Good morning, everyone, and welcome to the Ligand Third Quarter Earnings Call. My name is Selene, I will be consolidating the audio portion of the day. All lines have been place on mute to prevent any background noise. At this time, I would like to turn the show over to Mr. Todd Pettingill. You may begin, sir.

Welcome to Ligand's Third Quarter of 2018 Financial Results and Business Update Conference Call. Speaking today for Ligand are John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO. As a reminder, today's call will contain forward-looking statements within the meaning of federal securities laws. These may include, but are not limited to, statements regarding intent, belief or current expectations of the company and its management regarding its internal and partner programs. These statements involve risks and uncertainties and actual events or results may differ materially from the projections described in today's press release in this conference call. Additional information concerning risk factors and other matters concerning Ligand can be found in Ligand's earnings press release and public periodic filings with the Securities and Exchange Commission, which are available at www.sec.gov. The information in this conference call related to projections or other forward-looking statements represent the company's best judgment based on information available and reviewed by the company as of today, November 8, 2018, and do not necessarily represent the views of any other party. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. At this time, I'll turn the call over to John Higgins.

Good morning and thanks for joining our earnings call. Q3 was an outstanding quarter for Ligand. We exceeded our expectations and we are raising financial guidance for the rest of the full year. Ligand is enjoying significant revenue growth, a very high gross margins, strong returns from investments in our partners, robust cash flows and a strong cash position. 2018 is winding up to be a fantastic year and we have good momentum on all fronts as we move toward 2019. A few comments about Promacta and Kyprolis first. In our view, both drugs are on track to exceed $1 billion in revenue in 2018 in turn driving higher royalty revenue for Ligand. What is notable about both drugs is that after sales data were posted for this past quarter, there are research analysts who cover Novartis and Amgen with model that now show each product exceeding $2 billion in peak annual revenue in a few years. The analysts that cover the products have a range of projections, some higher, some lower, but given sales trends, this is the first time we have seen both products with estimates of peak sales over $2 billion projecting to remain considerable growth potential for both drugs. First with Promacta, Novartis report the highest quarterly revenue ever at $295 million, up 30% or $60 million over Q3 2017. The product is one of Novartis' top growth brands in their innovative medicines division. Promacta continues to do well given long term safety data that is building for the product, label expansions and increased utilization in countries around the world. Its performance is particularly impressive given there have been updates from competitive drugs that have had trial results announced for launch for other indications. It has a strong safety and efficacy profile as I mentioned and…

Thanks John. I'll start off this morning with a review of some recent developments for select program from our growing partnership portfolio that's the largest it's ever been now at over 178 shots on goal. I'll also discuss Ligand's technology platforms and highlight some recent upcoming clinical and regulatory events of our partners. And I'll comment on the integration of Vernalis and our internal R&D activities. Starting now with partner programs, we have done recent developments in progress on many of the programs we've highlighted previously as higher profile assets within our portfolio. Our partner Retrophin recently highlighted sparsentan at the ASN Kidney Week Conference here in San Diego. At the meeting, they presented positive longer term data from the open label extension portion of the Phase II DUET study of sparsentan for the treatment of Focal segmental glomerulosclerosis of FSGS, showing increased achievement of FSGS partial remission of proteinuria and stable EGFR observed out to 84 weeks. As background, Sparsentan has a dual mechanism of action that combines angiotensin receptor blockade with endothelial receptor type A blockade. Retrophin is developing Sparsentan both for the treatment of FSGS as well as for the treatment of IgA Nephropathy which is a rare kidney disorder that also often leads to end stage renal disease. Sparsentan has been granted orphan designation for the treatment of FSGS both by the FDA and the EMA. Following positive Phase II DUET Study results in FSGS, Retrophin initiated the pivotal Phase III DUPLEX study of Sparsentan for the treatment of FSGS. DUPLEX study includes an interim efficacy endpoint based on proteinuria to serve as the basis of an NDA filing for Subpart H accelerated approval of Sparsentan in the U.S. and conditional marketing authorization consideration in Europe. Additionally, Retrophin expects to initiate the pivotal Phase III protector…

Thanks Matt. I'm delighted to be reporting strong third quarter financial results this morning, which continue our excellent year-to-date results for Ligand across the board. Before I discuss the specifics of Q3, I'd like to once again remind investors that as of January 1, we began reporting revenue under the new ASC 606 guidelines. The principal places impacts Ligand is on the royalty revenue line. When discussing royalties, I'll mention the appropriate comparable prior year period that provides investors a roadmap to evaluate the growth of that line item. The tables in our earnings news release contained only the 2017 period, the numbers that were reported at the time. We plan to provide information to describe the differences in 8 investors and their analysis of the business in our 10-Q. Turning now to some of the financial highlights. Total revenues for the quarter ended September 30, 2018 were $45.7 million, up from $33.4 million a year ago. Royalty revenue in Q3 2018 was $36.1 million, which was a 28% increase compared with the royalty revenue of $28.3 million in Q4 2017, which is the appropriate comparable period. The growth in royalty revenue largely reflected higher Promacta in Kyprolis royalties. Q3 2017 royalty revenue as reported was $21.9 million, but as I mentioned this is not the appropriate comparable number to the Q3 2018 period. Milestone and license revenues were $2.5 million in Q3 2018 versus $3.8 million for the year ago period. Material sales in Q3 2018 were $7 million compared with $7.7 million in Q3 2017. For both of these line items, any differences between this quarter and the year ago period are simply due to fluctuations in timing of milestone license fee achievement, customer ordering patterns and the general variable pattern that we see in each of these…

[Operator Instructions] Your first question from the line of Dana Flanders. Your line is open.

Hi. Thanks for the questions and congratulations on the good quarter. And my first one here and appreciate this is not your product, but can you just speak on the Sage asset potentially launching soon and just, how you're thinking about the commercial opportunity for the IV, recognizing it's a long infusion but also just high unmet need? And then how you think that will of all assuming the oral gets to market and what you think the ultimate split there could be? And then I have a quick follow-up?

Yes, thanks Dana. This is Matt Kor. Obviously, we were encouraged and really pleased with the outcome of the AD COM on Friday, one of the things that really comes out of that as you're listening to the not only the physicians but the patients who have the courage to kind of present their experience with the diseases, really just substantial unmet medical need and how urgent the need is for something that can treat these patients. What they just been doing as we see it is really quite transformational in the CNS space really treating a disease in a way where you can kind of treat it in a onetime setting rather than in a chronic way. So we were pleased with the outcome of it. In terms of how they'll position it obviously they see a significant opportunity in the IV. We've been pleased with the work they've done over the last few years, they are developing a different drug that has an oral form that I think is awaiting some clinical data early next year. But they have in general terms kind of described how they position. We obviously directed them on kind of exactly how they're going to market and position the drug, but we're very pleased with the work they've done, and all of their preparations for commercialization as well, I think they commented that they've got a sales organization now over 180, who'll be focused on the rest, so we're pleased to hear that too.

Okay. And then my follow-up is just I know you have about a $1 billion of cash on the balance sheet and I know some of that's kind of coming out next year for the convert. But can you just talk about the priorities for M&A, and I know it's been a few years since LNP, how should we just think about another large kind of platform technology deal being on the table heading into next year? Thanks.

Dana thanks. It's John and Matt Korenberg can add some color too. Generally, our outlook today it's frankly is the most exciting M&A outlook we've had in the last few years, partly based on it's the largest cash balance we've had ever and substantially higher than it was even 5 months ago. Secondly, obviously we're aware that markets, the BTK, the biotech and pharma industries have pulled back a bit, many ways we think Ligand is a recession proof stock. We don't rely on the stock market to finance our business. We've got very good payers. We've got very well-funded partnered assets. And so we really can use our cash to focus on opportunistic M&A. We are very disciplined team, as I use the word deep value in my prepared remarks. We look at a lot of ideas. Things about Ligand is that we have our own drug discovery capabilities and platform technologies which you will licensing, and we've shown over the last 10 years, we have a very, very strong track record of perpetually continually doing new licenses at a rate faster than programs failed or terminated. So we are constantly building our portfolio even without M&A. So we have the benefit of that internal growth engine to drive our portfolio. But now with we think a more attractive investment environment for M&A and a very large balance sheet, we have opportunities. But again we will stay focused on our discipline and on strategic acquisitions that could expand the business.

I'd Echo everything John just said but. I think in particular, as I say to investors frequently with our 178 shots on goal today and the very attractive profile of that portfolio and the ability to add to that portfolio without any M&A, we always have the luxury of being extremely selective, when we're doing these acquisitions. So despite having extremely attractive shopping list so to speak as we look at it today, we continue to be selective and really find one that is of good fit perfectly with Ligand.

All right. Thank you.

Your next question comes from the line of Joe Pantginis. Your line is open.

Hey, guys, good morning. Thanks taking a question. Maybe two questions for Matt Korenberg. Just curious if you have any color right now about the existing buyback? And then second wanted to see if you could provide any color for long term or say let's just call it the next couple years with regard to your milestone revenue line and is it in any way analogous to the choppiness of the Captisol line? Thanks.

Thank Joe. So yeah first on share buyback, I think as most investors know, we've had a $200 million share repurchase plan in place to be used opportunistically for several years now. There was a plan it was put in place in 2015 and then again replaced in September of this year and so we've got a repurchase plan in place, we bought back shares pretty aggressively at a couple different points in time over the last 5 or 6 years in 2014 and again in 2018, this year - earlier this year. As people are probably aware, the recent pullback in our stock has all occurred post blackout window where our closed window period so we were not able to buy back any shares since October 1st. And so, we're certainly evaluating that internally and we'll continue to think about how to best of our cash as we see fit under the share repurchase plan. On the milestone side, very good question I think most investors know but we have over $3 billion of potential milestones that are owed to us under the 178 shots on goal today, not all those will be realized but many will, as we look at that line and model it out overtime, we see that we'll realize those milestones on average $30 million to $40 million a year, for the next 10 to 15 years at least. And so when we model of internally long term we do it on that basis but each year as investors know I've given guidance the last two years a core amount of milestones and then and potential upside from that, this year it is the start of the year guidance was $25 million plus potential for $20 million upside, our current guidance now implies that we'll…

I know that's very helpful. Thanks for that color. And then one of the see if I could get just sort of a broader view on the OmniAb platform, I guess I want to approach it from this angle sort of how many deals have you been looking at say per year, the number of imbalance you kind of get and versus the actual number that you might sign?

Yeah, thanks, Joe. It's Matt Foehr. Anyone time we're in multiple - I'll say multiple term sheet negotiations with partners, the visibility around OmniAb, we've noticed a continued increase with the addition of crystal bioscience and the Omni chickens that increase the value proposition for partners substantially where we now have three species with fully human immune systems producing fully human antibodies. So we continue to see the kind of growing interest of partners understand the value of the technology, it helps a lot that many of our partners present at these antibodies discovery conferences, that now there are 9 clinical stage antibodies we have a couple in Phase II, so multiple progressing with partners and many of those partners are ones that smaller emerging players in the industry really look up to, for their kind of the example they set and the tools that they use. So hope that gives you more color.

No, Absolutely. Thanks a lot, guys.

Our next question comes from the line of Matt Hewitt. Your line is open.

Good morning. Congratulations on the progress. First of all, the material sales and you spoke about this in your prepared remarks a little bit but you're seeing strong demand from both sample requests as well as the incremental orders from existing customers. Do you have a split on that or you could you provide us with a little bit of a sense on what the breakdown was for that line item?

Hey, Matt. Thanks for the question. Annually, we give a split in our 10-K, that breaks out the clinical from commercial orders. And typically in quarterly we haven't given the split. On an annual basis, it tends to be 60-40 on the clinical side versus sorry commercial side versus clinical in the last year or two. And then this quarter is a little bit heavier on the clinical side as you saw from the margin side, so the higher the margins usually the higher the clinical mix but we don't sort of give quarterly specific guidance on that.

Understand. Okay. And then I wanted to - I guess dig in on the iohexol opportunity a little bit and thank you for providing the update. As we think about some of the discussions and meetings that you've recently had I think you mentioned may be getting into the clinic in 2019. How is that timeline likely to shake out I guess in relation to like Jerry and how should be thinking about potential partnerships and those types of opportunities?

Yeah, thanks Matt. It is Matt Foehr. Obviously the team's been working doing some great work around campus on able to excel, and a key part of our business model and as you and others know is that we do focused R&D investment with the sole intent of answering a couple key questions and then partnering, right, using that data to then drive better partnering event or larger partnering events that was the case with TRA as a reference and iohexol a different space obviously the imaging space which has some significant needs but we're following that similar path. So the team's been doing great work will be filing both IND and the Canadian CTA simultaneously, expect to have clinical data in 2019 and then from there would look at a partnering process. We've done some very encouraging primary market research that we're excited about and really validated and kind of further broadened our understanding of the needs within this area and obviously mapped out the development path with the FDA. Those are obviously value driving events but then expect to have clinical data on 2019 and pursue partnering.

Okay. Great. I think that's it for me for now. Thank you.

Our next question comes from the line of Larry Solow. Your line is open.

Great. Thanks. Great quarter, great outlook. Thanks, thanks again. Just a few follow-ups, most of my questions have been answered. On the Vernalis, good opportunistic acquisition there, could you just walk through the effects or is it the dilutive or nearly breakeven in the first quarter or remainder of 2019, obviously require 70% now R&D teams are in the some expenses there?

Yeah, thanks, Larry. A lot to give details 2019 guidance later next year earlier next year. And then on 2018, the guidance they gave already fully incorporates everything from Vernalis. But specifically what we said at the time of the deal was that - it would be largely neutral, other revenue the team generates from service revenue service, fee for service revenue is offset by the expense of maintaining the team. We still see that being the case and that's largely what we expect from both Q4 of 2018 as well as of all of 2019, annually, approximately $8 million or so of revenue $8 million to $10 million and $8 million to $10 million of cost, so it's on that order of magnitude.

Got it. And the service from your assume that that's going to at least for 2018, is that going into the license that's going to license roll revenue I guess on your line and is that part of the reason why you bumped up your numbers a little bit on that?

Correct. Yes. So it will lend in a milestone licenses another revenue line, is the same place that are crystal OmniAb revenue hits from - for the same sort of work. And then it was a portion of the bump on the milestones side was related to that.

Got it. Could you give us any update on progress on LTP technology, I have heard too much about that last two quarters?

Yeah Larry, thanks. This is Matt Foehr. We have a couple of partnerships centered around LTP highlight want to a company called Nucorion and that's generated some positive data that was presented at one of the Liver Health Meetings earlier this year showing better targeting of cancer drugs using the LTP technology. Our team also has continued to do work internally around LTP enabling some of the large lipid lowering agents where increased liver targeting would be thought to help the certain patients who right now can't tolerate lipid lowering agents or certain lipid lowering agents tolerate them. Some of that data has been presented as meeting but we do expect to present more data in 2019. So yeah, it's an exciting platform, smaller number of partnerships than we have for our larger platforms but it's definitely progressing well and generating positive data for us.

Great. Thanks, guys. Appreciate it.

[Operator Instructions] We have another question here coming from the line of Scott Henry. Your line is open.

Thank you and good morning. Most of my questions have been asked but just to a couple. First, with regards to Zulresso and Brexanolone, I would assume there would be a small milestone upon FDA approval. I guess the question is, is that a reasonable assumption and if so would that be upside to your milestone forecast?

Thanks, Scott. Yeah, if you scan through this Sage public disclosure, you'll see that they disclose clinical milestones associated with the program about $800,000 and regulatory milestones associated with the program of $3.8 million, which you can imagine would be split between a filing and an approval milestone. And so the bulk of that is probably on the approval and yeah that would be part of some of the upside.

Okay. Great. Thank you for that clarity. And then just the other question with regards to LGD-6972 the Roivant partner product. Do you have any color on what's next for that compound and how we should think about upcoming visibility?

Yeah, thanks, Scott. It's Matt Foehr. Yeah, so what we used to call LGD-6972, obviously during the period where Ligand was doing the Phase I studies and the Phase II study, Roivant our first two as RVT-1502 is the deal with them earlier this year. And one of the things that we liked about how Metavant I should say Metavant was thinking about the asset was that they saw opportunity not only in Type II diabetes but in Type I diabetes as well. They've disclosed they're going to start a trial in Type I diabetes before the end of this year. So we're obviously keeping an eye out for that. And we think Type I is a really exciting expansion beyond Type II of the therapeutic potential for the drug, obviously there are 1.5 million adults in the U.S. with Type I diabetes and really there are only approved drugs are - have limitations really, the therapies, they're really unmet need for therapies to improve glycemic control without increasing risk of hypoglycemia or diabetic ketoacidosis. And therapies that would allow reduction in insulin requirements could and also prevent weight gain and curb hypoglycemic risk could really see a nice spot eventually in the market. So we're excited with the progress they're making. They've been moving very efficiently, not only with the large scale up activities but also other activities to support their disclosed plan of starting the Type I diabetes trial this year.

Okay. And I don't know if you have this color but that Type I trial, when would we expect to see data and I guess is that a proof of concept or is that a Phase II trial just trying think about that?

Yeah, I have to direct you on data and the details of the trial, I want to direct you to Metavant team to comment there?

Okay. Great. Thank you for taking the questions.

Thanks, Scoot. So that concludes our call. We appreciate your tooting in, and clearly a very busy year, a very successful year. And our outlook in the 2019 is building with good momentum across all fronts. Thank you. We will be on the road with a number of conference events that will be announcing, invitations that we've received and again we're looking forward to an Analyst Day event in the early part of 2019. Thank you very much.

This concludes today's conference call. You may now disconnect. Thank you for your participation.