Ligand Pharmaceuticals Inc (LGND) 2016 Q4 法說會逐字稿

Greetings and welcome to the Ligand Pharmaceuticals quarterly earnings conference call. At this time all participants are in a listen only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now like to turn the conference over to your host, Todd Pettingill. Thank you. Please begin.

Welcome to Ligand's fourth quarter of 2016 financial results 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 and its management regarding its internal and partner programs. 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 in Ligand's earnings press release and 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 represents the Company's best judgment based on information available and reviewed by the Company as of today February 23, 2017 and do not necessarily represent views of 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.

Welcome and thanks for joining our earnings call. We've wrapped up a strong 2016 and are positioned nicely to build on our financial and business momentum as we move into 2017. Last year was a year distinguished by solid financial performance, significant increased investment in R&D, excellent integration of our OMT acquisition at the start of last year, and a substantial expansion of our portfolio of fully funded programs.

A quick overview in terms of financial performance, the business had stellar royalty growth and major contributions from contract payments. Corporate gross margins were 95% for 2016 and the Company generated significant cash flow from operations.

Let me provide some highlights for our main royalty financial drivers. Promacta continues to perform very well under Novartis commercial leadership. As background, it's a treatment Ligand discovered for low platelet count, or thrombocytopenia.

Q4 Promacta revenues by Novartis were $178 million, and full-year 2016 revenues were $635 million. That is an impressive 37% growth over full-year 2015 revenue, and it is especially impressive year over year growth, given the product that has been on the market for eight years.

It's an important product that stands out in its medical category in what it offers it's targeted patients. We expect continued growth for the product with sales eventually exceeding $1 billion annually, based on reports by security analysts who cover Novartis. We enjoy tiered royalties on net sales and now with the growing level of sales, nearly half of the revenue for the product in 2017 will yield royalties to Ligand at the highest tier, which is near 10%.

Moving onto another product, Kyprolis also continues to perform will commercially. And it is an important second line treatment option for multiple myeloma patients. As investors who follow us know, Kyprolis is Amgen drug that uses Captisol in its formulation. We have a license agreement with Amgen but are not involved in the commercialization or development of the drug.

Amgen reported $183 million in Q4 Kyprolis sales which results in full-year sales of $692 million. In addition, ONO is Amgen's Japanese commercial partner for Kyprolis and ONO launched the product in Japan in August. Sales for the last five months of 2016 were nearly $10 million in Japan, so combined worldwide sales for Kyprolis were $702 million in 2016.

The product is doing well by many standards and third-party analysts expect that to continue to grow significantly. That said, the multiple myeloma market is a very important medical market that serves terminally ill cancer patients and several companies have invested significantly to bring their own products to market with different mechanisms of action. Consequently, the category has become very competitive.

Kyprolis is still positioned well in the treatment paradigm and Amgen recently announced it will be commencing a major Phase III trial exploring the use of the drug in combination with Janssen's drug, Darzalex, a leading new antibody drug in the category. 13 analysts cover Amgen and by 2020, the revenue estimates for Kyprolis range from $1.3 billion to $1.7 billion. A doubling of revenue from current levels.

Onto another product, EVOMELA is a product formulated with Captisol and commercialized by Spectrum Pharmaceuticals for stem cell transplants associated with the treatment of multiple myeloma. It was approved and launched in 2016, so last year was the first year Ligand earned royalties. It's an important new product and Ligand will earn a 20% royalty on sales.

Spectrum has not yet reported Q4 2016 sales for EVOMELA, but in Q3, the product realized good growth over its initial weeks of launch in Q2. We expect this product to contribute a solid measure of new annual royalties to Ligand in 2017 and beyond.

We recorded $27 million of contract revenue in 2016, which consists of license and milestone payments. Across-the-board it was an outstanding year of partner events and revenue earned by Ligand for contract payments, driving record high revenue. We have both an expanding portfolio of partnerships and programs advancing to later stages of development. Which together are driving both the number and the size of contract payments.

Captisol material sales came in lower than we expected as we closed out 2016, driven by external factors at our partners and some delays in product launches. Overall, the Captisol business is doing well. While we would've liked to have booked more orders in 2016, the fact is we have more Captisol customers than ever before, there is continued clinical demand for Captisol and the commercial products that use Captisol are generally early in their commercial lives. Matt Foehr will discuss more, but we've seen record levels of sampling, we continue to sign up new customers and many important partners are advancing towards potential product launch.

A quick remark about cash expenses and investment in R&D. We spent just under $29 million to fund operations in 2016. We view that as a lean operating cost structure supporting a very productive and high-growth business.

What is impressive is that while costs have moved up modestly over the past few years, we have generally been able to hold general and administrative expenses steady, focusing our investment in increased spending on R&D. Specifically, we are pleased to be well underway running a major phase two trial for our GRA diabetes program and we've built in new investments in our cost structure supporting our promising and expanding on the Omni-Ab antibody drug discovery platform.

Finally, a few remarks about our 2017 financial outlook, which we provided in our earnings release. Matt Korenberg will review the numbers, but I will provide some perspective on our guidance given the substantial growth and evolution of our business as we move into 2017.

Instead of a specific revenue range for 2017, we are providing projections for what we view as core revenues for the business based on our three main categories of revenue, that are royalties, Captisol, and contract payments. Plus we will provide some information for additional potential contract revenue. We see 2017 royalties coming in line with analyst expectations for the major products from which we earn royalties. For Captisol our 2017 outlook is essentially consistent with 2016 Captisol revenue. We are confident in the strength and growth potential for Captisol but are calling an outlook flat to 2016 as we await more information on late stage trial data and product launches.

Finally, for contract revenue, we are providing revenue outlook for a core amount of revenue we expect will be earned and also provide some general information about potential additional revenue we could earn in 2017. We see a very substantial calendar of more than 60 events where we are entitled to payments potentially happening in 2017. Most likely all will not occur and we will provide more information on any additional contract revenue we might book as the year progresses, and we learn more about the time and probability of the full range of events.

The number of milestone events we are facing is increasing each year and owing to the later stage of many of those events, some of those milestone payments are quite large. As such, we are taking this new approach to milestone guidance which reflects the range of external events we face going into the year. And now with that, I will turn it over to Matt Foehr to talk about our portfolio.

Thanks, John. I'm going to start off today reviewing additional key developments with some of our partner programs. And I will also provide updates on our two main technology platforms, Captisol and OmniAb. And I'll touch on recent licensing activity and the progress of our Phase II diabetes program. Our partners at Melinta Therapeutics announced that they have been assigned a PDUFA date of June 19 for Captisol enabled Baxdela. As a general reminder, Ligand has a 2.5% royalty on global net sales of Baxdela.

In the latter part of the fourth quarter, Retrophin presented positive data for their drug Sparsentan and focal segmental glomerulosclerosis at the American Society of Nephrology meeting in Chicago. They presented at the High-Impact late-breaking clinical trial session at the meeting. And as expected, the data were well received. Retrophin indicated their plans to meet with the FDA to discuss the regulatory path for the drug and we continue to watch for developments there. Sparsentan is a drug for which Ligand would earn a 9% royalty on potential future net sales.

Last week, Merck announced that verubecestat would not meet its primary efficacy endpoint in a Phase II-III trial that treated patients with mild to moderate Alzheimer's disease. I'll note that Merck continues a Phase III trial in early stage or prodromal Alzheimer's patients. They began the second trial, called the APECS trial, in 2013 and it includes 90 centers globally and 1500 patients with prodromal Alzheimer's, which is described as mild cognitive impairment due to Alzheimer's.

The patients in the APECS of Phase III trial have measurable cognitive deficits along with a positive PET scan performed with an FDA approved amyloid tracer called flutemetamol, but who are not yet functionally impaired. APECS compares two different doses to placebo for a two-year treatment period and will address the outstanding question of whether early intervention is a key to clinical success for this devastating disease.

Earlier this month, Merck indicated that they have completed enrollment in the APECS trial and expect data in early 2019. Alzheimer's has clearly been a very difficult indication if not the most difficult area in drug development for a long time. And we continue to watch as data for Merck's first trial become visible and to 2019, when the Phase III APECS trial in early stage patients is expected to complete.

Our partners at Viking Therapeutics have continued to build momentum toward readouts this year of two Ligand partnered Phase II trials from their pipeline programs VK5211 and VK2809. First is VK5211, which is an orally available nonsteroidal selective androgen receptor modulator, or SARM. It's in Phase 2 development at Viking for the treatment and prevention of lean body mass loss in patients who have undergone hip fracture surgery.

VK2809 is a small molecule thyroid beta agonist in Phase II for hypercholesterolemia and fatty liver disease. That Phase II is also expected to read out this year.

In November, Viking presented new clinical data for VK2809 at the American Heart Association Scientific Sessions showing statistically significant reductions in atherogenic proteins observed following 14 days of treatment. Which builds upon previously reported data showing substantial reductions in LDL cholesterol and triglycerides.

Additionally just last week, Viking announced that they are pursuing an additional indication for VK2809 in glycogen storage disease 1A, and announced plans and financing around filing an IND and starting a human proof of concept study this year. We are very pleased to see the work that Viking has done around added indications for the programs.

Our partner Aldeyra recently announced their updated plans for Captisol enabled ADX-102. Those plans include Phase II B and Phase III trials in multiple ophthalmology-related indications including a Phase III start in this year's second quarter.

In January, Vertex announced it licensed rights to Captisol enabled VX-970 to Merck KGaA. We obviously have an existing relationship -- highly productive OmniAb relationship with Merck KGaA, and are pleased to now also have a Captisol-related partnership with them as well.

VX-970 is a first in class inhibitor of the DNA damaged repair enzyme ATR and is currently in nine actively recruiting phase I and phase II oncology trials. Over the years we've seen a number of Captisol enabled assets become important pieces is both M&A or licensing between established companies. And VX-970 is one of the latest examples of this.

Our Captisol and OmniAb technologies continue to be important vehicles for further diversification and growth of our partner pipeline. We invest in intellectual property as we continue to innovate with both of these technologies.

We are pleased to receive news from the US patent office that a new OmniAb patent issued in late October. That patent is directed to a [novel three prime enhancer] region of OmniRat and effectively extends our US patent protection for OmniRat to April of 2034. We also focused on global IP for the OmniAb platform and recently were granted a patent from the Korean patent office as well.

For Captisol, we now hold issued patents in over 60 countries, with patent protection through 2033 in major markets, including new patents that just issued in 2016. Interest in Captisol continues to grow substantially as we expand our [dramaster] file and the technology continues to experience clinical and commercial validation and success globally.

In 2016, we processed over 820 new inbound Captisol sample requests, which is a record high. As a comparison, in 2011 when we bought Captisol and brought it into Ligand, we received less than 200 inbound requests. Over that timeframe, we have also entered into over 450 research use and animal use agreements for Captisol. Which is further indication of the growth and diversity of our base of Captisol users.

We see our technologies as a key element in continuing the growth and diversification of our portfolio of partnerships. Like we continue to do with Captisol, we are expanding our reach with the OmniAb platform as well. And as part of that, we recently announced a new addition to our team focused around antibodies and large molecules and we are pleased to welcome Dr. Christel Iffland to Ligand. She joined us earlier this month from Merck Serono.

Switching now to licensing. In recent months we disclosed a new OmniAb partnership with ONO Pharmaceuticals. ONO represents our first Japan-based multi-national partner for OmniAb, and is a respected and well established player in the antibody space. Under the agreement, we are entitled to receive annual access payments on each anniversary of the deal, and will be eligible to receive milestone payments and royalties on future sales of OmniAb antibodies.

We also recently expanded our Captisol relationship with Novartis. Entering into a commercial agreement for Captisol-enabled pediatric formulation of trametinib, which is a MEK inhibitor globally as Mekinist by Novartis.

In Q4, we entered into a new commercial agreement with [Bilatecha] Incorporated and I'll also briefly mention that just earlier this week, we entered into a new clinical license agreement for Captisol with Eisai.

I will conclude with a brief remark about our internal pipeline, specifically our glucagon receptor antagonist or GRA program, known as LGD-6972. We have been pleased with the engagement and progress at our clinical sites that are participating in the Phase 2 GRA trial. Enrollment has continued to progress according to our expectations and we're generally anticipating completion of enrollment in the very near future. And to having data in the second half of this year.

I also note that our program and glucagon antagonism were highlighted in a recent Nature Reviews article authored out of Dana-Farber and Harvard Medical School that reviewed the role and potential management of hepatic glucose metabolism in the treatment of type II diabetes.

We will be providing more details on our platform technologies, Captisol and OmniAb, as well as our GRA program at our Analyst Day event, which is coming up on Tuesday. And with that I'll turn the call over to Matt Korenberg to discuss the financials.

Thanks Matt. 2016 was another year of significant growth for Ligand with respect to revenue, royalties and cash flow. Looking forward, we continue to foresee significant growth in total revenues coupled with relatively flat cash operating expenses. And as a result, continued growth of earnings and cash flow.

We expect strong growth in royalties from Promacta and Kyprolis, the addition of royalties from recently launched EVOMELA and further royalties from potential product launches. And on milestones, as John mentioned and I will detail in a minute, the contribution for milestone and license revenue based on achievements of our partners developing our portfolio programs will have the potential to dramatically impact 2017 and beyond.

Turning now to the financials, I'll start with a few comments on revenue for the quarter and the full-year of 2016. Total revenues for the quarter were $38.2 million and included royalty revenue of $19.6 million. Both of these figures represent record high quarterly numbers for Ligand since the transition to our current business model ten years ago.

Royalty revenue grew 70% over the year ago period and total revenue was up 80%. The royalty growth largely reflected higher Promacta and Kyprolis royalties, coupled with addiction of EVOMELA and CorMatrix to our roster of commercial products that are generating royalty for Ligand.

Milestone and license revenues were $9.5 million versus $2.4 million for the year ago period, with the increase due to the timing of achieving milestones and the addition of OMT. Captisol material sales for Q4 were $9.1 million, which is one of the largest quarters ever for Captisol despite the delay in orders we saw tied to the launch of certain commercial drugs.

For the full-year 2016, total revenue was $109 million versus $71.9 million in 2015. The substantial increase in revenue represents 52% year-over-year growth and more than three times the revenue we generated just four years ago in 2012.

I mention 2012 because that with the first year we were cash flow positive. With the revenue growth since that time, and our almost flat cash expense base, we have been able to significantly grow cash flow over that period. In 2014, cash flow from operations was just over $20 million, in 2015 just over $40 million and now in 2016 it's over $60 million. We at Ligand are proud of this trend and we see it continuing into 2017.

Regarding gross margins, our Q4 gross margins for Captisol were lower as compared to Q3 as well as to the prior-year period. As we've mentioned consistently, our mix of commercial and clinical materials can shift significantly from quarter to quarter and year to year resulting in changes in gross margin.

Recognizing that Captisol material sales are the only item that generate significant cost, it's useful to mention quickly our overall corporate gross margins. In 2016, our corporate gross margin climbed to 95%, up from 92% in 2015, driven by the strong growth in our 100% margin royalty and milestone revenue lines.

On the expense side, our Q4 R&D and G&A cash operating expenses were about as expected and we ended the year with just under $29 million of cash expenses. For the quarter we reported adjusted net income of $16.1 million or $0.74 per diluted share. Compared to $12.2 million or $0.59 per diluted share for the same period last year.

As reminder, our adjusted EPS reporting methodology has changed beginning with this fourth quarter, as we outlined in our 8-K filed on January 18. For Q4 2016 and going forward, we will no longer adjust earnings for non-cash taxes that are included in our GAAP earnings.

Despite the fact we pay less than 1% cash taxes as a result of the utilization of our NOLs and other tax assets, our GAAP financials reflect a fully taxed number that represents the amount of tax assets used in a given period. Historically we would adjust for these non-cash tax amounts in calculating our adjusted net income and EPS. Going forward, we will not.

Given that, I also wanted to mention that we provided a table in our earnings release that allows investors to bridge between our new method and our historical method both for Q4 2016 and full-year 2016. As you will see in that table, adjusted net income and EPS in the quarter under our historical calculation were $27.2 million and $1.25 per share, respectively. For the full-year 2016, it would've been $72.4 million of net income and $3.33 of adjusted EPS.

On the balance sheet, we finished the year with $141 million of cash, cash equivalents and short-term investments, fueled by the $63 million of operating cash flow generated. In Q4 alone we generated $21 million of cash flow, an increase from the $13.7 million of operating cash flow generated in the year ago period.

Lastly, before I move to financial guidance, I just wanted to touch briefly on our GAAP net income for 2016. As outlined in our earnings release, GAAP net income for the year showed a loss of $1.6 million. GAAP earnings were impacted by a write down we took related to the common stock holdings we have in Viking Therapeutics.

Given the stock price has sustained below our book carrying value for a period exceeding 12 months, we have effectively marked a portion of the holdings to market. We have not sold any shares and continue to believe that Viking is executing well on the plan it outlined at the outset of its clinical development work. Combined with the mark-to-market charge in Q4, our share of pro rata losses of Viking expenses and charges taken related to the dilution of our position in connection with the financing that they completed earlier this year, Viking impacted our GAAP net income by over $20 million in 2016.

Turning to guidance, as detailed in our press release, we are providing updated full-year 2017 financial guidance. We continue to expect solid revenue and earnings growth for 2017. As John already discussed, we're moving to a forecast focused on core revenue and simultaneously giving our investors a sense of the potential upsides we see.

More specifically, our core revenue estimate assumes about $87 million of royalties, in line with the consensus of research analysts covering our partner companies, about $23 million of Captisol sales, and at least $20 million of milestones and license fees. As I'll detail at our Analyst Day event next week in New York, this year could be significantly impacted by milestones and license fees.

Coming off a year in which we saw $27 million in milestone and license revenue, we believe that in 2017 we will see at least $20 million. However in total, we believe there is more than $30 million of additional milestones that could hit in 2017. In total, there are over 60 events that we think of a chance of happening in 2017. Of course not all will be successful and some may not happen in the calendar 2017 window. Our best estimate today though is that at least $20 million will occur and can be recorded in 2017.

This all translates to full year 2017 core revenues of at least $130 million with upside for milestones and license fees and adjusted earnings per diluted share to be at least $2.70. Similar to 2016, we expect about 40% of our revenue and adjusted EPS to fall in the first half of the year. Guidance I've just gone through reflects our historical revenue recognition policies and therefore assumes our royalty revenue will continue to be booked on a one quarter lag.

As mentioned in our 8-K filed in January, all companies will be required to adopt the new ASC 606 revenue recognition guidelines in 2018. We currently anticipate adopting the guidelines at the start of 2018. And at that time, our royalty recognition will move from the one quarter lag to being recognized in the same period the underlying sales are generated.

One final note on guidance for adjusted EPS. As I mentioned, we are moving to a fully taxed adjusted EPS number. Our adjusted EPS will be calculated using a tax rate reflective of the utilization of our NOLs, assuming our taxable income matched our adjusted income. We currently expect that tax rate to be between 36% and 39% and I'll provide more details on 2017 guidance and the rest of the P&L at our Analyst Day next week.

Lastly, just a reminder that our adjusted diluted EPS guidance excludes stock-based compensation expense, non-cash debt related costs, changes in contingent liabilities, transaction related purchase price amortization, our pro rata share of net losses of Viking Therapeutics, as well is the fair value adjustment to our holdings in their common stock and convertible note and warrants, our mark-to-market adjustments for amounts owed to licensors, the excess convert shares covered by our bond hedge and certain other one-time nonrecurring items. With that, I'll turn the call back over to the operator and open it up for questions.

(Operator Instructions)

Drew Jones with Stephens.

Thanks, good afternoon guys.

Hey, Drew.

Looking at the guidance for 2017, wanted to dig into a couple areas of that a little bit deeper. Starting with the contract revenue of $20 million, can you flesh out the composition of that a little more? And specifically, OMT contribution there. And maybe how much of that is from new partners and how much of that is from programs maybe progressing into the clinical stage?

Good question, Drew. We will certainly have a lot more detail at Analyst Day next week on the specifics of milestones and the buckets. But generally speaking, I think that the milestones across all the 60 events do spread across all the buckets that you referred to; OmniAb, the clinical events, regulatory events, and some other things progressing through development in different ways. We haven't given specific guidance on OmniAb generally speaking other than the $12 million that we mentioned at the outset of the acquisition. That still is, generally speaking, about in line with where we see the composition of that $20 million.

So the $12 million doesn't really change much even though you guys have added new partners?

Correct. The $12 million reflected some new partners. We've done more than we expected, so it would probably be a bit above the $12 million, but it's around that number still.

And then just -- sorry to keep picking at the milestone area, but the decision to exclude the $30 million from guidance now, is there less certainty involved? These seem like some potentially significantly larger milestones that are out there. Are there any events in particular that maybe you could point us to a couple that would be needle moving, maybe?

Yes Drew, it's John. Some perspective, and investors or analysts who have known the story for the last couple of years, I think will readily recognize these events. And now that we are in the calendar year, we want to be, one, very transparent with the magnitude and the quantitative dollars and the number of events but also be realistic that they're out of our control.

An example I will share is related to EVOMELA, product partnered with Spectrum. In 2015, we expected approval, and upon approval we were due a $6 million milestone payment. The NDA was set for approval in the fourth quarter, October time frame, and we were highly confident the drug would get approved. At that time though, Spectrum got a complete response letter, they had to answer some manufacturing related questions. And that approval came the next year, in March five or six months later.

So our outlook, our confidence in approvals, was very high. We were correct in that it did get approved. At the time, this is back into 2014, we thought it was reasonable to make some assumptions that the $6 million would be included. But this is a good example where there was about a two quarter delay which obviously impacted 2015 revenue and so on.

So that's an example, another more recent example, Lundbeck, they have of a product, Carbella, which we thought would be approved in September, at the end of September. And we were owed a milestone, significant milestone, it actually got approved October 7, about a week or two later after that core cut off.

So these just illustrate the sensitivity of timing. In both cases though, the products were approved, and I think in terms of the overall picture, really not a consequential impact. When we describe our revenue, we did $27 million of contract revenue in 2016. That is a profound amount of revenue.

We have over $2 billion of potential payment under contracts with our partners. Obviously, that's spread over a long period of time, and based on a lot of events. But when we look at 2017, we feel very comfortable saying we will book at least, at least -- and that's important, at least $20 million. We do believe we will book more than $20 million, but right now, early weeks of 2017, we aren't prepared to call the timing or the probability of this other $30 million of potential milestones.

So that's some perspective. We absolutely had these contracts, we've got visibility on the timing on the dollar amounts, but we aren't going to put this into a traditional tight range bounded guidance. We want to just really be illustrative of the potential, and we will give more information as the year progresses.

Understood. Thanks, guys.

Matt Tiampo with Craig-Hallum.

Hi gentlemen, good afternoon. I want to follow-up on Hunter's question just a little bit. Maybe you can give us a sense for what your previous outlook assumed from a methodological standpoint in terms of discounting the potential milestones that were out there.

So it's relatively easy for us to take the 130 base and then walk $30 million across to the $160 million previously. But I can't believe that there isn't some other bucket that is -- maybe its material sales, it's come down a little bit. Given that you probably didn't have 100% contribution from available milestones in that previous guidance. Thanks.

Yes, Matt, good question. I will add some color and Matt Korenberg can jump in. Overall, 3 main buckets of revenue. We believe we've got good visibility on -- the royalty is obviously the majority of our revenue, 100% gross margin, and consistent with our practice, we are really looking to third-party analyst estimates to drive that. I think Promacta is on or maybe ahead of schedule over the last year or two. Novartis is doing very will, Kyprolis is -- we are very pleased with this performance, but frankly it's coming in probably lighter than what we or analysts would've expected about a year ago.

Partly it's competitive, the competitive environment, obviously there's sharing of revenues, but also they had a setback on one of their trials. They've had very good clinical success but one of their trials that would've supported label expansion did not come in at the second half of last year. So some pluses and minuses there, but I think royalty's fairly in line with what we been looking at historically.

Captisol, we've talked about this, we are very proud of the fundamentals with Captisol, but because of timing of data and approval, 2016 came in light. We were expecting numbers in the $25 million and $30 million range, we came in around $22 million. So as a predicate, as a base value, I think Captisol contribution for 2017, very plainly speaking, is a bit lower than what we would've expected six or nine months ago.

With regard to milestones, we know this year we are looking at a Carbella launch. We are looking at Baxdella approval and launch. We are looking at data from SAGE, and a potential approval for that product. There are a number of regulatory events around Sparsentan.

So this is a short list, but I presume a very obvious list for investors of major late age assets that do have not only milestones, but in some cases Captisol and royalties tied to them that are going to hit in 2017. So instead of assuming we run the table and over promising on revenue, we want to be completely transparent, we want to lay out the information as we see it now, and provide more information as the year progresses. And I will see if Matt wants to add any other color.

I think the only thing I'd add, Matt, is very specific to your question about maybe the difference in methodology or buckets I think is, as John just alluded to, and you can speculate, related to those regulatory events there a couple larger milestones, a handful of larger milestones that have moved out of the 2017 window in our mind into 2018. So there are some -- [the thirty] bucket, it wasn't that we were calling 100% of thirty bucket previously, and now we are calling less than it is now. The bucket has shrunk just a little, and we are being transparent about the size of the bucket.

That is helpful actually. Thank you. In terms of Captisol, do you think that, that 2017 estimate for Captisol is a little bit lower than he might've -- clearly lower than you would've expected six to nine months ago, but do you feel like you've taken an appropriately conservative stance there, similar to what you've done with milestones?

Yes. I think that's right, and again, not to keep plugging Analyst Day, but we will have a little more about this next week. But we did a deep dive on customers and buying patterns and things like that. And while it's going to continue to be lumpy and we can't predict the timing of everything, we feel like the 23 number is a very good solid core for the Captisol number, with some upside from some of the products that get launched or moved through the regulatory pathway.

Great. Thanks very much, guys.

Larry Solow with CJS Securities.

Good afternoon. Not to beat a dead horse, just on the Captisol though, and I know you guys have your Analyst Day in a few days, is it fair to say with all the growth metrics and barring a change or something unforeseen hard to say what growth is this year, but fair to say that over the long-term you would expect this number to continue to grow?

Yes. And -- yes, clearly we do for two reasons. Today, about 40% of our portfolio are tied to our capital base customers. Okay. So very significant amount of customer base.

We have about 14 revenue generating assets today and about half of them or so are Captisol based. But we expect the number of approved products to increase meaningfully when you go out, let's say, to the end of the decade, we could have 14 or 15 Captisol base products approved up from 7 or 8 right now.

So not only will more products be approved pulling out demand for Captisol commercial use, but also as I mentioned in my remarks, the products, when you [look at] EVOMELA, and Kyprolis, the existing Captisol products are very early in the lifecycle. So new product launches continue growth for all those reasons, demand for commercial use will definitely increase and we expect to drive the core Captisol use.

The clinical side of the business is also a very important part of the revenue contribution. But every product is different. Number of patients, whether it's 50 patients or a thousand trial size; the amount of Captisol used to solubilize the drug, highly variable; the number trials required to get approval; that is more abstract.

It's difficult to talk out three or four years what the clinical demand will be. But as Matt said, if sampling has gone from 200 a year to 800, if the publications and the interest and success with Captisol is growing, we expect there will be continued pull through for clinical use as well.

Right. You just assume based on a reasonable hit rate, you would assume it should grow unless something in the competitive environment changes or something. Okay. Fair enough.

And just in terms of the -- again just on the license payouts or expected payments. It sounds like basically you have that $20 million and I guess some of the $12 million from OMT also has some portion of milestones in it. But I guess I view significant amount of that is highly visible for you guys, right? So the other $8 million is coming from the 60 events and there's a bunch that you're not including in there? Is that a good way to look at it?

Hey, Larry. Of the $12 million that we originally called on OmniAb, more than half of that is tied to just regular annual renewal and licensing fees. We've got a good window on that.

The balance of that is products going into clinical trials. We said that we expect three going into clinical trials this year. We're hopeful it's going to be more, but that is what was included in the original numbers. The balance of the 20 are things that we do have a pretty good window on. Trials that are lined up ready to start, or those sorts of things.

Got it. And just the growth and expected royalties obviously, pretty significant. Still majority -- will there be any material -- are you building any material benefits from anything outside of Promacta and Kyprolis at least by themselves? I realize together the rest of the stuff may be material, but anything material by itself?

Yes, Promacta, Kyprolis, and EVOMELA make up about 95% of royalty sales in our projections. Promacta and Kyprolis, EVOMELA well covered, as John alluded to in his talk, that we use the research analysts and make a couple tweaks to those based on whether the research analysts are out of date or whatnot.

But other than that, if you just take the consensus of those three, the average of the high and low, the gets you to about 80 and change of royalty. Then you had CoreMatrix and the other products onto that and that's how we get to the 87.

Got you. And just lastly, your upcoming analyst day next week. Going to give us a teaser or anything we can look forward to and are you guys going to provide any sort of longer-term financial outlook like you have in years past? Thanks.

So on the finance side, I will comment and then maybe Matt will comment on some of the other program highlights. We will give what we're calling our outlook to 2020. It won't be specific numbers or guidance, but we will give you some guidelines to work your models.

Got you.

Yes Larry, this is Matt Foehr. We'll also do a deeper discussion of both OmniAb as well as Captisol, which obviously key technologies that are driving further partnering, diversification and growth of our portfolio. Also a deeper discussion of our GRA program, our glucagon receptor antagonist, which is well in its Phase II right now.

Great, thanks.

Greg Fraser with Deutsche Bank.

Thank you, this is Fraser on for Gregg Gilbert. I just want to follow-up again on the material sales guidance. As we think about 2017, Kyprolis sales will be higher, EVOMELA with be higher, Carnexus should be launching. You have more partnerships for Captisol than ever.

All else equal, it seems like that line should be higher versus 2016. Wondering if you can give us some more color there. I know you're going to talk more next week, but any more commentary there would be helpful.

Look, we've said it before, but I will reiterate that some of our partners make large purchases well ahead of things like launch and trials. And as we dug into the details of 2016, what we quickly realized by the end of the year was that some of our large partners basically have had enough of Captisol to last them through particular trials or launches or whatnot. And so we have adjusted for that, and we think the core is where it is, and we think there's upside as new trials and growth in products and things like that.

You have a good list. This is John. You have a good list of products or commercial drivers. EVOMELA is a high royalty, an excellent royalty, it's actually a small user of Captisol. So that's not a major variable under really a broader range of revenues scenarios.

When you look at Lundbeck's product, Carbella, this is an example of a product that again, we thought would be approved in September and came in October. It has not launched yet, they are still working through some timing issues related to lunch. We do expect that product to launch in 2017. But the magnitude of orders will be different whether it's early 2017 or late. A couple of variables like that.

But overall we feel we do have good visibility on the number of customers, we have obviously excellent relationships. Anecdotally, I know Matt is going to go into this a little more next week, but our rating as a vendor, as a supplier of an excipient has improved significantly.

A few years ago we were a small market cap company, had a much different capitalization and credit rating. And frankly, we provide excellent service and reliability. And this has really changed the inventory requirements held by partners and the like. So overall the business is doing well, and we've got some good metrics I think to talk about that next week. We are calling a number that we feel very good about for 2017, and we hope that there is some upside there.

Okay, that's helpful color. Thanks for that. On the additional $30 million of potential contract payments, are there any chunky things in there? If so, could you call those out?

There are, and we are going to try to give a little more information next week. Just in a larger format and with the benefit of slides and the like. But it's going to be limited information.

And the reality is and I think investors who know us, we really try to be as transparent as possible. When this is a royalty based business, when this is a contract payment based business, we want investors to know the amount and the event by which Ligand is going to get paid. Most of our partners though really invoke strict confidentiality provisions and don't permit us to talk about that until payments are either been made or are imminent within a couple of weeks or so.

So we will largely describe this probably tied to type of event, Phase III data, product filing, approval, et cetera. But it's unlikely that we are going to be giving much specificity in terms of the dollar amount or the exact product or event that it is tied to.

Okay. Thank you.

(Operator Instructions)

Eugene Fox with Cardinal Capital Management.

Hey, gentlemen. So I guess the 270, Matt, if I do the math, would be equivalent of about 415, 420, something like that in terms of the previous guidance? Does that make sense?

Yes, tax is harder to predict then that quite exactly, but by our math it is closer to $4.50 or so.

$4.50.

Yes. Just to be clear, that is just at the $130 million, and if we have milestones that come in above that, that obviously all drops almost 100% straight for the bottom line after-tax.

That's sort of where I was going. It seems like because of your cost management, you are actually able to bring more of it to the bottom line than one would've expected, given the change in core revenues. Is that correct?

Yes, you are exactly right. I think our expense management and otherwise has been a little bit better than we predicted a year ago when we set the guidance.

Yes, margins, cost of goods, are holding very well, if not better than expected. The operating expenses, again, we are very pleased, we are running a very productive high growth business. But research costs are relatively flat. We know share count very stable, it's a very small growth -- interest rate, the interest environment is still very low, but the actual cash tax rate is below 1%. We are now obviously reporting out on a fully taxed basis, that was going to be inevitable in the next few years anyway, but we're doing it now.

But I think your general reaction to the math on $130 million of revenue what Matt Korenberg is saying that, allowing for some tax assumptions, equate to about $4.50 under the old method, a few months ago. As we have described, as we move through the year and get clarity on timing and probability of other milestone events. And we will talk about those numbers and we believe there will be an amounts that are additive to the $130 million. Which, as Matt just said, that, but for tax, will flow essentially directly to the bottom line.

Got it. One of the questions -- and just to finish up that subject, if your cash expenses are about, call it, $30 million, we are talking about $100 million of free cash flow generation before CapEx, which is modest. Is that fair?

Yes. Close, the only thing that is also cash expense that's in there is the material sales cost of goods. So at the levels we are talking, and the margins we're talking, it's going to be $5 million or $6 million.

So it'd be $95 million. Okay. That make sense.

Talking about the glucagon receptor agonist that you're running the Phase II on. I believe that you expect results in the second half of the year. If you were to choose to license that business, I assume that you would potentially get enough front payment there. Is that something you would have included in the guidance? I guess not, because you don't have the results yet. So how should we think about if you are successful on that and have the results, would that be something that you would consider or potentially get some sort of payment upfront on?

Yes. Gene, that is our business model and plan. Run the trial, get the data, if the data [are positive], supports licensing, we would license out. We will get into more detail next week. We've got a nice presentation around the GRA program planned for next week.

But the reality is we can't predict a deal by the -- one, we can't predict positive data, and we certainly can't predict a deal by the end of the year. So if we do a deal though, yes, we would expect a license fee. As investors know, we focus our economics on back-end economics. It's not a small company that relies on these cash up front payments. We like those certainly, but we would expect some sort of a license fee. Generally, that GRA program and expected licensing really isn't contemplated as far as our revenue build for 2017.

Simply because of timing and where you are. Okay.

Exactly. And we think its appropriate, it's not a [judgement] on the program at all. It's just prudent. We aren't going to start to build revenue or license fee expectations around an unpartnered program right now that we don't have the data for.

So that, I think, speaks to our prudence and guidance information about the business and conservativism around the program. But nonetheless, we've got a robust Phase II trial in an important category, and the second half of the year, we will present the data, and we're hopeful that will be the basis for a licensing event over the next six to 18 months or so.

Got it. Trying to anchor back to your previous guidance, if I do the math right on the $30 million of incremental milestones, that would equate to on a cash basis about $1.30 of incremental earnings, which would suggest if you got them all, you would have a number of about 580. That may not be entirely correct, so would it be appropriate for us to risk those in some way? And based on that, to come up with a number that we feel comfortable with?

Yes, I think the only thing I think I would disagree with your math there, Gene, is that the $30 million taxed would be closer to $20 million. And so it's more like $1 a share not $1.30. But everything else you said pretty much holds.

I was anchoring on the old way of doing it, not on the --

Sorry, under the old way, yes. That would be correct.

All I'm trying to do is to try to understand -- put myself in your shoes earlier, if you were to have assumed that what sort of number would you ended, it would've been obviously a higher number than $5, than based on the math as we do it. Obviously on a tax basis it would be somewhat different than that.

That is correct, and I think a fair [reasonable] way to work through it. Obviously in light of reporting out EPS reflecting fully taxed, again, our tax, actual cash tax rate, is near 0% and it will be for the next few years. But we are now reporting fully tax. So you are correct on the mathematics and the number would be well north of $5 a share.

And I think the big picture, we aren't being specific about guidance in terms of expected payout of that, quote, other $30 million. Realistically, the idea that all 60 are going to pay out this year, that is not our expectation. There may be new deals we do, there may be upside elsewhere, we aren't talking about that, but realistically the idea that we get a perfect schedule of payouts is not our outlook.

At the same time, we feel very, very confident about the $20 million, the core milestone or contract revenue. And I think by law, the development and publication of data, and success rates at the FDA and so on, inevitably we also believe that some, maybe not all, but some of those payments will hit.

But right now, given the magnitude and again, I am sure investors can understand this. We've got an impressive roster, over 90 corporate partners, over 150 shots on goal, over $2 billion of contract payments. As we look at this, we simply today aren't going to make dollar or spot estimates on the quantum of additional revenue. But as the weeks and some of the months roll on, we will have more information and we will be talking about that as the year evolves.

Thanks, John, I will get back in queue.

Thanks, Gene.

Drew Jones with Stevens.

Hey, guys. One follow-up for me. What is the street estimate for EVOMELA revenue in 2017 that you guys are assuming in guidance?

So Spectrum has not reported yet their quarter, they don't report until a week or two from now. And so we are working off of last quarter's number. Last quarter's number as a reminder, I think it was $5.9 million of revenue.

Three analysts cover EVOMELA Spectrum and report on EVOMELA. Those analysts have not really updated, the low analyst is still at a number below the one quarter for next year. So it hasn't really updated. The high analyst is at $30 million and so we have taken a Q3 annualized number of about $20 million, a little lower than the annualized number as our low-end estimate for next year, and the high-end of 30 and then taking the average of that to get to the numbers we are including in the --

Q4 2016 through 3Q 2017, you're assuming $25 million in EVOMELA revenue? Is that fair?

About that, yes.

All right, thanks guys.

Thanks, Drew.

We have no further questions at this time. I would like to hand the floor back over to management for closing remarks.

Thank you, appreciate your time and questions. Again, we are pleased with the business. OmniAb we closed that deal just over one year ago and the founding scientists and our colleague and fellow employee, Dr. Roland Buelow will be here with us next week. It is a very exciting antibody technology that is really helping drive the future and the growth of the business. We've got a lot more information to talk about, but we look forward to Analyst Day next Tuesday. We hope you can join us, please RSVP if you can. And for now, we do appreciate you joining our call. Thank you.

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