Ligand Pharmaceuticals Incorporated (LGND) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ligand First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Capuzelo, Investor Relations for Ligand. Thank you, ma'am. You may now begin.

Thank you, Jesse. And welcome to Ligand's First Quarter Financial Results and Business Update Conference Call. Speaking today for Ligand are John Higgins, President and CEO; Matt Foehr, Executive Vice President and COO; and John Sharp, Vice President of Finance and CFO. As a reminder, today's call will contain forward-looking statements within the meaning of federal securities laws. These may include, but are not limited to, statements regarding intents, belief or current expectations of the company; its internal and partner programs, including Promacta and Kyprolis; and its management. These statements involve risks and uncertainties, and actual events or results may differ materially from the projections described in today's press release and in this conference call. Additionally, information concerning risk factors and other matters concerning Ligand can be found at Ligand's public periodic filings with the Securities and Exchange Commission, which are available at sec.gov. The information in this conference call related to projections or other forward-looking statements represents the company's best judgment based on information available and reviewed by the company as of today, May 8, 2013, and do not necessarily represent the views of GSK, Onyx or any of our other partners. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. At this time, I'd like to turn the call over to John Higgins.

Thanks for joining us, and welcome to our call. We've had an outstanding start to 2013 and are increasingly confident and excited about the future of our business. I'll simply say, Ligand is on the move. Now if you are on this call, you likely already know Ligand is focused on financial growth driven by strong revenue performance and cash flows. By this metric, we have delivered. Total revenues more than doubled over a year ago, with strong royalty contributions from Promacta and Kyprolis. The company is now built around these 2 strong financial growth pillars. Promacta is a classic franchise medicine that has a potential to treatment option for a broad array of indications. It has a young patent life, and we enjoy an attractive royalty. The Kyprolis royalty is the new heavyweight financial asset that has entered our ring. The product has exceeded our expectations. Following Onyx's Q1 revenue report yesterday, we are set to receive nearly $1 million in royalties in Q2. That is only 3 quarters following the launch of the product. Now as a comparison, the Promacta royalty took 10 quarters to generate that level of royalty for Ligand, and the royalty rate on Promacta is roughly 3x higher. Now as clear as our financial performance has been, I'm also pleased that we are exceeding well on building growth for our future as well. Last month, we announced the acquisition of over 15 royalty assets from Selexis. These are future potential financial payments due from partners who have licensed Selexis's technology to improve the manufacturing yield on the production of biologics. This is an excellent deal for Ligand, as it significantly expands our Shots-on-Goal royalty portfolio. And it diversifies our portfolio to a new category medicine, to new indications and some new partners. Virtually all of the programs we acquired are in clinical development, and the latest-stage programs could be in the market within 5 years. Investors benefit from this deal, as we are clearly investing in our future. Our financial upside has increased, and our risk profile, due to further diversification, has decreased. We are excited about our financial growth prospects over both the short and the long term, and by bolting on more portfolio assets such as these, we are looking to extend our growth even further. Ligand investors are witnessing an evolution of our pipeline, or should I say, a remarkable revolution of our pipeline. When I joined Ligand about 6 years ago, we had 9 fully funded partner programs. Today, we have over 85 fully funded programs, essentially a tenfold increase in fully funded programs. 10x the number just 6 years ago. The potential of the portfolio is underscored by both the quality and growth of our current revenue-generating programs and also by the significant investment our partners are making in the development-stage programs. We estimate that our partners currently spend over $0.5 billion a year on these 85 programs. Now beyond the large number of funded programs, significantly, today, 7 products are paying us royalties, up from just one 6 years ago. Now I've already talked about Kyprolis and Promacta royalties as being dual major assets for Ligand, but a couple of others, while small, are beginning to pick up some momentum as well, like Conbriza and Nexterone. Combined, these 2 products are beginning to provide contributions to our EPS on a quarterly basis. In this past quarter, we enjoyed nice cash flow from operations, we raised our revenue and EPS guidance, we paid down $7 million of debt ahead of schedule, and today, we are announcing a share repurchase. Given the quality of our revenue, our high gross margins, our strong discipline over expenses and our very large tax assets, we are increasingly confident about our business and future. Matt?

Thank you, John. I'm going to start off by saying that in March, we licensed our Captisol-enabled melphalan product to Spectrum Pharmaceuticals. First, I want to say that, that's an outstanding deal for Ligand. We had considered taking the product to market ourselves. And in the end, we did a deal with a focused oncology partner that we believe has the potential to generate significantly higher revenue with the product than we could have on our own, and we secured a significant royalty interest on the product. We've now transferred the asset to our partners at Spectrum, and we've been very impressed with their professionalism and focus, and we're pleased to see their dedication to the asset firsthand. They took over at a time when the pivotal trial was ramping up very nicely and enrollment was accelerating significantly, and we've seen that the Spectrum -- that Spectrum's development teams have the experience and knowledge to manage the trial to a successful and swift completion. With melphalan now on the hands of a very capable and dedicated partner, I just want to spend a few moments talking now about 2 unpartnered assets that warrant some attention currently. The 2 assets I want to spend time on are our diabetes asset, the glucagon receptor antagonist; and our SARM asset for muscle wasting. For both of these, we feel we have improved next-generation molecules compared to what's currently in development. And for both of these targets, there are other sponsors in mid- to late-stage clinical development that are serving to ripen the landscape with data or events that should be coming in the next 3 to 6 months. I think these assets illustrate how we use our R&D efforts at Ligand to seed future potential partnering opportunities. I also want to briefly mention that we included in our press release today mention of 2 clinical publications that recently went to press in the journal Epilepsia, relating to our Captisol-enabled IV-Topiramate program. We want to commend our collaborators at the University of Minnesota who performed and published the work. And I will note that for that program, the R&D here -- the R&D team here at Ligand continues to actively pursue the attainment of an orphan designation for that product. Switching gears now, our partners at GSK have continued to show their commitment to the Promacta brand, putting significant global resources towards it to increase the reach in the current indications and expand into exciting new indications. We see that GSK is very committed to Promacta's use in HCV, with continued commercial rollout in the U.S. following its formal launch for this new indication in late January of this year. And we expect that additional markets for the HCV indication will launch in the coming few quarters based on GSK's previous disclosures of filing dates. There are over 30 Promacta trials at various stages of development recruiting right now, including those in oncology-related indications and other diseases that have significant unmet needs, like aplastic anemia, where earlier published clinical work suggests Promacta's use beyond supportive care and as a potential disease-modifying medicine. We expect to see GSK continue to publish data on Promacta at the upcoming conferences over the summer and would generally expect, like last year, that the European Hematology Association meeting, or EHA, in June will be an important event for the brand, as well as the ASH conference in December here in the U.S. With that, I'll now turn it over to John Sharp, who's going to talk through the numbers.

Thanks, Matt. I will conclude with a few brief comments before we open it up for questions. The financials were straightforward this quarter, and as John said, revenues more than doubled. We also enjoyed corporate gross margins of 94%, and cash expenses were essentially flat. Excluding the noncash expense for the change in contingent liabilities, we recorded net income of $3.3 million or $0.16 per diluted share. Looking forward, we continue to expect total revenue for the full year to be between $43 million and $46 million and earnings per diluted share between $0.47 and $0.51. We expect combined R&D and G&A expenses for the year to not exceed $27 million, and we expect to -- our cost of goods sold for the year to be approximately 40% to 45% of material sales. As I often do, I would like to remind everyone that our expected quarterly revenues are lumpy, given the timing of Captisol orders and licensing milestones and the annual reset of our royalty tiers on our major royalty streams. And as such, for the second quarter of 2013, we estimate revenues to be between $9 million and $9.5 million and earnings per diluted share to be between $0.03 and $0.05. Our earnings-per-share guidance for both the full year and the second quarter does not include the effects of any increase or decrease in contingent liabilities. And with that, I will turn the call back over to the operator and open it up for questions.

[Operator Instructions] Our first question comes from the line of Joe Pantginis with Roth Capital Partners.

A couple of questions, if you don't mind. I guess, let's start with the -- a little bit on the financing side and linking that to your overall strategy. You announced a share repurchase program today, about $5 million. Wanted to get a sense of, first, how committed you are to that amount over the next 12 months. You're also looking to pay down your debt by August 2014, you said, and that's very encouraging. So I guess I wanted to link those 2 questions to how it really relates to your cash on hand and your anticipated cash flow with your overall business model of constantly looking for opportunities such as what you just did with Selexis?

Right. Joe, thanks. Appreciate the question. The overall perspective that we have about the business is that we are now profitable, cash-flow positive. The business is generating very nice cash flows. Our first priority is to pay down the debt. And as we discussed, we took down a chunk ahead of schedule. Beyond that, as we look at other opportunities, the Selexis deal, a very good fit, small acquisition price, and we're continually looking for other opportunities like that. Right now, we're comfortable authorizing admittedly a small share repurchase, because our interest income environment, the yield on investments is essentially 0%. And given our confidence and outlook in the business, we really are bullish on Ligand right now. And opportunistically, if we're able to buy back some stock, we're prepared and willing to do that. Having said as much, our focus is on continuing to build and grow the business. And if we need to do acquisitions with larger amounts of capital beyond our operating cash flows, I believe we'll be able to do that through debt borrowings. We have no plans for equity financings, certainly at these levels.

Sure. No, that's helpful. And then, maybe just a couple -- looking for some clinical updates here. I guess I'll start a little earlier stage. The MedCo product with the CE, Captisol-enabled clopidogrel, was a nice highlight at your Analyst Day in December. I was just curious if you had any updates on that product?

Yes, they started their trial -- they announced that late last year, but really no clinical data updates at this point.

Okay. And then just lastly, regarding Promacta. Obviously, you said they'd have over 30 studies ongoing at Glaxo, seeing some data come out at EHA and ASH. What do you think is the lead focus there? Do you -- obviously, we were looking at things like chemotherapy-induced thrombocytopenia as something that we have been excited about in the past. And now you're talking more and more about the potential disease-modifying characteristics of the drug. So what do you think Glaxo and you guys are most excited about for these -- for the prospects of Promacta?

Yes. I'll comment, Joe. GSK started to talk more about their pipeline in their -- more about the Promacta development in their pipeline summary. They've got active trials in MDS and AML. So we'd expect to see data at those likely at the big hematology meetings at EHA and at ASH. Also, continuing to work on, as you said, the chemotherapy-induced thrombocytopenia in the tumor realm, they're continuing to invest significantly there. And then lastly, in aplastic anemia, there was a journal article that came out last summer in New England Journal of Medicine suggesting that Promacta had disease-modifying effects in aplastic anemia, and we know GSK is pursuing that in trials also.

[Operator Instructions] Our next question comes from the line of Irina Rivkind with Cantor Fitzgerald. Irina Rivkind - Cantor Fitzgerald & Co., Research Division: I just wanted to ask a couple around Kyprolis, if I may. So going through the Onyx call, they were talking about development of an oral product, the oprozomib, and then also another form of Kyprolis that they said could extend the PK profile of Kyprolis. Can you sort of weigh in as to how these other research programs affect the longer-term prospects for your Captisol-enabled form of Kyprolis and whether or not you think Onyx is going to move to one of these other forms longer-term? And then the second question I had on Kyprolis was, they reported $58 million in demand and then a gross-to-net accrual of $6 million in the quarter, and I was just wondering if your royalty next quarter is going to be based on the full $64 million or the $58 million?

Yes. Irina, I'll take the second question first. Yes, we expect the royalty will be on the full sales figure that Onyx reported. And as far as the first question, I'll ask Matt to add a little more color. We certainly have a perspective on both of your questions. One is the oral landscape, IV versus oral, as well as the very early discussions Onyx has had with investors about their research into other IV forms of Kyprolis. But I just want to first acknowledge that these are Onyx's programs, and Matt can add some perspective as it relates to Ligand and, obviously, our business, which is important. We really encourage you and other investors and analysts to defer the technical questions to Onyx, as these really are their programs, out of respect for our partner there. Matt?

Yes. So, Irina, all that -- on the oral work, obviously, all that -- that there's -- we're continuing to watch that space. Its early-stage work and multiple myeloma is, obviously, a very hot space. So not surprising that there is some work looking at oral medicines. GSK -- or Onyx, I should say, has talked a little bit about looking at some exposure experiments in rats. That's all preclinical work. It really hasn't been a significant focus, and it generally appears that the work is focused on trying to inform some of their other proteasome inhibitor programs at Onyx. And I'll add, it's certainly not uncommon for a top-tier scientific organization like Onyx to pursue more detailed understanding of how their molecule works and behaves in a variety of settings. They're obviously on the frontiers of proteasome inhibition, and in general, we'd expect folks like them to keep pursuing further understanding of the mechanism and the scientific space, and we see that as really what's going on here. Irina Rivkind - Cantor Fitzgerald & Co., Research Division: I think they said on the call that they're going into Phase II with it, actually. But, all right. And then the other...

Well, actually -- no, Irina, I think you're referring to their oprozomib formulation. Irina Rivkind - Cantor Fitzgerald & Co., Research Division: That's right. That's right, yes.

Yes, that's not -- yes, just wanted to clarify that.

Yes. And I think there are 2 separate issues. One is the oral form. It's a dosage form question, which, although we're talking about clinical-stage studies, they are years from the market. And it's a question of whether the product will be differentiated or if it will be an alternate dosage for them. I think Matt's other comments were relating to the ultimate forms of Kyprolis. And frankly, if they're even targeting multiple myeloma or if it's just understanding the science behind the active ingredient better, which, again, you would expect a company of Onyx's stature and resources to be focusing on. Irina Rivkind - Cantor Fitzgerald & Co., Research Division: Okay, understood. And then, just on the guidance, you guys had a nice beat this quarter. So I was just wondering why you just decided not to raise guidance for the year?

Well, we did raise guidance. We came out with a guidance at the start of the year and then raised it mid-quarter. So we're pleased with our performance. We're excited about the portfolio and are proud of the numbers that we can continue to back on this call today.

It appears there are no further questions at this time. I would like to hand the floor back over to Mr. Higgins for any concluding remarks.

Thanks for attending our call today. We're going to be on the road a bit the next few weeks. We'll be at the Bank of America conference next week. And then in early -- in late May, rather, we'll be at the Deutsche Bank conference in Boston. And early June, at the Jefferies conference. So Ligand -- again, we're very pleased with the evolution of the story. The financial growth aspect is playing along nicely, and we have some very substantive programs that we're advancing through the clinic and through our partners' relations, and look forward to updating you as the year progresses. Thanks for attending our call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.