$LGND Ligand Pharmaceuticals

[Ferg]

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