Ligand Pharmaceuticals' CEO Hosts Analyst Day Conference (Transcript)

Dec. 4.12 | About: Ligand Pharmaceuticals (LGND)

Ligand Pharmaceuticals Inc (NASDAQ:LGND)

Analyst Day Conference

December 4, 2012 10:15 am ET

Executives

Jennifer Capuzelo - IR

John Higgins - CEO

John Sharp - CFO

Matt Foehr - COO

Simona Skerjanec - VP, Global Competitive Strategy, The Medicines Company

Nishan de Silva - VP, Corporate Development

Analysts

Ed Arce - MLV & Co.

Jennifer Capuzelo

So hello everybody and welcome to Ligand’s Analyst Day. So before we start today, I would just like to remind everybody that during today's presentation, we will be giving forward-looking statements under the meaning of Federal Securities Law. These statements will include but are not limited to those related to expected revenue and net income, expected operating expenses, cap results and sales expectations, royalty revenue projections based on third party research and expected license and milestone revenue. These statements involve risks and uncertainties and actual events or results may differ materially from projections described in today's press release and presentations.

Additional information concerning risk factors and other matters concerning Ligand can be found in Ligand’s periodic filings with the Securities and Exchange Commission, which are available at www.sec.gov. The information presented during today's Analyst Day related to projections or other forward-looking statements, represents the company's best judgment on information available and reviewed by it as of today and do not necessarily represent the views of GSK, ONNX or any of our other partners. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of the Analyst Day.

So at this time, I would like to turn things over to Ligand’s CEO, John Higgins. Thank you.

John Higgins

Thank you Jennifer. Thank you everybody for joining us today in New York City. We have a nice turnout here in the conference center and appreciate all those who have joined us live by webcast as well. We are very pleased to be here today. It’s the end of the year in New York City, the city seems to be recovering well from Sandy. We've an exciting story to tell, and given the recent developments this year, we believe we are at a very special time in our corporate history.

All great corporations have moments that define their greatness, seminal moments, we believe that Ligand is at a very special moment in time. We believe that we're at very major inflexion point. Now this is based upon the developments in the last several quarters, as well as the portfolio that we have assembled. We're projected we believe to produce significant growth of revenue, profitability and cash flow. And most significantly for investors, we believe our business model is structured such that we have a very significant platform to continue to grow the business for years to come.

I'll like to give a brief overview of the agenda today. I will discuss the business in general. I’ll talk about our business model which is important to understand in investment in Ligand. I'll talk specifically about why we believe we are at a major inflexion point and also the growth drivers going forward.

John Sharp, our CFO will discuss more details around our financial guidance. We're going to talk through 2013 and 2014, and he will get in to details around our tax assets and also give some more analysis around our financials.

Matt Foehr, our Chief Operating Officer will discuss our R&D model. The choices we make, what to invest in and the goal to drive our research to partnering. We have a special guest and colleague from one of our partners, The Medicines Company, Simona Skerjanec is here to discuss a very valuable program we have around a Captisol-related project. And finally, Nishan de Silva is going to discuss more detail our Shots-on-Goal business model and highlight several important assets.

Now afterwards we will allow sometime for Q&A and then we will move onto luncheon and anybody who can join us is certainly welcome to. To go into our business model this is where, I would like to start and to begin with just first to comment about biotech performance and valuation. In the world of small cap biotech stocks companies are principally focused on funding on research projects that drive towards catalyst or positive events. They are looking positive data, NDA actions, product launches. These are all important events that certainly change the potential of our opportunity, they change the probability of success.

But what these translate into in terms of stock performance is perceived value. A company is not created real value until they have created cash flow, until they have generated sustainable cash flow real value. This is Ligand’s top priority, it’s what we are singularly focused on, building a financial growth company.

Now certainly we care about the research, we are focused on driving quality and development, having good partners, getting good regulatory events and so on. But again we are focused on generating real value for our shareholders. When we look at Ligand we believe this is a very unique biotech investment, and unique we think is the right word.

We are projecting above average growth and below average risk. This maybe a sound byte from a traditional portfolio or a mutual fund; as an operating company, we understand the risk in the business, but we have created a very unique investment opportunity, premised on strong financials, a robust growth engine and again diversified risk.

So let's talk a little bit about our model, the Shots-on-Goal model, it’s a sound byte that we have coined, we have been using it for a years. But as we walk through the slides today, I think you will be impressed that we have brought our vision to reality in a profound way. Very simply most programs fail in biotech and pharma most R&D projects fail that is a fact. That has been the history and that is how it will be going forward. It’s the nature of the business. But not all things fail, not all research projects fail.

And our business model is premised on two basic principles. First, the more programs and development the more likely you will have success. Shots on goal. It is quantity and also quality. Having a partnership, having an R&D project that has a solid potential of converting to an approved product.

And the second premise is that a company does not need to retain full program rights to generate significant revenue and cash flow. We feel very strongly about this, partly you get significant revenue through high quality projects, through a deep portfolio of revenue generating assets and you can enjoy significant cash flow per share by keeping costs low and the share count low.

So to go further on the shots on goal business model, we have two primary business objectives. What are we focusing on at Ligand. Two objectives first, drive R&D to the earliest inflection point for partnering. Many small cap companies they are focused on one or two therapeutic areas and its important in their mission to retain program rights well into late stage development if not commercial launch. That is one business model. Ours is to identify questions, get answers to those questions and find quality partners to drive those programs forward.

A second business objective of ours is to acquire asset efficiently that is an acquisition focus model; acquire assets to further build our portfolio. The result which we have clearly demonstrated is that we can generate high margin revenue, we can keep the operating cost low and we have significant portfolio diversity.

Here is an illustration of a profound expansion of our partner portfolio. Six years ago, we had nine programs. I joined the company about six years ago. We had nine partnered programs. Today we have 70. We have grown nicely year-over-year and we believe that we have a capability to continue growing the asset base and this growth even comes amidst failure and setbacks.

We have had programs that have been cancelled. They have been terminated. They had clinical failures. There are programs that have been cut from research because of big pharma M&A and despite that attrition, we have still grown this portfolio to 70 partnered programs today.

When we look at the business model, I would like to talk a little bit about our team. I'm very proud of our team. It’s a competent team, dedicated focused team that's highly engaged and committed to this business model. Its 22 people. It’s a small team. On the front line, the front office so to speak is our business development effort. We are in a commercial enterprise. We don't have sales and marketing. We aren't calling on doctors.

Our frontline for our business is business development. And we have experienced executives with investment banking background, private equity, venture capital, healthcare management consulting, colleagues who worked at big pharma and biotech. Equally important is our commitment to research.

Now a small team we will operate as a virtual business and we don't have large labs and huge teams of scientists. But what we do have our very capable credible long tenured scientists who are running our chemistry, biology, pharmacology and formulation services.

Beyond that, we have an operations business that is focused on customer service with a breath of partners that we have as much as we answer early questions and hand off our program the fact is many of our relationships rely or are built around strong customer service whether its for our technologies or whether its to continue to support the research and development activities.

And of course, we've got a strong internal administrative team, for example, legal, accounting and communications. So what does this team do, what are our core competencies? This is not a typical biotech. We are proud of our biotech heritage, we're proud of our research accomplishments and we care passionately about participating in the biotech space but what we focus on is a bit different than many of our peers.

First, we're, one of our competency is hunting for new drugs, identifying target and answering questions. We're good at drug hunting.

Secondly, we think expert in licensing, binding, creating and importantly managing deals. Now it's not uncommon that biotech companies do licensing deals. We understand that. For the size of our company and our history, given the number of deals we've done, we believe we have a special expertise. We’ve deep [Rolodex] and we have experience, not only structuring and negotiating deals but also working with partners in a collaborative way to get quality outcome out of our licenses.

Thirdly, we're focused on acquiring and integrating assets and companies. This is one area where we are very different from our peers. Few small cap biotech companies have a focus on acquisition the way Ligand does. We’ve acquired five companies in the last several years. Most companies don’t do it and the mechanics of pulling off acquisitions are complicated. We believe we're good at it.

And finally, we are serving partners and customers, we're a customer service oriented company, we need to be and I believe we demonstrated our value to our partners.

So moving on, that is our business model. Now, I would like to talk a bit about why we believe we're at a major inflection point for the company. Ligand is uniquely positioned to generate significant cash flow per share. I would offer that there is no other company, no other small cap peer of Ligand’s that has this profile. And when I say that we are uniquely positioned is to generate significant cash flow per share, we have high quality of revenue by that I mean its recurring, its consistent, its high margin revenue, John Sharp, will talk through our margins, we believe that who enjoyed 90% plus margins on our revenues.

Significantly, we are also operating with very low operating cost, we’ll show some charts that illustrate this and if you take high revenue opportunity, high revenue growth and high margins and low operating cost. You overlaid that was significant tax assets. We will be very tax efficient in a low share count; this is why we believe this business is poised to generate significant cash flow per share.

Turn to our financials; again it is a strong story. For revenue, simply there are four major drivers of revenue Promacta, Kyprolis, Captisol® license and milestones. Two of these Promacta and license and milestones were part of the story two or three years ago but they were there more in concept, Promacta revenues were low and the license fees were there but frankly we had fewer deals.

Today, Promacta is profoundly grown, Kyprolis is approved, we now have Captisol® as an enabling technology and more partners then ever. These are our four major drivers of revenue that are developing very nicely for Ligand.

Our expenses as John will illustrate are low and significantly we believe that revenues can grow meaningfully without further investment in the business. We don't have to fund the Phase 3 study, we don't have to build out our sales force, we don't have to build out manufacturing plans, we can grow revenue without additional investments in cost.

Tax assets more than $0.5 billion in fact, when you look at John’s slide it is close to $0.75 billion of tax assets and share count, 20 million shares. If we have 20 million of pretax profit, if we have 20 million of pretax profit and are not paying taxes that is effectively 20 million in after tax profit with only 20 million shares that's $1 a share in EPS. It’s simple math but that is the leverage in our model.

Now I would like to show four charts, four bar charts. These are our new charts. We have not shown these to investors in the past but it’s now a collection of the outlook for the business. This chart shows the quarterly royalty revenue that Ligand has enjoyed the last four years. Promacta was launched essentially in early ’09. It was launched in the US, Europe came online, then Japan and other markets.

The bars up to third quarter we have shown before and you can see there's a nice escalation of royalties. Notably the fourth quarter, this is fourth quarter 2012. We already know what our royalty is. We book our royalty on a one quarter lag basis. We've received this payment. This is the royalty we received from GSK for Promacta based on third quarter royalties. It a profound increase Q4 over Q3 and is driven by higher sales and is driven by the fact we are now in a higher royalty tier, its simple math. This is the model though. This is why this is so exciting.

You can see that acceleration, and notably this is all revenue based principally off of the initial indication, ITT, which is an orphan niche indication. A much larger indication thrombocytopenia in HCV patients was just approved one week ago. Those sales ostensibly are not reflected in this chart. To go a step further, we are now sharing with the analyst what Wall Street’s projections are for these products.

I'll start with Promacta. Here the revenue projections that GSK sell side analysts have for Promacta. These are now Ligand’s projections, these are not the analysts who cover Ligand. These are analysts who cover GSK, who have projections for Promacta. This goes out the next five years and you will see essentially the street on a high to low, on a low to high basis in 2013 the product could do $300 million to $400 million. We show the low and the high and give the average in the blue line.

You go out five years in 2017, today the Street believes Promacta could do roughly anywhere from $500 million to $700 million. What we have done is derived our royalties. We've taken those exact projections. We have used our royalty rates. We've adjusted them on a one quarter lag basis and we are illustrating what our derived royalties would be off of third party street projections.

We show a similar graph for a second major revenue driver that's Kyprolis. I'm sure most of you are aware of this product, it’s a very important medicine to treat multiple myeloma. It’s just launched and by any measure the launch has been a huge stunning success. This chart shows third party forecast for analysts who cover ONXX. There are 11 analysts who cover ONXX right now as of November. These are their numbers. Again we show the low and the high, we give the average.

Profoundly, revenues for 2013 are projected to be in the $100 million to $300 million range, and when you go out five years the street view is that this product will do roughly $1 billion to $2 billion in annual revenue. Again on a royalty offer this in addition to selling ONXX Captisol and this other chart shows the derived royalties that Ligand will receive.

Now what we have done here in this chart is put those bars together. This is why plainly, we believe we're at a major inflection point for financial growth. This chart shows royalty revenues. The smaller products that are not covered by analyst, we have input our own estimates. We believe they are conservative but they are also smaller products. So the revenue contributions is less important.

What is driving this inflection point is the expansion of Promacta, continued growth as GSK rolls out the product in new markets and they get continued commercial momentum, and presumably increase sales off of ACV, and the blue bar captures the new product launch and anticipated growth by third-party analyst for controllers. This is a fascinating chart because it very, very plainly shows that if these third-party analyst are correct, we're indeed at a major inflection point for revenue growth.

The other thing that’s significant is that this chart excludes any new product royalty over this projections period, it excludes Captisol revenues and it excludes partner payment. Three other major sources of revenues are excluded from this illustration. To give you a preview of some more the details that John Sharp will walk through, here is a quick summary of our two-year financial outlook. This is new information and guidance we are giving for the business for 2013 and 2014.

We do believe that we will enjoy 40% annual revenue growth for the next two years, with revenues over $40 million in 2013 and just over $60 million in 2014. We believe with that revenue growth expenses will be relatively flat, roughly a 5% annual growth year-over-year. What this produces is 200% earnings growth per share 2014 over 2013.

Next year we believe will generate over $0.35 a share, and in 2014 we believe we will generate well over $1 per share. During this time period the company will generate significant cash, and our goal is to paid down debt and build our war chest.

I often get the question what do we plan to do with the cash? And there are two simple answers; first, we are going to continue to look to acquire assets inefficient, disciplined transactions to build our portfolio of fully funded Shots-on-Goal. If the opportunities don't arise and if we can't find quality transactions or can't negotiate structures or deals that we think are fit with Ligand, then our other priority will be simply to return capital to shareholders. We’ll do that via a share repurchases or dividends.

Finally I would like to leave you with a slide or two on our growth drivers. As much as a company can focus on what we have achieved and can give a picture for the next year or two, what is most important we believe for investor’s decision is does a company have a sustainable incredible plan to grow the business going forward and our view is unequally yes.

As I’ve said today we have 70 partner programs. Now we understand realistically not all will make it to market considering biotech success rates, we understand that, but we do have 70 programs that's a fact and these are fully funded and they are advancing. Now, given current programs status, here's how the new products could enter the market through 2020. We carefully analyzed every single program. We consider the stage of development, the quality of the partner, the length of trials per program and our analysis today suggests that as many as six programs could launch in the next three years.

Six programs, that would double the number of royalty bearing assets that we currently enjoy. If you go out another couple of years the number could be as high as 10 to 12. What is fascinating about this business is that today Kyprolis is just getting started. Promacta is still a young infant product for us from a revenue perspective.

We have a bevy of new partnerships that have a potential to generate new products but if we go out five years, we believe we can enjoy significant growth as I've illustrated but when we go out five years by this schedule we will be on the eve of as many as 45 new products having the potential to launch in 2019 and 2020. These are existing deals.

Again, we are proud of the business we have built and believe that we have a very sustainable, credible plan to grow the business for years to come.

And with that, I would like to turn it over to our CFO John Sharp to go through more details around our financials.

John Sharp

Thanks John. You are going to hear a lot today about our shots on gold business model and our key revenue drivers but I want to take a quick diversion and talk about two other pieces to the Ligand model.

And that is our cost structure and our tax assets. Now, if you followed Ligand for any amount of time, you know about four or five years ago we were transitioning away from a commercial business. We did a number of acquisitions and you can see in 2009 our expense base was over $50 million more than double what it is today.

But due to cost reductions including headcount reductions and shutdown of non-core facilities, we drastically reduced those expenses and got to our expense inflection point in 2011. And now, we believe even though we show modest growth here that we are basically at our expense cost structure that can run this business and continue to grow the top line as John mentioned, we don't need to increase expenses to grow our revenue.

So how do we deal with this cost structure? Well John mentioned, the small team of employees that we have. You can see that represents about a quarter of our expenses. We also have a fairly low fixed cost base; about 20% of our cost represents fixed cost. So you add up those two categories and less than half of our expenses or what I will call the cash expenses to maintain the business.

Now we don't want to just maintain the business though we want to grow this business. So what you see are the variable costs which these are the costs and that represents almost 30% and this is R&D project cost, this is business development. These are things that will actually grow that business. So in our $26 million of cost structure it actually includes costs to grow this business.

Now I want to focus on tax assets. We've been talking for a number of years about our tax assets and more so now that we are on the verge of profitability. In general, we have three types of tax assets. Those are net operating loss carry forwards or NOLs, tax credits and future tax deductions.

By far, the biggest piece of that is our NOLs and as John mentioned, we now have about three quarters of $1 billion of tax assets, represented by almost $0.5 billion of federal NOLs and I want to point out that this is fairly unique to a small cap biotech. The majority of these NOLs are unrestricted. We could use them today. $435 million, we could use today.

In addition to that, we have about $140 million of state NOLs. We also have a significant amount of tax credits. Now the difference between the tax credit and NOL, NOL offsets future taxable income. Tax credits are one-for-one against tax payments. So on apples-to-apples basis, more valuable and you can see we have just under $20 million of federal tax credits and $17.5 million of state tax credits.

In the last category, I will call future tax deductions. These are really timing differences. And so these are things that have been already run through the book expenses but have not been deducted for tax purposes and there is a very long laundry list of these timing differences but I am just going to focus on the, what we called, the capitalized R&D expenses.

So these are R&D expenses that we incurred in previous years. We capitalize them for tax purposes and then you amortize them. You really extend the life of an NOL by doing this. And right now, we have about $90 million of future NOLs in the form of these capitalized R&D expenses. About $80 million of these were going to realize over the next five years.

So here they all are summarize on one page. I just wanted to point out that given our current outlook which includes very significant revenue growth; we would expect to use these, the majority of these tax assets over the next six to eight years.

So what all these big numbers really mean to Ligand from a tax basis and so there is, I really want to focus on two areas and they are pretty diverse. One is the actual cash taxes we will pay over the next five years to eight years versus what we will record on our books.

And so, I will start with the simpler and most important in my view which is how much taxes will we really pay over the next six to eight years. And you can see down here on this chart, I am conservatively estimating 2%, it will likely be much less than that, but as long as our, we have the tax assets available; we will be paying very little in taxes.

Now on the book side, it’s much more complicated, the accounting rules are getting little crazy. So right now, we have a valuation allowance against our deferred tax assets which are represented by what I have just gone through, before we released our valuation allowance, we would expect our expense on our books to be very low as well, right now I am estimating about 5% for next year.

When we show consistent profitability which is sort of an undefined term, we will release that valuation allowance and in that period we will record a very significant tax benefit, right now our tax effect of our assets is about just under $200 million. So next year and into our 2014, we would expect to, if we show that consistent profitability, we would expect to record the cash benefit of almost $200 million on our income statement.

For book purposes after that even though our cash taxes are still very, very small. The expense will really mere the statutory rates for taxes which we now estimate to be about 38%

Now I would like to switch gears and talk about 2013 and 2014 in more detail. John talked about our 40% annual revenue growth for the next two years. What I would like to point out is, not only are we expecting that great revenue growth, but the quality of our revenue is also getting better and by that I mean our royalties. So you can see here by 2014, we expect royalties to make up over 70% of our revenue.

For those of you that have talked to me, I always say it is very difficult to predict our top line revenue, and so just to be transparent and to share our thought process with you with respect to the Captisol sales and the license and milestones, we believe that 2013 and 2014 will be fairly consistent and you can see we are expecting between 13 million and 16 million in Captisol sales and $3 million to $5 million in license and milestones for each year.

On the top line, as John was walking through the charts there. There's a wide variety of opinions on what Promacta and Kyprolis are going to do over the next 5, 10, 15 years. So what we do is we will base our projections on the analyst estimates that are out there. Not our analysts, but the analysts that cover GSK and ONNX. So I want to talk a little bit about gross margin as well. As you saw from the slide, a couple of slides ago that again the majority of our revenue is going to be generated from royalties and from license and milestones, which obviously are at 100% gross margin. They dropped straight to the bottom line, but there is a fairly significant amount of Captisol sales that we are expecting in 2013 and 2014.

And as we've always said, the gross margin on the Captisol sales is very dependent on the type of material that we are selling clinical versus commercial, big disparity in the gross margins. Right now we are with the launch of Kyprolis. We are expecting that mix to start to sway a little bit towards the commercial side. So this year we are expecting 65% gross margins. We think in ’13 and ’14 that those margins will be at about 60%.

But overall as John mentioned, when you look at the overall business, the overall mix of revenue and factoring the gross margins, we are looking at about 90% gross margins on total revenue. And finally I'm going to leave you with our guidance for 2012. I'm not going to go through this slide, but I do want to point out for the first time we are actually giving you a little bit more color on the revenue buckets for Q4 and the full year.

And with that I will turn it over to Matt Foehr.

Matt Foehr

Thank you John. I'm going to spend a few moments talking about Ligand’s R&D model and then dig in a little deeper into the Captisol business and why we see that as a significant platform for future growth. At Ligand we focus our R&D efforts around what we call targeted value based project advancement. So we think very carefully about programs that we invested and every given year we probably have 15 or so programs that we could invest in, but we look at those very critically and with an eye towards partnering and look at three to four programs that we choose to invest in each year.

All of our efforts in R&D are what we call partnering driven, and we make sure that what we are doing is backed by strong science and that we derisk programs in such a way that we facilitate partnering for our business development team. One thing we do in the de-risking round, that’s a little bit uncustomary is that we make sure that we are leveraging not only internal milestones that we're controlling in terms of experiments or early stage clinical data, but also leveraging external milestones, allowing other investments to build value in to some of the assets that we have.

So you see here, our diverse asset base. This is just a sampling of selected assets in our unpartnered asset portfolio, the Captisol-enabled Melphalam program that John will talk a little bit more of in a bit. That’s a program for which we completed a successful phase 2 trial last year and right now we're initiating a multi-center pivotal trial for this program. Our SARM program in muscle wasting successfully completed a Phase 1 and is Phase 2 ready and our glucagon receptor antagonist program in diabetes.

Before leaving the slide, I want to call out, there obviously are additional programs that are in other significant areas, pain, oncology, respiratory. We don’t list them all here, but it's important to note that given our model we have a number of programs that are potential partnering assets to fuel future growth for the company.

Just a little bit on our glucagon receptor antagonist program, we acquired it through our Metabasis acquisition a few years ago. It's a differentiated novel agent with a strong intellectual position. We've proven it's efficacy in a number of animal models and have completed a whole host of preclinical IND enabling studies to support an IND filing for the program in 2013. The glucagon receptor antagonism mechanism is a validated target and this is one example where we're leveraging external data. Lilly has been investing in a Phase 2 asset that was centered around validating this target. We're very pleased to see the target validated clinically and continue to invest in our program which we feel has beneficial properties as compared to theirs.

So I am going to switch gears now and talk about Captisol. Those of who have been following the story know that we acquired CyDex Pharmaceuticals in early 2011 that brought to us the Captisol platform technology, it is a modified beta cycle of Dextrin, essentially a circular sugar that is specifically designed to solubilize and stabilize a broad swath of active pharmaceutical ingredients. It was recently discovered and invented in Val Stella’s Lab at Kansas University and we couldn't be more pleased to have it, there couldn't be a better time to have Captisol technology.

Captisol meet an enduring and growing need in the industry and that is formulation, solubility and stability. Many times active ingredients are discovered, they have good invivo or invitro activity or have trouble and then troubled being formulated in invivo setting formulators realize. They may not be able to get the product to the clinic, but they can't figure out a way to solubalize it. As I was saying, and we feeling we have the right technology at the right time with advancements in combinatorial chemistry and high throughputs screening that came in the mid and late 90s.

The number of compounds that have solubility issues is sky rocketing up, one of the other elements that's important to many of our partners is the fact that we manufacture Captisol to the highest quality standards, we choose to manufacture it to active pharmaceutical ingredients standards given the large amounts of Captisol that are used in many of our partnered products, we therefore have validated our process as one would for an active pharmaceutical ingredient or a finished product, and have a significant safety data base that has been generated over the years by many of our partners that we referenced and provide to our partners as they progress through regulatory submission.

This is a graphic that was published in the American Pharmaceutical Review of last year, showing kind of the hockey stick effect if you will of the interest in solving solubility problems in the industry.

As I mentioned with the advent of high throughput screening and significant advances in combinatorial chemistry you see how important solubilization technologies have become. It’s important to note that Captisol not only can make major drugs possible like Kyprolis which is a product for which Captisol is a critical component of the formulation, that's a product that truly would not be on the market today were it not for Captisol but it makes existing drugs better.

Simona will talk in a few moments about MDCO-157 PLAVIX which is the active; the clopidogrel is the active ingredient in PLAVIX is a perfect example of a drug that was begging to be delivered in an IV setting couldn’t be for solubility reasons and Captisol solved that problem.

Also important to note that Captisol is paying us today. We've already received our first commercial royalty payment from Onyx for Kyprolis and we have a number of other existing deals, dozens of “Shots-on-Goal” that came with the CyDex acquisition and our [BV] team is continuing to add new deals all the time to create a source of future royalty revenue.

So I'm going to spend a few moments talking about the multiple ways that Captisol can create value through different deals and what you see here across the slide moving left to right are different types of deals and different sorts of problems that Captisol solves for our partners.

And we have examples of each of these deals; I'm going to dig into them more deeply in the following slides. A single compound deal is a situation where we will have a partner, maybe a biotech company sometimes a big pharma who has a single product that they cannot solubilize. They have an NCE, they can't figure out a way to formulate it and get it into the clinic.

Obviously, we defined license fees milestones, royalties all of these examples have those elements work up a deal with them and help them progress into and through the clinic. A platform deal is one in which generally a larger pharma partner may have a whole class of molecules or a whole pipeline of early stage discovery molecules that they know from the start will be active but may have significant solubility problem.

So Captisol creates a readymade way for them to solve that issue and progress those programs through and then the last is what we call an enabled product deal. So, this is where we've done some work to illustrate proof of concept invested in a targeted way and some CMC work and maybe even some early stage clinical work and provide the partner a late stage product with a clear development path that can fill perhaps a pipeline hole that they may have.

So I'm going to start-off first with a single compound deal. We've talked a little bit about Kyprolis obviously. This started out as a single compound deal. So Proteolix had carfilzomib which is the active ingredient in Kyprolis. They approached at the time CyDex Pharmaceuticals to help them solve that issue.

Onyx obviously acquired Proteolix, Ligand acquired CyDex and that's how we became [merry] together around the Kyprolis product. Obviously, the active ingredient is more soluble with Captisol which leads to better absorption, better safety and efficacy profile and ultimately lower drug cost.

This is a laboratory photo, an illustration to those of you that have followed Kyprolis closely obviously a program that is very high profile. If you looked at the approved label, each vial of Kyprolis contains about 60 milligram, contains exactly 60 milligrams of active ingredient which is carfilzomib and 3,000 milligrams of Captisol. So Captisol is needed at that level to dissolve Kyprolis to get an idea of how critical Captisol is to the formulation. Q3, Onyx launch the product had a partial quarter of sales, greatly exceeded analyst expectations with $18.6 million of sales in its first partial quarter and we agree within that we see them as unlocking significant potential for this product.

You see there are royalty rates which we disclosed previously and then here the range of analyst projections for Kyprolis, clearly an important medicine that has blockbuster potential.

Let me switch gears now and talk about another example of our Captisol deal which is the platform deal that I mentioned earlier. Last year, we executed a platform license deal with Eli Lilly. They're permitted to nominate an unlimited number of Captisol-enabled candidates from their internal pipeline.

They recognized they had a number of compounds that could benefit potentially by using Captisol. They paid us a $1 million upfront and a milestones and royalties have been predefined in that deal, although they are not disclosed. We hope to disclose them as these products move further through Lilly’s pipeline and we see this as great validation not only for technology that’s used in a number of commercial products already but are excited to see a significant player putting significant resource behind Captisol-enabled programs.

And then lastly, I am going to touch on a Captisol enabled product deal example. Late last year, we licensed worldwide exclusive rights to the medicine’s company for Captisol enabled IV clopidogrel. As I mentioned, that’s the active ingredient in PLAVIX. With Captisol, we're able to produce a novel IV form which increases onset of actions and becomes critical in the critical care settings where PLAVIX is often used.

So, we completed CMC in early clinical PK studies for IV or for Captisol enabled IV clopidogrel that allowed us to just strike a deal with higher economics and licensing a larger upfront and double-digit royalties and MedCo is progressing this program which we see as an important solution in care medicine.

With that I am going to introduced Simona Skerjanec, Simona heads Global Competitive Strategy for The Medicines Company and she’ll provide an update on MDCO-157.

Simona Skerjanec

My name is Simona Skerjanec and I am responsible and one of the Vice Presidents of The Medicines Company responsible for cardiovascular antiplatelet business.

I will be making some forward looking statements. So please refer to our SEC filings for specific risks. Now, The Medicines Company and some of you are now be familiar with us is focused in acute intensive care hospital medicine.

Our purpose is to improve clinical outcomes including saving lives in acute setting and doing it in an economically viable way for our customers. Our vision is to be the leaders in acute care setting and lead with customer value, leading portfolio depth and do that with hiring high caliber people to create a financial performance that's sustainable.

Acute peer market is large, according to WHO there will be 68 million deaths in 2013, and leading with that will be heart attacks. So cardiovascular disease is a fairly substantial proportion of the acute market and its growing. It is growing globally. There are some shifts in geography as you can see, although the North America and Western Europe will continue to the need for acute care medicine will grow, markets such as India and Far East will become a very important market for this particular area.

We have proven ourselves in this setting with our flagship product Angiomax, Angiox in Europe and we are a market leading solution as an anticoagulant in patients undergoing PCI that is Percutaneous Coronary Intervention, patients who require angiography and usually receive a stent. We have treated about 5 million patients worldwide. We've saved lives. We have improved clinical outcomes and importantly we have saved a tremendous amount for our customers.

We are also experienced in developing products in acute care markets. Our pipeline is fairly substantial and it’s a late stage pipeline. We have an acute care anti infect oritavancin under development, MDCO-157 which we've talked about already today. We also have cangrelor and we have a MDCO-216 which is in an earlier stage of development. So MDCO-157 which we call Captisol enabled IV clopidogrel of The Medicines Company has a potential to be used as an IV option in situations where administration of oral platelet inhibitors is not feasible or desirable.

The regulatory pathway is fairly straightforward. We can use the 505(b)(2) provision, FDA provision to use pharmacodynamic data by equivalence data to be able to register. When I say not feasible or desirable I mean the patients who come to the hospital and need to be resuscitated. So those that cannot swallow, those that are incubated, those that are in shock, those that are nauseated and are vomiting.

However what I also mean here is that acute coronary syndrome patients, particularly acute MI patients, patients in acute heart attack, actually cannot absorb oral drugs. Therefore they can't make them available very fast to be able to act at a time when they need to act in acute setting. This is the data that was published back in 2009, actually it was one of the cardiology experts opinion leaders in Netherlands that have treated a number of STEMI or acute MI patients with 600 milligrams of Clopidogrel Plavix and compare the rate of absorption and also the extent of absorption to healthy volunteers.

And what you can see here is that absorption is delayed and the extent is lower. And I always think that pictures tell a better story than the 1000 data points. So this is an image from one of the interventional cardiologists who was treating a patient for percutaneous intervention took, and what you can see that was a patient who had a prior [cabbage] for those of you who are familiar with these images. But what you see in the stomach is 475 milligrams Plavix spills, which have not yet been dissolved and have not yet been obviously absorbed and can’t work when the doctor is performing their intervention.

So I would conclude that Captisol enabled IV Clopidogrel has a potential to meet significant unmet need in MI, and because the bioavailability of oral agents in acute cardiovascular setting is not ideal. I would also like to thank Ligand for the courage to partner with us, because we believe we're the right partner. We have the right vision. We are focused in acute care. We know how to commercialize and develop these products and we're global.

So with that I will pass it on to Nishan. Thank you.

Nishan de Silva

Thanks Simon. I am going to touch on Ligand’s business model as well as highlight several of our portfolio assets. Ligand’s business model quite simply is focused on Shots-on-Goal. If you look at the industry average probability for success for a single drug advancing through clinical development and regulatory approval, the results are quite low, and so what follows from that is that most drugs fail but importantly not all, and so operating in this industry dynamic, we believe the way to maximize the odds of business success, or to have a large and diverse portfolio of programs and we believe we have built a robust portfolio of partnered opportunities.

Ligand portfolio is now 70 Shots-on-Goal. The portfolio has had a great year, highlighted by the approval of Kyprolis release here as Matt discussed; Promacta new indication, hepatitis C just a couple of weeks ago. At the beginning of the year, the portfolio was 60 partner program, so you’ve seen some nice growth here in the course of the year and we have seen good additions of the early phase of the portfolio and the preclinical and the phase 1 throughout the year. And now it’s approximately 43% of our programs are Phase 2 or later.

On the right hand of this chart, I have highlighted several key programs in our portfolio, we have already touched on Kyprolis and MDCO IV Clopidogrel. I am going to highlight and spend sometime on most of the other ones that we have listed here. Promacta is our single largest value driver, as you know it’s an oral medicine to treat platelets. It was first approved with the end of 2008 to treat IDP and the recent approval that I mentioned in hepatitis C just a couple of weeks ago.

Long exclusivity window here with patent protection through 2027, and importantly hepatitis C is not the last step for Promacta here in terms of the label, there’s over 25 active clinical trails that are ongoing, and Ligand has a significant [growth] industry in the program as I have highlighted on the bottom of the chart.

The country is shaded in orange on this space represent countries where Promacta is currently approved, what is up to 91 countries now. So a significant global footprint for the drug. This chart shows Promacta’s revenue over the last seven quarters, broken out into the four geographic regions as GSK reports it. So US, Europe, emerging markets Asia Pacific and rest of world.

As you can see there’s continued strong growth for the drug across geographies. We are pleased by the approval for Promacta and hepatitis C just a couple of weeks ago, the official indication is for the treatment of thrombocytopenia in patients with chronic hepatitis C to allow initiation and maintenance of interferon-based therapy.

GSK has a commercial and scientific presence focused on herpetologist and infectious disease specialist, and they do have the separate sales force that is now up and running and promoting the drug in this indication.

Taking a step back in terms of the hepatitis C landscape, obviously there has been and continues to be a major industry investment in achieving an (inaudible) free regiment. However, we think there are still is a meaningful opportunity for Promacta for several reasons.

The first is the (inaudible) will be coming off patent in the coming years and that leads to become a lower price therapy which then will come in more firmly entrenched as a standard of care in emerging markets. The drugs that are currently in development for hepatitis C [aren't] equally effective against all the genotypes are largely focused on genotype 1 and while genotype 1 is a predominant genotype in North America and Europe when you look at other geographies genotypes 2 through 6 are more broadly represented.

And so this graph here shows which is an excerpt from a Nature Outlook paper showing that in North America and Europe those purple bars along the bottom represent genotype 1. So you see North America and Europe that's a predominant genotype but a more diverse mix of genotypes across the other geographies.

And importantly I wanted to highlight that Promacta is not going after the universal hepatitis C patients. It’s really targeting the sickest patients with low platelets and its meeting a significant unmet medical need. To help frame the opportunity for a Promacta and hepatitis C, there's over a 150 million hepatitis C patients worldwide. But again this is not the market that Promacta is going after. It’s going after the sickest patients.

The GSK has said that in the US of the 4.2 million prevalent patients about 3.5% have low platelets and would be eligible for Promacta. That's about 147,000 patients. If you extrapolate that 3.5% to the worldwide to get an estimate there are at least about 5.3 million patients with low platelets worldwide.

So we ask the question, is it feasible for Promacta to capture about 100,000 patients over the next three to five years. And we believe the answer to that emphatically is yes. So 100,000 patients represents only about 2% of the patients with low platelets and so it’s not 2% of the 150 million, again we are focused on the sickest patients with low platelets, 2% of this roughly 5 million.

As I mentioned, GSK has said there is approximately 147,000 eligible patients just in the US alone. And so we think it’s feasible to get those 100,000 worldwide over the next three to five years and that would be roughly $2 billion revenue opportunity for GSK. So you can see we are excited about the percentage of Promacta in this important patient population with significant unmet medical need.

As I mentioned though hepatitis C is not the last leg of potential label expansion for Promacta. As I mentioned, it was approved at the end of ’08 for IDP, a couple of weeks ago for hepatitis C and there's many GSKs committed to oncology related thrombocytopenia for the drug and that ongoing trials in cancers like (inaudible) syndrome, AML and chemotherapy induced thrombocytopenia I'm going to touch on a couple of these to give you some additional color.

So at MDS these patients develop severe cytopenia and require frequent transfusions. There's excess bleeding can result in major complications or death in about a quarter of patients. And so they are coming up at [Asheville] this weekend GSK is going to present some Phase 2 data for Promacta and MDS patients looking at patients in MDS who have low platelets, who are ineligible for further therapies or relapsed or refractory to other therapies and looking at Promacta as a single agent.

And AML is a fast growing cancer. Here you have a problem where the abnormal cells crowd out the normal cells. Importantly, pre-clinically Promacta has been shown to inhibit leukemia cell growth and it is clinically intriguing because as you would expect given its mechanism as a thrombopoietin agonist it increases platelets but there's this preclinical signal as well that can actually have some direct effect in producing the proliferation of leukemic cells.

So there is going to be some Phase 1 dose escalation data AML presented at Asheville.

Early this year, there was some data published in New England Journal of Medicine for Aplastic Anemia. Aplastic Anemia is a rare disease where the bone marrow doesn’t produce enough cells and all three major cell lineages are affected. There is low red blood cells, low white blood cells, and low platelets.

So, this New England Journal article that was published in the middle of the year with an NIH sponsored study and looked at patients who are refractory to the standard care that these, care that these patients get which is immunosuppressive therapy and there at high risk for death and bleeding after they no longer respond to these therapies.

In the studies show that 44% of the patients had a response in at least one type of blood cell. So importantly, it is not only platelet response which is what you would expect given the mechanism. They also saw response in red blood cells and white blood cells and so that’s what made this data particularly intriguing because it has shown that Promacta has the potential to have an effect on other cell lineages other than just platelets.

So far, we've highlighted Kyprolis as Matt had discussed and Promacta which are two biggest revenue drivers as well as our late stage program, IV clopidogrel with The Medicines Company. We're excited about the depth of the portfolio. I mentioned 70 different programs and so I want to spend a few minutes just highlighting some of the other assets in our portfolio that hopefully gives some color around it and why we're excited about the prospects should the rest of the portfolio going forward?

The first program I wanted to highlight is a base inhibitor, an Alzheimer disease opportunities program is partnered with Merck. Elevated beta-amyloid levels are found in the brains of these patients and base inhibitors reduce beta-amyloid levels. Merck reported some single dose state that’s saw up to 92% mean reduction in beta-amyloid levels from baseline in the CSF and this program seems to be having a rising profile within Merck as well, just on their Q3 earnings call, their CEO highlighted the base program.

And just yesterday, you may have seen Merck is initiating a Phase 2, 3 study in mild to moderate Alzheimer diseased patients. This is going to be a 78 week study; double blind, randomized, placebo-controlled, parallel designed testing three doses of their drug against placebo.

In the Phase 2, portion they said they will have 200 patients looking at safety and in the Phase 3, portion could have up to 1,700 patients. So we are very pleased to see the late stage initiation of this trial, Alzheimer disease obviously a huge market opportunity significant under that medical need, and we think the base program could be an important program in this space. And so we are (inaudible) its entitled to royalties on compound.

Another late stage program we are partnered with Merck is [dyna cycline] which is an oncology drug. It’s a cycle independent kinase inhibitors, CDK is thought to be important regulator of the sales cycle, here Merck started or initiated a Phase 2 B3 study in Refractory Chronic Lymphocytic Leukemia recently, as good patent protection long (inaudible) window and we are entitled to milestones and royalties on this program.

The final partner program, I want to highlight is the women’s health asset that's a partner with Pfizer called the Aprela. Aprela has two main active ingredients and one is a selective estrogen receptor modulator or SERM and the other one get the one is PREMARIN. So the SERM that's in this compound is bazedoxifene. So bazedoxifene was discovered by Ligand, licensed to in the 1990s and now Pfizer is seeking approval for this drug. They filed for approval in Europe, beta indications for motor symptoms associated with menopausal and prevention of osteoporosis.

They filed in Europe early this year. They expect to hear back next year and again we are entitled to milestones and royalties on the program. All the programs I have discussed so far have been within our partnered portfolio. We did want to take a few minutes to highlight one of our late stage unpartnered programs we feel is a compelling opportunity that we are taking forward into pivotal trails shortly.

The premise of the program is that its based on existing marketed drug, but removes one of the [recipients] in that drug and replaces it with Captisol, which we feel creates a differentiated opportunity that has high value in the stem cell transplant conditioning regiment. It’s a low risk, late stage opportunity. We say low risk because its predicated on melphalan which has been around for years and physicians are familiar with, the activity profile is well known and late stage because we will be shortly starting a pivotal trial.

It’s a rare combination of a 505(b)(2) pathway which as you know a 505(b)(2) pathway is predicated on referencing data from an existing marketed drug and the potential for seven years of our specivity through orphan drug and we are currently evaluating whether we take this forward to market ourselves while also exploring potential interest in partnering with oncology focused companies. So Melphalan is a standard of care for stem cell transplant conditioning in multiple myeloma patients. This chart is meant to just provide a snapshot of the treatment paradigm in multiple myeloma.

So over the last 10 years these patients have enjoyed several new drugs that help their disease and things like Velcade, Revlimid, and now Kyprolis. There's also several drugs in late stage development that could approved in the coming years, but importantly all of these drugs while extending the survival of myeloma patients don't cure the disease. So the disease eventually comes back. And so stem cell transplant has continued to remain one of the best options that these patients have for a long term remission. So as these patients are living longer and longer 10 years ago they might get one stem cell transplant. But now as they are living along with these new therapies, we are increasingly seeing they are getting not one but potentially two or three during the course of their myeloma treatment.

So we commissioned some market research understand how stem cell transplant volumes are going to change over time. Multiple myeloma incidences is growing at a 1.7% a year in the US but stem cell transplants are projected to grow at nearly double that rate, and this is driven by not only patients getting a first transplant but also more and more receiving a second and third transplant. The current IV Melphalan market in the US is about 130 million and the majority of that use is in stem cell transplant conditioning. So we think that this market is well positioned for future growth in line with the volume of stem cell transplants.

So we believe we have the next generation Melphalan. The current product is called Alkeran and one of the key excipients of the drug is propylene glycol or antifreeze. It comes at a two vial preparation and has to be given over 60 minute infusions that's in the label and that's because its very unstable once its reconstituted it starts to degrade right away. So from the time the pharmacist reconstitutes it, it has to be, the infusion has to be completed in the patient within the 60 minute window. And so what our next generation Melphalan does is it takes out the antifreeze and replaces it with Captisol. It comes in a one vial formulation and its up to a 24-hour infusion.

It’s the importance of this longer window of infusion not only from a logistics perspective, but it opens up the potential for the drug to be given at higher doses over time, because limited to 60-minute window of infusion and potentially a slower infusion rate and so as you may know multiple myeloma cells are relatively slowly dividing and so there's a theory that by spreading the infusion rate or slowing down the infusion rate you can more closely match the rate of replication of these cells but eventually have a better eradication of myeloma cells.

So finally we feel that the business is in a great position. It’s been a great year, we are excited about the process going forward, and we expect that the news flow coming out of that portfolio will be robust over the next year as well and so we've highlighted some of the things that we expect to be hearing more about over the coming year on this page.

So that concludes our formal program. I will turn it back over to John.

John Higgins

Thank you, Nishan. Just a final comment or two and then we're going to have management come up and we’ll have a question-and-answer session. First, I would like to thank all of you for attending a great turnout today. The room is nearly packed, standing room only and I’ve got a report there is quite a long list on the webcast as well. So we really appreciate the attendance and the interest in Ligand.

Our goal today was to lay out the business we built and to draw from information from our partners and public third-party reports to give a picture for the future. We believe we're at a major inflection point. Our goal is to build the revenue, the profits and the cash flow, and we believe that we got the business model to do that. We're excited about the business we built. I want to thank our team, the team who is here as well as, my colleagues back at the office. It's a small team but passionate about what we're doing.

We're excited about being in the research business, participating in developing drugs to treat serious disease. We're equally passionate about building a financial growth story. Thank you for coming and with that I would like to invite my colleagues down and will open up the floor up for questions.

Couple of hands up.

Question-and-Answer Session

Unidentified Analyst

Thanks John and thanks for hosting today. I was wondering if you could dive a little more in to the Promacta opportunity in HCV. Obviously, you are looking at it as a completely global platform with regards to it opportunity. From a devil’s advocate perspective, is it possible to interpret the US opportunity as seeing some potential headwinds as you might have alluded to because of the direct anti-virals or how it could potentially compete their or be included?

Nishan de Silva

So as you know the enable studies were with the patients with low platelets and it was in combination with interferon and ribavirin. So we think in the near term that’s what in that slide we talked about the opportunity over the next three to five years. It will take a couple of years for the overalls to reach the market, and we think there will still be an opportunity for the sickest patients. But to your point is not going to be an infinite window of opportunity, and so we see the near term an opportunity in the US and then continued longer term opportunity in the emerging markets.

John Higgins

And I will just add as well, its an important indication there is tremendous focus by company's and analyst investor in HCV. We are very pleased with GSK, their execution of the clinical regulatory management of running the programs has been A plus, and everything we have heard so far they are very committed to herpetology, they understand this is an important medical and commercial opportunity. So we are excited about that and the other thing I will say just putting context for Ligand this is a very significant royalty.

The Kyprolis revenue potential is two to three times, what the street thinks Promacta will do, but a royalty on Promacta is four times the royalty, weekend on Kyprolis, so the royalty contribution of this product is very meaningful. There is question back here [Jean].

Unidentified Analyst

Why don't you guys could just give us an idea of how we should think about what sort of barriers there are to protecting Captisol and making sure from competitive standpoint that you are able to maintain protecting of the, how as maybe IP of the drugs that is solubilizes impact it or how does it impact that IP and then maybe a little bit about the Promacta IP and how long what duration that is, thanks?

Matt Foehr

Great, so I will comment on the question on the Captisol IP, we have protection on Captisol through 2029, so we have got a host of a few patent families with Captisol when we call the high purity family. We also got protection around the morphology of Captisol itself and then there are a host of other individual applications specific to certain formulations.

So there are certainly the intellectual property portfolio which we feel is strong. Additionally, too many of our customers some of the most important differentiating facts for Captisol are the way in which we manufacture the product as well. Not only the intellectual property in the patents but also the fact that it’s made to high standards to API type standards. Many of our partners are using very high amounts of Captisol in their products which is great for us from a material sales perspective but also important to them in terms of the performance of their profits.

John Higgins

And the Promacta royalty compensation matters through 2022, 2023 and there are other patent formulations and other series of patents that Ligand and GSK has through 2027.

Unidentified Analyst

(Question Inaudible)

Matt Foehr

Sure so just to repeat the question, it was about Promacta and the potential timeline in oncology related thrombocytopenia and indications. So GSK hasn't commented on timing of Phase 3 studies. You know the nearest sure thing is the Phase 2 ongoing MDS. There's a study also ongoing in chemotherapy induced thrombocytopenia on the Phase 1 in AML. And so they are kind of in the Phase 2 type phase where they haven't commented on timing of Phase 3.

Unidentified Analyst

Hi John. Of the 5.3 million low platelet HCV candidates how many of them are based in the US, I guess going forward what GSK has planned with respect to getting the HCV indication for Promacta in non-US territories?

John Sharp

So of the 5.3 million, 147,000 are in the US. That's a figure from GSK and they have said based on the prevalence of low platelets. And they have submitted in Europe for approval in the hepatitis C indication as well.

Unidentified Analyst

And do you expect the label expansion to impact pricing of Promacta?

John Sharp

I think it’s too early to be able to tell because they are still working at the dosing regiment and the length of therapy for the oncology related thrombocytopenia.

John Higgins

The quick answer is no. I mean there's nothing that we've heard or read that suggests there's going to be a change in pricing. With Promacta it was launched and the list of the retail price was as high as $45,000 to $50,000 a year. The question is, is how much a drug a patient uses on average per year and so for our modeling we are assuming on average about six months of treatment whether its an ITP patient or an HCV patient but we don't have any color on price changes for the HCV indication.

Unidentified Analyst

And how is your market share trended for ITP against end plate?

John Higgins

Very nicely. End plate is a pep to body that Amgen launched about the same time that Promacta came out. It’s a drug that also boosts platelets, it’s a once a week oral injection. In their first year of launch, GSK only had about $1 out of $6; one out of 15% to 17% of revenue was enjoyed by GSK.

Every single year with the rollout of new markets and just better performance in all the geographies, now GSK has about 38% approaching half of the revenue dollars for ITP. So they made a very impressive gains against end plate for that indication significantly, Amgen is not developing end plate for HCV. Promacta will really enjoy this market on to itself.

Unidentified Analyst

Amgen decided to join expand end plate towards some of the other indications?

John Higgins

Not the HCV. While we saw Phase 2 trial listed a year or so ago, we don’t believe there is much clinical activity against that indication to speak of at all. There have been ongoing studies in other indications, MDS but that program to our understanding was terminated. In fact there is label disclosure on the end plate label saying that the drug should not be used in MDS patients. There is ongoing work in other cancer indications, AML, CIT but it seems to be about similar stage as Promacta right now.

Unidentified Analyst

And just one more in Promacta, does the approval of the [FC] indication possibility resurrect GSK’s efforts in the chronic liver disease indication or is that still likely a (inaudible)?

John Higgins

That’s a great question. We believe that given the safety profile and the potential in CLD, I would say the safety profile with FC and the potential CLD that there is a theoretical path forward. We respect GSK for now they have said that they are not pursuing CLD. It's important to note that we have easily another 10, maybe 15 years of commercial life with this product and one thing is clear GSK, they are doing excellent job developing it and are investing significant resource. So while today, they have decided not pursue CLD at least they are liking, we still see a potential path forward but it will be down to road and we are eager to see what GSK has to say on that in the future.

Unidentified Analyst

Thanks a lot for the increased disclosure today, appreciated.

John Higgins

Thank you, we got a question back there?

Unidentified Analyst

I wish you could expand a little on your comments about Captisol manufacturing, in terms of what your current capacity is, how much it goes to good support clinical trails versus actual sales. What the total capacity is and what the timing is in your plans for expansion?

Matt Foehr

Great, questions. We actually earlier this year, we were very closely with our manufacturing partners Hovione based in Portugal; they have sites spread out around the world. This year, we actually invested in expanding our [drawing] capacity there, to bring us to over a 100 metric tones of capacity, so we have got plenty of upside or plenty of room in our capacity at this point. As John Sharp was mentioning and your question around sales, we do sell Captisol for clinical use and then also sell it for commercial use.

The margins are different for those because we enjoy royalty on the commercial sale but our mix from any quarter-to-quarter will change based on ordering from our partners as they progressed through larger clinical trails.

So we feel very good about our capacity and our quality standards. As I mentioned few times, we put a lot of effort towards validating the process and really building value around our drug master file that we maintain with the FDA. All of those things are extremely important to our partners.

Unidentified Analyst

(Question Inaudible)

Matt Foehr

Yes probably two-thirds and one-third, yeah.

Unidentified Analyst

(Question inaudible)

Matt Foehr

Yeah.

John Higgins

And just to illustrate the business the last several years virtually all of our sales have been clinical related. But now with Kyprolis we’ve got an important new customer that will be ordering we expect regularly for commercial use. We have one or two other customers that we think are on the cusp of going commercial as well. So a total Captisol material sales may increase, but the mix will evolve from heavy clinical sales to more of eventually in a year or two we think a 50-50 mix of clinical versus commercial.

Unidentified Analyst

(Question inaudible) Okay have been in the Abbott and the recently reported 7977 Ribavirin genotype 2, 3 study compared to ENABLE are these similar sort of status aortic patients or they.

Matt Foehr

In general there haven't been trials. The ENABLE 1 and ENABLE 2 trials treated at subset of really the sickest of the sick Hep C patients. Many of the trials that are running now in fact most all of them don't have patients in with the level of platelet counts that were; the low level of platelet counts that were required to get into the ENABLE 1 and ENABLE 2 trials. So those trials are treating a far sicker subset of patients.

Unidentified Analyst

We still haven't seen data with the interferon free in those sort of patients.

Matt Foehr

Not at this point no.

Unidentified Analyst

Okay and just a question for John. Can you remind us what the deferred tax asset was recorded for on your recent Q? How much is in valuation allowance and how you are splitting the two and how are you impairing it so to speak.

John Higgins

So right now we have just under $200 million of deferred tax assets and that's a big number I presented tax effected. So right now we have a full valuation allowance and so $190 million of assets, $190 million valuation allowance. Once we show that continued profitability, we will release all of some portion of that valuation allowance.

Unidentified Analyst

(Question inaudible)

John Higgins

Yeah you have to show consistent profitability.

Unidentified Analyst

Hi, I have a big picture question for you guys. As you said in the beginning of the presentation that you don't need to sink any additional revenue into growing the business, but just wondering how you are thinking about potential acquisition and whether you are in fact planning to grow the business inorganically and that's my first question.

John Higgins

Sure. Our model is built on acquisitions. We don't have to acquire unlike let's say specialty pharma company that often keep buying revenue. We don't have to acquire, but in this industry we've been around for 30 plus years. We think there's a lot of inefficiencies of cost, financial investment inefficiencies that create opportunities for an operating company like Ligand to acquire or merge with other small cap biotech companies. We can do stuff with these companies that a traditional investor can’t.

Traditional investor could invest cash and owned 20% of the company, but they can’t restructure cut cost, they can’t decide which programs to fund, or benefit from the tax assets. So we do see opportunities and there are hundreds of public biotechs. Many of them aren’t a fit for us. Their cost, their commercial focus aren’t a fit. But we will continue to look at acquiring, but our focus is along the lines of deals we have done, where we can acquire companies, often, maybe distressed companies. They just had a major failure, they got quality assets but they are focusing on needing to do financial restructuring cost cut etcetera, but the programs are either fully funded and already partnered, which would be a perfectly fit with our portfolio or the early research that is unpartnered where we can invest in that, answer a few questions and within a year or two, get new deals.

So those are the type of targets, whether they are asset purchases or corporate purchases. So yes we're looking to expand in that way. Having said that, we don’t have to acquire, our focus will do discipline deals, efficient transactions. We aren’t saying our expenses will never increase, but for the business we're looking at right now, given the turn over of expenses annually, we can answer today’s question, next year we can fund this year’s budget for next year’s programs and we do not believe we need to increase expenses to see revenues and cash flows grow.

Unidentified Analyst

Okay, and the second question I had was on the Melphalam program. I keep asking about this, but you guys are deciding whether or not to keep it market it yourself, or partner it. Just wondering if you’ve moved any further along that thinking and also if you were to commercialize it your self, how much spending you estimate that would require?

John Higgins

Right. So Mephalam is a very unique program in our portfolio. it came by way of our acquisition of CyDex and our partner, Simona, who talked about the MDCO program, while it's very different, it's a (inaudible) up the opportunity that X ray she showed with the unabsorbed oral PLAVIX pills really speaks to the benefit of having an IV product. Now in this case, IV Melphalan already exist but we can take out the toxic excipients, we can slow down infusion rates, we can have a drug that is unlabelled currently Melphalan is not used on label. So there is a whole variety of reasons why this is a very interesting product opportunity.

Now it’s a 505(b)(2) of bioequivalence trial, low cost, fairly short study, quick to get an answer, we think a fairly high probability of success, that's our regulatory pass forward. We believe that we could be within year and half to two years of having an approved drug for and as [Nishan] showed over a $100 million specialty oncology market in US alone.

So to your question, what we are going to do with it? Well, we are evaluating either partnering it and we are in discussions with about a dozens specialty oncology companies right now, and it could be a very, very interesting a plug and play product, late stage product that could fit very nicely in this category of specialty oncology players.

However, we are also evaluating a commercial model where we would sell it ourselves. Again, we are not a commercial company; we don't expect to become a big commercial infrastructure; however there are 200 transplant centers, 200 centers cover about 80% to 90% of the procedures.

So we believe the 10% to 12% commercial team could cover this market. This could have a 90% to 95% gross margin a very high gross margin and a very low commercial cost. So we are evaluating doing ourselves, but if we are committing to partnering or the commercial launch, we are going to execute the clinical trail and over next we expect 12 months to 15 months we will get an answer whether or not we are going to partner this program. We've got a question from Ed.

Ed Arce - MLV & Co.

I really appreciate the actual disclosure and the long-term outlook. A couple of questions, one related to Irina’s previous question, you know given that you will have sensibly a lot of excess cash in the near-term that you discussed the two plans for that and the fact that you look at probably about 15 in licensing deals on an average year. I am just wondering where; how you look at next couple of years in terms of the ability to find, continue to find quality assets that fit your criteria as opposed to the other option which might be actual share repurchases or potentially a dividend?

John Higgins

Right. Good question. We know what we are going to be working on but we can't predict the future. I’ll say in terms of the business given the models that we are sharing with investors, the goal for the next two years for cash is to pay down debt. We have about $27 million to $28 million in debt. We believe we can pay that down on schedule and we are paying essentially 10% to 10.5% interest.

So when you think about the P&L that interest off that principal will go away. So again further improving our efficiency and profitability. As far as acquisitions, we have bought a public and private companies Pharmacopeia, Neurogen, Metabasis. We bought CyDex. We are looking at new delivery technologies, another Captisol type platform technology. As Matt has shown, we think that beyond CyDex there are other stabilization or solubility technologies that could be a dynamite fit.

So we are evaluating that as well as other companies in the vein of what we've done already. We are very disciplined in deal making though. We want to do fair deals. We want to do ideally friendly deals but we are very disciplined. Nishan who runs our corporate development team. We've got a tremendous team. We are looking at 50 or 60 targets right now. Most programs, most targets we look at are not a fit. So we can't predict the future but whether they are small acquisitions for a few million or larger acquisitions, it really has to be seen how our process works out.

Ed Arce - MLV & Co.

And then one other Kyprolis, given the early success and the launch in multiple myeloma I know that you discussed this a bit but if you could just share with us where they are right now in looking at near-term follow on indications and how they expect to grow that?

Matt Foehr

Yeah. The team at Onyx is obviously progressing to Phase 3 trial. It was approved on early on in Phase 2 data obviously in approval earlier this summer. So we expect to see that data come out next year and they are obviously committed to continue to invest in the asset and add more indications to it.

So we couldn’t be more pleased with the effort that Onyx is putting behind Kyprolis obviously not only on the commercial side but also on the R&D side. You know I think additionally expanding the indication it’s something that's very central to their plan.

Ed Arce - MLV & Co.

They haven't disclosed anything in particular?

Matt Foehr

No, only that they got more Phase 3 data coming up.

Ed Arce - MLV & Co.

(inaudible) because of the (inaudible) is just still developing second generation TPO Agonist?

John Higgins

They have not discussed publicly what they are doing with the [back] molecule. Ligand, in our history, like SERMs and SARMs and other classes of drugs, we have a very rich library of TPO [Nomadics], and the initial program was around Promacta and then in 2008, they did a second licensing deal.

We received $5 million upfront, $170 million potential milestone, 16% back in royalty. They had the molecule. It has different pharmacological features. We're in active dialog with GSK about the path forward. We think with longer patent life and different features, there is a different path forward, but they haven't announced what they are doing with that program. They are basically reserving any comment on that right now as they focus on Promacta.

Ed Arce - MLV & Co.

And you said that if they go forward works and then commercialize, it's a 16% royalty?

John Higgins

It is a 16% royalty, correct. We share a small amount of that with Rockefeller but that is the nominal royalty.

Okay, thank you. Great questions, great attention, really appreciate the turnout. We have a lunch. We welcome all of you to stay, enjoy a sandwich or lunch with us, ask us more questions. We do have a takeaway gift, a little (inaudible). It's a “Shots-on-Goal” hockey stick. Alright, it's a miniature hockey stick. We're devoted to this business model. We're very excited about it. Take that home, take one or two or three, whatever for the kids, enjoy that and we look forward to keeping you updated. Happy holidays.

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