Ligand Pharmaceuticals Inc (LGND) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Ligand Pharmaceuticals Q2 2020 Earnings Conference Call.

(Operator Instructions)

I would now like to hand the conference over to Patrick O'Brien, SVP of Investor Relations.

Sir, the floor is yours.

Thank you, Carmen.

And welcome to Ligand's second quarter of 2020 financial results and business update conference call.

Consistent with recommendations for social distancing, all of our speakers for today's calls 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 to guide our discussion today.

We also will 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 our Ligand's earnings press release, slides and our periodic filings with the SEC.

Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

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

Patrick, thank you, and good morning, everyone.

Welcome.

Thank you for joining our second quarter earnings call.

I'm going to start with Slide 4. Some of you may be dialing in new to the Ligand story.

Just a quick overview.

Our company delivers innovation to the pharmaceutical and biotech industry to drive value for shareholders.

Our business is focused on technologies, technologies that help discover drugs and make drugs possible.

We've got a broad portfolio, over 200 partnered programs partner with over 120 companies in the industry.

And ultimately, we're looking at driving financial growth, running an efficient business, funding quality projects, pursuing quality partnerships and driving growth.

The focus -- the way we drive our success is, first, on customer service.

Our partners lead the way.

They choose the targets, they go after markets and medical programs that they believe are important and we serve them.

We've got an amazing team.

We're devoted to operational excellence.

We have an amazing roster of partners, and we want to match them in our quality and reputation.

And ultimately, our focus is all on deploying capital, identifying projects and companies to invest in to help build our business.

Finally, we can't do this without our team.

We've got a strong company culture.

We have a diverse, highly experienced Board of Directors, very active with management.

And we're focused on corporate governance, looking at environmental, social and governance factors that will help make our company better and help make our communities better as well.

Before I go further, I do want to say thanks to our team.

We're operating in a very difficult business environment, obviously, with the pandemic, but this team is doing outstanding work.

And I just want to acknowledge our scientists, our business leaders and our team members.

Our success is a team effort and Ligand is thriving right now.

And it's because of the strong efforts of the team and the work we're doing right now.

I'm going to move to Slide 5. This is an overview of recent developments, a bit of a dashboard.

Our financial performance this past quarter, now our outlook for the rest of the year speaks for itself.

We are also backing up the financial performance with outstanding execution.

And across the board, I'm going to give some highlights, and then Matt and Matt are going to go up a little deeper.

But the business as a team, and in terms of our productivity, is executing very, very well.

When we look at OmniAb, we've had major OmniAb achievements.

We acquired this platform several years ago.

And the last 3 or 4 months really has been a watershed period for the platform, defining the success and the potential of the platform.

Captisol is a second major technology pillar of our business.

And we are seeing significant growth in sales with some expanded use by partners, and we anticipate significant growth in volume sales, the rest of this year into the years beyond as well.

Business development activity is very robust.

Substantial new licensing, we secured new contracts, quality economics and some major payments.

And we also closed an important new acquisition during Q2 as well.

So we're very pleased as we continue to expand the business.

And ultimately, this is driving a strong balance sheet and growing cash flows.

This is a strong business with the growing cash flows and our capital, we are focusing on investing in new opportunities, new platform technologies, identifying new sources of revenue, to help drive our business.

When we turn to Slide 6, just a quick highlight on OmniAb.

Matt Foehr is going to go deeper into this.

But again, we acquired the platform several years ago, we had 15 partners at the time.

Today, we have over 45.

Over 45 partners are using this technology.

It's an antibody discovery technology.

Over 80 programs in development.

When we acquired, again, a few years ago, we, at the time, did not have any of the programs in clinical development.

Today, now there are 47 ongoing or completed trials.

The past several months due to development of late-stage data, that's come out a number of regulatory advancements and new program initiations.

And notably, the next 12 months, just within the next year or so, it's summer of next year, we are looking forward to potential approvals about the first drugs, if they are approved, we expect to begin to receive royalties on commercial sales for our first OmniAb programs and also there are 4 major clinical data readouts in this period as well.

OmniAb has always been a strong platform for Ligand, but I think there's more clarity around its potential now than ever before.

When we turn to Slide 7, this is an overview of our Captisol business.

Captisol has been with us for about 9 years or so.

It's been a very important technology platform that has not only defined our view of how we can serve the industry, identifying quality technology platforms that help enable drugs, we are good at sourcing these technologies, but also, we have proven our ability to enter very important partnerships with industry-leading companies, that ultimately is driving value for Ligand.

The last quarter, we saw 40 customers placed orders received Captisol shipments.

The major commercial assets today are Kyprolis, which is marketed by Amgen and Ono, and EVOMELA, marketed by CASI and Acrotech.

Notably, there are 5 other products that are in development that could launch in the next 3 years.

So we could see a significant increase in the major commercial offerings in the next few years.

Captisol, as most of you know by now, is also used to solubilize remdesivir.

This is Gilead's antiviral treatment for COVID-19.

This is a very important therapy, obviously, given the world health crisis ongoing right now.

Beyond Gilead, we're also supplying quantities to partners that are participants in the global consortium.

Notably, we've had a program around CE-iohexol.

It's -- iohexol is an agent in the contrast market.

This is a program we've been funding.

We are very pleased to announce on this call that we are advancing now to a pivotal trial.

Matt Foehr is going to go into more details.

This is a very substantial market.

We have the financial and the operating resources to make this investment, and we're very excited to be able to advance this pivotal stage asset.

We're now forecasting growing demand for Captisol and discussed in June with our customer, we are making a major investment to expand the production of Captisol to support the expected growth we see going forward.

Finally, my last series of slides really is a simple road map for the next 12 months.

We see major potential pipeline events playing out the next 12 months.

And the next few slides, basically, just add a little more color on 9 specific programs.

In the second half of 2020, and of course, we know there's just 5 months left, but we are calling out 6 programs that are in line for major data or regulatory events, and then another 3 we're calling out in the first half of 2021.

That's on Slide 8.

But if you look at Slide 9, it's the same drug, but we're just building it a little bit.

There are 3 programs, Palvella, Immunovant and C-Stone, all have major data readouts coming.

These are programs that we've talked about in detail, but now we have a line of sight on these data readouts.

In the case of C-Stone, the data, the Phase III data, if it's positive, will set the stage for an NDA filing in China, we forecast could happen by the end of this year.

When we look at the next column for 2020, Takeda, Verona and Amgen also have major data readout events, Phase III data or in case of Amgen, sNDA approval, potentially by year end.

Again, these are programs that are on track that could deliver significant news events and ultimately, products are approved, could lead to some important economics.

I want to clarify with the Verona program, they're infocentering, it's a Phase III trial start.

It's not a data readout, it's a trial start.

But that's significant because they had a very positive Phase II data, they had a -- in the Phase II, meeting with the FDA and closed a significant $200 million financing the last month or so, and so now have what they need to start this important trial.

Now finally, on Slide 11, we just called out the major events we've seen in the first half of 2021, Retrophin, Sermonix and Gloria, again, all have some major events coming out.

When we look at these 9 events in portal, what's interesting to break it down to understand our business, 3 of them are OmniAb-based, 2 of them are Captisol-based.

Another 3 programs came from acquisitions, Ligand has done.

It's a very good balance representing how we are building our business.

These are quality partners, they're tied to high-quality programs.

Important medical markets, and they all have strong economics.

So we're pleased with this calendar.

And again, just in conclusion, we're excited about where Ligand is right now.

We're well balanced between OmniAb and Captisol, and again, are pleased with the outlook for a major pipeline event.

That's a quick overview of our business highlights.

I'd like to now turn it over to Matt Korenberg, who will walk through the financials in more detail.

Thanks, John.

Before I go into the discussion of the numbers for the quarter, I wanted to provide investors with a quick update on the impact we see from COVID-19 on our business and the industry.

As we look across our 4 business lines, we see positive signs across the business.

For commercial products, in particular, those that generate our royalties, partners are reporting that patient visits to health care providers were significantly lower in Q2 but that the pace of visits is increasing again.

Our partners working on our programs are now reporting resumed enrollment in most of the clinical studies that may have been paused early on as a result of COVID-19.

And our service work for various platforms has been uninterrupted with the implementation of social distancing in our labs.

And our partners that are using OmniAb at their facilities, report the same experience.

Our production of Captisol continued uninterrupted throughout, including with our significantly increased output.

And while there remains uncertainty with the ongoing impact of COVID-19, we see positive trends across the business for the remainder of 2020.

Turning now to Slide 14.

As John mentioned, the second quarter of 2020 was an exciting period for Ligand driven by our Captisol material sales, combined with strong financial results across the business.

I'm pleased to be able to deliver a very positive second quarter financial report and an increased outlook for 2020 and beyond.

For the quarter, total revenues were $41.4 million, with continued growth in royalties and another sizable increase in Captisol sales.

Our revenue is up 66% over Q2 2019.

Adjusted diluted EPS was $1 per share or 47% higher than Q2 of 2019.

In addition, we generated over $24 million in cash flow from operations in Q2 2020, and our revenue, cash flow generation and EPS, all exceeded our expectations.

We exited the quarter with $810 million of cash, cash equivalents and short-term investments.

It's a very strong capital position, especially given our outlook for increasing cash flow and considering that we used a large amount of our capital in Q1 for share buybacks and bond repurchases.

In terms of capital deployment, our priority focus is on M&A and project investments across several types of targets, ranging from small technology bolt-ons to large acquisitions that will hopefully deliver Ligand platform technologies and new revenue streams.

Digging now a little deeper into our Q2 performance on revenue.

Total revenue for the second quarter of 2020 was $41.4 million and included $7.2 million of royalty revenue, $24.5 million of Captisol sales, $4.6 million of service revenue and $5.2 million of contract payments.

With respect to royalties, Kyprolis and EVOMELA drove the year-over-year growth.

Amgen posted $253 million of sales for Kyprolis in Q2, lower than Q1, but in line with our expectations given the softness expected by the pandemic.

Ono, on the other hand, had an outstanding Q2 sales for Kyprolis, posting $16 million, the largest quarter ever for the product in Japan.

We feel good about royalties.

And if Q3 patient access recovers as expected, we could possibly exceed the revised outlook we previously gave for the full year royalties in 2020.

Captisol sales of $24.5 million in the quarter compared to $8.5 million a year ago, up 186% or nearly 3x the level in 2019.

And I'll touch a bit more on Captisol in the next few slides.

Service revenue performed in line with our expectations for the quarter, and our contract revenue in Q2 2020 was in line with our revised expectations provided on our last earnings call, and it came in just over $5 million.

The most significant payment for this quarter was a $3 million milestone we earned upon the successful Palvella financing.

Focusing more on the Captisol business now on Slide 16.

We saw continued substantial growth in Captisol material sales in Q2, and we shipped Captisol to more than 40 customers during the quarter.

The Captisol sales increase was driven by sales principally related to remdesivir.

And as you can see from the chart, the Captisol business has clearly moved to a much higher ongoing level as a result.

When I discuss guidance details over the next 2 slides, you'll see that we currently project significant annual growth over 2019 with $90 million in Captisol sales this year, based on our current orders and plans.

As typical in past years, quarterly sales for Captisol can be lumpy based on how customers' needs and planning develop throughout the year.

We anticipate the $44 million of remaining Captisol expected for the year to be more heavily weighted towards Q4, with about 35% of the second half 2020 revenue coming in Q3 and the balance in Q4.

We see the increased demand levels for Captisol continuing for the remainder of 2020 and then at much higher levels for 2021 and beyond.

Turning to full revenue guidance.

We are increasing our revenue guidance to $165 million of total revenue for 2020, up from our previous guidance of $140 million.

Captisol revenue expectations are now $90 million for the year, up from our most recent guidance of $65 million.

Captisol had a great year in 2019, pre pandemic, with sales exceeding our plans.

Now in 2020, it's continuing the momentum we have with the existing customers and the added demand for supply due to the international consortium requiring Captisol to solubilize the treatment for COVID-19.

As for our 3 other main segments of revenue, royalties service -- royalties, service revenue and contract payments are in line with our previous estimates.

Still in the pandemic, precise forecasting is more difficult, but the total revenue among these 3 categories is intact given our prior outlook.

Beyond 2020, we're not providing specific revenue guidance at this time.

However, demand for Captisol is increasing from our core business customers and the added new demand for COVID-19-related products is expected to drive volumes of sales to levels higher than 2020 for the next year and beyond.

As investors know and Matt Foehr will detail, we're significantly investing in our production capacity in order to supply the demand for remdesivir.

We anticipate this significantly increased demand we project for 2021 will last at least for the next 24 months, and then we expect an ongoing need for remdesivir and therefore, Captisol, well above our previous levels for years to come.

As John stated in his quote in the earnings release, we expect to provide major business updates and discuss more about our financial outlook at a virtual Analyst Day later this year.

Looking now to Slide 18 and more of the details for 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%.

For R&D, we now expect $46 million to $50 million of total expenses for the year.

Excluding stock comp and other noncash expenses, we expect that R&D cash expenses will be $33 million to $35 million.

For G&A, we expect total expenses of $37 million to $39 million.

And excluding noncash charges and stock comp, we expect G&A cash expenses to be approximately $21 million to $23 million.

Together, we expect cash operating expenses for 2020 of $55 million to $58 million.

Related to interest income and other income, we continue to maintain our cash and highly liquid short-term investments.

Our realized interest rates remain relatively low in keeping with the overall market environment.

And given these lower yields in our current cash balance, we expect our other cash income of about $13 million to $15 million in 2020.

These revenue and expense components all translate to full year 2020 adjusted earnings per diluted share of approximately $4.10, which is up 63% from the 2019 diluted EPS of $2.52 adjusted for the Promacta sale.

It is also an increase from our previous guidance of $3.65.

Finally, I'll direct our listeners to review our Q2 earnings press release and the slides issued earlier today and also 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 our portfolio and pipeline.

Matt?

Thanks, Matt.

Our technologies and license associated with them really formed the foundation of the portfolio at Ligand.

And I'll review some recent licensing activities and provide updates on the performance of our OmniAb and Captisol technologies.

And I'll also discuss our updated plan for our internal Captisol-enabled iohexol program.

The recent months have been very productive in terms of licensing activity, referring now to Slide 20 of the deck, which shows a summary of recent licensing deals related to our Vernalis design platform, or VDP, the Icagen ion channel technologies as well as OmniAb and Captisol, which I'll discuss in more detail.

The recent new deals have added upfront payments, future R&D service revenue and potential milestones of over $600 million and future royalties should products be commercialized.

Moving now to Slide 21.

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

Antibody-based therapeutics are one of the most important, valuable and growing areas of the pharmaceutical industry.

And as of the second quarter of 2020, there are now more than 80 OmniAb-related programs in our partnered portfolio, representing 40% of the pipeline.

OmniAb partners have now filed or have been issued more than 35 U.S. in international patents or applications, claiming OmniAb-derived antibodies as the primary invention with partners such as J&J, Genmab, Merck KGaA and others.

The number of active or recently completed clinical trials that include an OmniAb-derived antibody reached 47 in Q2, as John reviewed, with a number of new clinical trial starts in the first half of the year.

Multiple OmniAb programs are now in late-stage development.

Also at ASCO, at the annual meeting in June, clinical data from OmniAb programs were highlighted by Genentech, by Janssen and by Gloria.

Additionally, 3 Ligand partners are currently pursuing development of therapeutic antibodies that were discovered from OmniAb for the treatment of COVID-19.

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

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

I'll now update on Captisol and refer to Slide 22.

We continue to invest significantly and scale up and -- in our drug master files that we maintain in the U.S., in Canada, Japan and China.

The large safety database and other information in our DMFs are extremely valuable to our partners.

And we expect to file DMFs in additional countries this year as well.

This slide reviews Captisol's key differentiating features, which include our global reach with Captisol-enabled products now marketed in more than 70 countries, our know-how in intellectual property, the drug master files, as I mentioned, which includes safety data for various forms of administration, including IV and oral, inhaled and subcu and our manufacturing quality and scale.

There's been a significant amount of operational activity and progress relating to Captisol manufacturing this quarter.

We began shipping material manufactured at a larger manufacturing scale.

And our team is progressing very well with our capital investment plan to attain 500 metric tons of annual capacity.

We have significant equipment installations coming up later this month.

And I really want to thank our Captisol team, our manufacturing partners are countless, raw material partners like Wacker and others.

Various vendors and equipment suppliers who've all made significant efforts to continue to enable the progress we've made and position us very well.

All involved are well aware of the importance of their work, and we greatly appreciate their ongoing efforts.

Part of our scale of plan also includes leveraging additional sites for certain steps of the Captisol manufacturing process.

In addition to the 2 European sites that currently manufacture Captisol according to GMP, our current plans include 2 additional sites for final step processing, one of which will be located in the United States.

And in addition to the investment to attain 500 metric tons of capacity with our batch processes that are validated, we are also evaluating potential simultaneous implementation of a proprietary continuous process approach, which could add additional long-term capacity in excess of the 500 metric tons should that be needed.

Captisol is a complex technology, yet it's a proven technology platform that is used in a number of life-saving medicines that are helping patients globally, perhaps the most high-profile of which is remdesivir.

And Slide 23 summarizes some recent developments relating to Captisol and remdesivir as reported publicly.

I want to highlight recent publications relating to Captisol, including one by Ligand scientists and collaborators, illustrating the role that Captisol plays and the insertion of remdesivir into the Captisol cavity.

Also as reported by Gilead, there have been recent emergency use authorizations and approvals in multiple geographies, new analyses of data and the launching of new clinical trials aimed at reaching additional patient populations and care settings.

They've announced new trials with an inhaled solution form and disclose that they are evaluating potential subcu.

Given what's known and what's been published about Captisol's role with remdesivir for solubility and stability, it's expected these forms will use Captisol as well.

I'll wrap up with some comments on one of our internal R&D programs, which -- and referencing now, Slide 24.

We've made the decision recently to conduct a pivotal trial for Captisol-enabled iohexol.

A contrast agent used for hospital-based imaging procedures that could serve as the basis for potential registration of the product.

We have the operational and financial resources to advance the program internally, and we expect to start the trial near the end of this year.

The market for iodinated contrast agents is substantial with approximately 20 million imaging procedures per year, representing an estimated $1.5 billion in annual sales.

We expect the trial will enroll approximately 500 subjects and the objective of the pivotal trial will be to demonstrate a reduction in the incidence of contrast-induced acute kidney injury and the equivalence of image quality following administration of CE-iohexol compared to GE's Omnipaque.

In conclusion, Slide 25 shows an updated traditional snapshot of our partnered pipeline, which is diverse and partner type, therapy area distribution and underlying technology base.

And before I turn it back over to the operator, I just wanted to recommend that investors follow Ligand on Twitter.

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

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

Operator?

(Operator Instructions)

Your first question will come from the line of Matt Hewitt with Craig-Hallum Capital.

Congratulations on the fantastic quarter.

Couple of questions first on Captisol.

Obviously, phenomenal quarter.

Should we assume or can we assume that the $25 million increase in guidance is related to the partners that Gilead has signed up?

And maybe if you could provide an update on how many of those 9 you have contracted with?

I think last update, it was 4 or 5. We know that they've added more since then.

Yes.

Matt, this is Matt Foehr.

I can comment there.

Yes, we -- obviously, our supply in Captisol for remdesivir, we are supplying a number.

We're actively supplying, did in Q2 and expect and will supply more in Q3 to members of the manufacturing consortium.

We've entered into contracts with a number of them.

We've supplied, I'll say, R&D-grade quantities to most all of them and are in discussions with all of them.

So as you would expect, different companies move at different paces.

They have different approaches to manufacturing, et cetera, but we're in discussions with all of them.

Okay.

That's helpful.

And then as far as -- and I think you alluded to this, but I'm wondering if we could dig in a little bit more.

Gilead has publicly commented that they expect to have 2 million treatment courses by the end of this year.

Obviously, you've got their consortium on top of that, how should we be thinking -- I know you said over 90 million.

But how should we be thinking about the split for next year?

If Gilead's seeing multiples, and I don't know how to interpret what multiples of 2 million is.

Maybe you could help us with what you're thinking and then how should we think about the other 9 parties on top of that from a contribution standpoint?

Yes, Matt.

Gilead has said publicly, with regard to 2021, they expect several million more treatment courses in 2021.

As far as the consortium goes, there really haven't been many public statements around number of treatment courses at this point.

Obviously, the treatment paradigm is centered around a 5-day treatment course.

But there are 2 different forms of the vial lyophilized powder and an injection solution, the lyophilized powder uses Captisol at a ratio of 30:1, 30 parts Captisol to 1 part active ingredient, remdesivir.

And the injection solution uses Captisol at a ratio of 60 parts to 1 part.

So 60 parts Captisol to 1 part, remdesivir, as is described in the label.

But there really haven't been specific comments from the consortium on that.

Yes.

And Matt, I would add just that we did say on the last call that the first 1.5 million treatment courses that Gilead had been talking about, was roughly equivalent to the first increase we made.

Obviously, as Matt just went through, there's a lot of variables in which treatment course and dose they're going to use and all those sorts of things.

They also then up their production numbers for this year to 2 million.

And then I think you can maybe draw from that, that a portion of the orders that they're going to be delivered at the end of this year would obviously be used to produce remdesivir for next year.

But certainly not anywhere near enough in that 90 million to cover what they're talking about for next year.

All right.

And then I guess a couple of questions regarding iohexol, and then I'll hop off.

When do you anticipate that trial starting?

And I'm sorry if I missed that, and cost, and how quickly can you enroll and wrap that trial up?

Yes.

Thanks, Matt.

So yes, we expect to start the study near the end of this year, right near the end of the year, it's a proposed label-enabling adaptive design study.

The goal will be to demonstrate a reduction in the incidence of contrast-induced acute kidney injury and the equivalence -- is the equivalence of image quality comparing iohexol, our CE-iohexol compared to GE's Omnipaque.

It will be an adaptive design, randomized, double-blind, parallel group with patients -- and it will be performed in patients with impaired renal function, who are undergoing invasive coronary angiographies.

So we expect to recruit about 500-or-so patients.

We also expect there will be a prespecified interim analysis of the rate of contrast-induced kidney injury that will perform after about 60% accrual of the data.

So again, it will start near the end of this year.

It take about 24 months or so to get to full completion.

But again, it will be an adaptive design where we'll have an interim analysis after about 60% accrual of the patients.

And your next question comes from the line of Joe Pantginis with H.C. Wainwright.

Matt Foehr, I'd love to start also with iohexol here.

I guess my first question is, is this asset still up for business development?

I guess, I'm looking forward to the potential commercial profile here.

It's obviously an important decision that you guys made to bring it to pivotal studies here for this relatively large study.

So I guess I'm looking towards the next steps, if you can get a label for it?

Would you look to take it forward yourself?

Or is it still up for a potential partnering.

And then the second part of that question is just to allay any potential investor fears, just based on your history to date, is this just that your decision process is that you've really had the resources to do this and you want to take full advantage of the economics that you can

(technical difficulty)

it wasn't having to do with, say, not being able to partner it at this point?

Yes.

Thanks, Joe.

Yes, key part of our business, obviously, is partnering.

We take programs -- look, where we can answer a few questions and derisk them in such a way that we can drive better downstream economics.

And that's really what we're doing here.

So this is a trial that we have the resources and the expertise on.

Similar to what I said...

(technical difficulty)

Matt Foehr, I might jump in here because here, we -- there's a bit of echo on your line?

Yes.

Perhaps you're having some technical difficulty there.

I was hoping to head that off.

Operator, is there still echo in the line?

Just a little bit.

Yes.

Okay.

Well Joe, I'll take a crack at answering the question, didn't mean to talk over to Matt Foehr.

But Joe, if you're on a speaker, perhaps you can mute.

The -- we're very excited about this program.

And we are looking at the investment as a way to really expand the commercial potential for Ligand.

We have interest in the program, some participants in the existing market recognize the potential for a product like this.

We were going to an advanced smaller formulation equivalent trial.

And we realized that given the profile Captisol has right now, our expanding cash flow, we really believe we are in a much stronger position to advance the program ourselves.

Ultimately, I expect we will still license this out.

But we are also going to take the next 12 to 18 months to evaluate what it might look like for us to be more active in the commercial market as well.

We don't plan to become a commercial entity.

But again, we have the financial strength and the operational resources to advance this.

And ultimately, we think it is -- while any clinical program is not without risk, we think this is a good investment to potentially increase the potential for this asset.

That's really helpful, John.

I appreciate that.

And then maybe a question for Matt Korenberg with regard to the ongoing demand for remdesivir.

Obviously, all the points have been highlighted already in the new formulations and increasing the dosages, et cetera.

I guess I'm looking towards the potential volatility and how long this demand can continue when you say factor in things like government contracts along those lines as well even though there's obviously demand that would continue.

Yes.

Thanks, Joe.

Our expectation really is for significant demand next year and over the couple of years following, really based on the fact that even if -- even with vaccines, there may not be 100% effectiveness with other treatments, there may be combination therapies and other things where remdesivir ends up being part of the treatment regimen across the landscape.

So based on those dynamics, and just generally, our interactions with all of our partners, we see significant volume demand for the near term, as the world kind of stocks up on remdesivir.

And then beyond that, we see an ongoing permanent place for the foreseeable future until we're done with coronavirus entirely, where we'll see ongoing demand for remdesivir.

That's really helpful.

And then if you don't mind, just 1 quick question for Matt Foehr again.

Matt, you laid out a lot of different factors with regard to expanding your Captisol manufacturing investments, a lot of factors there.

So I'm just curious, what you consider to be the top rate-limiting steps for all the different factors you mentioned?

Yes, Joe.

We've been -- obviously, there's a very detailed plan that the team has worked up in collaboration with our manufacturing partners.

And it's really progressed extremely well.

I'd say we're positioned very well.

We obviously scaled up our process already in Q2 and delivered material from a scaled-up process.

Earlier, I would have said it was equipment fabrication, but that's gone very well and all the equipment is fabricated and ready to be installed this month.

So we're very well positioned for the expansion.

And so great to see the continued progress.

And your next question is from the line of Balaji Prasad with Barclays.

A couple of questions from me.

Following up on the -- on your comments on the sales to the generic companies or Gilead's partners.

Can you give us more clarity on what's the nature of your contracts with them?

Do you have any royalties factored into the generic contracts?

And secondly, do you have visibility into how the composition of sales from the partners versus Gilead itself will be over the coming years?

Yes.

Thanks, Balaji.

This is Matt Foehr.

The agreements with the partners in the manufacturing consortium are structured generally very similar to the deal, and I'm speaking in generalities here, but to the deal we put in place with Gilead back in 2015 for remdesivir when the drug was originally being used for Ebola.

So at that time, the economics were built entirely into the material portion, right?

So there's not a royalty with it, but the economics are built in the material portion.

And that's generally the structure we've been entering into and are pursuing with the members of the consortium as well.

In terms of your question on the mix, really too early to say exactly.

But as I mentioned earlier, we have already obviously shipped amounts to the partners in the consortium and have orders for continued shipments as well.

Just one more follow-up on me.

I think in your comment, you mentioned that you are working with Gilead with the alternate forms of remdesivir.

Did I hear that correctly that Captisol will be a part of inhalation on subcu forms?

Yes.

Thanks, Balaji.

So the -- as Gilead has announced, they launched new trials with an inhaled solution form, and they also disclosed that they're looking at a subcu route.

Obviously, our drug master files have a significant amount of data associated with those forms of delivery and given what's known and what's been published about Captisol's role with remdesivir for both solubility, so dissolving the active ingredient as well as chemical stability, yes, it is expected these forms will use Captisol as well.

Last one from me, and I'll jump back in the queue.

Can you just take me through what the acquisition of the new ion channel discovery unit means for the business itself?

Yes.

So yes, great question.

And we obviously announced the acquisition of Icagen deal closed very beginning of Q2, so on April 1. And with the acquisition of Icagen, picked up in ion channel technology that really fits well within our VDP platform and picked up some great partnerships.

Ion channels are frequently a focus of partners, both on the VDP side with Vernalis as well as with OmniAb.

They've got deep biological expertise focused around both ion channels and transporters, which are usually seen as high-value targets also picked up partnerships with Roche and the CF Foundation as part of that.

And notably, in the quarter, as was summarized briefly in the slides, expanded the relationship with Roche, with Icagen in Q2.

So we're real pleased about that.

Your next question is from the line of Larry Solow with CJS Securities.

Congrats on a great quarter.

Just a couple of follow-ups.

Most of my questions have been answered.

Just on the -- just to summarize, so the increased guidance obviously all reflects higher Captisol.

It sounds like your royalty revenues and expectations of sort of a reramp in product sales and along with sort of a reramp in clinical trial work for your partners is essentially pacing in line with where you thought it was going to be at the end of Q1?

Or when you last updated us on your Q1 call, is that fair to say?

Yes.

Thanks, Larry.

That's right.

Across those 3 buckets, there may be a little bit of shifting from bucket to bucket.

But in aggregate, we think the 3 buckets are still in line with where we are -- sorry, where we guided on Q1.

I'd expect that by the end of the year or certainly on the next quarter call, we probably will be able to give a little more precision on what each of the buckets look like.

But for now, it's -- in aggregate, it's all the same.

And the 25 million increase on Captisol, is that -- you're enabled -- you're able to do that just because you've got -- you're getting a little bit of capacity expansion over the next couple of quarters?

Obviously, I know you're going from 60 million to 500 million tons, I think, by the end of -- I think it was Q2 of middle of '21.

So maybe you can just sort of discuss sort of the pace of the capacity expansion, is that actually somewhat of a limiting factor?

And maybe you would have actually done even more than the 90 million in Captisol this year, if you had more capacity on hand already?

Yes.

Good question.

The -- I think it's a fair way to characterize it that to get to the upper ends of where we've guided to and to exceed it, we will have had to have successfully expanded our capacity for the year.

By the end of the year, we'll have sold more than our 60-metric tons capacity that we had talked about prior to any expansion.

So part of the reason for us needing to wait until now to talk about the full extent of 2020 or to the extent we have so far is really related to monitoring the ongoing ramp-up of production and then also ramp-up of capacity.

Okay.

Great.

And then shifting gears a little bit.

Could you just remind us on Captisol-enabled iohexol, I guess 2 questions.

I want to follow up.

I think Matt might have asked the question, but did you -- I didn't hear the answer.

Did you give sort of an approximate cost of this Phase III trial?

I guess, it would be over a 2-plus year period?

And then the second question is just if you can remind us, relatively speaking, how much Captisol, there's a ratio there?

I believe Captisol -- there's a lot of Captisol used or will be used in the iohexol?

Yes, Larry.

This is Matt Foehr.

The trial itself, as I mentioned, is expected to take about 24 months.

Overall cost all in for the trial is about $20 million spread over that period.

So fits within our general R&D spend, well within our -- we've got, obviously, the technical expertise to run the trial.

We've not disclosed the fine details of the formulation itself beyond to say, that this is a high Captisol user product.

It's expected it will be in many tens of metric tons really once a potential commercialized product is available.

And as I said, we're excited about the trial.

We're well positioned to run it.

And I think it answer -- will answer some key questions and really position it extremely well for partnering, as John was describing.

Okay.

Great.

And then just last question on some -- I know you have several upcoming milestones, or at least as we get towards the latter portion of the year, can you just remind us on the Palvella the -- on the PC for the rare skin disease, sort of the market sizes there?

I know you gave the royalty rate in your slides, sort of the potential market size and, obviously, the opportunity for you guys?

Yes.

Thanks, Larry.

It's about -- the population in the U.S. is about 9,000, 10,000 patients in the U.S. And so it's an extremely rare disease.

As Matt has detailed in the past, it's extremely debilitating disease for the patients that suffer from it.

They end up unable to walk frequently by the end of the day, each day or permanently in wheelchairs and really have a quality of life struggle that the drug will solve for them, if successful.

And so you can determine what you think the pricing might be.

But given the impact on quality of life, we think it could be a pretty substantial market, several hundred million dollars, upwards of $500 million plus.

Got it.

Okay.

If I could just squeeze one more in.

Just on capital allocation.

Clearly, a little bit of windfall of remdesivir, hopefully that lasts for a while.

So a little bit -- certainly better cash flow this year.

And you mentioned, obviously, you're putting some of that into the pivotal trial that you're going to do yourself, a little more money, obviously, into the Captisol expansion.

How about just outside of those couple of things, share repurchases?

Any thoughts of that?

Is that sort of cooled off for the time being?

And then on the acquisition front?

Has -- the COVID-19, is that creating more opportunities for you, less opportunities?

Is it too early to tell?

Any thoughts on that?

Yes.

All good questions, Larry.

The capital allocation discussion inside Ligand is always ongoing, and we continue always to evaluate everything from share repurchase, debt repurchase, consider dividends occasionally and M&A across the spectrum.

First, on the balance sheet side, we obviously did not do any share repurchase or bond repurchase in Q2.

And while we continue to think that the stock is undervalued and the bonds are undervalued.

We typically will keep an eye on the relative moves of our stock and bonds to the market.

In Q1, it was really dislocated.

And coming into the year, we didn't really have specific plans to do large share repurchase or large bond repurchase.

But both the stock and the bonds were quite dislocated from what we thought was proper value relative to the markets at the time.

And so we made significant buys there.

Our stock is held in reasonably well over the markets over the last quarter.

So we've monitored it, but we did not buy any stock in Q2.

Going forward, we'll continue to evaluate all these things, to the extent the bonds continue to trade at discounts where we'll think about buying the bonds similar to the stock, if it does not move in the ways we think it should, we'll buy stock.

Largely, though, the focus has been M&A for the year.

And with the pandemic environment, it was certainly a pause, if not a slowdown for a little bit, but discussions have certainly gotten back close to normal, although all virtual at this point largely.

We're continuing to look at a number of things, and I think we have some good stuff in the hopper.

So we're looking forward to active dialogue and hopefully, some transactions in the coming year.

(Operator Instructions)

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

Just a couple of questions.

I don't know if you mentioned it yet, but did you give any color on how we should think about the trajectory over the second half with regards to revenue and timing?

Yes, Scott.

Obviously, royalties -- because of the tiering and because of the fact that the products are all growing, Q3 and Q4 should be sequentially larger than Q2 and Q1, respectively.

So with -- we think the recovery in patient visits and patient access, we should see a return to growth for Kyprolis in Q1 -- Q3 over Q2, certainly in the U.S. and developed world outside of Japan, which grew significantly in Q2 already.

So royalties as per normal, should continue to grow sequentially from here.

Captisol, we mentioned that the balance second half of the year is about $44 million based on our guidance.

We see about 35% of that in Q3 and 65% in Q4.

And then milestones and service revenue, generally speaking, are always kind of bouncing around, but no reason to see it as anything other than kind of evenly weighted for the next couple of quarters.

Okay.

That's very helpful.

And then just a question on Captisol and remdesivir.

I mean has remdesivir, the attention that it's gotten, has that led to perhaps a boost in other people looking at Captisol?

I'm just trying to get a sense of what's the organic growth there if we strip out remdesivir?

And will it, over time, be deleveraged from remdesivir?

Or is that just the bulk of it regardless?

Yes, Scott, good question.

As the business is evolving, remdesivir, no doubt, has captivated the world's attention in terms of the potential and the need for treatments for COVID-19, that the drug requires Captisol is very important.

And so clearly, it's impacting our business right now, specific to that drug.

But your observation about -- is there a follow-on effect in terms of stimulating other interests?

And the answer is yes, there is.

The world has evolved where many good drugs need to be solubilized or stabilized.

Captisol has a great platform and reputation, but given what's going on now, there is tremendous awareness about Captisol, not just what it does technically, but just how strong the platform is in terms of the drug purity, the depth of the drug master file.

Now the high-volume quality manufacturing and so this is spurring interest.

Existing customers, of course, new, contracting and also frankly, it feeds into our decision to go after CE-iohexol for a pivotal trial, where this could have been a much smaller bioequivalence and frankly, smaller commercial outlay with a different label.

This is a substantial market.

If we can show drug safety in this large market, that is significant.

And it's really evidence of, I'll say, the evolution of the awareness and recognition of Captisol is important.

So it's an evolving field.

I think the best data point we have to speak to more financially the momentum.

2019 was an outstanding year for Captisol.

Of course, all of that was pre remdesivir.

We came in with a beginning of the year forecast that was the highest ever for the franchise.

We exceeded that.

We raised guidance.

We exceeded that last year.

And it has a really nice momentum, already forecasting higher volumes into 2020.

And that has continued across the board.

So we're very pleased with how the franchise is doing.

Okay.

Great.

Thank you for that color.

Final question.

In the presentation, I really liked slides 8 through 12.

There's a lot going on, and it allows you to get your sense of what to focus on next.

The question is, is the order of these programs, the 6 that you list, is that based on when the timing of when these events should occur or perhaps the magnitude of revenues?

Just trying to get a sense of really how I should think of that order -- and even more so, what's the next event that I should focus on, given you've got a lot going on?

Yes.

I'll give a general comment and Matt Foehr can identify the next event.

But generally, it is somewhat in order only 5 months left and the 5 months are going to go really quickly.

But the C-Stone one combines 2 events: Phase III data plus regulatory filing.

Both those could happen.

Of course, the data would come first.

But generally in order, they aren't ranked by importance or value of the program.

But these 6 events in the next 5 months plus 3 next year, this is the largest, most substantial late-stage calendar new events we've ever had.

Investors who have followed us know that we have had different ways of presenting our calendar of news events coming up.

Frankly, it's been a much longer list, a lot more details.

But now the portfolio is so large and substantial that we're really trying to focus on the largest items.

Matt Foehr, do you want to comment on the next 1 or 2 most likely near-term events?

Yes.

Yes.

And John, I think as you characterized it, that's exactly right.

They are somewhat in order, Scott, right?

So I'd say the Palvella pivotal data is probably the nearest term of those.

And just creating bookends on that group there this year.

Kyprolis' sNDA date is November 15.

So I'd put that as kind of the other book end.

But the nearest, I'd say, is the Palvella.

But as John characterized it, they are, what we call, somewhat in order, but that gives you kind of a range.

Thank you, Scott.

Well good.

We appreciate people's attendance and turn out.

Good questions.

Obviously, very busy time for Ligand.

I kind of want to acknowledge the team's work, outstanding execution through very busy period.

But we appreciate the interest.

We are going to be on the road virtually.

A number of conferences this fall, will be at the HCW conference in September.

We have a few other conference invites that we're finalizing now.

And as we indicated, we anticipate we'll be hosting a virtual Analyst Day in the next few months to give a fuller update on our business and outlook.

Thank you for your time, and we will stay in touch.

Thank you again for joining today's conference call.

This does conclude the call.

You may now disconnect.