Interview: Ligand Management Says Product Diversification Reduces Its Risk

| About: Ligand Pharmaceuticals (LGND)


Ligand Pharmaceuticals is an emerging biopharmaceutical company listed on the Nasdaq.

With more than 90 shots on goal and several revenue driving opportunities in 2014 alone, investors should watch it very closely.

In order to gain more insight on this opportunity, we reached out to Matthew W. Foehr, executive vice president and chief operating officer.

I recently conducted an email interview with Matthew W. Foehr, executive vice president and chief operating officer of Ligand Pharmaceuticals (NASDAQ:LGND). Mr. Foehr has more than 18 years of experience managing global research and development programs. Prior to joining Ligand in 2011, he was vice president and head of consumer dermatology, as well as acting chief scientific officer of dermatology, in the Stiefel division of GlaxoSmithKline (NYSE:GSK). Following are excerpts from the interview:

In layman's terms, could you tell us what Ligand is all about?

Ligand is about great science, early-stage product development and strategic deal-making, coupled with a very lean corporate infrastructure. We have a strong, company-wide commitment to maximizing cash flow. By diversifying the portfolio of assets across numerous technology types, therapeutic areas, drug targets and industry partners, we offer investors a de-risked opportunity to invest in the increasingly complicated and unpredictable pharmaceutical industry. We believe Ligand has assembled one of the largest and most diversified portfolios of current and future royalty-generating assets in the industry.

Could you give a technical explanation?

Our drug candidates are based on various technologies and mechanisms of action, and address a number of therapeutic categories, including thrombocytopenia, multiple myeloma, diabetes, hepatitis, muscle wasting, dyslipidemia, anemia and osteoporosis. Captisol is a patent-protected, uniquely modified cyclodextrin whose chemical structure was rationally designed to enable the creation of new products by significantly improving solubility, stability, bioavailability and dosing of active pharmaceutical ingredients. We have established multiple alliances with the world's leading pharmaceutical companies, including GlaxoSmithKline, Onyx Pharmaceuticals -- a subsidiary of Amgen (NASDAQ:AMGN), Merck (NYSE:MRK), Pfizer (NYSE:PFE), Baxter International (NYSE:BAX), Lundbeck (OTCPK:HLUYY), Eli Lilly & Co. (NYSE:LLY) and Spectrum Pharmaceuticals (NASDAQ:SPPI).

Are you encouraged by the current revenue growth of Ligand?

Our revenues reflect royalties on products we have licensed to others for commercialization, milestone payments on partnered assets and sales of Captisol. For Q1-14, total revenues were up 37% versus the prior year, and royalty revenue was up 35%. Our guidance calls for full-year revenue growth of 27% to 31%, building upon growth of 56% in 2013.

How is Ligand positioned for future revenue growth?

Future revenue growth will be driven by royalties on currently marketed drugs for approved indications, royalties on currently marketed drugs for new indications and new geographies, and by royalties on new drugs we have licensed to others. Many of our partnered assets have step-ups in royalty rates as certain sales levels are met. We also foresee growing Captisol sales for both commercial and investigational products, as well as a steady stream of milestone payments.

Is there any aspect of your business operations that is being overlooked by Wall Street?

We believe Wall Street generally understands our business, but note that our business model is atypical in the biotechnology sector. It is not our intention to develop and test products through to regulatory approvals and then manufacture and commercialize them, but we also don't have the expensive infrastructure and clinical trial costs "traditional" biotechnology companies have. Our risk profile is vastly reduced compared with industry norms owing to the large number of both partnered and unpartnered assets we have. We currently have more than 90 programs that are being fully funded by partners, and if there's a data point that Wall Street does not fully appreciate, it's that our partners are expected to spend approximately $800 million this year alone in R&D dollars on assets they have licensed from Ligand.

Ligand has established a multitude of collaborations, the majority of which are developing Phase I compounds that have a low rate of success (around 12.1% for all non-oncology indications combined, and only 6.7% for oncology indications). Is it fair to say that Ligand does not expect that the majority of the 45% of compounds in Phase I trials will be successful?

While 45% of our portfolio assets are in Phase I development, 36% are in Phase II, Phase III, approved or on the market. We are optimistic about our earlier-stage assets, but also are realistic about documented rates of success by stage of development and by therapeutic indication. In order to thrive in an industry where most things fail, Ligand believes that a very large portfolio of assets, or "shots on goal," is needed to overcome the odds. Today, our portfolio stands at more than 90 shots on goal.

Do you know how many compounds in development are targeting oncology and non-oncology indications?

37% of our programs are in oncology indications. Beyond that, 16% are in inflammation, 10% are in CNS, 10% are in metabolic disease, 8% are in blood disorders, 4% are anti-viral, 4% are in cardiology, 3% are anti-microbial and the remaining 8% are in various other indications.

Can investors expect that Ligand will continue its rapid rate of acquiring collaborations?

We pursue acquisitions and licensing opportunities that make excellent strategic and financial sense, and do not have minimums, maximums or quotas as to the number of deals and the timing of those deals. We operate in the best interest of our shareholders, and typically have a number of dialogues underway at any given time - although it's hard to predict which dialogues will results in agreements and when.

Considering the stock trades on consistently low volume, do you have any specific plans to increase awareness of Ligand?

We do not believe our average daily trading volume is an impediment to investor interest, yet there's always room for more volume. We have a comprehensive and active program of outreach to current and potential investors and analysts, including participation in a number of healthcare and growth investment conferences each year. We believe our communication with Wall Street is appropriately frequent, and we pride ourselves on being transparent.

What compound currently in clinical trials is most promising?

We are supportive of all our compounds, but note in particular that two products are awaiting upcoming regulatory determinations (Promacta for severe aplastic anemia and Carbella for seizures), and five are currently in Phase III testing.

Do you have an explanation for why Kyprolis featured a 1152% increase in revenue growth YOY? What other marketed products are exceeding revenue expectations?

Kyprolis was developed by Onyx Pharmaceuticals, which is now part of Amgen, and it is responsible for commercial activities and sales. Kyprolis was approved by the US FDA in July 2012, so the product is still in the relatively early stages of commercialization. Of note, we collect royalties on product sales on a one-quarter lag, meaning, as example, we receive royalty revenue on Q1 product sales by Amgen in Q2. We cannot comment on any product exceeding revenue expectations, as we do not have public guidance or expectations on sales of any partnered product.

Which collaborations do you view as most valuable to Ligand's long-term growth?

All our collaborations are valuable drivers of our long-term growth, but our multi-year alliance with GlaxoSmithKline for Promacta is arguably the centerpiece of our partnered portfolio. The Promacta opportunity is being well managed by Glaxo, including for multiple indications and multiple geographies. Promacta is currently being sold in 95 countries, and the drug has various approvals for a total of two different indications, with three to four more indications in clinical trials or pending approval. Our tiered royalty on sales of Promacta ranges from 4.7% to 9.3%.

What makes Ligand a compelling stock to buy or sell?

Ligand is worthy of an investor's due diligence for multiple reasons. We are a highly diversified biotech company focused on maximizing cash flow, with a vast portfolio of assets assembled through our "Shots‐on‐Goal" business model. We have more than 90 fully funded partnerships and programs, 10 potential revenue‐generating programs by the end of 2014 and more than 20 revenue‐generating programs projected by 2020. We have a successful research engine driving new clinical data, technology and licensing deals, and a significant calendar of substantive news flow over the next 12 months. From a financial perspective, we are highly profitable and cash flow-positive, with significant growth projected in the next few years.

What is the next potential value-driving catalyst that investors can broadly expect?

In terms of catalysts by our partners, Promacta continues to be in the news, and we expect to see both Phase III data in Pediatric ITP, as well as regulatory action for the sNDA for the Severe Aplastic Anemia indication in the second half of this year. Additionally, Pfizer expects regulatory action in the EU for Duavee, and Merck expects regulatory action for Noxafil-IV in the EU. Amgen also expects additional Phase III data for Kyprolis in Q2/Q3.

In terms of catalysts by Ligand, we will be presenting clinical data from our recent first-in-human trial for our Glucagon receptor antagonist program, LGD-6972, for Type 2 diabetes at the ADA meeting in San Francisco in mid-June. We see this program as one of our most promising unpartnered assets.

There have been a lot of insider sales recently, with little-to-no purchases whatsoever. Could you explain this trend?

Stock sales by insiders are conducted for any number of reasons, including for personal financial and tax planning, and expiration of options grants, among others. Insiders' interests are closely aligned with investors' interests, and as a company, we are laser-focused on creating shareholder value.

Could you please explain why Ligand's risk profile is diversified?

We have more than 90 programs that are partnered out and are fully funded by those partners, and multiple additional programs that are not yet partnered. There also are numerous companies testing new drugs that are formulated with our Captisol technology. Our programs are in eight primary therapeutic areas, with a particular concentration in oncology, CNS, inflammation and metabolic disease. Our partners range from global Big Pharma to specialty biopharmaceutical companies to relatively young privately-held firms.

Is there anything else you would like our readers to know about Ligand?

Beyond company facts, figures and the reasons Ligand is worth an investor's time to analyze, there are the intangibles that characterize Ligand. We are a small company in terms of headcount, but all 18 Ligand employees share an unwavering commitment to the success of our company, to our business model and to our financial performance. Our corporate culture is characterized by a positive, "can do" attitude, along with hard work, and a strong sense of camaraderie and a focus on driving shareholder value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.