Ligand Pharmaceuticals Incorporated (LGND) Q2 2026 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for joining us, and welcome to the Ligand Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Melanie Herman, Head of Investor Relations. Melanie, please go ahead.

Good morning, everyone, and welcome to Ligand's Second Quarter 2026 Earnings Call. With me on the call today are CEO, Todd Davis; Chief Financial Officer, Octavio Espinoza; and Vice President of Portfolio Strategy and Investments, Lauren Hay. During the call today, we will review the financial results released earlier today and provide commentary on our partner portfolio and business development activity, followed by a question-and-answer session. Before we get started, I would like to point out we will be discussing non-GAAP results, which excludes certain items such as stock-based compensation, amortization of intangible assets, amortization or impairment of financial assets and gains or losses from derivative assets, amongst others. I encourage you to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, which can be found in today's release available on our website. We believe these adjusted measures provide valuable insight into our core operating performance, both historically and moving forward. Our earnings release and a link to today's webcast can be found in the Investor Relations section of our website at ligand.com. This call is being recorded, and the audio portion will be archived in the Investors section of our website. On today's call, we will make forward-looking statements regarding our financial results and other matters related to the company's business. Please refer to the safe harbor statement related to these forward-looking statements, which are subject to risks and uncertainties. We remind you actual events or results may differ materially from those projected or discussed and that all forward-looking statements are based upon current available information. Ligand assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Ligand files with the Securities and Exchange Commission, or SEC, that can be found on Ligand's website at ligand.com or on the SEC's website at sec.gov. And with that, I will now turn the call over to our CEO, Todd Davis.

Thank you, Melanie, and good morning, everyone. We appreciate you joining us today. We continue to execute on the financial transformation of Ligand. In the second quarter, we continued to deliver outstanding financial performance while executing on 2 initiatives that significantly strengthen and position our long-term growth platform. First, shortly after the end of the quarter, we closed the acquisition of XOMA Royalty, the largest transaction in our company's history. Second, we successfully completed a $700 million 0 coupon convertible offering. Both of these represent outstanding execution by our team, while they simultaneously continue to execute on our core business. During the second quarter, royalty revenue increased 32% year-over-year and adjusted EPS grew 48%, reflecting the continued strength of our business model and diversification of our portfolio. Octavio will discuss in more detail, our growth continues to be broad-based across multiple products and partners, demonstrating the compounding growth of the royalty aggregation strategy that we have been executing on over the past several years. As we enter the second half of the year, we believe Ligand is stronger, more diversified and well positioned for our continued growth. Before discussing XOMA, I'd like to briefly touch on our financing strategy. Our objective has always been straightforward, maintain the financial capacity to move decisively when compelling opportunities arise. Our recent convertible offering accomplished exactly that. The financing strengthened our balance sheet, provided exceptionally attractive long-term capital and increased our flexibility to execute against a highly active business development pipeline. Access to low-cost capital is important and a strategic aspect of any investment business. It enables us to act quickly when attractive opportunities arise while maintaining the disciplined capital allocation philosophy that has guided our strategy since 2022. The XOMA acquisition officially closed shortly after quarter end, but it represents the culmination of months of work and marks an important milestone in Ligand's evolution. The transaction adds more than 120 commercial, clinical and preclinical assets to our portfolio, including several meaningful commercial royalty streams while nearly doubling our late-stage clinical pipeline. It also extends the duration of our royalty portfolio with intellectual property rights that, in many cases, extend beyond the next decade. The acquisition is immediately accretive, and we expect the acquisition to contribute approximately $0.50 of adjusted earnings per share during the second half of 2026 and approximately $1.50 during 2027, with meaningful growth and duration expected beyond that. Some investors have asked us, isn't the XOMA acquisition a concentrated bet given the size? In reality, it does not concentrate our risk due to the broad XOMA portfolio, it further diversifies our risk and accelerates our growth. This means higher growth at lower risk. It also extends the duration of our cash flows, in some cases, through 2040. The XOMA acquisition and our recent financing further demonstrate the effort we've been focused on since 2022, the execution of a differentiated royalty aggregation strategy. We are building a high-quality diversified royalty portfolio through disciplined capital deployment and rigorous underwriting led by a lean and highly skilled investment team. We continue to see an exceptionally attractive market for royalty investing. Across biotechnology, companies are increasingly seeking flexible nondilutive financing to advance innovative therapies while preserving their strategic optionality. At the same time, continued pharmaceutical innovation is expanding the universe of investable royalty assets. At Ligand, we have scaled the organization, recruited an experienced investment team, grown our base of diversified royalty cash flows, expanded our financial capacity and demonstrated consistent, disciplined investment execution. We believe this gives Ligand a meaningful and strong position as a preferred partner of choice for companies seeking creative financing solutions. Our business development pipeline remains exceptionally active. It spans traditional royalty acquisitions, structured financings, project finance opportunities and importantly, our special situations approach. The XOMA acquisition broadens our already diversified platform and further strengthens our ability to pursue additional opportunities. The transformation of Ligand since 2022 provides clear evidence that our strategy is working. Over the past 4 years, we have built a more focused, capital-efficient and royalty-driven company. Royalty revenue has increased from $73 million in 2022 to expected 2026 royalty revenue between $225 million and $250 million. This was accomplished with cash operating expenses of about half the 2022 level. That combination of strong royalty growth and operating discipline has produced significant earnings growth. Adjusted EPS has increased from $2.44 a share in 2022 to our updated 2026 guidance range of $9 to $9.50. Importantly, this transformation has not come from adding organizational complexity. It has come from simplifying the company, focusing our resources on high-quality royalty opportunities and building a platform designed to compound over time. The XOMA acquisition accelerates that strategy and adds scale, diversification and long-duration royalty rights while sitting squarely within the capital-efficient and operationally lean model we have been executing on since 2022. The next slide illustrates another important benefit of that strategy, the breadth of clinical and regulatory catalysts now embedded within our portfolio. Following the XOMA acquisition, Ligand is entering one of the most catalyst-rich periods in our history. Over the next 18 months, we expect a steady cadence of potential FDA approvals, pivotal trial readouts, label expansions and geographic launches across a broad range of therapeutic areas. Importantly, our outlook is not dependent on the success of a single product or program. These opportunities span rare disease, oncology, ophthalmology, cardiovascular disease, autoimmune disorders and neuroscience, and they are being advanced by a diverse group of highly capable and curated partners. This breadth and diversification are among the defining strengths of our business model. Rather than relying on a small number of binary events, we benefit from a broad portfolio of independent opportunities, each with the potential to initiate, expand or accelerate a future royalty stream. Of course, each of these opportunities carry some level of inherent risk. That's the nature of a broadly diversified portfolio. Many will succeed, but some will not. The business model is structured to be resilient to that. This is also why we continue to believe the royalty model is so compelling. By partnering with innovators across biotechnology, we gain exposure to important therapeutic advances without assuming the full burden and operational complexity of developing, manufacturing and commercializing those medicines ourselves. Furthermore, we do so with great selectivity and access to proprietary information. Together, these advantages provide us with the opportunity to deliver superior risk-adjusted returns. Our partners fund and lead those activities while Ligand participates in the long-term value they create through royalties and other contractual rights. As the portfolio grows, each investment adds another potential source of future value and further strengthens the diversification and durability of the business. As we enter the second half of the year, Ligand is operating from a position of considerable strength. We have a larger and more diversified portfolio, a stronger balance sheet, a highly active business development pipeline and one of the deepest collections of potential catalysts in our history. Our business looks meaningfully different today than it did when we presented our long-term outlook last December. And at Investor Day this December, we will share an updated 5-year outlook that reflects the larger, more diversified and higher growth business that we have built over the past year. Our strategy remains unchanged: deploy capital with discipline, partner with innovative and capable biotechnology companies and continue building a high-quality royalty portfolio designed to deliver significant and durable growth over time. With that, I'll turn the call over to Octavio for the financial update.

Thank you, Todd. As you've highlighted, we're entering a new chapter for Ligand. The business is performing exceptionally well. We've significantly expanded our royalty portfolio through the XOMA acquisition, and we further strengthened an already exceptional balance sheet. I'll begin with our second quarter financial results before discussing the financial implications of the XOMA integration, our recent financing activities and our updated outlook. The second quarter was another strong quarter across the business. We generated $64 million of total revenue, an increase of 34% over the prior year. Royalty revenue grew 32% to $48 million, driven primarily by continued strength from Filspari, Ohtuvayre and Zelsuvmi. Adjusted diluted earnings per share increased 48% to $2.37, reflecting the scalability of our business model and continued operating leverage. Turning to our balance sheet. We continue to strengthen our financial position. After successfully completing our convertible note offering and closing the XOMA acquisition shortly after quarter end, we still have approximately $700 million of deployable capital. At the same time, we're generating strong operating cash flow in excess of $200 million in 2026, growing to an expected $300 million in 2027. Together, this capital strength and cash flow generation gives us significant flexibility to continue executing our disciplined business development strategy going forward. Turning to XOMA. The integration is progressing extremely well. Before discussing the details, this team deserves real credit for what's been accomplished. Executing a transaction of this complexity required extraordinary collaboration across our business development, legal, finance, accounting and operations teams. Successfully completing the acquisition while maintaining strong execution across the core business is a significant achievement. From an operating perspective, we're on track to capture virtually all of the anticipated cost synergies. XOMA previously operated as a stand-alone public company with annual operating expenses of approximately $30 million. Under Ligand's operating model, we expect XOMA's annual operating expenses to decline to less than $5 million, primarily through the elimination of duplicative public company infrastructure, including legal, audit and SEC reporting costs. The acquisition also brings meaningful tax attributes, including more than $110 million of Section 174 tax credits and net operating losses that we expect to utilize over the next 3 to 5 years, resulting in significant U.S. cash tax savings. Strategically, the transaction more than doubles the size of our royalty portfolio by adding over 120 assets including 7 commercial stage programs, approximately 14 late-stage clinical programs and more than 100 additional clinical and preclinical programs that provide substantial long-term optionality. In addition to the royalty streams, the acquired portfolio includes approximately $2.3 billion of publicly disclosed potential milestone opportunities. While those milestones are naturally contingent upon further development, regulatory and commercial success, they represent meaningful embedded economic upside over time. It is important to note that some of these milestone rights are associated with assets accounted for as financial royalty assets. As a result, cash received upon achievement of a milestone may not be recognized entirely as revenue in the period received. A portion may instead reduce the carrying value of the underlying asset. The XOMA acquisition increases the number of financial royalty assets within our portfolio. While the accounting for financial royalty assets differs from intangible royalty assets, both represent valuable contractual rights that contribute to Ligand's long-term economic returns. We reflect the economics of these assets in our adjusted financial measures through the amortization of financial royalty assets. As they become a larger contributor to our results, we will continue providing additional transparency around both the accounting presentation and the underlying economics. Finally, I'd like to briefly address the Tremfya contingent value right. Under the transaction structure, we're entitled to receive 25% of any net proceeds ultimately received from the Janssen Tremfya litigation. Importantly, we have no governance responsibilities, no obligation to fund litigation costs and no downside financial exposure associated with this asset. It simply provides additional upside for our shareholders. Turning to our recent financing activities. We took advantage of an exceptionally attractive convertible debt market and successfully completed a $700 million convertible note offering at a 0% coupon. We paired the offering with a call spread transaction that reduces potential shareholder dilution because we intend to settle the principal amount in cash at maturity under the net share settlement feature, the structure protects shareholders from dilution up to approximately $524 per share. We also repurchased approximately 229,000 shares for roughly $60 million, reflecting our confidence in the intrinsic value of the company while helping offset the market impact from the convertible hedge activity. Overall, this transaction lowers our long-term cost of capital, strengthens our balance sheet and gives us additional flexibility to continue executing against what we believe is one of the strongest royalty acquisition pipelines in the company's history. Turning to our detailed financial results. Royalty revenue increased 32%, driven primarily by Filspari, Ohtuvayre and Zelsuvmi. Travere reported second quarter U.S. Filspari net sales of $141 million, representing 96% year-over-year growth. Merck reported net sales of Ohtuvayre of $204 million, representing year-over-year growth of 98%. This was partially offset by Amgen's reported Kyprolis net sales of $314 million, a year-over-year decrease of 17%, driven by lower volume, a decline we had anticipated to some degree and one that remains within our royalty revenue guidance. Operating expenses increased compared to the prior year as we continued investing in the growth of the business. Research and development expense included a $12 million onetime charge related to our Orchestra Bio investment. As we've discussed previously, depending on the structure, our R&D financing transactions may be required under GAAP to be expensed immediately. And even though we view them economically as investments expected to generate future royalty streams. The Orchestra Bio transaction this quarter is an example of that accounting treatment. And accordingly, this one-time charge is excluded from our adjusted earnings. General and administrative expense increased primarily due to higher stock-based compensation, continued investment in our business development capabilities and transaction costs associated with completing the XOMA acquisition. Outside of operating results, nonoperating income benefited primarily from fair value adjustments within our investment portfolio. GAAP diluted earnings per share were $2.22, while adjusted diluted earnings per share increased 48% to $2.37, reflecting the continued earnings power of our royalty-focused business model. Turning to guidance. We are increasing the low end of our adjusted diluted earnings per share guidance to $9 per share, while maintaining the upper end at $9.50. The increase primarily reflects the incremental earnings contribution from the proceeds of our 0 coupon convertible note offering, together with the benefit of the share repurchase completed during the year -- excuse me, during the quarter. At the same time, we're reaffirming all of our revenue guidance, including a royalty revenue of -- including royalty revenue of $225 million to $250 million, total revenue of $270 million to $310 million, Captisol revenue of $35 million to $40 million and contract revenue of $10 million to $20. For modeling purposes, I'd also note that within our Captisol guidance, we expect the remaining sales this year to be weighted towards the fourth quarter, approximately 40% in the third quarter and 60% in the fourth quarter, reflecting our current expectations for the timing of customer orders. Similarly, we expect the majority of remaining contract revenue to be recognized in the fourth quarter based on the timing of certain anticipated partner milestone events. Overall, we maintain highly confident in our outlook. With XOMA now closed, we believe we're well positioned to deliver another year of strong financial performance, supported by continued growth from our commercial royalty portfolio and the accretive contribution from the acquired assets. Importantly, the business today is materially different than the one reflected in the long-term framework we introduced last December. As Todd mentioned earlier, we'll update that outlook at Investor Day this December. That original 5-year framework didn't contemplate the acquisition of XOMA or several significant positive developments across our existing portfolio. The approval of Filspari in FSGS, the positive Phase III results for palvella and rapamycin and the acquisition of XOMA have all enhanced the long-term earnings power of the business. Those positive developments continue to build. In fact, 2 days ago, Travere reiterated its confidence that Filspari has the potential to achieve peak sales exceeding $3 billion across IgA nephropathy and FSGS. That further reinforces our confidence in the long-term growth opportunity for one of our largest royalty assets. We're excited to share the details with you at our Investor Day later this year. With that, I'll turn the call over to Lauren for an update on our royalty portfolio and pipeline.

Thank you, Octavio, and good morning, everyone. Following the acquisition of XOMA Royalty, our commercial portfolio now consists of over 40 royalty revenue-generating products with 15 key programs. The XOMA acquisition adds Roche's Vabysmo, Ojemda, which is marketed by Servier in the U.S. and Ipsen in Europe and Zevra Miplyffa. Of these 15 programs, 9 stem from royalties tied to new approvals or investments made since 2022 when we pivoted to a lean royalty aggregation model. Together, they span a wide range of therapeutic areas and partners, reflecting a highly diversified, durable and growing royalty revenue stream. Turning to a snapshot of our key partnered pipeline programs. Our portfolio now includes more than 70 clinical stage assets. While this slide highlights what we believe are the most significant late-stage opportunities, it represents a small subset of our broader development stage portfolio. The breadth and depth of these partnered programs provide multiple opportunities for future royalty growth as the assets advance through clinical development, achieve regulatory approval and ultimately reach commercialization. This diversified pipeline further strengthens our long-term growth profile and underscores the value of our royalty aggregation strategy. One asset I would like to highlight is Agenus Bot/Bal. Agenus entered into a financing in July, raising $85 million upfront with an up to an additional $225 million upon full exercise of purchase warrants. The financing was led by Commodore Capital with participation from Ligand among other investors. With this financing, Agenus is discontinuing its current Phase III trial in relapsed/refractory colon cancer and has reached alignment with the FDA on a new trial in the neoadjuvant setting. First patient dosing in this new study is expected in the first quarter of 2027. Last quarter, we highlighted near-term growth drivers, which had positive catalysts in the first half. These included Filspari, which was approved in April in a second indication, FSGS, where is the first and only FDA-approved treatment. Additionally, rapamycin demonstrated very positive Phase III data in microcystic lymphatic malformations. Both of these products are expected to be significant near-term growth drivers for Ligand. This quarter, I'd like to turn our focus to a few programs we gained through the recent acquisition of XOMA that are expected to play meaningful roles in the Ligand portfolio. First is the multibillion-dollar blockbuster treatment, Vabysmo, which is the third best-selling product in Roche's portfolio. Vabysmo is indicated for patients affected by wet age-related macular degeneration, diabetic macular edema and retinal vein occlusion, where treatment was recently approved to extend beyond 6 months. First half 2026 sales were approximately $2.6 billion and analyst consensus peak sales are approximately $7 billion, which would represent a peak royalty of approximately $35 million to Ligand. Roche is currently conducting a large-scale prospective non-interventional observational trial evaluating the long-term real-world effectiveness and safety of Vabysmo. The trial was initiated in 2022 and aims to track over 6,000 patients. Interim data has already been presented showing significant functional and anatomical improvements as early as 6 months into treatment. The trial has the potential to be an incremental growth driver for Vabysmo. In July 2026, Roche announced the Phase III trial evaluating Vabysmo in myopic choroidal neovascularization, or CNV, met its primary endpoint. A potential catalyst is expected in 2027 as Roche is expected to file a BLA in CNV. We look forward to following these key developments over the coming months. Turning to the next slide. Ojemda addresses an area of high unmet medical need in pediatric oncology. Ojemda is currently marketed in the U.S. by Servier and recently gained marketing authorization in Europe and is being marketed by Ipsen as its ex-U.S. partner. Servier acquired rights to Ojemda through its recent acquisition of day 1 for $2.5 billion, further validating the commercial potential of this asset. Ojemda is currently marketed under accelerated approval in relapsed/refractory pediatric low-grade glioma or pLGG, and is the first targeted therapy delivering clinically meaningful tumor shrinkage with durable responses in patients with BRAF fusion or rearrangement and V600 mutated disease. It is also in Phase III for frontline pLGG with top line data expected mid-2027. We are entitled to milestones and a tiered mid-single-digit royalty on worldwide net sales. Day One previously guided to 2026 sales of between $225 million and $250 million and Day One analyst consensus peak sales were estimated to be in excess of $1 billion. In addition to our mid-single-digit royalty on net sales of Ojemda, we are also entitled to regulatory milestones. Taking a step back to look at our portfolio as a whole, following our acquisition of XOMA, we are entering the most catalyst-rich period in our company's nearly 40-year history. Over the next 18 months, we have as many as 7 pivotal trial readouts alongside potential FDA approvals and geographic expansion opportunities for products already on the market. Each of these represents a potential royalty revenue stream being initiated, expanding or accelerating for our shareholders. Of course, biopharmaceutical clinical development carries inherent binary risk, and we do not expect that every one of these pivotal studies will be positive. The strength of Ligand's model is that we have strategically and intentionally positioned our business to be resilient to this risk by creating a highly diversified royalty portfolio. Let's start with the expected pivotal study readouts. Orchestra Biomed's AVIM therapy, if successful, could represent a significant new royalty in cardiovascular disease. Ojemda 's Phase III readout in frontline pLGG could result in a label expansion opportunity. LeonaBio's lasofoxifene has the potential to capture significant market share in the metastatic ER-positive HER2-negative breast cancer market. Takeda's Mezagitamab is being developed in both immune thrombocytopenia or ITP and IgA nephropathy, and Takeda has shared the IgAN data could read out as early as late 2027. Osavampator has several Phase III readouts expected in major depressive disorder. Rezolute announced positive interim data for Ersodetug in tumor hyperinsulinism in June with top line results expected in the second half of 2026. The Phase IIb trial of volixibat in primary biliary cholangitis is expected to read out in the first quarter of 2027. In addition, they have announced positive Phase IIb data in primary sclerosing cholangitis and will hold additional discussions with the FDA prior to NDA submission. Volixibat has orphan drug designation and breakthrough therapy designations in both indications. Turning to FDA approvals. Palvella began the process of submitting a rolling NDA for Rapamycin in microcystic lymphatic malformations, which is on track for completion by the end of 2026. Rapamycin has the potential to be approved in 2027 and if approved, would represent a major growth driver for Ligand. Finally, we're tracking potential geographic expansion for commercial products already generating royalties today. Filspari has the potential to be approved in Japan and IgAN, Ohtuvayre in China and Ojemda in Japan, which could significantly drive royalty revenue with potential milestone opportunities as well. In closing, with the acquisition of XOMA, we have never felt more confident about the potential of our portfolio, both in the near term and the long term. With that, I will turn the call back over to Todd for his closing remarks.

Thank you, Lauren. We are incredibly proud of the team at Ligand for their outstanding execution in the financing and the acquisition of XOMA Royalty. We have significantly scaled our royalty portfolio and accelerated our long-term growth profile while adding a highly complementary and diversified business to our platform. Additionally, we are pleased with the continued progress of our incredible partners and late-stage pipeline. While we are driving growth for our shareholders, it is very satisfying that we get to do so by helping our partners as they develop life-saving treatments and improve the lives of patients. Thank you for joining us today. And I will now turn the call back over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the strong quarter. I guess, first up, it's almost a month since you closed the XOMA transaction. I'm just curious if you found any surprises as you dug in a little more deeply into that portfolio of assets.

Yes. Good question, Matt. I'll have Lauren weigh in here. But I think, yes, there have been a number of developments in the portfolio that are positive. And I would just set Lauren up by saying that when you're acquiring a royalty portfolio of this size, you value the entire portfolio on a subset of assets and you value the rest of the assets at 0. It's kind of a triage approach to valuation. And we've had several positive developments on assets that we had originally valued at 0 in that process. So go ahead, Lauren.

Yes. Thanks, Todd. I think, yes, Todd is exactly right. We did focus our underwriting process on some of the later-stage pipeline assets. And since the acquisition closed, we've been connecting with each of the partners in our new portfolio and finding some really interesting new investment opportunities, both within kind of the mid-stage pipeline as well as some earlier opportunities. So I think related to our ongoing portfolio management strategy that we implemented this year, there's a tremendous amount of opportunity for us to provide further investment into some of those early to mid-stage pipeline assets, and we have a lot of conviction around some of those that we're starting to learn more about since the acquisition closed. So thanks for the question, Matt.

And I guess as a follow-up, XOMA had some -- a different type of royalty investments, the financial royalty investment. What are some of the pros and cons between that structure and the way that Ligand has historically done it? And do you anticipate going forward that you might seek out more of those financial royalties versus the prior version?

Thanks, Matt. I think that you're referring to the zombie strategy where they were acquiring essentially companies that had become distressed. And one of the main motives there was acquiring the tax assets and net cash from companies that were looking for basically liquidity options. And we certainly have looked at that strategy. I think part of each XOMA's royalties, and our strategy are driven by sort of circumstances, scale, access to capital, et cetera. And I don't think that we would look at very small deals where you're netting a couple of million and a de minimis amount of assets. But XOMA did a very good job of rolling up a number of these, which cumulatively we're benefiting from those now in terms of the tax assets that Tavo mentioned. But we are looking at a number of companies that do provide some tax benefits right now in our active pipeline. But our main focus is on the quality of the asset and the ability to monetize that in terms of royalty cash flows downstream.

Your next call comes from the line of Annabel Samimy with Stifel.

Congratulations on this integration. So the composition of your royalty assets now post XOMA seems to have really stepped up quite a bit. And it might be hard to move the needle now with additional one-off product deals. So with this completion here and your coffers refill, can you talk about your thoughts on deal type? Are you going back to asset-based type of deals? Should we expect bigger, more portfolio-like transactions? Just trying to think about how you're going to think about business development going forward.

Yes. It actually -- while we have scaled the portfolio, and accelerated the growth, the size of the market, the total available market that we're investing in the sub-$100 million market is very, very significant in size relative to the amount of capital we're deploying. And we've kind of done some analysis around the required level of investment for us to continue really perpetuity levels of growth. And it's around $100 million to $125 million per year at the yields we expect to generate off of those investments. But we're able to invest really very consistently in this market at the $200 million plus or minus level with this team on an annual basis. So I do think that we expect to continue to execute on the exact same type of deals, sub-$100 million, typically in the $25 million to $75 million range around specific royalty assets that we acquire or project financings that we do with partners. And in some cases, special situations, which can, on average, be a little bit larger, but are typically also pretty deep value opportunities. So I would say, expect to see more of the same.

And if I could just ask a quick follow-up. it looks like you can be shocking your closet for a while here with some of the early-stage assets. So anything -- have you started digging into that early portfolio yet? Or is it still -- are you still primarily focused on late-stage assets and mid-stage assets here?

We have. And because financially, we just -- we're a little bit more mature than XOMA and have more scale, more access to capital. It allows us to play the portfolio with a lot more optionality. And there are some, I think, pretty interesting assets in the portfolio that I'd say we're on the cusp of proving their value. So for very small levels of investment, in some cases, a couple to $3 million, you can validate some of these earlier-stage assets in the clinic and make them very licensable. So we're pursuing a number of ideas like that. It's a little bit early to say which ones seem most promising and which ones we will actually make final decisions around follow-on investments in. But it's such a large target-rich portfolio that I think there will inevitably be a few of those coming out of it. And I would just ask Lauren if she has anything to add to that response.

Yes. I think -- I would reiterate Todd's points and just add that the opportunities that we're focused on in the earlier-stage portfolio are still very well aligned with our investment criteria, which include ability to address high unmet medical need, evidence of efficacy and safety, strong alignment with our partners. We're looking to invest with great teams. So we're definitely finding opportunities in the earlier stage on the portfolio that while they may be a little bit earlier than we would historically look at, the assets themselves and the teams themselves are completely aligned with our overall strategy in terms of the types of assets that we're looking at. So hopefully, more to share publicly a little bit later on this year, but we're busy and excited about what we're seeing.

Your next question comes from the line of Yigal Nochomovitz with Citigroup.

Also congrats on a very good momentum. I was also curious about XOMA. Obviously, you have a lot in the early-stage pipeline. You mentioned over 100 preclinical and clinical assets. But with regard to the 14 late-stage ones, could you speak to those a little bit more? Which ones would you call out as potentially most interesting or most promising? And of those 14, were some of those or a subset of those or all of those included in the valuation during the underwriting process? Or were some of those also sort of zeroed out as you referenced earlier?

Yes. Happy -- good question, Yigal. And I'll just -- I'll hand this one off to Lauren, but just by stating and leading in that a strategic part of our organizational changes over the last couple of years has been to put in place a sophisticated portfolio management opportunity or opportunity system, which allowed us to absorb the XOMA assets with a de minimis amount of absorption of their existing infrastructure. So Lauren is overseeing that. She heads our portfolio management system and is engaged in detail on the late-stage assets, the analysis of those and additional follow-on activities where it makes sense. Lauren?

Yes, sure. Thanks for the question, Yigal. I think we've talked about what we're uncovering in some of the earlier-stage pipeline. So I think I'd respond by saying what we're most excited about in the near term are probably some of the assets that we highlighted in our prepared remarks related to upcoming pivotal study readouts. So we're looking at Ojemda in frontline pediatric low-grade glioma. And then we have data expected for Mezagitamab, Osavampator, volixibat in PBC as well as. So there's a number of shots on goal here when you look at just the late-stage portfolio. So as we shared in the prepared remarks, we don't expect all of these to be positive. But I think when you think about the volume of catalysts that we have in the next 18 months in the late-stage XOMA portfolio relative to, say, what we had this year, we had one major data readout with palvella and rapamycin in microcystic lymphatic malformations, which really delivered exceptional results. When you think about that compared to up to 7 potential pivotal study readouts in the next 18 months across both the XOMA and Ligand portfolio, it really is going to be a busy exciting time for us. And so we're most focused at the moment on some of those later-stage assets. So thanks for the question, Yigal.

And then just one follow-up. Obviously, with the recent $700 million transaction with a very low cost of capital, just wondering if that impacts or changes your thinking in terms of what you'd be willing to accept or transact with regards to deal size or hurdle rates? Or is the underwriting discipline essentially unchanged despite obviously a very attractive cost of capital on that tranche of money?

Yes, Yigal, that's a great question. Our strategy and our underwriting criteria as well as target returns remain unchanged. Lower cost of capital just allows us to deliver greater alpha and a spread for our investors. So -- and the deal sizes will remain in the same ballpark as well because we're really focused on the market that needs this type of capital the most. And we think the sub-$100 million deal size, which is our typical range that we're in, at least that's our limit, say, per asset is quite target rich. There's lots of small-cap companies, late-stage private companies, even some mid-cap companies where this is a very good fit. And we're focused on really serving that market. So this is really where we've focused the engine that we've built is in that market.

Your next question comes from the line of Jason Zemansky with Bank of America.

This is Jackie on for Jason. Congrats on the quarter. So can you quantify the XOMA revenue and cash flow contributions contributed in your revenue projection -- or sorry, in your projections and the second half EPS accretion, including the principal commercial assets driving the contribution? Ultimately, how much of the $1.5 is expected in the 2027, representing underlying ROE growth versus cost synergies and tax benefits?

Go ahead, Tavo.

Jackie, thanks for the question. The contribution from the XOMA acquisition is entirely reflected in the increase in guidance that we announced a couple of months ago upon the announcement of the XOMA deal. It does include the top-line contribution as well as cost synergies that we expect. And obviously, that all takes effect starting in the third quarter and then obviously, the full year contribution in 2027. So yes, that $1.50 is 100% tied to the top line contribution from XOMA plus the significant synergies that I referenced in my prepared remarks.

Your next question comes from the line of Leland Gershell with Oppenheimer.

Adding my congratulations as well to Todd and the team. A couple of questions from us. I wanted to ask, as Ligand has grown its presence in the royalty aggregator space with the XOMA acquisition, I wanted to ask how your ability to be competitive may be enhanced by not just having a larger presence in terms of assets, but also some of the key members of the XOMA team as part of the Ligand.

Yes. I think in general, in terms of the landscape, the competitive landscape, our ability to execute within the markets. The overall amount of royalty capital involved in financing pharmaceutical companies, biopharmaceutical companies is less than 9%. On the development side, now this is my own estimate, so this is rough, but it's less than 5%, I would say well less than 5%. And there's only a few players that really do this consistently, and they all have their different approaches. So it's a very early-stage market, and it's pretty low competition in terms of providing nondilutive capital in the form of royalty finance. That is exactly why we proactively and initially focused on the market that we focused on, which is development stage, sub-$100 million deals, mostly small-cap companies, but late-stage private and some mid-cap as well. And there's a very, very high demand and low supply of capital in the space in general. But even the players that do it consistently as part of their core business have very different approaches. So, we haven't really been head-to-head on any royalty financings. We do invest in very capable partners. They have to have good management team so that we don't have to manage it. That allows us to achieve very high operating leverage. So, they usually almost always have alternatives. Those alternatives are -- there are other options in the equity markets, access to debt, et cetera. So that keeps everybody honest, and it keeps the market pretty level. But it's a very good market, and there's a high demand for what we do.

And just maybe one question for Tavo. You mentioned on the $110 million -- more than $110 million of the tax credits and NOLs to be utilized over the next few years. Any cadence to the utilization of those as we think about benefit to your cash generation and any limitations on their utilization?

Yes. Thanks for the question, Leland. Yes. So, the Section 174 R&D tax credits that came about from the big beautiful bill. The sponsor, the holder of the asset has the option of either taking a 100% write-off against their taxable income or deferring it over 5 years. The vast majority of the sponsors that generated these assets under the XOMA -- these are assets that came over from XOMA, obviously. They elected to defer them over 5 years. So we will continue with that cadence, if you will. And the bolus of the value will be absorbed or realized over the next, call it, 2 to 4, 3 to 5 years, given our taxable income profile. On the NOLs, which is a significant smaller portion of the overall asset. Those are limited to the general rule there is 3% of the acquisition price per year. But it does inform our cash generation meaningfully. You heard me say in my prepared remarks that we expect to generate approaching $300 million in 2027. And some of that is informed by this tax asset, this tax attribute that comes over from the XOMA acquisition.

Your next question comes from the line of Joe Pantginis with H.C. Wainwright.

So my 2 questions. First, Todd, I guess I'm going to approach XOMA from the opposite end. With so many opportunities there, you say you might be looking to invest in some of the smaller opportunities that you're looking more into. But is there anything now since you can talk 100% freely about XOMA since it's closed, that you might be looking to unload or spin off at this moment?

Nothing that I can really talk to, Joe. I think in terms of how we monetize assets, and I'll use this great question as a platform to make, I think, an important point. A lot of and what we value the XOMA company on were partnered assets and it was a subset of the total number of assets. There are many assets. In fact, a significant majority of the assets that we either do not have enough information about or they were just very early. So we valued those at 0. So again, it's kind of a triage approach. Now Lauren, through the system that she set up to manage these is going through the full portfolio. There are also unpartnered assets. And so, when we look at these opportunities to create upside beyond our original underwriting, we're looking at certain technologies and assets that may be very promising, but require really a de minimis amount of investment to establish proof of concept, which would then make them very licensable or partnerable. So that is a whole other area that is pretty target-rich for us. And I can't name anything specifically yet because it is early in our analysis in that regard. But I'd be surprised if we don't get a couple or several opportunities like that, that are pretty compelling. And so we can continue to farm basically some of the unpartnered assets that come along with the portfolio. In terms of the already partnered assets, just as we do with our existing portfolio, we basically will participate, as Lauren mentioned earlier, as she reestablished the lasofoxifene opportunity within a new company platform and a new financing, we'll participate in those financings as we did with the Agenus financing as well to support those companies and facilitate the robust kind of nature of the programs to make sure they're properly capitalized. So you need to stay engaged with these assets from a partnership management perspective and support the companies. So in many cases, like with Palvella, I think we have followed on in every equity financing they've done to give them basically strength from the insiders as they've gone out for additional equity rounds. And that's a sign of confidence, of course, in the team and the asset. But we will do that to support our companies on the equity side, even though we're not equity investors as a core business, we will use that as a tool to make sure that our partners have financial strength, which ultimately leverages the value of our royalty asset. So that's how we think about managing these things, and we're constantly reassessing, reprioritizing the portfolio as news, as data rolls out.

No, that's very helpful color. I appreciate that. And then my follow-up is maybe a question for Lauren. So both Ligand and XOMA participated in a very interesting and powerful deal with regard to Castle Creek. Just wanted to see if there was an update there because the profile for DEB patients has really increased significantly over the last several years with Crystal and Abeona.

Yes. Thanks for the question, Joe. So we continue to have a lot of conviction in D-Fi. We think that VYJUVEK has been a great introduction for the DEB community because historically, there were no FDA-approved treatments, and it's been a great first step. There are some limitations with byproduct that we think D-Fi can address. Those include the body surface area that you're able to treat, the types of wounds. So could we be looking with an injectable treatment and addressing some of the chronic wounds that patients have or different locations of the body. So we think the unmet need here still remains. We think there's a great opportunity for combination therapy as well now that we have a second product in the market with Abeona. But we think that these are nice complementary programs that really the DEB community has been waiting for, for quite some time. When you think about especially the RDEB patients and some of the more severe folks, they have extensive body surface area coverage with wounds. So we continue to have a lot of conviction in this program. XOMA did as well. So our royalty rate increases a little bit, and we will look to see additional developments in the coming months.

Your next question comes from the line of Sahil Dhingra with RBC.

This is Sahil. My first question is related to the $2.3 billion of potential milestone opportunities from the XOMA portfolio. Can you frame for us the probability where near-term value? How much is tied to the Phase III readouts in the next 18 months versus longer-dated commercial milestones? And how would your contract revenues look in 2027 and beyond versus the 2027 versus the 2026 contract revenue guidance of $10 million to $20 million.

Sahil, thank you for the question. Yes, frankly, very excited about the potential upside here from the magnitude of milestones that we have contractual rights to. It's $2.3 billion. You're right, as you said, that have been disclosed. You could see that figure in XOMA's previous filings. We are still digesting the various contracts and getting our head wrapped around the timing of the potential -- the probability of success the stage of these milestones ranges from, as you would imagine, preclinical early development stage and yes, even some that we see coming through potentially as early as later this year. We're not prepared to give further visibility to the quantum or the partners that these are attributable to, but we do plan to provide more visibility and greater detail when we discuss this more broadly at Investor Day in December.

And then my follow-up question is related to Mirum's call last night, they disclosed that the FDA recommended a Phase III for in PSC at the pre-NDA meeting. So how does this change your timeline and risk adjustment for the product?

Yes, sure. I'm happy to take that question. So we were certainly disappointed to see that news last night. We continue to have a tremendous amount of conviction in this asset, both in PSC as well as PBC. I think with regards to PSC, our partner executed the largest randomized study to date in this indication, and there are no FDA-approved treatments. The company remarks that they thought it was potentially due to a new review team, not data deficiencies. And then interestingly, they got breakthrough therapy designation after the meeting. So there's a little bit of mixed signals, if you will. So it pushes it out a little bit in terms of the potential approval date. They're now targeting iterative discussions with the FDA that they get through the breakthrough therapy designation and then a submission in the first half of next year as opposed to the last half of this year. So move things out a little bit. We think this is an indication that the company continues to believe strongly that they'll get approval here without another Phase III study being required. And then they also continue to believe that the IIb that they're completing the VANTAGE study in PBC remains on track. So disappointing news for sure. We've seen this a delay earlier this year with Filspari in January when there was a major amendment and push out the approval to April. No major changes in terms of our projections, and we'll hope for good news here as they continue to engage with the FDA and hopefully clear up some of the miscommunication.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.