funds, operating cash generation and financing access should be sufficient for anticipated operating, capital and debt-service needs.
  • Debt: The company had $245.0 million principal amount of 0.75% convertible senior notes due 2019; carrying value, net of discount and issuance costs, was $207.4 million. The notes were classified as current because the stock-price conversion threshold was exceeded at quarter-end; this classification is reassessed quarterly. Estimated fair value was $408.5 million. First-half net interest expense was $6.1 million.

Material changes and business developments

  • Ligand acquired substantially all of OMT’s assets and liabilities on January 8, 2016, adding its OmniAb antibody platform and 16 partnerships. Consideration was $173.4 million, comprising $96.0 million cash and $77.4 million in shares. The preliminary allocation included $167.0 million of finite-lived technology intangibles and $60.1 million goodwill; the technology is amortized over 20 years.
  • In May, Ligand paid $17.5 million for economic rights to CorMatrix programs, including a portion of revenue from marketed products and potential future royalties.
  • Ligand announced worldwide OmniAb licenses with Gilead Sciences and F-Star, with potential access, milestone and royalty payments. A new license with Nucorion covers three liver-targeting prodrug programs and provides for milestones and royalties of 5%–9% on future net sales. Ligand acquired a minority interest in Nucorion for $1.0 million on July 28, after quarter-end.
  • Royalty growth was primarily attributed to Promacta and Kyprolis. Management attributed lower Captisol material sales to the timing of customer purchases; higher license revenue reflected milestone and upfront-fee timing and OmniAb partner revenue.

Outlook, risks and contingencies

  • No specific quantitative revenue or earnings guidance is provided. Management expects to build cash as royalties, licenses, milestones and Captisol sales continue, citing Promacta and Kyprolis sales, product approvals and regulatory developments. It cautions that these expectations are uncertain.
  • Management does not provide forward-looking estimates for R&D project costs or completion timing, citing clinical, regulatory, funding, partner and recruitment uncertainties.
  • Key risks include reliance on partner products and Captisol sales, dependence on a sole Captisol supplier, partner termination rights, clinical and regulatory setbacks, patent challenges and generic competition. Ligand disclosed a Paragraph IV challenge by Par involving generic NOXAFIL-IV and Captisol-related patents; Merck’s amended complaint against Par added a patent assertion in July 2016.
  • Contingent liabilities were $7.0 million for CyDex-related obligations and $2.5 million for Metabasis CVRs at quarter-end. Fair-value changes depend on estimates and may differ from actual payments. A securities lawsuit dismissed by the district court remains on appeal; its outcome is not presently determinable.
  • Other notable exposures include the $245.0 million minimum principal cash obligation on the convertible notes, potential dilution or cash settlement on conversion, and market risk in the investment portfolio. The company reported no off-balance-sheet arrangements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether Promacta and Kyprolis growth, new OmniAb licenses and milestone timing translate into sustained royalty and license revenue.
  2. Captisol sales variability, customer concentration, sole-source supply continuity and the status and potential impact of the NOXAFIL-IV patent litigation.
  3. The notes’ quarterly conversion status, current-liability classification, cash obligations and potential dilution relative to the company’s liquidity.
  4. OMT integration and the assumptions underlying its preliminary purchase-price allocation, intangible valuation and expected commercial potential.
  5. Viking’s performance and valuation, contingent-liability estimates, and the outcome of the securities-litigation appeal.