$LGND Ligand Pharmaceuticals

Introduction

Ligand are listed on the NASDAQ and have been trading since 1987. They are profitable, growing and cash flow positive. They have also de-risked their exposure to launching new drugs by being the inventor/gatekeeper - more on this below. Their website explains what they do better than me but in a nutshell they run drug discovery programmes (which are on-sold to partners for clinical trials and taking to market) and they also sell the drug delivery & stabilisation medium Captisol.

Warning: the share price is extremely volatile and not for the faint hearted. The spike in early 2021 was centred around the Gamestop fiasco where hedge fund shorters were being pursued by retail investors - Ligand were temporarily caught up in that.

The readers digest version. Ligand:

• partners with pharma and biotech companies by providing newly discovered drugs and anti-body platforms etc.
• earn milestone payments as different drugs pass through the clinical stage processes
• earn royalties on drugs that go to market
• make and sell Captisol at over 60% margin which is used in a number of drugs including Gilead's Remdesivir to treat COVID-19
• own drug discovery platforms under the names Pelican, Icagen, and OmniAb (see below) and a large number of patents
• the business model is that like that of a snowball - as time progresses the business earns more milestone revenues and more royalties, by which time more drugs have been tested and taken to market and so on. With over 300 drugs in the pipeline and potential earnings of US$4.6b I believe there is a lot of revenue and profit upside for Ligand.

The drugs & technologies pipeline

• their partners have over 300 drugs in various stages of approval (and growing), they have 130 partners (and growing) and over 1400 patents (and growing). These stats are from the last annual report. Note: I personally researched and found almost 1,100 patents on the US patent website under the Ligand name and under various subsidiary names. The balance may be overseas patents and /or under partner names.
• Check out page 5 of this investor presentation for a visual representation of the drug pipeline where each dot represents a different drug
• they have acquired various technologies over the years; the largest recent acquisition was Pfenex acquired late 2020 for US$437m-$516m which is revenue and profit accretive
• Revenue was down in FY2019 given Ligand sold its largest revenue earner, Promacta, for US$827m in 2019 (annual revenues in FY2018 were US$99m)
• The shift from Promacta to Pfenex is like stepping off one escalator onto another
• Reported maximum pipeline payouts from programmes currently in play is US$4.6b (source: annual report)

Financials

• It is a complex business but they have 16.7m shares available and a float of 15.9m shares, an approved share buyback scheme and market cap is US$2.5b at US$165/share.
• Institutions love this stock so much they own 148% of it (from here) - although not as much as before given they owned 188% of it in April 2021.
• 155 employees per latest AR of which 118 are in R&D
• Their latest quarterly report shows they continue to be profitable, FCF positive and they have reaffirmed their increased "adjusted EPS" guidance for the current FY to ~$6
  
  • Cash on hand of US$323m, Current ratio = 12:1
  • Total liabilities : Equity = 0.57:1
  • It is hard to do comparatives given Pfenex was acquired late 2020 (adding R&D and intangible costs) but Q3 YTD revenues of $204m are +$88m vs last year (+75%) mostly off the back of increased Captisol sales +$60m & milestone & royalty revenues +$28m.

Issues

• Historical shorting by hedge funds, in particular Greg Lemelson who was charged by the SEC for shorting and distorting the stock (and I believe he was recently convicted)
• High shorting activity was likely off the back of a) a misunderstood business model (which in fairness is confusing) and b) historical issues around the accuracy of Ligand's financial reporting some years ago. One issue was channel stuffing (i.e. bring sales forward) and the other was the accuracy of the deferred tax asset value. Both issue have since been rectified.
• Drug approvals take a long time so this could be a long burn before we see dividends
• Currently Captisol (which is used in the COVID treatment drug Remdesivir) accounts for 63% of revenues and will be negatively impacted if and when virus infections abate

Recent Major Development
Ligand announced yesterday they intend to split the company into two. One half comprising the emerging OmniAb platform and drugs and the other being the cash cow with existing contracts and royalties (ie Pelican & Captisol). They intend to unlock the value, fund each entity appropriately and shareholders in Ligand will likely be allocated 80% of the shares in the new entity, with the other 20% going to market under an IPO. Interesting times indeed.

Disclosure: I hold shares in Ligand and will do for some time.

Disclaimer: none of this is investment advice, I am not a professional advisor and this post is my personal opinion based on publicly available information as linked and disclosed. I recommend you do your own research before investing.

P.S. Regular updates are posted on Twitter here: https://twitter.com/Ligand_LGND

Pharma stocks are a huge gamble and way too risky for my liking (or understanding). Since Covid, many of the long time pharma stocks like PFE have not kept in pace with the market index returns. They consistently underperform for the level of risk. MRNA has done well only because it was an even bigger gamble (their early stage of their COVID Vax, approval, etc. was pure luck and no one could have predicted it's return 2 years ago).

Hedge funds that pick stocks to go for short do so for good reasons. It's because they lack some understanding of the company's business model. More often, it's usually the glossy prospectus and constant share dilution etc. by pharma stocks that attract the shorts to move in.

A good example is that NZ company Naked Brands (NAKD:Nasdaq). During the GME meme hype, it's stock price was over $1.50 and it kept going down. Recently it's had a recovery but no where near the action that GME or AMC had. I've read NAKD is getting into the EV business of making cars.... What did Petery Lynch say before? Companies that don't stick to do what they know, and venture into other areas usually get burned.

@SBQ I hear you and agree that individual pharmaceutical companies are high risk, i.e. high volatility of returns (positive and negative) and a greater possibility of capital loss (including by capital dilution). This is especially so where drugs are still in development and/or there is a limited drug pipeline for an individual company. This is where I see LGND as being different.

130+ partners pay Ligand as they go through the drug approval process - so LGND gets paid irrespective of whether or not their partners' drugs get final approval or not. Ligand also get paid when the drugs are being sold to market via royalties, but without the operating costs. LGND isn't taking the drugs to market (the partners do) so LGND does not need to build a sales force, distribution network or admin team like a Merck or Pfizer for instance, so there is little risk of capital dilution as there would be for a new drug company setting up these processes.

Furthermore, as more of the 300+ drugs in the pipeline go through the approval process this means more milestone/contract and royalty income for LGND with minimal (or no) variable costs associated with the increased activity.

If one "asset" is risky but a "bundle of assets" is a lower risk (being the principle of diversification), then that is what LGND represents - a bundle of assets in a high risk industry with a net lower risk than any individual asset. As we saw with Promacta in 2019, the sale of one drug to another investor earned LGND US$827m which equates to about ~US$50/share. Not all drugs will be like that, but not all will fail either so I genuinely don't see this as being as risky as a single pharma company, despite the SP volatility.

Update on the activity of Ligand and its partners:

• SP continues to be volatile (currently US$143.96), although Yahoo Finance have their 5 year beta at 1.03 which suggests it carries a small risk premium vs the volatility of the NASDAQ
• partner Gloria Biosciences received approval for its Hodgkin's Lymphoma treatment in China (30 Aug)
• CRDC (China Resources Double Crane Pharmaceuticals) entered into an agreement with Ligand to develop an oral treatment for Cvd19 (21 Oct)
• partner Sermonix successfully raised funds to continue clinical testing for lasofoxifene for the treatment of breast cancers (16 Nov)
• partner Gilead expects Remdesivir (aka Veklury) to continue to be effective with the Omicron variant of Cvd19 (1 Dec)
• US FDA accepts priority review for partner Merck's pneumococcal vaccine Vaxneuvance (1 Dec)
• partner Amgen to present clinic trial findings relating to its hematology pipeline (6 Dec)
• partner Jazz Pharmaceuticals announced positive stage 2/3 clinical trials for its drug Rylaze, used for the treatment of complications pertaining to asparaginase treatment of lymphoblastic and lymphoblastic lymphoma (12 Dec)

Latest investor presentation (19 Nov) shows 130+ partners on p5 and a healthy pipeline of circa 300 drugs in various stages of development.

$LGND will unlock value for shareholders by spinning their OmniAb division into a newly created SPAC. $LGND shareholders will own 75-84% of the new entity. Transaction will occur within the next 100 days. Ligand will retain most of the current revenue streams but lose significant staff/R&D costs such that it will be leaner and more profitable.

Announcement is here.

DYOR: info on OmniAb

We finally have a date for splitting OmniAb into a separate entity:
https://investor.ligand.com/press-re...r-distribution