Hello, and welcome to the Ligand Pharmaceuticals Second Quarter 2019 Earnings Call. All lines have been placed on mute and today's call is being recorded. At the end of today's presentation, we will have a question-and-answer session. [Operator Instructions]. It is now my pleasure to turn today's program over to Todd Pettingill, Senior Director, Corporate Development and Investor Relations. Sir, you may begin.

Welcome to Ligand's second quarter of 2019 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, July 30, 2019, 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.

Todd, thank you, and welcome to our call. The past few months were defined by progress across many fronts. We signed nine more licensing deals, we closed an acquisition, partners reported several late-stage positive updates, Sage launched ZULRESSO as the latest commercially approved Captisol enabled drug, we posted positive Phase 1 top-line results for our iohexol program, and today, we're reporting solid financial performance for Q2. The business is doing well and we're pleased with our momentum, our financial outlook and the calendar of portfolio events coming up. So Ligand's primary current operating business is supporting partners using our antibody discovery technologies. I want to talk a little bit more about OmniAb. OmniAb is our antibody discovery platform that we built through acquisition and internal investment. Three acquisitions that have cost us about $220 million over the past three-and-a-half years have resulted in what we believe today to be a leading best-in-class technology to discover antibodies. OmniAb is a collective genetically modified animals namely rats, mice, and chickens and an anogen sourcing technology that has helped Ligand assemble a very large portfolio of partnerships with companies of all types private, public, small, and large to help do their research. Now antibody research is one of the largest areas of R&D investment dollars in the pharma and biotech industries today. Antibodies are proven to be an attractive category to research outcomes in commercial success. The data suggests biologic and antibody drugs receive on average higher rates of marketing approval from the FDA than small molecule or chemical-based medicine after a successful Phase 1 trial. Ligand decided in late 2015 we wanted to stage a claim in the burgeoning antibody field. We made our first move by acquiring OMT, followed by Crystal Bioscience, and more recently now Ab Initio. Like any good…

Thanks, John. I'll begin today with a review of the financials contained in our earnings release issued earlier this morning. Total revenues for the second quarter of 2019 were $25 million and included $6.6 million of royalty revenue, $8.5 million of material sales, and $9.8 million of milestone and license fee revenue, with a strong quarter overall and exemplifies the diversity in our revenue base. With respect to royalties, Kyprolis is the source of our largest current royalty and given that Amgen the marketer of Kyprolis has not yet reported their sales for Q2, we took the Kyprolis royalty as flat to Q1. Any difference between the actual royalty and the royalty we booked will be captured in the Q3 revenue number consistent with the new revenue recognition rules that we adopted last year. On the milestone license fee line, we saw more than double the revenue we recorded a year ago from the normal course contracted milestones. And material sales also had a strong quarter with nice double-digit growth over the prior year period. Total revenue for Q2 of 2018 was $90 million and included $31.4 million of royalty revenue, $7.6 million of material sales, and $51 million of milestone and license fee revenue. Q2 of 2018 included a full quarter of royalty revenue from Promacta which we sold to Royalty Pharma as of March 6 this year for $827 million. Ligand did not receive any Promacta royalties in the second quarter of 2019 and will not receive any Promacta royalties going forward. Milestone and license fee revenue for Q2 2018 included a $47 million payment from WuXi Biologics to amend its OmniAb platform license agreement. Regarding gross margin, our Q2 gross margin for Captisol sales was lower versus the prior year. Our mix of commercial and clinical material…

Thanks, Matt. I'll start off with our OmniAb technology platform. We've noted the increase in clinical investment by our partners who are pursuing development-stage OmniAb-derived antibody. As John described, there are now 29 clinical trials evaluating an OmniAb derived antibody that either have been recently completed or in progress. For active trials there are a total of 16 Phase 1s, eight Phase 2s, and three Phase 3s. 10 novel antibodies are being used in active studies some of which are being pursued by multiple partners in different therapeutic formats or for different indications or geographies. We see this growth in a number of trials as a representation of the commitment of the partners. As a point of reference, on our last earnings call, we referenced about 15 clinical trials related to OmniAb. So this has been a pretty recent increase in clinical work by our partners. Looking at the targeted patient enrollment numbers for the trials that are posted to clintrials.gov can also give an idea of the scope of clinical investment by our OmniAb partners. Adding up the targeted enrollment figures you get a number in excess of 3,500 subjects with more than 1,800 subjects estimated for enrollment in Phase 1 trials, more than 500 estimated in Phase 2s, and more than 1,300 estimated in Phase 3s. The Phase 3 trials are all related to CStone CS1001 program which according to CStone could be China's first fully human and full length anti-PDL1 monoclonal antibody. The vast majority of the trials underway are in oncology and it's worth mentioning again that at the time we closed the OMT acquisition there were no clinical trials of an OmniAb-derived antibody in progress. We continue to invest in the OmniAb platform to keep it on the cutting edge of antibody discovery technologies and…

Thank you. [Operator Instructions]. And your first question comes from the line of Joe Pantginis with H.C. Wainwright.

Hey guys. Good morning. Thanks for taking the question and thanks for the added details today. First, if you don't mind I want to get a little extra clarity for the GRA program or RVT-1502. So like the nuance I'm getting is that Metavant is trying to see it bringing it forward or they're looking to bring it forward. But you're saying okay maybe we're not going to see development in the U.S. So just want to get some clarity as to where you think it might or might not be going? Thanks a lot.

Yes, Joe. Thanks. This is Matt Foehr. Yes, there Metavant is working with the FDA now on a path forward generally when you have dialogue with the FDA like this, you try to get meetings, try to discuss it with the FDA. We've obviously said our view in the U.S. we see it as highly unlikely based on the preclinical and clinical trials that they're going down that we see it as chronic uses is out for the drug and they've told us, they expect to make a decision later this year.

Okay, I understand. Thanks. And then two more questions if you don't mind maybe one for the other, Matt. Seeing a boost in R&D obviously and I want to know if this should be considered a baseline going forward obviously because of your acquisitions and integrating different businesses at this point.

Yes, thanks, Joe. We continue to see our cash expenses for the year around that $50 million to $52 million range that we provided earlier this year. You will see some added non-cash R&D expenses running through as we amortize the upfront prices, purchase prices of the investments we made in the Palvella program and Novan program. As I mentioned this quarter they added about $3 million to the GAAP numbers. So that will be a bit inflated but otherwise R&D budget and cash expenses are still on track.

Great thanks. And then a couple other little ones and one forward-looking. If you don't mind and thanks for indulging me. So I want to talk about maybe a little forward-looking with regard to the Captisol franchise and its longevity. And I'll give a specific example. We've actually been getting some questions on this. So recently I guess several months ago the paragraph 4 filings have started with for Kyprolis ANDAs and obviously with regard to litigation, we'd expect it would take a few years unless you disagree with that to maybe get some clarity on any potential generics coming forward. But with regard to the longevity of Kyprolis, is it safe to assume that a whoever were to file a potential generic for Kyprolis -- for Kyprolis would still need Captisol and you have precedent thus far to show something along those lines.

Yes, Joe, I can comment on that. Generally we've seen -- it's not new to see a generic challenger to one of our Captisol Partners. We saw this with the Merck drug a few years ago. And we obviously in that instance Merck was negotiating. There was apparently a settlement. Subsequent to that settlement we received permission from the partner to enter into a Captisol supply contract with the other party that Merck had settled with. Again we don't comment on specific litigation but we feel we've got obviously a great intellectual property portfolio. Partners really do see the value in our drug master file. There's been a lot of investment, millions and millions of dollars over many years, a lot of patient data, a lot of Tox data. But within our drug master file and patients -- our partners see a lot of value in that. And we continue to enter into a new Captisol deals. We disclosed in our announcement this morning new deals with Millennium, Takeda, Bexson Biomedical, Valanbio, couple of other small players. So we continue to add on new Captisol partnerships.

And Joe, I will just add. With the business, I think what you're getting at is as products naturally and expectedly come off patent. If there's a generic field will those other generic entrants require Captisol? We can't say across the board every generic will use Captisol perhaps they get sourced from elsewhere. But today we are seeing that we are the best-in-class Beta-cyclodextrin the quantity we can supply, the quality we can supply, and the consistency for pharmaceutical great products is a requirement. And we are unquestionably the best in the world in meeting that customer need. This analogy that Matt referenced Merck's product NOXAFIL. When a generic entered, they entered a supply agreement with us we're selling not only Captisol but also are getting a royalty on sale to a generic participant. So it's an illustration that what Matt said is correct to find new customers, new IP, new products is a myriad of ways, new Captisol-based products can be pat protected well beyond the IP of Captisol but beyond that we're seeing as markets become genericize over the next five to 10 years, there is a model that suggests that generic participants will also be customers of Ligand as well.

That's very helpful, John. Thank you. And my last one if you don't mind since you talked about the iohexol program and congrats on the recent data. What is the mix right now that you can share with us because Matt you said you're exploring partnerships for the potential next phase in 2020. But again similar to the GRA program, you have the financial leverage to hold onto it a little longer to maybe garner better economics. So I was just curious how you're looking to strike that balance?

Yes, Joe, you're correct we do. Our team is working towards what the next clinical steps would be in 2020 likely a trial that would start in the second half of 2020 but this is a program that's getting attention, people know about it. We expect we'll present data in the last part of this year at upcoming medical meetings; we will present the Phase 1 data. So as we did with what was the Melphalan program that became EVOMELA, with the GRA program, and with other programs where we've done targeted investments for Fosphenytoin, and others, we will continue to make those targeted investments while we assess partnering, the partnering landscape and that's what we're doing here.

Your next question is from the line of Matt Hewitt with Craig-Hallum Capital.

Good morning. Thank you for taking the questions. First one, given the launch of ZULRESSO in the quarter. And did you factor any revenues or contribution from that in the quarter. And how should we be thinking about that ramping in the second half of the year?

Yes, thanks Matt. It actually launched in the last couple days of the quarter. So there was almost zero revenue that we would have been owed, so very, very little was what in this quarter.

And as far as how should we be thinking about that for the back half of the year. Is there a kind of a range that you'd recommend we incorporate into our models?

Yes. So we obviously had -- we typically look to the consensus research reports from analysts. There's a bit of a range but the consensus that we see is in the low-double-digits $10 million to $20 million or so for the year. And that's kind of what we're factoring in.

Okay great. Thank you. And then what are the items that I guess you didn't touch on here but you did at the Analyst Event CO6 Internal OmniChicken programs that you've worked on. Is it still your expectation to out license those yet this year and maybe how are those early discussions going so far?

Yes, thanks Matt. This is Matt Foehr. Yes those programs have been progressing well. And we have binders and packages that are forming for all of them. We have had initial discussions and we'll continue those in the second half of this year and into next year.

Okay great. Thanks. And then the last one is Captisol and I know there was lot of focus on the OmniAb and I really appreciate some of the detail there. Captisol seems to have taken another; they are shifted into maybe the next gear. Given the number of partnerships that you announced here recently the ramp that we're seeing in the Captisol's material sales as you look at some of these new partners are any of those working on drugs that you would consider more high volume type situations or as you look down the road; is there opportunity for another iohexol for example where it's expected to be a very high utilization type drug. Are any of those in the mix with some of these new partnerships? Thank you.

Yes, Matt. Yes you're correct. We definitely continue to see partner interest in Captisol as we always say with material sales for Captisol they can be lumpy, right. And that's driven by number of factors, some partners may have a very large Captisol buy to support a Phase 3 trial and then that partner may not need material for a year or so, others have annual cycles for their commercial buys that are linked to their budget planning or linked to perhaps volume tiers that exist within our contract. So there's always an element of lumpiness to Captisol. That said we are seeing new uses for Captisol among our partners. We have a few that are going down an oral route that are in fairly advanced trials and those are fairly heavy users. We have some using in gel caps and some in eye drops, other things. Again a range of uses but as we see the portfolio advance to later stages generally you start to see more use. But again not all partnerships are created equal as you look at amount of material used but in general, yes, we're seeing good interest in the platform.

That's great. Maybe one last one and then I'll hop back into queue, as we think about it. You talked about this a little bit at your Analyst Event, then I think you mentioned it briefly in the prepared remarks but as we start to look out in a couple of years 2021 through 2023 even given some of the puts and takes I mentioned on today's call. But how should we be thinking about that time period from kind of an eye-opener or growth perspective. I mean as I look at some of the upcoming catalysts with Phase 3 trial readouts and potential launches that kind of stuff I mean do you still believe or is it still your expectations that you should see a really healthy step-up or a big step-up in the revenues and obviously the flow through to earnings during that time period? Has anything changed in your mind?

Yes, Matt. It's John. The business today as investors who follow this story it looks different today compared to let's say four or five months ago when we still own Promacta. Again just a little back story we divest that asset as we described in March, a very substantial amount of money, it was our largest asset, a major contributor to royalty revenue and had driven our growth the last few years. What investors I think the question you're getting at what investors need to look at is how the business has been reset financially, the P&L today, the revenues roughly, very roughly about half of what they were a few months ago projected for this year and earnings as well as a function of taking out Promacta. So the revenue earnings is lower. The growth outlook for the rest of the business is unchanged. And this is important because it gives a very robust calendar of OmniAb-related activities. Of course Captisol, we have Viking assets with TR-Beta, we have Fosphenytoin. We have acquired again the Novan and the Palvella synthetic royalties. These are Phase 3 stage drugs that will readout and we believe could launch as early as 2021 or 2022. This is a way to say that the business today is very well-positioned. There's nothing new in terms of what assets we have and the general outlook for the calendar. But the outlook for financial growth is substantially different, substantially higher than it was a few months ago when we still had Promacta. Again we're centered around $3.20 earnings growth. Our view is that revenues will continue to grow in 2020, 2021. We believe we can maintain the same cost structure. We don't have to build manufacturing and run Phase 3 trials or build marketing; those are the…

[Operator Instructions]. Your next question is from the line of Larry Solow with CJS Securities.

Great, good morning guys. Of course my question have been answered just a couple of follow-ups. On the OmniAb, you mentioned I think there's 27 active trials. And I know all the Phase 3 or with CStone is it still 12 compounds that are or there more in than 12 that are actually making up those?

Yes, Larry. Thanks for that. Thanks for the questions it's Matt Foehr. There are 29 trials that have either been very recently completed or are active. For those 29 it depends on exactly how you define it. 10 novel antibodies but used in multiple formats, right. So we have situations where the same discovered antibody is now used in multiple formats or dosages for different geographies and that brings the number up to 13 to 15 depending on how you count those different programs. But that -- I think that summarizes for you.

Okay yes, that's helpful. And then just it looks like just on share repurchases this quarter looks like if I do the math from I guess from your last conference call looks like you spent about $40 million, is that right?

Yes, I think it's between $35 million and $40 million, that's right.

Okay. And any -- I know guidance hasn't changed has the composition any change on the sales, team [ph] royalties, milestones any change there. Sounds like Captisol material sales were just coming. I know you have a little bit more of sort of a potential on the license of milestones. Is there any update there? And then on the royalties do you still sort of expect -- has anything changed there?

Yes, so, for the year, we still see the mix roughly the same as we had seen before. But we didn't provide the precise breakdown because we may see some shifts over the back half of the year between some of the buckets. The total is still definitely there at $118 million but if it is any shift, it'll be a million or two going from one bucket to the other for the year. But right now it all still looks generally in line. Obviously no change to the outlook longer-term for any one of the three buckets.

Okay. On EVOMELA the opportunity in China is that one supposed to be commercialized next year, when is the timeline?

Yes, Larry thanks, Matt Foehr. So they got approval at the end of last year and as standard process in China, they get their designation in barcode and they've indicated they will be launching EVOMELA in China this year. And it will be -- as we understand from CASI, the only approved Melphalan product in China. So we're obviously looking forward to that.

So down in the back half of this year, it sounds like.

Yes, yes.

And then just lastly Kyprolis additional trial data I know you had spoke about that at general phase [ph] that -- since that early 2020 thing or when do we expect something?

Yes, Larry generally obviously we'll direct folks to Amgen on updates on exactly when they expect their trials to readout. But generally ASH meeting at the end of the year we've generally seen Kyprolis data at major medical meetings and we generally expect to see that this year as well.

And there are no further questions at this time. Gentlemen, do you have any closing remarks?

Thank you. We appreciate people's turnout today and we'll be on the road, we've got some conference invitations this fall. We'll keep you posted as the business evolves. Thank you.

Thank you again for participating in today's conference call. This concludes the conference. You may now disconnect.