Ligand Pharmaceuticals Inc (LGND) 2020 Q3 法說會逐字稿

It is now my pleasure to turn today's program over to Mr. Patrick O'Brien, Senior Vice President, Investor Relations.

Sir, the floor is yours.

Thank you, and welcome to Ligand's Third Quarter 2020 Financial Results and Business Update Conference Call.

Consistent with the recommendations for social distancing, all of our speakers for this call are in separate locations.

Speaking today for Ligand will be John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO.

We will be using slides together with our discussion today.

We will also use non-GAAP financial measures and some of our statements will be forward-looking.

Additional information concerning risk factors and other matters concerning Ligand can be found in the Ligand's earnings release issued earlier this morning and the slides associated with this call and periodic filings with the SEC.

As a reminder, Ligand takes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that, I would now like to turn the call over to John Higgins.

Thank you, Patrick.

Good morning, and thanks for joining our call.

I'm pleased to report that Ligand is doing well and is closing out 2020 in a strong position in terms of financial growth, portfolio expansion and excellence in our business operations.

We have some slides to go with our program today.

I'd like to turn to Slide 4 to start out.

A simple slide.

Ligand is delivering major value.

We serve the industry.

We serve our partners with our research and technology.

There are several ways that we are supporting our partners, but first is helping them discover new medicines; secondly, helping improve the safety of their medicines; and thirdly, helping our partners reduce their cost to make their medicines.

We are technologists, we are innovators, and we are proud of what we are doing to help facilitate the care and human health around the world.

Let's turn to Slide 5. I'd like to give some comments overall about the business in third quarter specifically.

Q3 was an exceptional quarter across the board.

M&A and major portfolio news are highlights, but we are also very pleased with our financial performance.

Both of our major royalty-bearing assets posted growth, with underlying revenue for products, increasing in all major regions, Q3 over Q2 2020.

Earlier in the year, as we discussed, we forecasted the pandemic would impact patient visits and starts on some treatments in the short term.

But we are very pleased to see growth returning now.

And in particular, Amgen noted recently that early indications point to a strong launch of Kyprolis and DARZALEX combined regimen for relapsed multiple myeloma following positive data and label expansion earlier this year.

Now in terms of our expanding portfolio, we have completed multiple M&A transactions recently, bringing top-tier partners to Ligand, and we've had a very productive year-to-date with entering into new license contracts, granting technology rights to our partners.

Notably, we have 5 partner programs in development now, more than ever before, with 5 drugs where Ligand is entitled to a royalty projected to be up for approval in 2021 alone.

As for excellence in our business operations, it's best illustrated by our ability to rapidly scale up production to meet the world's Captisol supply needs for the manufacturer of remdesivir.

One, remdesivir, it's the Captisol partnership with Gilead we are very proud of.

Our Captisol is required to make it.

No other company provides the quality, the purity, the quantity or the safety record for this vital ingredient.

Veklury, as it is branded now in the U.S., is the first and only FDA-approved treatment for COVID-19.

We know for society to get back to normal, we need treatments and we need vaccines.

There will be other treatments eventually approved to add to the armamentarium, but this drug works and is considered today to be a part of the standard of care.

As such, all current and future therapeutic clinical trials will be required to use remdesivir in the control arm.

Of note, the U.S. Surgeon General said just last Friday that while hospitalizations are starting to go up, the country COVID-19 mortality rate has decreased, thanks to multiple factors, including the use of remdesivir.

On the recent earnings call, Gilead executive remarks that they have repeatedly seen the clinical benefits of Veklury across multiple clinical trials.

They said in the past quarter, these benefits have been unequivocally demonstrated in global clinical trials.

The definitive results from a fully powered, double-blind, placebo-controlled and randomized trial showed an average reduction in recovery time of 5 days.

They see their peer-reviewed data from blinded and controlled trials as being the pinnacle of science and clinical studies today.

They also commented that they currently estimate that roughly 40% to 50% of hospitalized patients are getting Veklury right now in the U.S. Gilead also said that the percentages of hospitalized patients receiving Veklury is expected to grow with the FDA approval, recent peer-reviewed publications and now that they have a field team to educate physicians on how best to determine appropriate patient population use of Veklury.

Also of note, Gilead reminded people that they are working on an outpatient treatment options under additional clinical trials to potentially expand the use of the drug outside the hospital setting.

As for Ligand, the need for remdesivir is real, and that could not be more clear to Ligand given our highly interactive work with Gilead to meet their Captisol needs.

We are making as much Captisol as we possibly can at this time to supply Gilead in their international generics consortium.

This is supply that we had not contemplated at the start of this year, and it's adding about $60 million of revenue this year alone, about 1/3 of our total revenue forecast for 2020.

And we see it adding significantly more revenue contribution next year.

As we all know, the pandemic is raging right now worldwide, and hospital rates are again skyrocketing.

We think this will not only drive demand for remdesivir, but also will reinforce to major medical markets how much the health care system and patients can benefit from this drug right now.

Our long-term value proposition is based on our core business and the growth we project.

But no doubt, the additional Captisol we are selling to support remdesivir is driving upside, financial and strategic benefit for Ligand and our investors.

We are better off in the short term as well, given our success in answering the call to supply this key manufacturing ingredient, as inbound requests for Captisol are now at an all-time high.

For the next few quarters, we forecast substantial sales for Captisol, and the surge in business will enable us to support the expanding Captisol business long term can allow us to invest in other R&D over the next 18 months to drive future growth.

Along with my comments about remdesivir as an antiviral treatment for COVID-19, we are also pleased to note that there are 3 different partners developing novel antibodies for treating COVID-19 that came from Ligand's OmniAb platform.

Veklury is the first and so far only FDA-approved treatment for COVID-19.

Undoubtedly, other treatments will come along to further support the medical needs in the market.

And we are pleased to have 3 different partners working on novel antibodies derived from Ligand technology.

Now I'd like to switch to Slide 5. And just highlight the 5 main programs that are on deck for potential approval next year.

This is an important calendar of news events, while we have significant late-stage regulatory and clinical events as well.

This is the largest calendar of potential approvals we've had in our history, tied to some very well-funded high science programs.

One is partner with C-Stone, a Chinese company that's had some major news recently.

We have partnerships with Merck and Jazz, another with Gloria and now with Alvogen.

Notably, 2 of these are OmniAb-based programs, and 3 of them, the Merck, Jazz and Alvogen programs, came to us via our acquisition of Pfenex.

We are excited about these assets and are pleased to see this calendar develop as it will create potential new royalty streams for us starting next year.

Picking up on the basis for these programs.

A quick comment about our OmniAb platform.

The business is doing very well and continues to perform above our expectations.

There are many highlight examples of call out, but 1 recent development is the major commercial contracts that our partner C-Stone entered into partnering to commercial rights to their OmniAb-derived antibody for a variety of cancers.

The trial -- the leading trial concluded on an early interim readout of data given the outstanding positive results in reducing the death rate for the patients with a rare form of lung cancer.

This is C-Stone's #1 program and is derived from Ligand technology and we'll get royalties.

Investors have taken note and bid the C-Stone stock up to a $2 billion market value.

More importantly, 2 major pharma companies, including Pfizer, have recently struck major deals with C-Stone.

The Pfizer deal is worth calling out as C-Stone announced the formation of a $480 million strategic collaboration that encompasses a $200 million investment in C-Stone and a major collaboration between the companies for the commercialization of C-Stone's Ligand-based antibody.

It's a first-line treatment for Stage IV squamous and non-squamous non-small cell lung cancer.

We find this to be a bellwether deal as signature financial event for C-Stone, a major validation for Ligand-discovered antibody for an important category.

Another example of OmniAb's stellar performance is Immunovant, which is also developing an OmniAb-derived antibody.

Immunovant announced positive top line results from a multicenter placebo-controlled Phase IIa trial for their antibody.

It's an antibody that was -- that's being used in a subcutaneous injection form for patients with myasthenia gravis.

They're pursuing a registration-enabled Phase III trial in the first half of 2021.

This is Immunovant's lead program, and their market cap has grown now to $4 billion, largely due to the success, again, of this Ligand-based antibody.

Just a quick comment about our Pfenex acquisition since 3 of these approvals that we're looking at next year are based on acquired assets through the Pfenex deal.

Pfenex has proven to be a great deal for Ligand in just a few short weeks since we closed the deal.

Matt Foehr is going to provide more color on that acquisition, but we see it as transformative to Ligand.

We project that it will add meaningfully to our financial growth, both in revenue and profitability.

Our royalty revenue is the main driver for our business.

And Pfenex is projected to boost our royalty revenue by about 50% as we look out the next few years.

In addition, the proprietary protein expression platform is backed by top-tier existing partners, and we are in discussions right now with multiple other parties for additional licensing in 2021.

All right.

Now as I wrap up, I'd like to go to Slide 7 and just make some remarks about our growth as we see it going forward.

We provided guidance last week at our Analyst Day for 2021, calling for robust adjusted diluted earnings per share growth of more than 50% year-over-year.

This outlook assumes funding 2 promising internal programs, PF 810, which we just gained from our Pfenex acquisition, as well as CE-iohexol.

Funding these high-value projects over the near-term should not be viewed as changing our long-term R&D spend.

And we remain committed to lean operations and strong annual profit growth over the years to come.

Overall, we see accelerating growth for Ligand.

This year, so far, our revenues and earnings are up sharply over last year.

And given the information we have in the business right now, we have forecast over 50% top line and bottom line growth for 2021 over 2020.

The growth is coming from big increases in royalty and Captisol revenue.

This outlook is supporting our ability to keep having strong cash flows and investing in the business.

Now for a more detailed review of our financial results and guidance, I'd like to turn the call over to Matt Korenberg.

Thanks, John.

As John mentioned in his comments, the third quarter of 2020 was a very busy period for ligand.

We announced 3 acquisitions on the strategic front, including our largest ever.

We announced the sale of our Vernalis business shortly after the quarter ended, and we had a robust top line driven by our Captisol material sales, combined with strong financial results across the business.

More specifically, total revenues for the third quarter of 2020 were $41.8 million and included $9 million of royalty revenue, $23.4 million of Captisol material sales and $9.5 million of contract revenue.

With respect to the royalties, Kyprolis revenue at Amgen for Q3 of 2020 was up over Q2 2020, but was down year-over-year as sales continue to be impacted by the pandemic as fewer new patients began treatments for Kyprolis due to the COVID-19.

Ono.

Ono in Japan, again, had outstanding sales for Kyprolis, posting $17.3 million in Q3, the largest quarter ever for the product in Japan.

EVOMELA revenues in the U.S. and China were higher both year-over-year and sequentially.

Our true royalty growth for the quarter was obscured principally by an anomaly in Q3 2019 that included a larger-than-typical true-up from Q2 2019.

Adjusting for these true-up items, despite the pandemic, royalty revenue in Q3 2020 would have grown slightly rather than decline slightly versus Q3 2019.

Captisol sales of $23.4 million in the quarter compared to $6.8 million a year ago, up over 240% or over 3x the level in 2019, similar to our Q2 trend.

Our contract revenue in Q3 2020 was in line with our revised expectations provided at our Analyst Day last week, coming in at $9.5 million as compared to $8.2 million a year ago.

Adjusted diluted EPS for Q3 2020 was $1.04 or 112% higher than Q3 of 2019.

In addition, we generated $12 million cash flow from operations in the quarter.

We finished the quarter with approximately $795 million of cash, cash equivalents and short-term investments.

After closing the Pfenex acquisition, the day after the quarter closed on October 1, our adjusted cash balance was approximately $400 million.

Turning to guidance on Slide 10.

We provided updated guidance last week at our Analyst Day.

As a reminder, our top line guidance is now $170 million of total revenue for 2020, up from our previous guidance of $165 million.

Royalty revenue is expected to be $33 million for the year, up from $32 million in our most recent guidance.

Captisol revenue expectations are now $92 million for the year, up from our previous guidance of $90 million, and contract revenue is expected to be $45 million for the year, up from previous guidance of $43 million.

The $170 million annual guidance results in Q4 revenue of just over $53 million, which is consistent with our previous guidance for the second half of 2020 revenue to be more heavily weighted to Q4.

Regarding the rest of the P&L on the expense side.

We expect an overall corporate gross margin for the year of approximately 80% to 85%.

We expect cash operating expenses for 2020 of $73 million to $75 million.

These cash expense estimates incorporate the Taurus, xCella and Pfenex transactions and also assume that the Vernalis transaction closes in Q4.

These revenue and expense components translate to full year 2020 adjusted earnings per diluted share of approximately $3.95, which is up 57% from the 2019 diluted EPS of $2.52, adjusted for the Promacta sale.

For the next couple of slides, I'll dive a little deeper into each of the revenue lines.

On Slide 12, you can see the royalty revenue trends for the last 4 quarters.

Our 2020 guidance of $33 million implies a Q4 royalty number of $10.3 million.

We arrive at this estimate assuming that our 2 major products grow in Q4 versus Q3.

As John mentioned, both Kyprolis and EVOMELA grew quarter-over-quarter in Q3 in each region around the world.

Focusing more now on the Captisol business on Slide 12.

You can see from the chart on the right that, for 2020, we were consistently operating at a much higher level than we were for the past few years.

We believe that 2021 will again take another step up with quarters averaging over $45 million versus the low 20s million average we saw in 2020.

Our estimates for Q1 2021 are supported by binding orders and forecasts from our partners.

With the pandemic developments around the world continuing to create a very dynamic situation, the ultimate need for treatments may fluctuate dramatically from month-to-month.

However, we continue to believe that the manufacturing demand for Captisol for 2021 will sustain at these higher levels.

Related to contract revenue, the chart on the right of Slide 13 shows that Q4 is expected to be the highest quarterly total we've had in the last 2 years.

As investors know, contract payments and timing will move up and down as the flow of partner clinical trials and progress with programs ebbs and flows.

Q4 of this year is lining up to be a quarter where we see many events hitting all at once.

In addition to approximately $7 million of service-related revenue in the quarter, we expect a number of OmniAb events, Vernalis events related to contracts that we're retaining in the transaction and protein expression events to generate significant Q4 revenue.

On the last slide that I'll cover today, I'm showing a summary of the 2020 full year expected results versus the 2019 full year.

On the left, you can see that 2020 revenue will far exceed the 2019 number with nice contribution from each revenue line.

On the EPS chart on the right, you can see that EPS exceeded each quarter in 2019.

Obviously, the 2020 bars on these charts include the contribution of Captisol sales related to remdesivir.

In 2020, the added demand related to remdesivir contributed about 33% to total revenue.

In 2021, we expect the remdesivir-related demand will contribute approximately 55% to our total revenue.

The core business, though, remains strong and will grow nicely into 2021, but we'll utilize the extra remdesivir-related revenue in cash flows to reinvest in the business and improve the strength and diversity of the core business.

Finally, before I turn the call over to Matt Foehr, I direct listeners to review our Q3 earnings press release and slides issued earlier today and available on our website for a reconciliation of our adjusted financials to GAAP reported items.

With that, I'll turn the call over to Matt for some comments on the portfolio and pipeline.

Matt?

Thanks, Matt.

Now on Slide 16, our technologies and the license associated with them form the foundation of our portfolio.

Our technologies enable new medicines through our licensing partnerships and ultimately help patients by meeting major unmet medical needs.

This morning, I'll review each of our core technologies and discuss the integration of Pfenex into Ligand as well as our strategy and plans for our new protein expression business.

I'm referring now to Slide 17, which highlights the suite of technologies within our OmniAb platform.

We believe OmniAb continues to be the best-in-class of advanced antibody discovery tools.

We continue to innovate and invest in the OmniAb platform with internal R&D efforts, academic collaborations and through acquisitions.

Our partners value the work we do, and understand the importance of efficiently discovering fully human antibodies in a variety of formats.

Most recently, we acquired and integrated new technologies and scientists from xCella and Taurus Biosciences.

The xCella technology brings in ultra high-resolution and high-speed technology to antibody selections from our animals.

Current and prospective partners are already seeing the value of this technology, and we are already deploying it in multiple partnered programs.

The Taurus acquisition brings cow-based CDR-H3s humanizing binding domain antibody technologies to the OmniAb suite.

And we are branding the technology as OmniTaur.

The antibody features some of the longest CDR 3s of any species with unique genetic and structural diversity that can enable binding to challenging targets with applications in therapeutics, diagnostics and in research.

As we go forward, these acquisitions are expected to enable our OmniAb team to secure new licensing agreements and expand economics as a result of the additional tools and IP we can now offer to partners.

We carefully looked at multiple public and private platforms to acquire in order to continue our expansion of OmniAb and determined that xCella and Taurus represented the best fit and opportunity.

And now I'll move on to Slide 18 and note that multiple partners have leveraged our o platform for discovery of antibodies as potential therapeutics to treat COVID-19.

The 3 partners are Takeda, Immunoprecise and Genevac.

Our OmniAb partner see advantages to rapid discovery of fully human antibodies with the platform as an antibody approach may be well positioned to neutralize emerging strains of the SARS-CoV-2 virus.

And OmniChicken is viewed as a unique system for discovering SARS-related antibodies given the chicken's known ability to mount vigorous antiviral responses.

And importantly, our GEM assay can be leveraged to select for rare antibody specificities, including cross reactivity with other respiratory viruses.

We look forward to further updates from our partners as they disclose the details of their progress.

And now moving on, I'll provide an update on Captisol and refer you to Slide 19.

This year has been a transformational year of growth for the Captisol technology on many levels.

With globally recognized programs that use our Captisol technology, we've seen a record growth of inbound interest in the technology, along with continued and growing business momentum.

We've entered into more licensing deals for Captisol this year than any other year.

Our partners are expanding their use into new delivery routes and we've expanded our intellectual property estate.

And all that happened in parallel to us greatly increasing our manufacturing capacity and global footprint and meeting significant increases in demand for clinical and commercial material that Matt Korenberg described.

We believe our Captisol technology is positioned very well for years to come.

Moving on to Slide 20.

The team at Icagen is managing our ion channel technology partnerships and they've had a very productive year as well.

They've managed 3 high-value partnered programs that are progressing rapidly and positioned to contribute meaningfully to the business in the future.

There are 2 partnerships with Roche, with more than $500 million in potential milestones associated with them as well as potential tiered royalties; and also a valuable collaboration with Cystic Fibrosis Foundation.

Icagen's stature in the ion channel space and their discovery successes with the current programs are now driving partnering interest from additional big pharma players for multiyear collaborations with potentially valuable back-end economics.

We're excited about the future of this technology, which we added to Ligand in April of this year.

And now switching to our newly added protein expression business on Slide 22.

The acquisition of Pfenex closed 4 weeks ago and the integration of the business has progressed extremely well.

We've realized synergies in the business and have also welcomed some fantastic new colleagues to Ligand.

We're very excited about this technology and the prospects for future growth of the protein expression business overall.

The technology is based around P.fluorescens, which is a highly versatile organism for making therapeutic proteins.

In a real simple sense, the technology makes complex drugs possible.

Oftentimes, with increasing frequency, traditional systems are just not well suited for the desired structural complexity of therapeutic proteins.

And our technology delivers significant competitive advantages to our partners, including speed with which they can enter into clinical production, increased product quality and lower cost of goods.

Our platform has an over 80% success rate in producing proteins that have previously failed in traditional systems like those based on E. coli.

Keep in mind that these are proteins that companies have wanted to manufacture to progress into development but simply can't and our technology enables that.

This then leads to valuable partnerships like the 2 that we've highlighted here on Slide 23 with Jazz Pharmaceuticals and with Merck.

In the case of Jazz, they sought to develop a recombinant Erwinia asparaginase to provide reliable high quality supply.

Our technology enabled that for a drug that is now positioned for an approval filing and downstream economics to Ligand.

Merck sought a high quality and reliable source for their global needs of CRM 197 as a key carrier protein for the V114 vaccine program.

Merck's recently highlighted positive Phase III data and plans to file their BLA later this year.

And it's worth noting that this is a substantial program at Merck, with 16 Phase III trials enrolling over 18,000 participants in some 36 countries.

This is a global opportunity in a multibillion-dollar existing market.

Going forward, we see a growth trajectory for the protein expression business that can drive revenue and yield 3 different types of deals that are shown on Slide 24.

And now a month into owning the business, we see clear paths and opportunities for partner development deals, traditional asset outlicensing deals and what we term as platform pairing deals.

This is an important element of our overall strategy with the business.

The partner development deals around the platform are the type that yielded the Jazz transaction and partnership.

These are where partners come to us to solve their manufacturing issues.

These are generally collaborative deals and ones that leverage our team's deep knowledge and expertise.

Out-licensing deals are the ones where we license rights to an asset that was developed and enabled by our technology.

These can be extremely valuable and have yielded partnerships like the Alvogen teriparatide relationship.

And I expect we'll see more deals like this in the near future as we leverage the past investments of Pfenex and the team's knowledge around the programs.

We also see significant potential for platform pairing deals where our technology is married to an in-house technology at a partner to meet a key need.

That's been the case with the multiprogram deals with both Merck and Arcellx and we expect to see more of these types of deals as well.

And lastly, on Slide 25, you'll see a summary of our partnered pipeline that our valuable technologies have created.

And we continue to expect this pipeline will grow and mature in the months and quarters to come.

Before I turn the call back over to the operator for questions, I wanted to remind investors and recommend all to follow Ligand on Twitter.

Twitter is a great platform for us to communicate updates on our partner program progress, and it's a great way to keep up to date on our expanding portfolio in real time.

And with that, I will turn the call back over to the operator for questions.

Operator?

(Operator Instructions) We have our first question comes from the line of Matt Hewitt from Craig-Hallum Capital.

A couple for me.

First up, regarding the contract revenues or the implied contract revenue guidance for the fourth quarter.

You mentioned $7 million coming from services.

What kind of visibility do you have into the other payments that you're expecting in the fourth quarter, given some of the variability that we're seeing because of the pandemic?

Yes.

Matt, thanks for the question.

Good question.

There are a number of events tied to some things like OmniAb trial advancements, things going from Phase I to Phase II or are going into humans, but there's -- those types of things are not publicly available or known in terms of timing precisely.

But there's also a number of things that tie to events, where partners have made public statements already around, as an example, starting a Phase III trial in the quarter or filing a BLA, those types of things.

So we have pretty good visibility into all of the events that we're counting in this number for the quarter, either publicly or privately.

Great.

And then another question, this was a little -- probably a little more challenging, but you came out of the analyst event, provided some pretty impressive growth targets for the next call it, 2 to 3 years, and really highlighting how the business is going to shift more and see more growth on royalty side, where I think you can argue you're going to get more of a valuation benefit in your stock.

But the stock didn't react that way.

And I'm curious, what were your thoughts on that reaction?

And what do you think investors are missing that might fill that gap?

Yes, Matt, it's John.

I'll comment and Matt Korenberg can as well.

The business this year, there are 2 major drivers that we are working to focus investors on.

One, of course, the developments with M&A.

And sometimes M&A is not entirely obvious, what we acquired in terms of calendar of news events, partner events, but also how products might ramp up with royalties.

And Pfenex, of course, is the largest acquisition, but Icagen earlier this year as well, brought us some top-tier partnered assets.

So that's one area of, I'll say, development that really has built out very, very nicely.

We are an M&A-focused company.

We think we're good at sourcing technologies and innovation to acquire and we know this with Captisol.

I mean that has been a home run acquisition.

OmniAb as well.

But we know with M&A, it takes a while for investors to fully comprehend how our technology acquisitions really drive value.

So that's one thing we focused on at Analyst Day.

And clearly, when we're looking at 3 out of 5 of our potential approvals next year coming out of Pfenex, this is an area where royalty contribution and growth the next 2 or 3 years, we think, will build out very nicely.

The second part of the message really comes with our core business, the legacy assets.

Every year, we're doing anywhere from 5 to 15 new licensing contracts.

We know there's lead time to development.

But we have seen an unprecedented run of good developments, positive developments, advancements with trials with R&D investments and movement toward regulatory filings, potential approvals with our legacy pipeline.

And one of them, of course, is sparsentan.

We're excited about that.

Phase III data, we expect here in the next couple of months.

And while we did not call this out specifically in our long-term guidance, it's mostly because the more healthy economics to Ligand are very, very substantial.

If we see positive data and is filed, clearly, we're going to give more clarity for investors.

But this is an exciting asset.

The C-Stone OmniAb-based drug, we've talked a lot about that, but this really was not on people's radar 12 months ago.

So that is a second area, focusing investors on our developing portfolio of royalty-bearing assets.

And this is coming together.

We call this our core business.

The legacy assets, coupled with new M&A, these 2 factors are coming together.

We do foresee and forecast significant royalty growth.

We've had charts.

We described the math.

And what's important for royalty growth is to understand the margins, they're essentially 100% gross margins.

Once we have contracts in that royalty revenue, there's no offsetting cost, and there's very efficient operating costs throughout the rest of the P&L.

So we do forecast the revenue growth to be there and do believe it's going to create tremendous leverage with earnings and cash flow over that period.

So Matt, I don't know if you want to add any other color.

Yes.

Thanks, John.

I'd say to reemphasize a point John made, when we gave our long-term outlook, we treated it as long-term guidance, as John just called it.

I think some investors took that to mean that we didn't have confidence in either sparsentan or teriparatide getting a TE approval over the long term.

We do have confidence in those events.

And rather than give folks the realm of possible, all of the product -- assuming all products are approved and assuming peak sales are hit and all that sort of stuff, we gave what we thought was, what I'll call a risk-adjusted or a true guidance number that we think we can live up to in any circumstance with some upside from all those other events that we left out.

So I just want to point that out and remind people that those items are things we still have high confidence in and we think that they'd be upside to the numbers that we talked about.

We have our next question comes from the line of Balaji Prasad from Barclays.

So a couple of big picture questions.

I think in terms of trying to understand the business and the outlook for it.

One of the questions -- a couple of questions I received the most is really trying to understand what is the guidance framing in or not for 2021 and beyond?

And you partially addressed it in the previous question.

I'd still like to get your views on what could be upside risk to your guidance for the next 1 to 2 years?

Secondly, on capital allocation, and it's kind of part of mixed question tied in with business development, you're still sitting on a significant amount of cash.

Do you think you have enough on your plate for business development now?

And if so, with the stock now, what, around sub-90s level, what are your thoughts around a buyback at this level?

And I have a couple of capital-related questions.

Yes.

Thanks, Balaji.

So first on the guidance question and what remains to be upside from the guidance.

I think from that standpoint, we give our guidance each year in a way that we think is achievable, of course.

We've had a history of the last several years on the contract payment line of making sure that we frame that in a way for investors that, that was a number we could live up to, but that the realm of possibility for those numbers significantly exceeds the guidance that we have given.

This year, with the pandemic, obviously, the timing of a lot of events was pushed back.

To the extent the pandemic continues steady state, let's call it, where, in our view, the patient access and clinical trial world has returned somewhat closer to normal than it was certainly in Q1 and Q2 of this year.

We could see a significant amount of upside, we think, to the contract payment line for 2021.

And then separately on the remdesivir topic related to Captisol, obviously, we've outlined for folks what we thought the number was there.

To the extent the current trends in hospitalization and infection rate continue to increase, as we've seen over in Europe and in the U.S., I think that could result in significant upside to the Captisol number.

The second part of your question on capital allocation.

We do have about $400 million of cash and cash equivalents left.

We obviously have $500 million of convertible debt coming due in May of 2023.

We're certainly mindful of that.

But we are obviously very focused on monitoring the bond price as we bought back bonds at a discount earlier this year, but also stock price relative to our own internal views and market dynamics.

And we would, of course, agree that we feel the stock is significantly undervalued now, with our window now opening likely tomorrow or after the next trading day.

We'll certainly be opportunistically looking at stock price as well for capital allocation for deployment of capital.

That said, our specific focus on capital allocation continues, as we said last week on the Analyst Day, to be split relatively evenly between the M&A side and returning cash to shareholders.

So we'll continue to look for new opportunities to add interesting assets to the portfolio in the near-term as well.

Great.

That's helpful.

On Captisol moving to it, so you made an interesting comment in your opening remarks that all current and future trials will be required to use remdesivir in the control arm.

Can you clarify what this means?

And also on the same subject, Gilead commented about Captisol -- remdesivir development in pre-hospital settings and inhalation.

So can you also quantify the contribution of Captisol or the quantity of Captisol in these developmental studies?

Yes.

Balaji, this is Matt Foehr.

I can comment.

And I think, John was commenting on the use of remdesivir in clinical trials.

And generally, when something is established as standard of care, it is used in that -- in clinical trials, and we're seeing that real time, both in the trials that are being posted on ClinicalTrials and other in terms just clinical use.

So that's something we are seeing now and expect to continue to see.

Your question about other use settings.

We've been obviously very pleased with the work and the dedication of the Gilead team across the board, but they are analyzing all additional settings for use for remdesivir as well as additional forms, right?

So they've disclosed that they have an outpatient program, both in nursing homes as well as other outpatient settings where they're looking at Veklury used there.

They're also doing work on an inhaled solution form that also uses Captisol in its formulation, and also in a subcutaneous form that also uses Captisol's formulation.

So they said they expect data to start coming for some of these other trials and forms next year, early next year.

So we'll continue to watch the space.

But I've been pleased with the investment and the work that they're obviously putting into that.

Maybe if I can squeeze in the last question.

What are your thoughts on CapEx for 2020 and 2021?

And how much of this would go towards Captisol capacity augmentation?

And also, you said that you're currently supplying as much Captisol as you can.

And I'm imagining that means you're running at full capacity of 100 metric tons.

Is that right?

Yes.

I'll comment generally about the production and then Matt Korenberg can comment on the CapEx.

The -- when Gilead contacted us at the beginning of the year indicating their need to move quickly, obviously, we answered the call and started to manufacture as much as we could.

But also, we do keep inventory quantity, extra supply for all of our customers.

And really ramping up the first few months, first couple of quarters, we have delivered as much Captisol as we can.

We've cleared out our cupboard, so to speak and our manufacturing at peak levels.

Of course, early this year, we announced that we are investing to continue to scale up.

So we're actually now producing at higher and higher levels.

And that scale-up is still happening.

What will be -- we estimate fully operational at our highest scale probably in the next 2 or 3 months or so.

We're giving an outlook on revenue for Q3 -- I'm sorry, for Q4 and for Q1, really, because we can look at what our max production level is.

If we can manufacture more faster and deliver more to Gilead, we will.

Gilead clearly is seeing tremendous demand.

And it was fascinating last night -- we finished our Workday late last night, and the case load reported in the U.S. is the highest ever since the pandemic started, over 87,000 new cases reported yesterday.

And we know what's going to happen.

In just a matter of days or so, a week, perhaps at most, the hospitalization rates are going to go up as well.

And so what's interesting is that right now, Gilead is calling 40% to 50% of those hospitalized patients, nearly half are getting remdesivir.

They also are telling the markets that post approval, they expect the proportion of hospitalized patients getting remdesivir will increase, above that 40% to 50% level.

So if the proportion of patients are increasing and the number of patients in the hospital is increasing, it would follow that, obviously, the demand, the U.S. demand is going to go up.

Also, we know from disclosures from Gilead and just a public messaging out there that Europe has seen significantly higher rates the last couple of months.

They have not been receiving allocations of remdesivir, but now, that has changed.

So again, the dynamics, the pull-through is real.

It's happening now, and we are doing, as a company, we are doing our best to produce as much Captisol as possible.

Korenberg, perhaps you want to comment on the CapEx and further investment?

Yes.

So Balaji, as you know, we announced a number of $60 million, 6-0 million dollars, earlier this year for CapEx related to remdesivir and Captisol, specifically.

For the benefit of everybody, I think we've said a number of times, but I'll repeat that, let's call it, 1/3 of that number for simplicity was things like buying machines and expanding space and things like that, about 2/3 of the number was more akin to prepaying for materials and other things like that.

So the, call it, $20 million or so number from that is spent and will run through the P&L adding some burden to the cost of goods over the life of the machines.

The expected need for additional spend, like the $20 million, there isn't really a significant need to expand beyond that.

So that portion is done.

The rest of the business doesn't really require a significant amount of CapEx.

The new protein expression business is a little more capital-intensive, but we still think CapEx annually will be sub $5 million for sure.

And we'll provide more specific numbers as we get into the 2021 budgeting and forecasting process earlier next year.

Our next question comes from the line of Joe Pantginis from H.C. Wainwright.

So 2 questions for the 2 Matts.

First, for Matt Korenberg, I guess I'll go off of the CapEx discussion you just had and wanted to focus on the SG&A and the R&D lines.

Now obviously, I know you don't break out specific guidance for that, but I wanted to get a sense of any of these cash charges that you've had so far that can be considered sort of onetime based on the acquisitions?

Like any spikes, how do we look at normalizing these rates?

Yes.

Thanks, Joe.

Good question.

You'll see on the adjusted tables in the earnings release that there is a transaction expense number.

That will -- that covers everything that happened in Q3.

And so you'll see again in Q4, a small number associated with that.

In Q3, it was about $5 million, a little less.

And that's buried all in the G&A line.

So that's really the onetime cost that you'll see there.

And then the only other sort of G&A and R&D numbers that you'll see, we talked about this at the Analyst Day, but obviously, with the sale of Vernalis, if that completes and closes in this year, next year, we'll reduce cost for that.

But then the Pfenex transaction obviously adds some cost to both the G&A and R&D line that will come on board and resulted in our guidance we gave for cash expenses for next year.

Got it.

And then for Matt Foehr, I wanted to focus on Captisol.

And I think you guys and your guests at the Analyst Day gave some great color specifically around the staying power for remdesivir.

So in case there was any earlier concerns from the investment community about it just might be a temporary blip for remdesivir needs, I think that's been answered.

I hope you agree with that.

But I guess, when you look at the staying power of the asset, look, a lot of people keep coming to you to help solve their solubility issues.

So again, I ask my question from a risk perspective.

So Matt, what do you consider the biggest risk to the Captisol franchise?

Is it anything competitive based?

Or is there -- what's at the top of your list?

Yes.

Joe, thanks.

Yes, to your point, the inbound interest in Captisol really has never been higher.

I mean, one of the best, we often say among the Captisol team, the best advertisement for Captisol are the publications that partners make and the progress that partners have.

And we obviously had a lot of high-profile highlights of the value of Captisol, and not only from remdesivir, but other programs as well.

Clearly, there are other technologies out there, right, that people can use to solve a solubility issue, but they generally create a more torturous path through development, right?

One can tag on a different molecule, but then they've got to go back and repeat a lot of tox data to answer a lot of regulatory questions.

So the value proposition for Captisol is very clear and I think that's why we're seeing so much inbound interest.

I think for us, the real key, right, and this is what we spend our time thinking about is execution, right?

Being sure that we're consistently there to answer the call.

And that's what we're focused on, making sure we continue to do that.

This year has been great from an operational perspective, but that's really where we focus our effort is making sure we're always there to not only answer technical questions of partners, but make sure we're there operationally.

Got it.

And you know what, I could ask one question of John, if you don't mind.

So I really appreciate the color you gave before about the question about what you think the Street is missing here.

So I guess are you still getting -- because we get some of this with our discussions.

I'm just wondering how much you get on your end with -- I'm very happy that you brought up retrophin today with regard to Sparsentan and the opportunity there because I think that could be quite sizable based on a fixed 9% royalty.

So you have those legacy assets that you talked about.

So I guess the question comes down to, you do have some very interesting royalty streams that are coming in.

And the question that I was alluding to is, do people still come to you and say, we're not interested until you can replace Promacta revenue?

Because it seems like you can do that in a pretty timely fashion.

Yes.

Good, Joe.

Thanks.

The business, as much as we are innovators and technologists, our business is delivering solutions to our partners.

And if we're successful, if our partner is successful, we share in revenues.

And that is, I suppose, our model is.

Of course, we have to identify good technologies.

We have to identify partners and structure good contracts.

Along the way, we get paid service revenue, we get paid milestones.

But the royalty line really is vital.

It's paramount to the growth and success of our business.

So investors can know us.

We had an amazing royalty asset would Promacta, incredible medicine, partner with Novartis.

And it was entering its kind of end-of-life stage.

We divested that early 2019.

That had a basis, about $100 million of royalty revenue at the time.

And so some legacy investor, I'll say, people have been with us for quite a while, do ask the question, what are you doing to replace Promacta?

New investors, of course, may not have that basis of that history and are looking at the baseline now of about $30 million or so royalties.

And so whether you've been with us a couple of years and are asking for how are we replacing $100 million of revenue, or whether your new investors, I do think actually, just in the last 2 or 3 months, we are hitting a stride where people are beginning to realize the royalty growth is beginning to happen.

It is -- while it's been relatively flat the last 1.5 years, the trend lines, even for the pandemic, are looking encouraging for the core assets right now.

And the pipeline, the calendar news of quality data, major partners and just the quantity, the number of potential approvals is stacking up, again, unlike anything we've ever seen in Ligand's history.

So when we described this royalty line, again, low $30 million this year, $33 million is our guidance.

We see this essentially tripling into 2023.

And as Korenberg mentioned, that excludes certain lead assets because of their outsized potential.

As sparsentan shows good data, it's filed next year, it gets approved and launches in 2022, 90%, that could, at some point, generate Promacta-like royalties.

Some analysts, we've read, have described that as $1 billion potential market in the U.S. alone.

9% on that is $90 million of royalty in the U.S. alone.

So we are excited about what's happening.

Not only are the core assets growing, we see a stable of fairly high probability assets that should be approved in the near term and, of course, the Pfenex contribution.

They already have some in line royalties that we see ramping up next year.

So all 3 of these layers are coming together.

And it's more focused, and I think there's more tangible evidence that this royalty line is going to grow than we've had the last 6 quarters.

A final comment I'll make just call to out a specific asset.

Another program that we're very excited about is our partner program with Palvella.

This is a private company that is running a pivotal trial right now for pachyonychia congenita, it's a rare skin disorder, incredibly debilitating, and the data are expected here in the fourth quarter.

Now we call this project finance.

They came to us as a private company.

They saw a funding vehicle to fund their Phase III work.

So far, the Phase II data looks superlative.

And they are very close, we believe, to announcing their pivotal results.

If this is positive, it could be a catalyst to filing an NDA.

It could be a catalyst to a major financing, possibly an IPO and a launch.

And we disclosed the royalty rates for us, it's a 5% to 9.88% rate.

So again, a very substantial royalty from what could be an incredibly important medical market.

And that is months, if not weeks away from a major data event.

Our next question comes from the line of Scott Henry from ROTH Capital.

First, a couple of just clarifications from Matt Korenberg.

Matt, I thought I heard you give Kyprolis in Japan revenues for the quarter and perhaps some color on EVOMELA for the quarter.

Could you just walk through those one more time?

I think I missed that.

Yes.

With Kyprolis in Japan, Ono reported JPY 1.8 billion, which translates to about USD 17.3 million.

And that was, by far, an uptick from last quarter, which was about USD 16 million, translated.

So a record quarter for them.

And then on the EVOMELA side, we booked our revenue to a level that is above -- that shows growth both over last quarter and also over last year.

But neither company has reported officially yet, so we can't disclose those specific numbers.

Okay.

And then with regards to teriparatide in the therapeutic equivalents, what should the next data point we get be?

I don't know.

I think you have to do factors testing.

Will you announce that data?

Or will you just announce when you file it?

Just trying to get a sense of how you can gauge progress on that event.

Matt Foehr can maybe give a little extra color, but the simple answer is that our partner, Alvogen, will be running the trial.

It's expected to start relatively soon.

They've been discussing with the FDA when and how to run the trial.

Prior to our acquisition, Pfenex and Alvogen were seeing the trial would start in Q4.

And then after the trial is done, they'll submit to the FDA, and then we'll get our response sometime.

The timing of all that is not precise, but we expect -- we've said, Alvogen has not, but we have said publicly that we expect sometime next year to get an answer from the FDA.

The -- so in terms of things to look for, I suspect it would be either Alvogen or Ligand commenting on the start of the trial, and then enrollment, and then refiling with the FDA.

Okay.

That's helpful.

And I don't know if you've talked about it or given color, but -- and I don't know who would take this question.

But could you give a sense of what the revenue potential for teriparatide looks like with or without the therapeutic equivalent designation?

And I believe your guidance conservatively assumes it does not have it at this point throughout the duration of the guidance.

Sure.

Yes, I think we've given some framework in the past where, in the U.S., at least, we can frame that as the comparator drug, Forteo, in 2019 had about $645 million of sales.

The first 2 quarters, this year, we're about $125 million a quarter.

So plus or minus a $500 million market at run rates right now.

You can pick your penetration number for biosimilar.

But once you pick your penetration for the biosimilar and then you put a discount for price, and then what we've -- what has been publicly disclosed is that sharing, well before a therapeutic switchability rating is tiered, but up to 40% for Ligand on gross profit.

So you've got to factor in some margin from the sales to gross margin.

And then you can factor in whatever penetration you'd like.

So we do all that math.

And what we've said is we think it could be kind of $5 million to $10 million, maybe $15 million prior to therapeutic switchability to Ligand, and at least double, maybe triple that with therapeutic equivalents, partially because we think the substitution or the penetration will be higher, but also because the sharing goes from tiered up to 40% and preapproval.

And then it's a straight 50%, 5-0 percent, gross profit share once they have approval.

We have time for one more question from the line of Dana Flanders from Guggenheim.

Great.

Two quick questions for me.

First, Matt, maybe just some thoughts on how you are thinking about some of the oral antiviral treatments potentially impacting the COVID landscape?

Roche, I think, for instance, recently in-licensed an agent with Phase II data in hospitalized patients early next year.

So maybe some just comments on what the potential impact could be?

And then secondly, maybe for the other Matt.

I know a bunch of moving pieces with M&A.

You had historically given some long-term assumptions of material sales growth, ex remdesivir, obviously, of 5% to 10% and contract payments between $40 million to $60 million annually.

Just wondering if those still hold?

Or if those have potentially moved higher given some of the recent deals and obviously, greater focus on Captisol.

Yes.

Thanks, Dana.

This is Matt Foehr.

Yes, in terms of therapeutic approaches for COVID-19.

Obviously, this is the biggest health crisis of our lifetimes.

And clearly, there's a lot of investment going on.

Not only in the vaccine side, but on the therapeutic side, and we obviously monitor the landscape, clearly, folks developing immune modulators.

Obviously, folks looking at antibodies to potentially block cellular uptake of viral particles.

I obviously highlighted that we've got 3 partners pursuing in the antibody, and then also antivirals as well, the ones that you mentioned and others.

And we continue to monitor the landscape there.

I think it's clear, at this point, remdesivir has established itself as standard of care with the first approval.

We obviously monitor the landscape.

And I think that's also why our partners at Gilead are continuing to look at other ways to treat patients as well in an outpatient setting.

So as I mentioned, they're working on an new tailed form that also uses Captisol in its formulation as well as a subcu form as well.

But yes, we're -- we monitor the landscape, as one would expect, there will continue to be innovation.

And ultimately, we expect for a virus like this and a disease like this, you follow the natural history of the viruses and the fact is that they don't go away, right?

They're around for very long time.

And one would expect there will be multiple therapeutics used in combination, as we've seen with other viral diseases over the years.

Yes.

And on your comments on longer-term guidance, yes answer both those still apply.

The Captisol business outside of remdesivir continues to grow nicely.

And I think we continue to see that over the longer term.

And then on the contract payment side, we had a slide in our Analyst Day that talked about the total and then the risk-adjusted numbers.

That was just some insight into how we're calculating those numbers that I've given over time.

But we continue to see the contract line as a $40 million to $60 million.

Some years, it's going to be lower.

Some years, it's going to be higher.

But that math was always driven by that risk-adjusted portion of that chart we showed at Analyst Day that showed over $1 billion of future risk-adjusted payments.

And in particular, we had over $400 million over the next 5 years that we saw as potential.

So those numbers are where those things are coming from.

Well, thank you.

I appreciate the question and turn out on our call today.

Just a quick wrap-up remark.

Again, we're pleased with the business, the performance for Q3 as we move into next year.

The 2 main things that investors are focusing on, one, is financial growth.

This year, our numbers suggest we're going to have a better-than-50% growth in both top and bottom line revenue and adjusted earnings per share and that's our outlook for next year as well.

So we're pleased with the trend lines, with that performance.

The second factor are the quality partnerships.

Not only quantity we've got the most ever, but some top-tier partners that are funding really important medical programs.

We've got a win screen on some good data and obviously a significant counter of new events coming up.

We appreciate investors' time today, and we look forward to giving you more updates as the weeks roll forward.

Thank you.

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