Ligand Pharmaceuticals Inc (LGND) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Ligand Pharmaceuticals first quarter of 2015 earnings call.

(Operator Instructions)

As reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Todd Pettingill, Senior Manager of Corporate Development and Investor Relations. Thank you, Mr. Pettingill, you may begin.

Welcome to Ligand's first-quarter financial results for 2015 and business update conference call. Speaking today for Ligand are John Higgins, CEO; Matt Foehr, President and COO; and Nishan de Silva, VP of Finance and Strategy, and CFO.

As a reminder, today's call will contain forward-looking statements within the meaning of federal securities laws. These include, but are not limited to, statements regarding intent, belief, or current expectations of the Company, its internal and partner programs, including Promacta and Kyprolis, and its management. These statements involve risks and uncertainties, and actual events or results may differ materially from the projections described in today's press release and in this conference call. Additional information concerning risk factors and other matters concerning Ligand can be found in Ligand's public periodic filings with the Securities and Exchange Commission, which are available at www.SEC.gov.

The information in this conference call related to projections or other forward-looking statements represent the Company's best judgment based on information available and reviewed by the Company as of today, May 11, 2015, and do not necessarily represent the views of Novartis, Amgen, or any of our other partners. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

At this time, I will turn the call over to John Higgins.

Thank you, Todd. Good morning, welcome, and thanks for joining for our first-quarter 2015 earnings call. We've had a great start to 2015. Highlights this year, so far, include strong growth in year-over-year cash flows; a positive Phase 3 data for major pipeline assets; a successful transition of Promacta to a stronger partner; numerous important regulatory developments; a new licensing deal; an acquisition; and the IPO of a corporate partner.

I'm going to cover our commercial assets and talk about capital allocation, Matt will cover some highlights of our partner portfolio, and then Nishan will cover financial highlights. And, now that we are well into our third year of profitability and being cash flow positive, Nishan will also provide some comments about our expectations for releasing our very sizable valuation allowance, a tax asset that we believe will run through our P&L later this year.

Now, to open a few comments about our commercial assets, Novartis closed its acquisition of Promacta and other assets from GSK, March 1, and reported a strong first month of sales, in March, of $36 million. This is consistent with what we've seen from publicly available monthly prescription data that was significantly higher in March over the prior two months.

GSK recorded revenues for the product for January and February, and, hence, Ligand will be receiving royalties from both companies for this transitional Q1 period. GSK did not break out Promacta sales on their earnings call; however, after they announced results, we learned from GSK that they recorded about $63 million in revenue from those two months prior to the March divestiture. Combining Novartis's and GSK's sales, Promacta would show first-quarter revenues of $99 million.

This comes in a bit lower than what we would've expected. However, it is worth noting that GSK's commercial efforts likely were significantly winding down during the final months of the transition to Novartis and the euro was down 12% over Q4, which would create drag on dollar sales equivalents.

We're proud of our past partnership with GSK and commend them for their commitment to the product and the success that they realized. But, following the acquisition by Novartis, we're pleased to know this valuable asset is now in Novartis's hands. Novartis has a superior commercial and development platform, compared to GSK, with 6 times the oncology sales force by size, covering many more geographic territories commercially and having a much larger oncology R&D budget.

Novartis has had a very impressive first month of sales in terms of dollars and prescriptions, and Novartis has had some substantial commentary related to Promacta on their recent earnings call. Novartis has identified Promacta as a potential blockbuster from the assets acquired from GSK. Novartis leaders have said they see opportunities for continued and accelerated growth in existing markets, expansion into new markets, expansion into new indications, and a potential for improvement in product gross margin.

Now, moving on to Kyprolis, Amgen reported Q1 revenues of $108 million, an increase of 19% over the prior-quarter reported revenues of $91 million. Importantly, Amgen announced data from its Phase 3 ENDEAVOR trial in early March, well ahead of expectations. And the data were also better than expectations.

The ENDEAVOR trial was designed to be a head-to-head comparison of Kyprolis versus Velcade, one of the world's best-selling medicines for treating multiple myeloma. We believe the data are, frankly, excellent, showing substantial improvement in progression-free survival over Velcade -- indeed, a doubling of the length of PFS, from 9.4 months with Velcade to 18.7 months with Kyprolis, in patients with relapsed multiple myeloma.

Now, what this means is, patients in this trial live twice as long -- I will say that again -- live twice as long without their cancer getting worse, with Kyprolis versus Velcade treatment. This is a terminal cancer that predominantly affects people who clearly have more life to live -- people at points in their lives when they want to enjoy their families, children. We see this as a profound outcome and are encouraged by Amgen's focus on international registration.

The drug is pending approval in the US and Europe for second-line treatment of multiple myeloma, with accelerated review having been granted for the drug in both major regions. The US PDUFA date for this indication is set for July 26, 2015.

Now, some brief comments about a few of our other commercial products from which we receive revenue. These are smaller products, and we don't break them out, usually. They are all achieving good growth, and it's helpful for investors to understand the other sources of revenue, and the growth and diversity of these assets.

With DUAVEE, monthly prescriptions continue to grow nicely. March prescriptions gapped up a very impressive 26% over February and now are over 12,200 per month. As US sales are growing, we expect Pfizer to finalize pricing in Europe by the end of the second quarter, which will earn Ligand a milestone payment.

Nexterone is a Captisol-enabled product, sold by Baxter, that we earn royalties on. Our Q1 royalties on this product are up over 70% compared to Q1 2014, based on significant continued quarterly growth of that product. Soon, it should be on a run rate to generate over $1 million in annual royalties for Ligand.

Another product, NOXAFIL IV, is a Captisol-enabled super-potent antifungal. Merck launched this last year as a line extension to its well-known and highly used oral form. Since the launch of the IV version of NOXAFIL, the entire product line has seen a tremendous increase in last 12-months sales, with sales increasing $120 million, or 38%, over the 12 months prior to product launch of the IV form in Q1 2014.

Now, I'd like to make some comments about our business model and capital allocations. Those who follow us know that our business is focused on assembling a large portfolio of revenue-generating assets based on fully funded partnerships. Our internal work is on drug discovery and technology invention. We then patent our ideas, develop data, and ultimately license our programs to quality partners to advance the programs through later-stage development on to commercialization. By focusing on early R&D, we can conduct our work very cost effectively. And we contract with manufacturing and drug development vendors on an as-needed basis, further helping keep costs low.

The other aspect of our business model is focused on efficiently allocating or deploying capital to further expand our portfolio of assets to drive future value. We are very active with capital deployment and take advantage of the opportunities that different market environments present us. For example, during the great recession, from 2008 to 2010, we had a string of important acquisitions that radically transformed our asset base. At the time, the markets were in a state of fear and we seized the opportunity, buying quality companies at distressed values.

In 2011, within sight of turning profitable and cash flow positive, we acquired a profitable high-growth capsule technology business that has clearly accelerated our financial growth. More recently, we've had an unprecedented period of new out-licensing and deal-making. This is a result of public and private companies being flush with cash and eager to in-license product programs and technology from Ligand.

Another example of capital deployment is at the end of last year, when we used our cash reserves to buy back a large number of Ligand shares. This has already generated a very substantial return on investment and will boost per-share profits and cash flow meaningfully. And examples of our recent capital deployment do not stop there. We've invested capital in an important new company, Viking, that is advancing numerous programs licensed from Ligand. The company closed its IPO one week ago. In addition, today we announced the acquisition of more royalty rights from Selexis for programs tied to biologics and biosimilars. This follows the successful original deal we closed with Selexis in 2013.

This is a broad array of deal-making and highly diverse capital allocation. Investors have come to expect not any one specific type of deal from this team, but instead for us to take advantage of our market knowledge and the experience we gained from our vast roster of partners to find opportunities to invest and create value from the biopharma industry.

We will continue to explore original opportunities that our programs and the markets present us. Specifically, we look forward to further leveraging Captisol, our LTP technology, and leading development programs such as Glucagon to continue to find ways to expand our partner portfolio and work to maximize value for shareholders. We are proud of our inventions, our deal-making and our capital allocation. Ligand has the largest and most promising portfolio of assets ever and a high-growth financial business.

With that, I will turn it over to Matt.

Thanks, John. I'm going to start off this morning by briefly highlighting some program progress or milestones that our partners have reported on over the last few months or so.

Notably, Spectrum announced that their NDA was accepted for filing for Captisol-enabled Melphalan, now called EVOMELA, with a PDUFA date of October 23. So, FDA action is expected just a little over five months from right now. This was an asset for which we designed and initiated the pivotal clinical trial for before partnering it, and it's great to see our committed partners at Spectrum progressing it towards potential approval.

Melinta reported positive Phase 3 data for Captisol-enabled delafloxacin, and SAGE Therapeutics announced initiation of a Phase 3 for Captisol-enabled SAGE-547. Retrophin recently announced that they received orphan designation for sparsentan for FSGS.

Sparsentan is a selective dual-acting receptor antagonist with an affinity for endothelin and angiotensin II receptors. This drug was originally developed as an anti-hypertensive medicine by Pharmacopeia, a company that we acquired in one of the deals that John referenced earlier in his remarks about capital allocation. In those earlier days of clinical development, sparsentan's mechanisms of action showed that it could reduce proteinuria in nephropathies that are the hallmarks of FSGS, which is what led to our partnership with Retrophin.

Also this quarter, along with our partners at TG Therapeutics, we presented data at the AACR conference relating to the IRAK4 inhibitors program that we partnered with them last summer. The data demonstrated clear anti-cancer activity and synergy with other actives for the IRAK4 inhibitors.

When we license assets, oftentimes there can be multiple parties involved as potential partners as there were for IRAK4 last year. We spend considerable time thinking about which partner or strategy will best position an asset for future success, either based on partner structure, unique experience base or a willingness to clearly commit to prioritize the asset, and we monitor the progress of our partners closely. And I note that we've been very pleased with the progress of our partners recently.

I will also mention the recent IPO by Viking Therapeutics that John generally described, which is another example of a key partner making progress in advancing important assets. At Viking, they've got five programs, all of which are partnered with Ligand. The programs are VK5211, which is a selective androgen receptor modulator or SARM, and that's a Phase 2-stage asset being developed for hip fracture.

Also, they have a TR beta program focused around dyslipidemia and nonalcoholic steatohepatitis, or NASH, as well as a rare orphan disease called X-linked adrenoleukodystrophy, or X-ALD. And Viking also has additional assets licensed from Ligand focused on anemia, obesity, dyslipidemia, and diabetes.

More specifically, I'd like to highlight the SARM asset, now called VK5211 at Viking. SARM is a lead asset and is now a centerpiece of the Viking pipeline. The drug is one that our scientists here at Ligand discovered out of the same discovery heritage that led to Promacta and led to DUAVEE.

SARM is a drug that we invested in significantly and advanced into the clinic ourselves, obtaining positive safety and proof-of-concept data in humans via our own internal R&D efforts and investment. We then worked creatively to find ways for the SARM asset to get the funding it deserves. And, while we seriously considered straight or traditional licensing of SARM, we wanted to pursue a path for it that could bring maximal benefit to our shareholders in the long term. So we're pleased to see SARM now progressing to Phase 2 at Viking.

I will now make a few comments about our current internal R&D efforts here at Ligand. Our internal team continues to be highly productive in the preclinical and clinical development of our own assets, assets that we see as positioned to fuel future partnering events or value-creation events.

Our Glucagon receptor antagonist called LGD-6972 has progressed very well. This drug has been a large part of our internal R&D spend over the last few years, and the Phase 1b clinical trial we are investing in now has run precisely to plan. We will be presenting clinical data at the ADA meeting in Boston on Sunday, June 7, and I note that we will also be hosting an evening data presentation event in Boston following our presentation at the scientific meeting.

We look forward to completing and unblinding the trial and presenting the 6972 data at ADA. And we continue to believe that we have the potential to have a best-in-class molecule for a novel mechanism for treating diabetes. We feel that we are approaching an important moment for the 6972 asset, where we can unblind new data and decide what path will ultimately be best to maximize our shareholders' return in relation to the asset. In addition to the clinical efforts for 6972, we continue preclinical and formulation work on other programs including our small molecule oral GCSF as well as Captisol-enabled Busulfan, and we look forward to disclosing data relating to those programs or other programs at future meetings.

I will also mention that our team continues to be pleased with the potential of the internally developed LTP technology, and we are continuing to develop new data internally that we believe positions the platform well for future partnering. Potential partners have even approached us with ideas of forming companies around one or multiple LTP-enabled programs. And these are the kinds of creative ideas we are willing to consider with our technologies, if we have sight to a clear path that could benefit Ligand shareholders.

I will finish, spending just a few moments on our Captisol technology. Operationally, we're gaining business efficiencies with Captisol's increased visibility and scale, and we're receiving more in-bound technical information and sample requests than ever. We've invested to increase our production capacity of Captisol over the last couple of years, expanding production and distribution to multiple geographies, and the benefits of that investment are now clearly in sight.

Importantly, Captisol continues to be used in new ways. The use in dosage forms other than the well-established IV route by our partners continues to expand, and there are now multiple non-IV Captisol-enabled products progressing into the clinic. And, customers are also now seeing opportunities to marry Captisol with other technologies or delivery devices to optimize delivery or extend the patent protection of their products. Additionally, our intellectual property reach for Captisol continues to expand. In recent months, we've had new patent allowances in the US, in Europe, and in Japan.

And, with that, I will turn the call over to Nishan.

Thanks, Matt. I will recapture a few of the highlights from our earnings release issued earlier today. Total revenues for the quarter were $14.6 million and included royalty revenue of $10.3 million, which is an increase of 31% versus the year-ago period and largely reflected higher Promacta and Kyprolis royalties.

Captisol material sales are slightly ahead of our expectation at the beginning of the quarter. Collaborative R&D revenues were in line with our expectations, given the roster of potential milestones and events in the portfolio that were expected for Q1.

Our cost of goods sold for the quarter decreased to $1.1 million, versus $2.5 million in the year-ago period, driven primarily by lower material sales in the current period due to the timing of large Captisol clinical orders in Q1 last year. Our cash R&D and G&A expenses were about 5% higher compared to the year-ago period due to the timing of spend on our ongoing Glucagon receptor antagonist clinical trials. For the quarter, we reported adjusted earnings from continuing operations of $6.9 million, or $0.33 per diluted share, compared to $7.3 million, or $0.35 per diluted share, for the same period last year.

On the balance sheet, we ended the quarter with $177.2 million of cash, cash equivalents, and short-term investments. We generated operating cash flow of $7.6 million during the quarter, a meaningful increase from the $2.6 million of operating cash flow in the year-ago period. The significant increase illustrates the leverage in Ligand's business model of growing royalties and top-line revenues, [combined] with low-cost infrastructure.

As noted in the news release, we will provide a summary of the accounting impact of the recently completed Viking IPO by June 30, and we will also update our 2015 financial forecast at that time. Currently, we reaffirm our previous full-year guidance of total revenues between $81 million and $83 million and adjusted earnings per diluted share between $2.14 and $2.18.

For the second quarter, we expect total revenues to be between $17 million and $17.5 million and adjusted earnings per diluted share to be between $0.37 and $0.40. Our adjusted earnings per share guidance for both the full year and the second quarter exclude changes in contingent liabilities, mark-to-market adjustment for investments owed to licensors, non-cash stock-based compensation expense, and non-cash debt-related cost.

Regarding Ligand's estate of tax assets, we currently have a valuation allowance against our over $760 million of NOLs and tax credits, and it does not appear on our balance sheet. Accounting rules typically call for evaluation of releasing the valuation allowance after a period of sustained profitability of about three years. Releasing the allowance creates a gain on the income statement as the tax asset now appears on the balance sheet.

After the valuation allowance has been released, book EPS will appear as fully taxed on our income statement going forward at approximately 35% to 38%, even though we will continue to pay cash taxes of less than 5%. In the second half of this year, we expect that Ligand will have been sustainably profitable for about three years, and we currently anticipate releasing the valuation allowance in either the third or fourth quarter of 2013. At this time, we estimate there will be a gain of over $200 million that will run through the P&L when the valuation allowance is released, which is non-cash, and we will subtract that for adjusted earnings so our guidance will remain unchanged due to this event.

On Friday, we closed the second transaction with Selexis, a private Swiss company, in which we purchased the financial rights to more than 15 fully funded partnerships for $4 million. As with our first transaction with Selexis approximately two years ago, their portfolio consists entirely of protein therapeutics as a mix of novel biologics and biosimilars at various stages of development, from preclinical through Phase 3.

We completed our first transaction with Selexis in April 2013 and continue to feel good about the deal as we have received approximately 10% of our purchase price back in the form of milestone payments from partners, and multiple programs continue to advance towards approval. We maintained a good relationship and open dialogue with Selexis' management after the first transaction, and, as a result, we have the exclusive opportunity to close this deal.

With that, I will turn the call over to the operator and open it up for questions.

(Operator Instructions)

Matt Tiampo, Craig-Hallum.

Good morning, gentlemen, and congrats on an excellent start the year.

Thank you, Matt.

I just had a couple quick ones. I wanted to drill down a little bit on the acquisition, mainly what was the motivation from Selexis for the sale this time around? I think last time they were hoping to build out some production capability.

And then can you give us any color on what the royalty rates might look like on those 15 products? Thanks.

Sure Matt, this is Nishan. I think the motivations are pretty similar to the first sale we did two years ago. As you know, Selexis is a private Swiss company still controlled by the founders, and they were looking to raise capital in a non-dilutive fashion to continue to advance and grow their business, including investing in new product lines and potentially bringing in new technology through BD.

So it was really a non-dilutive way of raising capital, so many similar themes as the first transaction with then two years ago. To your second question about the range of the royalties is again similar to the first transaction we did two years ago with them where they're low single-digit range royalties.

Great, thanks. I assume there is no change, but on general mix of business, I think you last quarter talked about maybe 50% from royalties. I just want to confirm that there's no change there. And then finally from me, it looked like a really strong gross margin for material sales in the quarter, and I'm just wonder what drove that in particular?

Matt, to your two questions on the royalties, there's no change in our outlook in terms of the mix of royalties as a proportion of total revenue. I think to your second portion on gross margin, as always it's a mix of commercial and clinical sales, and I think that drives our gross margin. But then secondly as Matt alluded to, we've been investing in our production capacity and ordering more from our supplier, we're achieving higher tiers in our relationship with them where we enjoy lower pricing in our purchasing price of Captisol, so that helps drive margins as well

Great, thanks very much.

Joe Pantginis, ROTH Capital.

Hey guys, good morning, thanks taking the question. Regarding today's Selexis assets, can you give a sense of the relative stages for the assets that you just brought on and any potential news flow we might be seeing?

Sure Joe, this is Nishan. So it's a mix as we mentioned of from preclinical through phase 3, I'd say overall probably more biased to the earlier stage, preclinical phase 1. But there are things represented throughout.

And as we are able to over time as with the first deal, we will disclose some of those partnerships as we get permission from the partners and be able to talk about those more. But overall very happy with the deal and a good mix of stage of assets that we've acquired.

That's good, thank you. And then maybe for Matt, with Novartis now with taking control of Promacta, can you characterize the later stage clinical trial programs in oncology, especially since Glaxo had put together some earlier stage data with regard to the disease modifying characteristics of Promacta and where Novartis looks to take that. And separately with that, do you expect the same type of showing from Novartis at both ASCO and ASH?

Thanks, Joe. I will say a few general remarks. One, we couldn't be happier about the transition with Novartis. As John was generally describing in his remarks, they are a much more substantial oncology player and are taking over the asset really at couldn't be a better time in terms of the bigger indications that are to come that are related to oncology.

In their earnings call, they highlighted the work in MDS and AML, and there's obviously ongoing work out there in CIT. And I say that in a general sense, Novartis is much better positioned just because of their footprint and their experience and investment profile to capitalize on those opportunities. I would expect continue to see data at scientific meetings. Novartis is obviously highly present at meetings like to ASCO and ASH, et cetera, and we couldn't be happier with the transition.

That's helpful, thank you. And then maybe just one last quick one for John. I mean John, with the biotech markets being so volatile right now, is it safe to assume that you guys are relatively still shopping?

Joe, yes. We are always evaluating opportunities. Really wanted to put in context our history of the capital allocation as I did earlier in my remarks.

There's no one type of deal that is the standard deal for Ligand. In weaker or distressed markets where we can find good value in targets, we may be more active with M&A.

The last several years the markets have been performing incredibly well, companies are flush with cash. So we've been doing more outlicensing which has been supremely efficient for us instead of us deploying capital in terms of funding these companies directly or acquiring -- sending cash to acquire companies, we're actually receiving cash in the form of license fees and milestones to outlicense our technology.

The end purpose of our strategy is to amass a large portfolio of fully funded assets. So we are doing it in a variety of ways, and, yes, as the markets transition through a different state, we will continue to evaluate targets. And if we see good value, I think that's the hallmark of our dealmaking is discipline and trying to target good value, that's where we will turn our sights and pursue other opportunities.

Great, thanks guys.

Joe, thank you.

We've reached the end of our Q&A session for today. I will turn the line back to Mr. John Higgins for closing comments.

Thank you, really appreciate people's attention today and attendance. We know it's a busy day being the last day of earnings season. As investors know, we often have to push our call later in the cycle as we are aggregating information from our corporate partners. Obviously we'd like to keep our commentary fresh and relevant as it relates to the disclosures of our partners.

So thank you for joining us. The business is doing well. Financially clearly we're enjoying strong financial growth, and we are pleased with our performance here early in 2015.

As investors look at Ligand, we encourage you to look at the size of our portfolio. It's the largest ever. We encourage you to take a look at the performance of our later stage and commercial assets that are partnered. There's good data coming out of our partners, there's good progression of our late stage assets that are partnered. And obviously there's been some nice performance by our commercial assets that are also partnered.

And finally, again in regards to capital allocation, we have a history now of acquiring companies, of acquiring technologies, of acquiring one-off assets. We've done share repurchases. We have invested in private companies that now have gone public. Again, there's really a very broad array of dealmaking that is a strong foundation to our ability to drive our asset portfolio.

We are pleased with the business. The next two months we have attendance at several conferences, Bank of America investor conference Matt and I will be presenting at tomorrow. We will be at Craig-Hallum's conference in late May in Minneapolis. ROTH is hosting a conference in London. We have a nice cadre of European investors, and we look forward to seeing them in late June. And then we will also be at Cantor's investor conference in early July.

So we appreciate the chance to interface with our investors. Again, thank you for your interest in Ligand. And with that I will turn the call over to the operator.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. We thank you today for your participation.