Ligand Pharmaceuticals Incorporated (LGND) Q2 2022 Earnings Report, Transcript and Summary

Welcome to the Ligand Pharmaceuticals Second Quarter Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to your host, Simon Latimer. You may begin.

Thank you. Welcome to Ligand's Second Quarter of 2022 Financial Results and Business Update Conference call. Some of our speakers for today's call are in separate locations. Speaking today for Ligand will be John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO. We will use non-GAAP financial measures, and some of our statements will be forward looking, including those related to our financial condition, results of operations, financial guidance and the impact of the COVID-19 pandemic and the expected timing, completion and effects of our previously announced plans to spin off the OmniAb business to become a stand-alone public company pursuant to a business combination with the Avista Public Acquisition Corp. II. Additional information concerning our risk factors and other matters concerning Ligand can be found in our earnings press release and our periodic filings with the SEC. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. A reconciliation between the non-GAAP financial measures we discuss and the closest GAAP financial measures can be found in our earnings release issued earlier today. I'd now like to turn the call over to John Higgins.

Good afternoon. Thanks for joining Ligand's Second Quarter 2022 Financial Results Conference Call. We are executing well across the organization and are pleased to share our success this quarter, highlighted by strong royalty growth, major partner news and good progress toward our OmniAb spin-out. All aspects of the business are on or ahead of plan financially. As Matt Korenberg will go into, we are raising full year 2022 guidance due to our royalty revenue momentum. Couple of years ago in 2020, our initial outlook for royalties within the low $30 million range. Now we are forecasting more than $60 million in 2022. With our current portfolio of royalty generating assets, we are increasingly confident we are on a trend ultimately to surpass $100 million in annual royalties, excluding any contribution from OmniAb. After the spinout is completed, and we have more updates on late-stage regulatory approvals by partners, we will provide a more detailed framework for our financial outlook. We're excited about our business with the backdrop of what appears to be an improving environment for the equity capital markets. The industry has seen some major positive developments emerge very recently, and there has been significant M&A announced, both in number of deals and size of deals, which indicates the strength and the durability of our industry. We are increasingly excited for a spin-out of OmniAb, and we believe the market environment is strengthening for the debut of this special company. OmniAb has what we believe are best-in-class antibody discovery tools that are highly sought out by major industry players to help advance their work in direct discovery. As a stand-alone company, OmniAb will have a dedicated capital structure and a Board and senior leadership team with deep domain expertise to drive the investments and strategy for the company. The very high caliber of partners in the recent string of positive developments and regulatory events underscore how valuable this platform is in the exciting field of antibody drug discovery. As for the actual spinout process to split Ligand into 2 independent publicly traded companies, we've advanced the SEC review process in Avista, our SPAC spin-out partner has filed the second amendment to the S4 in response to comments from the SEC. After the review is fully completed and the registration statements for Avista and OmniAb are declared effective, we will then proceed to the shareholder vote by the Avista SPAC shareholders and the spin-off of OmniAb through the merger with the SPAC. The outlook on timing to close the spin-off and merger and have 2 independent public companies is currently Q4 2022. Strategically, Ligand RemainCo is focused on 3 primary areas: one, acquiring royalty rights to late-stage assets, consistent with what we've done the last 5 to 10 years; two, continuing to strike partnerships for our Captisol and Pelican technologies; and three, refocusing our capital markets activity and messaging for Ligand RemainCo following the OmniAb spin-out. We have good momentum with our royalty portfolio, and our goal is to continue to expand the number of partner assets through acquisition or technology licensing. It's an attractive market to be looking for assets to acquire or invest in. We are ready for RemainCo to operate separately from OmniAb. As a stand-alone company, we are highly optimistic that RemainCo's business model and growth prospects will create opportunities for both existing and new shareholders and for analysts to engage with Ligand. Now I'd like to turn the call over to Matt Korenberg to review our financial results and guidance in more detail.

Thanks, John. Today, I'll review our financial results, update guidance and give a brief update on some of our major partner programs. The second quarter of 2022 was a strong quarter financially, with particularly impressive performance in the royalty revenue line. Total revenues for the quarter were $57.4 million. Royalty revenue increased 108% to $18 million from $8.6 million a year ago. Royalties on all of our major products grew year-over-year. In addition to Kyprolis, which posted its largest quarterly revenue ever, a significant portion of the total royalty growth was driven by Rylaze and teriparatide. Teriparatide, in particular, realized significant year-over-year and quarter-over-quarter growth. In Q2 2022, we realized $4.9 million of royalty on this drug versus our original expectations for less than $2 million. At the beginning of the year, we expected additional generic competitors for teriparatide by the middle of 2022, based on input from our commercial partner. That competition has not yet materialized, and as a result, the product is exceeding our expectations. Total Captisol sales were $29.5 million for the quarter, and this compares with $62.5 million a year ago. As expected and as we've discussed with investors, COVID-related Captisol sales are much lower this year versus last year. Core Captisol sales were $3.3 million this quarter, in line with our expectations and on track to meet our expectations for the year. Contract revenue in Q2 2022 was $9.9 million. This is lower than last year's second quarter of $13.6 million, but as investors know, contract revenue fluctuation is mostly due to timing of partner events and related milestone payments. Our GAAP EPS for the quarter was a loss of $0.05. Net loss for the second quarter of 2022 included a $1.9 million net noncash loss from changes in the value of Ligand's public company holdings. Adjusted diluted EPS for the second quarter of 2022 was $1.03, and this compares with $1.63 in the second quarter of 2021. If we remove COVID-related Captisol sales, our adjusted diluted EPS for Q2 2022 was $0.34 compared with $0.76 in Q2 2021. With our core revenue nearly equivalent in Q2 2022 and Q2 2021, the decrease in adjusted and diluted EPS is largely driven by additional OmniAb expenses as that business scales up in preparation for the spin-off. In the quarter, we repurchased $62 million in principal of our convertible notes at a 3.4% discount to par for $60 million in cash. As of June 30, 2022, we had cash, cash equivalents and short-term investments of about $148 million. Turning now to guidance. We're raising our 2022 revenue outlook for the combined business. We now forecast 2022 royalties to be in the range of $62 million to $66 million, up from our previous outlook of $55 million to $60 million. This increase of about 10% for the full year is driven mostly by upside from teriparatide and Kyprolis, offset by slightly lower full year contribution from VAXNEUVANCE. As mentioned earlier, Kyprolis is doing well and hitting all-time highs for quarterly revenue. Teriparatide is riding strong commercial trends because additional generics have not entered the market yet. We're now assuming the other generics will enter in early 2023. If that does turn out to be the case, we would anticipate sales for teriparatide next year will be lower than 2022. As for VAXNEUVANCE, it's a very promising vaccine with impressive new data announced over the past few months. It's now positioned to launch for the pediatric age group by early next year. Merck is our partner, and they will compete against Pfizer in this $6 billion vaccine market. The pediatric population represents 75% of the market and Merck's approval in that population coming more than a year ahead of Pfizer, we expect that, that will produce -- or help drive royalties in the future. We now expect Captisol material sales to be in the range of $55 million to $60 million, up from our previous outlook of $40 million to $50 million. We continue to expect approximately $17 million to $19 million of our Captisol sales to be core Captisol sales and the balance to be Captisol sales for COVID. We affirm our forecast for contract revenue to be in the range of $52 million to $62 million. These guidance components result in total revenue for Ligand of $169 million to $188 million, which is up from our previous total of $147 million to $172 million. Within the revenue numbers I just provided, we expect $35 million to $45 million to be attributable to the OmniAb business principally in the contract revenue line. And with respect to the COVID-related Captisol sales, our updated guidance reflects the sales already completed year-to-date as well as sales that are completed or expected to be completed in Q3. We are also raising our guidance for the Ligand business excluding OmniAb and COVID-related Captisol. For that portion of the business, we now expect revenue to be $97 million to $104 million, up from $90 million to $100 million previously; and adjusted diluted EPS to be $1.80 to $2.05, up from $1.50 to $1.80 previously. We estimate that the combined earnings for both COVID-related Captisol and OmniAb for 2022 is about $0.60 to $0.95 per share. Therefore, for consolidated reporting for the year, our outlook has increased to $2.40 to $3 in adjusted diluted EPS, up from our previous range of $1.70 to $2.20. One final note on the guidance I just provided, we've excluded from all these numbers 2 large milestone payments that may hit in late 2022 or early 2023. Ligand has owed $15 million upon the approval of sparsentan, and OmniAb has owned $25 million upon the first commercial sale of teclistamab. Given the size of these payments, it's impossible to build a range around their achievement, and as such, we've simply excluded them from guidance since we do not know with high confidence exactly when those payments will be achieved. Just as a reminder, I'd like to direct our listeners to our second quarter earnings press release issued earlier today and available on our website for a reconciliation of our adjusted financial results to the GAAP results I talked about today. Now I'll turn to providing a few updates on some of the key portfolio programs that are remaining with Ligand following this -- the OmniAb spin-off. We're continuing to monitor the progress of sparsentan as we approach the November 17 PDUFA date for IgA nephropathy. We expect to launch earlier next year, early next year and expect sparsentan royalties to be a major driver of growth for us. Travere provided a regulatory update last week when they announced plans to submit their conditional marketing authorization application with their partner, Vifor Pharma for IgA nephropathy in Europe, with a review decision expected in the second half of 2023. Travere also now plans to pursue a traditional approval of sparsentan for FSGS pending completion of the Phase III DUPLEX study, which is expected to conclude in the first half of 2023. In June, Merck announced the FDA approval of VAXNEUVANCE for infants and children 6 weeks through 17 years of age. Subsequently, the CDC's ACIP voted unanimously to provisionally recommend use of VAXNEUVANCE as an option for pneumococcal vaccination in infants and children. VAXNEUVANCE is a 15-valent pneumococcal vaccine utilizing Ligand's CRM197 vaccine carrier protein that's produced using the Pelican expression technology platform. Additionally, Merck announced positive results from a Phase I/II study evaluating V116, which is their investigational 21-valent pneumococcal conjugate vaccine utilizing Ligand's CRM197 vaccine carrier protein. Merck stated -- sorry, started a broad Phase III program for V116 in July 2022. Lastly, on the program front, Novan announced positive results from their B-SIMPLE4 pivotal Phase III study for SB206 in patients with molluscum. At the end of 12 weeks, 32.4% of patients in the SB206 group achieved complete clearance of lesions compared with 19.7% of patients in the vehicle group. Novan plans to file an NDA for this program, SB206, later this year. With that overview, I'll turn the call over to Matt for to provide additional details on the OmniAb business and strategy. Matt?

Thanks, Matt. I'm going to focus my comments this afternoon on our OmniAb platform as we continue to prepare for the business to become an independent publicly traded company in the fourth quarter. We're making good progress on our operational and strategic goals as we prepare to become a stand-alone public company. And as John said in his opening remarks, the path we are on to separate OmniAb into its own company is exciting, and momentum is building to further drive growth and expansion of the company post spin. Recent events and input from our partners validate our plans. Our team continues to be highly focused on value-creating areas that include gaining new partners, supporting existing partnerships and expanding the utility of the OmniAb platform. Just as some background for those on the call who might not be as familiar with it, the OmniAb discovery platform provides our partners with access to diverse antibody repertoires and cutting-edge high-throughput screening technologies designed and operated with the goal of enabling the discovery of next-generation therapeutics. At the heart of the OmniAb platform is the biological intelligence or what we call BI of our proprietary transgenic animals. Multiple species of animals have been genetically modified to generate antibodies with human sequences that facilitate the efficient development of human therapeutic candidates. Within OmniAb, we also have extensive capabilities centered around ion channels and transporters. We view these as differentiated capabilities for viable target to lead delivery and particularly for difficult and high-value ion channel targets. These capabilities were established and built around small molecules and have clear potential in multiple formats and modalities. In addition, these differentiated core capabilities can provide novel reagent generation, proprietary assays and in silico capabilities that support partner discovery programs and can be accessed when pursuing ion channels and transporter targets in a variety of approaches. Our mission within OmniAb is to enable the rapid development of innovative therapeutics by pushing the frontiers of drug discovery technologies. We work to achieve this by enabling the discovery of high-quality therapeutic candidates and by being the partner of choice for pharma and biotech companies. We are very proud of the role that we play within the industry and the contribution that we make to the discovery of therapeutics to improve human health. A significant value driver and differentiator for OmniAb is that our team and technology can be easily inserted into a variety of workflows to meet each program's scientific needs. That flexibility allows us to efficiently grow our portfolio of programs while investing in further improving what we see as a best-in-class biologically driven discovery technology platform. Currently, more than 60 partners have access to OmniAb-derived antibodies and more than 270 programs are being actively developed, and this number continues to grow as we add new partners and as existing partners leverage our platform for more programs in new and exciting ways. During the second quarter, we added 4 new OmniAb partners. Today, there are 2 NMPA approved drugs that were derived from our OmniAb platform and another one that is under review at both the FDA and EMEA, with action expected in the coming weeks. Also of note, a partner very recently entered the clinic with the first antibody drug conjugate, or ADC, that was discovered using our platform. We're pleased with the progress and are excited to deliver Ligand shareholders their shares in a new stand-alone company as we expect the completion of the spin in the next few months. And with that, I'll turn the call back over to the operator for questions. Operator?

[Operator Instructions]. We have our first question from Larry Solow with CJS Securities.

It's Pete Lukas for Larry. In terms of Kyprolis sales grew very nicely in the quarter. Just wondering how much of this growth is being driven by second-line therapy in combo with DARZALEX?

Yes. Thanks for the question. Yes. No, really nice quarter out of Kyprolis. Amgen obviously, with record sales in their territories. Ono in Japan had good sales, not quite a record quarter, but very nice sales for that region. And the China sales, we're estimating was kind of in line with the second quarter growth. So good sales all around. We obviously don't get details on exactly what line of therapy is driving or exactly where the sales come from, but anecdotally, we're hearing sort of what you're hearing that increased use with DARZALEX and the broader data set that Amgen and others have been putting out is what's driving some of that revenue growth.

Very helpful. And just one more quick one for me, switching gears here. Can you give us an update on the progress with VK2809 therapy for fatty liver disease? I know the enthusiasm has waned a bit around this one, but just would love to get an update on where we stand if there is one to provide.

Yes, sure. Obviously, the program you're talking about is the Viking's TR Beta NASH program that has been progressing significantly well. Obviously, the trial had some delays through COVID with enrollment and otherwise. We're working towards their data which they expect next year. And then following that, obviously, they'll likely have to run a pivotal trial to get to the endpoint. All signs, so far, our trial is on track and data should be solid.

We have our next question from Matt Hewitt with Craig-Hallum.

John, you had given us the 3 priorities for RemainCo. And I'm just curious, given the environment that we've kind of weathered here so far this year, I'm just curious if that's created any interesting opportunities from an acquisition standpoint as you look to bolster the royalty rates portion of your business?

Yes. Well, it certainly has -- we've talked about our business model, and we're dedicated to technologies necessary to discover, develop drugs but also royalty acquisitions, finding companies that need more capital support, doing our diligence and coming in. We excel in thriving markets when there's tremendous capitalization and fund flows. We've seen in the last decade tremendous inbound interest to license to access our technologies, but obviously, there's been a pretty significant contraction in the last 1.5 years. We're reading over 20% of companies public biotechs in less than 1 year of cash. And so this is creating an opportunity. Quality companies are on the wrong side of their stock price in desperate need of cash. So it's creating more inbound overtures to partner on some late-stage assets from an investment perspective. From an acquisition, you know our history, we've acquired a handful of, what we call, bucket biotechs, good companies with IP and data. But again, they really got stuck from a market timing issue. We're being more selective about doing those sort of acquisitions. We're good at it. We really have demonstrated a great track record of securing high-quality assets for very attractive values. But we want to be disciplined in terms of how much infrastructure overhead and cost we're bringing on. One final comment I'll make is we are highly engaged. We are throttling our activity a little bit with an eye towards completing the spin out. And we do believe we're very close. We haven't lost opportunities, but practically speaking, we want to make sure that we've got a clean story. There's no other public proxy issues that might interfere with closing this very important transaction for all of our shareholders.

That makes complete sense. And thank you for the details there. Maybe one more question. As far as the Pelican platform is concerned, obviously, you've had some really good success initially out of that program. But I'm just curious, what would be the next 1 or 2 opportunities coming out of the Pelican opportunity?

Thanks, Matt. yes, the Pelican platform has been performing extremely well. Obviously, 4 major programs that we talk about publicly on the calls and in our disclosures with the Merck, VAXNEUVANCE program, JAZZ, Rylaze, the Alvogen teriparatide program, and Pneumosil from Serum Institute of India. There's additional programs from Serum Institute of India, one in meningococcal vaccine. And then there's additional programs from Jazz that they're working on that are follow-ons there. And obviously, I mentioned today, the V116 program for Merck. All of those we expect will be kind of the next crop of growth drivers for the portfolio. And behind that, there's a handful of existing and new license deals that the team has done over the course of the time before we had owned the business as well as since we've owned the business that should fuel the growth for years to come.

Our next question is from Bruce Feldman with Morgan Stanley.

My question is simple. A couple of years ago, we came out with a product for post partum depression. I've never heard anything in your calls as to how that is progressing. Can you give us an update on that, please?

Thanks, Bruce. Yes, there are actually a couple of programs for postpartum depression in the portfolio. One was from a company called Sage Therapeutics that the program is now approved called ZULRESSO. It's had limited commercial success but has done about $1.5 million in revenue a quarter for the last several years as the programs commercialization has been limited to an in-institution or in-hospital delivery. A second partner called Marinus has a program called ganaxolone or IV ganaxolone, which was recently approved orally but the IV formulation is still in development, and that is being studied in that disease as well. So both of those are in the portfolio and progressing.

We have no further questions. I will now turn the call over to Mr. John Higgins for closing remarks.

Thank you. I appreciate the turnout of the questions. We are delighted with our performance this year. We're watching the equity markets. It's a challenging environment, but our execution has been superb. And I know it's not lost on our largest shareholders who've spent maybe more time in meetings with us, but we're effectively running 2 companies now -- 2 public companies. We have the management teams built out the infrastructure, and both companies are really very far along to be run independently. We continue to execute on licensing, new deal making, obviously, reporting on our partner events. But the momentum we have with the overall company, but specifically the momentum we have into the spin-out, we feel really, really good about. So thanks for your patience. It's been a long journey the last year or so as we've worked up our planning and had our process communicated. But we feel we are close, and we are really excited about all aspects of our business right now. Thanks for joining the call, public, in-person conferences are coming back. We will be live at some events this fall, but the next one coming up is in about 5 weeks, the HCW Conference in the middle of September. So if you sign up for that, we'll see you there. Thanks, everyone. Bye-bye.

Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.