Greetings and welcome to the Ligand Pharmaceuticals Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-answer-session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Erika of Investor Relations. Thank you. Please begin.

Thanks, Jesse. Welcome to Ligand's third quarter financial results for 2014 and business update conference call. Speaking today for Ligand are John Higgins, President and CEO; Matt Foehr, Executive VP and COO; and Nishan DeSilva, VP of Finance and Strategy and CFO. As a reminder, today's call will contain forward-looking statements within the meaning of our 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, Kyprolis and Duavee 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 its conference call. Additional information concerning risk factors and other matters concerning Ligand can be found on Ligand's public periodic filings with the Securities and Exchange Commission, which are available at www.sec.gov. The information in this conference call related to projections or other forward-looking statements represents the company's best judgment based on information available and reviewed by the company as of today, October 27, 2014, and do not necessarily represent the views of GSK, Pfizer, Amgen 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'll turn the call over to John Higgins.

Good morning. Thanks for joining us for our third quarter call. Well into 2014, Ligand's cash flow generation and growth potential is becoming increasingly clear. Our primary wealthy assets are doing well in the commercial marketplace and the Captisol business is thriving. We continue to enter new deal to expand our portfolio of partner programs and we are advancing our internal pipeline with new data. And with that productivity, cash expenses are essentially flat. Now as evidence of our financial growth and increasing cash flow, I would like to point out how the nine months year-to-date have changed over the past few years. For the first nine months of 2012, we had $17.8 million in revenue and had an operating cash loss. Now two years later, for the first nine months of this year, we posted $41 million in revenue and generated $0.93 in adjusted EPS, which essentially reflects operating cash flow per share. That is well more than a doubling of revenue in two years for the comparative period and we moved from losing money to generating significant cash flow from operations. And 2014 is not over. As investors who follow us closely well know, our business drives big fourth quarters financially, given the tiering in our royalty contracts and the ordering patterns of Captisol for commercial use. As such, we are facing our biggest quarter of 2014 by far with revenue projected to be nearly $22.5 million to $24.5 million or more than 50% higher than Q3, with a strong outlook for both GAAP and non-GAAP earnings. Our revenues come from three sources, royalty, Captisol and licensing fees. I want to talk about all three right now and explain some of the positive dynamics that are forming around our revenue. In regards to royalty, our lead program is…

Q3 was a great quarter for the growth and progress of Ligand's portfolio of assets. I'm pleased with the work our team is doing here on our internal programs as well as the work relating to some R&D collaborations we've recently put into place with newer partners. And importantly, our existing partners continue their significant and growing investment into our partner portfolio, and we continue to see the benefits to our business from that investment. I'm going to start off first by touching on our Captisol technology. Captisol continues to be a highly valued solution to partner solubility and stability challenges. It's enabling new formulations of existing drugs and is being expanded from a use perspective in use in topical or transdermal programs as well as in oral programs. The AAPS meeting is coming up here in San Diego next week and we and some of our Captisol partners will be presenting data on Captisol use and its value in a number of new and important formulation settings like orals and topicals. The work being presented sets the stage likely for further expansion of this technology into these new areas. We entered into a number of new deals for Captisol this past quarter, including ones with and Marinus Pharmaceuticals and Boston Strategics and one for a new additional Captisol-enabled program with Amgen. Captisol has enabled the development of a number of commercial programs in our portfolio as well. And some of those programs have had important data read-outs and events recently. Late last month, our partners at Merck received European approval for Noxafil IV. This approval was Captisol-enabled Noxafil IV in a total of 29 countries. And as John mentioned, our partners at Amgen also announced Phase III data for Kyprolis last quarter and publicly shared their plan for global…

Thanks, Matt. I'll recap just a few of the highlights from our earnings news release issued earlier today. Total revenues for the quarter was $15.0 million, up $2.0 million compared to the same quarter last year, driven primarily by an increase in royalty revenues of $1.8 million. Total gross margin taking into account all revenues was 90% for the quarter. Our cost of goods sold for Captisol for the quarter was $1.5 million, resulting in a gross margin on Captisol material sales of 76%, driven by a higher proportion of material sales for use in clinical products. In addition, our cash G&A and R&D expenses, backing out the non-cash impact of stock-based compensation expense and depreciation and amortization, were $5.4 million, virtually flat compared to the same quarter last year. For the quarter, we reported non-GAAP net income from continuing operations of $7.6 million or $0.36 per diluted share compared to $4.2 million or $0.20 per diluted share for the same period last year. On the cash side, we ended the quarter with $187.8 million of cash, short-term investments and restricted cash. We paid off our $27.5 million loan with Oxford at the end of July. In August, we closed the $245 million five-year convertible note with 0.75% coupon. From an accounting perspective, the convertible note is considered to have two components. The first is straight debt and the second is the conversion feature. We had an independent valuation performed by PricewaterhouseCoopers to determine the allocation of the $245 million between the debt and the conversion feature. PWC determined that the initial value of the debt was approximately $192 million at closing, which will accrete over time at what they determined to be a market interest rate of 5.8% to reach the $245 million in face value at the end…

(Operator Instructions) Our first question is coming from the line of Joe Pantginis with ROTH Capital Partners.

First, maybe for Nishan, with regard to Captisol material sales, I know you mentioned something earlier with regards to the margins for Captisol and thank you for that, how the margins really differ between, say, commercial margins and the research margins before you can actually get to getting royalties from potential commercial sales?

As I just mentioned, I guess for Q4, we expect the range will be 58% to 62%. And in general, we say the range for material sales, gross margin is about 60%. And as you pointed out, that's driven by a mix between what proportion of the sales is coming from commercial sales and clinical or research sales. Generally speaking, we've guided to our margins on commercial sales that are about 50% and our margins on clinical or research sales are about 80%. So depending on how that mix comes out, we think that ends up around 60% level overall.

And then maybe a question for Matt. I know as you mentioned and thanks for the detail on DUAVEE. Can you maybe just go back a little bit and discuss some of the differentiation that DUAVEE is potentially bringing to the market, especially on the cardiovascular front?

Obviously this was a program that was in development at Pfizer, a very large development program, some of the largest studies ever done in this space. This was one of the largest pharmaceutical spaces for a long time prior to the women's health initiative. And Pfizer did a great job sticking with the development and designing really stellar studies and put together a very nice label for DUAVEE. Right now just in terms of size, it's about 33 million women in the US between the ages of 45 and 59 and the average age of menopause is 51. So essentially, there are estimates of about 50% of post-menopausal women experience moderate to severe motor symptoms, what we call hot flashes, and that's what the label obviously is centered around here in the US. The studies that were done were very large, obviously created very nice efficacy and safety database for DUAVEE. And I think we're starting to see some of the impact of that now, and that's one of the reasons that Pfizer is investing so much in the education to get that large safety and efficacy database out in front of people.

And then I guess just quickly with the Glucagon asset, do you believe that once you finish the MAD study that that would be sufficient to be able to then partner the asset?

For any asset, we always look at what are the key questions that we want to answer that will drive partnering, and that helps define what work we prioritize in R&D and what work we do. So we do feel like the multiple ascending dose trial is an important element to help drive partnering and that's why we're focused on it. The trial we're doing now or gearing up for now is a randomized double-blind placebo-controlled trial. It's a multicenter trial on three sites. It's in two parts, with normal healthy volunteers, dose for 14 days; and then Type 2 diabetics, dose for 28 days. And we're testing three different doses. So we do feel like this is going to be an interesting set of data. We're very encouraged with the data that we saw out of the single ascending dose study and we're looking forward to seeing data in the second quarter.

Our next question is coming from the line of Matt Hewitt with Craig-Hallum Capital Group.

First question, I guess, a little bit on Captisol. So you have had a couple of quarters in a row where you've seen very strong interest or demand, and a lot of that demand is new. Customers are new biotech entrants into the market that are just starting to do some work. How quickly in your history have you seen where someone comes in, orders may be an initial order, how quickly does that typically translate into a partner program? Are we talking about a year's time? Is it longer, shorter? Just some clarity here would be helpful.

It varies depending on the program, depending on the development and regulatory strategy of the partner. But in general, they tend to follow kind of a similar flow. It's difficult to put a hard timeline on when a customer comes in and orders the initial R&D supply to when that translates into, let's say, a launch commercial product or a full commercial license. And it varies depending on what they're using Captisol for. As you know and as those that follow the Captisol technology know, we have some partners that are using it for, say, reformulation of an active that may already be on the market or a new delivery mechanism. Maybe that follows the 505(b)(2) path, having more accelerated development pathway. And then now we got some partners using it in new delivery mechanism, transdermals, topicals, orals, where it hasn't been used before. So that landscape is a little different in terms of the amount of Captisol that they use and their timeframe for doing it. So it's difficult to put a hard line on it. But in general, the ordering patterns shows as we work with partners, how far they're progressing and when they're progressing and what we're seeing now really encourage us that this technology is doing very well.

DUAVEE obviously, it's great for investors to see that commitment by Pfizer. But what have you seen or what can you tell us about the script volume? Have you seen an uptick in the purchasing post the kick-off of that campaign?

Yeah, Matt, we have. More than six months ago, really zero for that. Now it's doing about 5,000 prescriptions a month in the US. Admittedly, these are still low level. It's very early days. The financial contribution for the product really is still to come in the future. But I think it's important for investors to keep in perspective what this actually represents. You've got the world's largest drug company in Pfizer with the world's largest women's health franchise that has just launched really what is a breakthrough medicine. It's a combination drug with really the best safety and efficacy profile of the entire class of medicines. The other thing environmentally, the landscape for menopause, the perception, the perspective on how to treat or intervene in the indication has changed dramatically in the last decade. And so this is just an example of research at Ligand, where could research at Ligand take this business. This was a deal based from mid-90s. It was a very long development cycle. But here we are on the back-end. We have an approved drug with a great partner and a very large consumer health category. And we're just pleased to see what Pfizer is doing and investing with it. It is not trivial. There is no way investors should discount or trivialize what is going on with DUAVEE right now. I think what's important for us is to just report out the facts what we're seeing and to talk about the new regulatory events. We think Europe will come online by end of the year, possibly Canada and other territories. And then it's a matter of really seeing how this category evolves over the next couple of years. This is a product that we believe that the low-end could do $10 million in revenue to Ligand. It could do as much as $40 million to $50 million in royalty revenue to Ligand. And that's again royalty revenue to Ligand. But again, the product has to launch and obviously be successful under Pfizer.

Any update on the Hospira launch? Do you guys have a sense if that's going to still hit before the end of the year or where that sits would be helpful?

That's an undisclosed program and we can't disclose the target or the therapy area. So there's really not much more color we can add to that program at this point.

Our next question is coming from the line of Irina Koffler with Cantor Fitzgerald.

I just wanted to ask about what timeframe you're thinking about deploying your newly raised cash in? And is Ligand thinking about buybacks still as the primary use of this cash or have you had any different ideas?

With the remaining proceeds, over $187 million of cash, our objective really is two-fold, without priorities, is to pursue optimal investment. And one is looking at acquisition and the second are share repurchases. Now repurchases, we've already invested more than $40 million on repurchases to date. So we act upon that. And as far as acquisitions, as you well know, we've had five or six acquisitions for the last several years of varying sizes. Now with our cash war chest and with our growing financials, cash flow and the like, frankly we're able to do larger deal. However, I think a hallmark of this game is deal discipline. Not every company is a fit for us either because of value or because of cost structure. So we're constantly evaluating opportunities and options. It's a very fluid market environment. And what we've seen in the last year is a chance to participate in is private companies, investing in some other assets. We're looking at some acquisitions that could be bolt-on for the shots on goal portfolio, possibly a way to buy additional revenue streams. But that's the general business outlook. We don't get into specific initiatives we're working on and we don't guide to specific timing, given how fluid our investment options are.

And then on SAGE-547, I think there's some data that are expected fairly soon. And what was the program to develop this thing further market look like and what's the timeframe around that?

Any detailed questions we obviously direct to Sage in terms of the development path. They've announced that they expect data in their super-refractory status epilepticus trial in the next couple of months. Through the course of their IPO, they disclosed some very promising patient-level data in super-refractory status epilepticus where they were essentially showing, in a layman's way of saying, reversible coma in some patients. But again, any detailed question upon their development or their timeline should obviously be directed to Sage. But we think they're doing a great job with the program. They're a fabulous partner, a highly qualified team.

And then I have one last one, which is, as you move forward with these alternative Captisol forms, transdermal, oral, how should we think about the volume of Captisol used in the programs? When you do an injectable partnership, does that mean that there is a lot more products sold for those than there is for an oral? Can you just help us quantitatively get our arms around that?

The answer on that is not so precise, because it varies, much like it does on the injectible side where we may have on per vial basis a partner using, say, 3,000 milligrams per vial for one product and other partner is using 7,000 or 11,000 milligrams per vial for another product. We do see varying amounts used in the topical or oral space. We have some oral partners that look to be very heavy users should those programs progress through late-stage development and on to the market. But again, it varies, much like it does on the injectible side.

Our next question is coming from the line of Christopher James with Brinson Patrick Securities.

Most of my questions have been asked. Just quickly on the Phase I multiple ascending dose study with the Glucagon Receptor Antagonist, can you give a little bit more about the size of this study, maybe number of clinical sites and what patient types you're going to be looking, particularly the Type 2 diabetes?

As I think I mentioned, it's a randomized double-blind placebo-controlled sequential multiple oral dose study. It's in two parts that will be conducted in two parts. The first part in normal healthy volunteers that will be dosed for 14 days and the second will be Type 2 diabetics dose for 28 days. We're going to set three doses of LGD-6972 5 milligrams, 15 milligrams and 30 milligrams a day. There'll be 12 subjects per group, nine active and three placebo. And the primary endpoints obviously in a Phase I multiple ascending dose trial are for safety and tolerability. There'll also be a PK and PD assessment on fasting plasma glucose, Glucagon GLP-1 and insulin measured over 24 hours. And then we'll also likely look at HbA1c at 28 days. So in terms of the range, we're looking at patients with an HbA1c between 6.5% and 10.5% and BLI between 20 and 45 kilograms per liter square.

And then on the Promacta program, can you help us maybe understand the size of the opportunity in severe aplastic anemia and when could we get a better sense of what the launch looks like there?

It's a new approval that GSK just announced last quarter. They've obviously filed for aplastic anemia outside the US. You see varying numbers out there for aplastic anemia. It's in the tens of thousands of patients. But I think important to note, this is a major medical advancement for these patients that have not only low platelets, but low red blood cells and low white blood cells as well. So as John was mentioning, this I think really speaks to Promacta really going after a disease that has major unmet medical need and that is a very serious debilitating and fatal disease. So we're excited to see it out there. Obviously it's a third indication of Promacta and a lot of the focus now moving forward is with the oncology indication. Obviously there are late-stage trials running their plans to file an MVS next year. So we continue to see the scientific data for Promacta expand and build for future potential for the brand.

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

Thank you. I appreciate everybody's attendance and questions here this morning. Again, we're pleased with the business. We're executing well and I look forward to our Analyst Day in about three weeks. We'll see you on the road. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.