Ligand Pharmaceuticals Inc (LGND) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Ligand Pharmaceuticals' third quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Todd Pettingill, Senior Manager of Corporate Development. Thank you. Sir, you may begin.

Welcome to Ligand's third quarter financial results for 2015 and business update conference call. Speaking today for Ligand are John Higgins, CEO, Matt Foehr, President and COO, and Matt Korenberg, CFO. As a reminder today's call will contain forward-looking statements within the meaning of Federal Securities Laws. These may include but are not limited to, statements regarding intent, belief or current expectations of the Company, its internal and partnered, licensed and other 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 this conference call.

Additional information concerning Risk Factors and other matters concerning Ligand can be found on 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, November 9th, 2015, and do not necessarily represent the views of Novartis, Amgen, or any other party. 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'll turn the call over to John Higgins.

Thank you, and good afternoon everyone. Welcome. Thanks for joining us for our third quarter earnings call. Ligand posted strong revenue growth this past quarter, strong profit growth, and strong growth in cash flow as well. Our largest commercial assets are performing very well, and we have had numerous positive updates and developments with our portfolio. Of note, Promacta and Kyprolis hit again all-time high revenues in the third quarter, which will drive our royalties in the fourth quarter. These products are Best-in-Class medicines for serious life-threatening diseases, and they are marketed by major and highly respected international companies. Novartis announced Promacta Q3 revenues of $117 million. The highest quarterly sales ever, and 11% over the third quarter of 2014.

Of note this quarter there was a significant currency impact that impacted dollarized sales. We monitor US prescriptions and the prescriptions for Q3 were up nicely and drove solid growth in the US. In the past quarter Novartis announced the European Commission approved Revolade, the name of the product in Europe for the treatment of severe aplastic anemia in adults with certain conditions. Novartis announced the FDA approved an expanded use for Promacta, to include children one year of age and older with ITP. In addition to the continued strong commercial performance of Promacta, it's very encouraging to see the continued market and label expansion for the product now under Novartis' commercial business.

Another product I will add some comments about is Kyprolis, as investors who follow us know Kyprolis is an Amgen drug, that uses Captisol in its formulation. We have a licensing agreement with Amgen, but are not involved in the commercialization or development of the drug. Now on Amgen's earnings call last week, Amgen announced Kyprolis third quarter revenue of $137 million. That's a very significant increase over the prior quarter of $119 million, and over Q3 of last year of $94 million. Some investors estimated Kyprolis would do about $500 million in revenue in 2015, and by Ligand's estimates it looks like the product is on track to exceed that level this year. On their earnings call Amgen also announced that they expect approvals for Kyprolis in Europe, Canada, and some South American and Asian countries in the fourth quarter of 2015.

Now a comment about the approval stage drug [Ebamela], partnered with Spectrum. Spectrum expected FDA approval last month, but instead received a complete response letter from the FDA in relation to a third-party manufacturing question. Ligand is owed a $6 million milestone on approval, and we had included that amount in our 2015 guidance. We have talked to Spectrum and have monitored their public remarks. It is our strong belief that Spectrum can successfully address the issues, and we expect the drug to be approved. While we now don't expect to receive the approval milestone in 2015, we do expect to receive the milestone and see the product launched in 2016. We have enjoyed a few years of strong growth in profits and cash flow, and our outlook indicates our cash flow and profits will continue to grow.

With this history and outlook now is the appropriate time to release our valuation allowance, or our tax assets related to our substantial accrued net operating losses. While the release of the valuation allowance does not impact our core business, it does indicate our strong financial performance, and now will more readily call out in our financial statements this significant tax asset as a result of our past investments in the business, and the NOLs we have acquired through M&A. We are hosting an Analyst and Investor Day in New York City next week. The morning of November 18th. We'll discuss the business, provide updates on the portfolio, and present financial outlook for the Company. We encourage you to attend in person, or at the very least dial into the webcast. I will now turn it over to Matt Foehr.

Thanks, John. I'm going to provide some additional highlights on portfolio program developments from the last few months, and I'm also going to give a brief update on some progress with our internal unpartnered pipeline, and the expanded uses of our Captisol technology. Starting with our portfolio, the team at Viking Therapeutics has built significant momentum recently. As those of you who have been following Ligand for a while may know, Viking was formed around licenses for multiple Ligand assets. They successfully completed their IPO earlier this year, and are now in active clinical development. Viking completed a safety tolerability and PK study for their selective androgen general receptor modulator, or SARM, that they call VK-5211 in elderly subjects.

The study showed that their SARM, which was originally discovered by our scientists at Ligand was safe and well tolerated, and that the drug demonstrated predictable PK in elderly subjects. Viking then announced just last week, that they have now initiated dosing of the SARM in a Phase 2 study in elderly patients who have recently suffered a hip fracture. There's obviously a large and growing medical need for assisting patients with hip fracture, after breaking a hip elderly patients are known to lose bone and muscle at accelerated rates, placing them at risk for further morbidity, refractures, and prolonged disabilities. The profile of the SARM suggests it has robust anabolic effect on bone and muscle, which indicates that it could meet an important need in this setting.

Viking has indicated that they expect to have Phase 2 data for SARM in hip fracture in 2016. Viking also announced that they will be presenting additional data on the SARM program at the Internal Society of Sarcopenia, Cachexia, and Wasting Disorders in early December. Additionally Viking is actively progressing into clinical development their tissue selective agonist of the thyroid beta receptor in patients with hypercholesterolemia and fatty liver disease. They plan to file an IND for the TR beta program, and initiate Phase 2 studies prior to the end of this year, and expect to complete the Phase 2 trial in 2016. We are very proud of our relationship with Viking, as well as Ligand's scientific heritage related to the drugs that they are developing, and we look forward to two Phase 2 data events in 2016.

Changing gears in the third quarter we entered into an expansion of our relationship with Retrophin for Sparsentan as background Sparsentan is a selective dual-acting receptor antagonist with an affinity for both Endothelin and Angiotension 2 receptors, that is in development at Retrophin for focal segmental glomerulosclerosis, or FSGS. This drug was originally developed as an Antihypertension medicine by Pharmacopeia, a company that Ligand acquired. Sparsentan's mechanisms of action show that it can reduce proteinuria and nephropathies that are the hallmarks of FSGS, which is what led to our partnership with Retrophin. As I mentioned we updated our agreement with Retrophin in Q3. Specifically, this was in relation to potential expansion into the Asia/Pacific region. We did this because we see Sparsentan as a promising drug with global potential. Outside of the US Retrophin announced that the European agency for Orphan medicinal products issued a positive opinion for Orphan Drug Designation of Sparsentan in FSGS. The final decision that generally follows a positive opinion is expected within the next several months. Retrophin has also indicated that they expect topline data from their DUET trial in Q3 of 2016, and we look forward to hearing that outcome at that time.

Switching gears to our internal R&D and specifically our glucone receptor antagonist that we call LGD-6972. It continues to progress towards a Phase 2 trial in patients with Type 2 diabetes. We announced positive Phase 1b data earlier this year at the ADA Meeting and our currently completing non-clinical work, to position ourselves to start the Phase 2 in 2016. We are excited about the program, and we believe we have the potential to have a Best-in-Class molecule, with a novel mechanism for treating diabetes.

I'm going to wrap-up with just a few quick comments about Captisol. The week before last was The Annual American Association of Pharmaceutical Scientists Meeting, which is a meeting that brings together leading pharma scientists and formulators from all over the world. It's generally an important event for Captisol, and this year the interest and visibility for the technology was higher at the conference than it has ever been.

We were pleased to see presentations that referenced Captisol, and specifically will mention one out of Kansas University, that showed Captisol stability under very extreme formulation situations, and also data out of the University of Mississippi that showed enhanced dermal delivery of a testosterone gel formulation that was facilitated by Captisol. It's great to continue to see the growing body of data showing Captisol used in a variety of new and interesting ways, and it was fantastic to interact with many of our current and future partners, and hear about their experiences with the technology. And with that, I'll turn the call over to Matt Korenberg to run through the financials.

Thanks, Matt. I'll start today with a few highlights from our earnings release issued earlier today. Total revenues for the quarter were $17.7 million, and included royalty revenue of $9.8 million. The royalty revenue increase of 30% versus the year-ago period largely reflected higher Promacta and Kyprolis royalties. Captisol material sales for Q3 were $6 million, and collaborative R&D revenues were $1.9 million, both in line with expectations for Q3. On the expense side, our cash R&D and G&A expenses were slightly lower compared to the year-ago period, due to lower costs associated with business development activities.

Now a quick comment about gross margins. We once again saw higher gross margins as compared to the prior period. Our material sales margins are driven by both the mix of clinical versus commercial sales, and the volume of Captisol we purchased. As showed previously our margins are better on our clinical sales as compared to our commercial sales, and our overall costs are lower at higher annual volumes. For the quarter we reported adjusted earnings from continuing operations of $12 million, or $0.56 per diluted share, compared to $7.6 million, or $0.36 per diluted share for the same period last year. The primary driver of the increase is an increase in royalties from Promacta and Kyprolis, combined with a decrease in expenses. In the third quarter we had GAAP net income of $224.5 million, or $10.46 per share. Driven by the release of our valuation allowance related to our NOLs.

As we have discussed previously, Ligand has a useable portfolio of NOLs and other tax assets of more than $700 million. Through last quarter we had maintained a valuation allowance offsetting the entire balance due to the uncertainty of when we would use the NOLs and other tax assets. Given the sustained positive performance by the Company, and analysis of our cumulative historical earnings and forecasted future taxable income indicates that it's more likely than not that we'll utilize substantially all of the NOLs and other tax assets prior to the expiration, and therefore, we are releasing substantially all of the valuation allowance effective September 30th, 2015.

The income tax benefit from valuation allowance released net of our current period GAAP tax expense, increased our GAAP net income by $217.3 million, or $10.12 per diluted share for the third quarter. Roughly the $217.3 million equates to the future tax benefit we'll realize from the utilization of our NOLs and other tax assets. Now that the valuation allowance has been released, our GAAP EPS will appear as fully taxed on our income statement going forward, at approximately 36% to 38%. That's prior to any adjustments for differences in book and tax deductions other than the NOLs. Taking into account the usage of our NOLs and other tax assets, we continue to expect to pay cash taxes of less than 5%.

On the balance sheet we ended the quarter with just over $187 million of cash and investments. We generated operating cash flow of $10.4 million during the quarter, which is a meaningful increase from the $3.7 million of operating cash flow in the year-ago period. Our growing royalties and top line revenues combined with our relatively stable low cost infrastructure, continues to allow for significant cash generation. As John referenced, we are adjusting our full year 2015 guidance primarily to reflect an expected delay in the timing of receipt of the $6 million milestone payment due from Spectrum upon a approval of Ebamela. We now expect that milestone to be earned and paid in 2016, and will provide any updates on timing and outlook at our upcoming Analyst Day.

We now expect full year 2015 total revenues to be between $75 million and $76 million, and adjusted earnings per diluted share to be between $3.34 and $3.37. This compares with previous 2015 guidance for total revenues to be between $81 million and $83 million, and adjusted earnings per diluted share to be between $3.45 and $3.50. As you can calculate, we are adjusting revenue for the full impact of the delay of the milestone, but on the EPS line we expect that favorable changes to expenses and other items, will partially offset the delay of the milestone.

For the fourth quarter of 2015 we expect total revenues to be between $24.3 million and $25.3 million, and adjusted earnings per diluted share to be between $0.63 and $0.66. Adjusted earnings per diluted share guidance excludes changes in contingent liabilities, mark-to-market adjustments for amounts owed to licensors, noncash stock-based compensation expense, noncash debt related costs, pro-rata noncash net losses of Viking Therapeutics, and noncash tax expense. With that I'll turn the call back over to the operator, and open it up for questions.

Thank you. (Operator Instructions).

Our first question is coming from the line of Joe Pantginis with ROTH Capital Partners. Please proceed with your question.

Hey guys. Good afternoon, and thanks for taking the question. My first question revolves around 6972. I guess the question is, when could you get into the Phase 2 more specifically, and are you really looking to run the Phase 2 yourself, and build more internal value for the product before potentially out-licensing it or partnering it?

Yes. Thanks, Joe. This is Matt Foehr. As I mentioned earlier remarks, we're obviously real excited about the program. We are running some additional non-clinical work to facilitate the Phase 2 program. That work will continue into early next year, and then probably in the mid-year time frame, we'll keep folks updated as things progress, but is when we would be in a position to start the Phase 2. So we're excited about the program. We feel like we have got a Best-in-Class med. The more we see data from our program, the better we feel about it, and we're excited to be moving forward with it.

That is helpful. Thanks. And I guess you're always very selective, and I think that's always helpful with regard to maintaining your low expenses, or stable expenses I should say. Are there any other products that you might want to point to now that might be the next 6972 coming out of your platform?

Yes. We've got a couple of things, obviously that we continue to invest in. We maybe don't talk about all of the times, but I will bring up our small module oral G-CSF. Obviously we have got a history of discovery of successful small module [kinetics], not unlike Promacta of course. And those are the kind of programs that are more pre-IND, pre-clinical programs, but we feel like we have focused investment, we can continue to position. We have also got some Captisol-enabled programs, where we feel like Captisol can add specific benefit to maybe an active that is off patent, and could improve a product profile, and we have got some of those at earlier stages as well.

Okay. Great. Thanks a lot, guys.

Thank you. Our next question is coming from the line of Matt Tiampo with Craig-Hallum. Please proceed with your question.

Hey gentlemen. Good afternoon and congratulations on a solid quarter. I wanted to start by maybe just asking, I think it was pretty well understood that the $6 million that milestone is coming out, but it seems like you're able to weather that pretty substantially on the bottom line, at least the majority of it, and wondering if the strength there is coming from sort of continued strong gross margins, or if the current operating expense level will be the culprit in Q4?

Yes, Matt. It's a combination of both. I think margins on the gross side are better and that's helping quite a bit, and then the expense base is a little bit lower tracking than we had expected compared to guidance, or our internal focus on guidance. So yes, it's a combination of both.

Yes, Matt. John. You are good to pick that up. There are really two messages. One, obviously the Spectrum milestone we do expect to hit. It's a timing issue, but again our understanding of the technical issues and the like is that it will hit, obviously we won't see the revenue with their outlook in 2015, but you're good to pick up on, I'll say the better than expected performance in the rest of the business. When we look at higher gross margins, and some other, kind of small changes throughout the rest of the P&L earnings, notwithstanding that change in revenue adjustment, earnings actually is very strong for the business that we had estimated at the start of the year. So we are pleased with that. As we move into next year, we think at higher volumes we'll continue to enjoy a bit higher gross margins on Captisol, but we still need to talk about the overall expense structure, as it relates to our investment in Flucagon, but the business from an earnings and cash flow perspective are really strong.

Great. And then I wanted to ask if you can give us a sense for how Captisol sampling has progressed through sort of the middle part of the year, and then also it sounds like there's a pretty solid mix of clinical to commercial, and it looks like it will continue to be that way throughout the balance of the year, but maybe any additional color you can give us there would be helpful as well?

Yes. Matt, as I was saying, just coming off of AAPS, we continue to see increases in the in-bound requests for samples from new partners, new prospective partners, I think a lot of that comes from just the increased visibility of the Captisol technology, the growing safety database in our Type 4 and Type 5 drug master files that are real big value drivers to new partners, in terms of facilitating their dialogue with regulatory agencies, and facilitating their projects more quickly. So we are continuing to see good increases, real solid increases in Captisol sampling, which we're excited about. And I will say the mix in terms of clinical to commercial Captisol as we have said in the past, it can vary quarter to quarter. As a partner embarks on a Phase 3 trial, they may need for that program a big bolus of clinical grade material, so we do see lumpiness from time to time, and quarter to quarter in that mix, but we feel very good about Captisol's prospects.

Great. Thanks, gentlemen.

Thank you. Our next question is coming from the line of Larry Solow with CGS Securities. Please proceed with your question.

Hi. Good afternoon. Just on Promacta I think you guys said it grew 11% year-over-year. Do you happen to have what prescriptions did grow, and sort of what the underlying growth is, and I guess on the currency impact, you're subject to that, I assume, right? So whatever reported growth is sort of what royalties would be, correct?

That is correct, Larry. The last point. The currency I'll start with that. It's hard to look at the exact mix of every country, and the dollarized impact, but very roughly when we have looked at Novartis' public disclosures, the currency impact is, we estimate anywhere from 5% to 9% quarter-over-quarter, and it's just really an anomaly given what happened in the international credit markets and currencies. But having said that, again, all-time high sales report in dollars, and the US, since US is not impacted by currencies, we saw prescriptions what we're looking off of a public report, in Q2 prescriptions were about 10,700 as reported, in Q3 they were over 11,500. So that's just pure RX growth, and this is a Bloomberg Symphony data. So obviously we monitor the underlying prescription performance. It's solid and the overall momentum of the product is also solid, coupled with again, the new approval. The new territories and new indications, and some large indications, the oncology indications are still to come, with more Phase 3 data, and potential filings coming up in the next year or so.

Okay and on the gross margin question I realize a couple quarters don't make a trend, but I know you guys have spoken about some manufacturing improvements and efficiencies in Captisol, and was the gain this quarter, or the high gross margin clearly Captisol, and I think you mentioned some other lower cost and some other things, and then did it seem mostly because it was a higher clinical versus commercial sales, and it seemed like some of that is stand by, realizing on the operating side perhaps hard to say, because it could be some timing relation, but on the gross margin side perhaps you have a little better color on that?

Yes. I mean, Larry, fair question. The only cost of goods in our business relates specifically to Captisol.

Right.

The other payments milestone royalties are 100% gross margin. So Captisol is the factor. The higher volume is driving better pricing or cost for us, and this largely is due to a lot of the good work we're building in efficiencies with our contract manufacturers, but the other part as we talk repeatedly every quarter, it is mix. We have some visibility on estimated orders for commercial use throughout a year, but the timing of clinical orders is not perfectly known. So mix does drive a big part of this. The gross margin, the clinical sales are quite a bit higher, so there are those two factors. Again, there are some other elements throughout the P&L that also benefited the quarter from an earnings perspective, too.

Okay. And turning to Spectrum and the ebamela, it sounds like Spectrum is fairly confident in a fixable issue, and I guess you guys are sort of, I don't know if you're privy to the info yourselves, but clearly in the same ballpark as them. Is it sort of a not to pin you down exactly, but do you think it's something that happens more like in a six month time frame, or could it be more like 12 months, and how much of these sales, I guess you had given some projections out to 2017 in some of your longer-term projections. Did you guys include any meaningful royalties in those projections?

Yes. Larry, I'll comment. Obviously we're following the public narrative from Spectrum, obviously direct any detailed questions on to Spectrum, but as we understand they have been clear that there are no clinical issues associated with what was raised in the CRL. In general those sorts of things are resolvable. They have said they're in dialogue with the FDA, and again we see this as an approval, and now at this point we see it as an approval next year. So our view is that things like this are resolvable. It's a real important medicine, with real solid exciting clinical data behind it, and they continue to produce data actually there was a publication, there will be a publication coming out at ASH as well, but again at this point we're seeing as early, as next year.

Okay. Just lastly on your upcoming Analyst Day, without stealing your thunder any particular tease, how about a little teaser on anything we might, anything new and exciting we might see or learn that you could preview?

Well, fair question. Appreciate the invitation. I'll give a general overview, and we encourage investors to attend obviously.

Absolutely.

We aren't going to go through the substance of the format now, but typically for those who are newer to Ligand we do an Analyst Day about once a year. It's not exactly on the calendar, but we really look to have a substantive update as it relates to the body of developments in our portfolio. The past year we've had a significant string of new deal making, we had the Viking IPO. Just a number of other new developments, not to mention some fairly significant maturation or progress with the portfolio. So beyond the updates, it's putting in context for what do these events mean for the Company, the size of the portfolio, the Late Stage, the diversity, and we find its useful at a forum that it will be about a 1.5 hour program, to put these events in context and describe what does this mean for Ligand going forward over the next two to three years or so. So that is the general focus.

We have invited Brian Lian, the CEO of Viking to join the program. He will have a presentation on some of the Phase 2 stage programs at Viking, which we have done this in the past, where we invite a particular partner to come and talk about their programs, that are we think are of interest for Ligand and our investors. So that will be an element of it. We're also having our General Counsel join us to discuss our investment in intellectual property, and out patent state, this is a very important part of our business, and with the growing value of our royalties, we're going to showcase that. And also we're going our have one of our senior scientists joint us, Eric Vida, to go a little deeper into our glucagon receptor program for diabetes. So it's a program that we're looking forward to, and hopefully you will join us next Wednesday.

Absolutely. Looking forward to it as well. Thanks a lot.

Thank you. It appears we have no further questions at this time. So I would like to turn the floor back over to Mr. Higgins for any additional concluding comments.

Well, thank you. Good turn out on the call today. Appreciate the interest and the questions, and as we just went through a few minutes ago, we'll be back in front of investors in about a week and a half for our Analyst Day. Thanks for joining us.

Ladies and gentlemen, this does conclude today's teleconference.

Again we thank you for your participation, and you may disconnect your lines at this time.