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Summary

  • Ligand Pharmaceuticals has been the subject of 3 intense bear articles by the same author, predicting demise of the company.
  • Due diligence reported in this article reveals the value proposition for Ligand remains strong.
  • 4 revenue and EPS models were developed, with 5 year revenue CAGR ranging from 13-25% and EPS CAGR from 22-40%.
  • Upcoming readout of two Phase 3 studies for Kyprolis (Amgen) have a good chance of having positive outcomes, which could result in a 10-15 % price appreciation for Ligand.
  • The base case valuation provides a target stock price of $87.

Ligand Pharmaceuticals (NASDAQ:LGND) has been the subject of 3 extremely negative articles in Seeking Alpha over the past month by the same author, Amvona. Not only is this author short on this stock, he/she predicts the company has no value and will soon be out of business. As can happen with a small cap stock with low trading volume, these articles have created uncertainty and have moved some investors to the sidelines. The shares have dipped a few percent over this time, but the stock has not cratered since these articles began coming out, perhaps because the fatal flaw with the company has not been well articulated nor substantiated. As an investor in Ligand, I decided to carry out further due diligence to see if the short case had any merit.

In this article I present my due diligence on the prospects for the company and, in particular, focus on analyzing the worst case scenario for the company over the next 5 years. To summarize my findings, the value proposition for Ligand remains strong and I see no reason for long-term investors to worry, much less panic.

From Chaos to Profitability - The Royalty Model

Ligand Pharmaceuticals has been in business for a tumultuous 27 years and has traded as a public company since 1992. Ligand at one time had 650 employees, several research sites, lucrative collaborations with major pharma companies and a few marketed drugs - but remained unprofitable throughout most of its history. The stock price reached highs of $130 in Feb 2000 and $128 in Apr 2004, but plummeted to a low of $9.5 in Sept. 2010. In 2006, the Board began a massive restructuring and raised $470 million in cash in late 2006 by selling all of the company's commercial assets. Part of this cash was used to pay dividends and repurchase shares while the rest was made available for partnerships and asset purchases. As part of the house cleaning, John Higgins was brought in as CEO in 2007. Under his creative leadership, Ligand has made a remarkable turnaround and has developed a unique and profitable business model based on royalties - it acquires and develops royalty revenue generating assets.

During the years 2007 to 2009, Ligand acquired a number of troubled small companies at low cost. For $60 million in cash and 15 percent in company stock, Ligand acquired 60 drug candidates. Most of these deals offered milestone payments and single-digit royalties to Ligand. The mission of the company became to acquire enough assets such that royalties could provide the basis of a profitable business. As we will show below, Ligand has succeeded in its transition to a royalty-based company, but is currently still dependent on a small number of drugs. The company has many other drugs in the pipeline that should diversify future revenue growth. The attraction of this business model is passive income generation. Ligand has only 18 employees, so the overhead costs are very low and most of the revenue generated goes right to the income statement.

I will next review in depth the two major drugs, Promacta and Kyprolis, that Ligand currently relies on for most of its royalty revenue and are key drivers of future revenue growth as well. The bear argument maintains that both of these drugs will have little or no revenue in the future, leading to the demise of the company. We hope to show the bear arguments against both of these drugs have no merit.

Promacta - Revenue "Going Away?" No Way!

Royalties that Ligand receive from Promacta sales comprise the largest portion of their current revenue and are very important for the future health of the company. Promacta is currently a GSK drug but will be transferred to Novartis as a part of a deal in which the two companies swapped assets. It is unclear whether marketing teams for the drugs involved in the transfer will be part of the trade or whether existing teams within the companies will take responsibility. I don't see any sudden gap down in sales due to the transition. On the contrary, long term this is likely to be positive for Promacta sales as Novartis sees value in the drug as a part of its oncology franchise, a new and significant opportunity currently being pursued.

First approved in 2008, Promacta is an oral drug that treats thrombocytopenia, or low platelet count, that can lead to excessive bleeding. A summary of the current and future use of Promacta is outlined in the figure below. The drug is currently approved for two indications, idiopathic thrombocytopenia purpura (ITP) and in conjunction with interferon therapy for patients with HCV-induced thrombocytopenia. A third indication for aplastic anemia was filed in Feb 2014, and with a priority review, should be approved by Aug 2014. GSK also recently reported positive results for Promacta in pediatric chronic immune thrombocytopenia and intends to file a supplemental NDA this year. GSK is actively studying Promacta in the cancer setting, which is expected to be a future growth driver as low platelet count is a major side effect of several cancer therapies.

Promacta Indications, Current and Future

Source: Ligand presentation at Roth Capitol Health Conference, June 24, 2014

The revenue growth for Promacta since launch in 2009 is presented in the figure below. The revenue data are provided on the left-hand Y-axis and the Ligand royalties on the right hand Y-axis. Sales in 1Q14 (not shown) were $80 million, a 30% YOY increase. Importantly, only 38% of sales in 1Q14 were from the US, where the growth rate is slowest at 19%. Europe, Japan, and emerging markets had growth rates of >40%.

Source: Ligand presentation at Roth Healthcare conference, June 24, 2014

The main competitor to Promacta is Nplate, a once-weekly injectable drug from Amgen that was also approved in 2008 and is currently only approved for one indication, ITP. The chart below, courtesy of an Oct 2013 Seeking Alpha article, presents a comparison of sales of Nplate vs. Promacta over 6 quarters from 1Q12 to 3Q13, showing the gradual growth of Promacta market share. The author of the Seeking Alpha article attributed the growth in Promacta market share to the approval of the HCV indication. However, this indication was not approved until Nov 2012 so the gains made by Promacta throughout 2012 were not due to additional revenue from HCV patients. We note that all revenue through the end of 2012 for Promacta was generated from the single indication in ITP.

Source: Oct2013 Seeking Alpha article

The bear argument maintains Promacta sales will completely disappear due to the all-oral regimens for HCV that will eliminate the need for interferon use in the near future. However, it is clear that most of the sales of Promacta are derived from ITP. Revenues from HCV have only begun to contribute since 2013.

Amgen only has a single indication of IPT for Nplate. Nonetheless, Nplate continues to grow with sales of $113 million in 1Q14 (18% YOY growth) vs. $80 million for Promacta (30% YOY growth). Nplate is expected to have peak sales of $590 million in 2020 based on a report from Companies and Markets.com. The point is that Amvona's assertion that there is no market for ITP is absurd - the ITP indication is viable and both Promacta and Nplate are expected to continue to grow revenues from ITP over the next few years, although at a slowing pace as this market begins to saturate. Most additional growth for Promacta will come from the other indications that are in progress. None of these indications has large patient populations but collectively can add substantially to the revenue growth of the drug.

In the June 24, 2014 presentation at the Roth Healthcare conference, Ligand management argued that use as an adjunct therapy for HCV may still provide future revenue for Promacta:

  • Even with all-oral therapies that eliminate the need for interferon, many late stage HCV patients with cirrhotic livers do not generate adequate levels of platelets and may continue to need Promacta therapy.
  • The all-oral therapies are rolling out more slowly across the rest of the world than the US, so interferon-based therapies will not disappear for some time.
  • There are an estimated 150-200 million individuals worldwide infected with HCV. Even if only a tiny fraction of these are treated with Promacta, significant revenue will result due to the $10- 20K cost (depending on region and dose) for 6-months of Promacta treatment in conjunction with interferon. 5000 patients x $15K = $75 million.

Finally, we note that interferon use is declining rapidly. Roche reported their interferon drug Pegasys declined 19% in 2013 and 19% in 1Q14 while Merck's Peg-intron declined 24% in 2013. If Promacta was being used primarily for HCV patients taking interferon, we should have already seen rapid declines in Promacta sales in 2013. However, the opposite occurred with growth of 40%.

Our analysis above has shown that most of the current revenue for Promacta comes from indications other than HCV. Therefore, we expect revenue from the HCV patient population to remain a small fraction of Promacta sales going forward with revenue growth coming from the newer indications just beginning to roll out.

Promacta Revenue Estimates

In October 2013, GSK provided analyst estimates for Promacta sales through 2020. We note that in Oct 2013 the imminent launch of all-oral HCV regimens was common knowledge so these analysts would have been factoring this into their forecasts for use of Promacta in HCV patients. As seen from the graph, the ranges are quite large, from a low of $400 million per year to well over $1B over the 5 year period.

Source: Ligand presentation at Roth Healthcare conference, June 24, 2014

For modeling, we will use the low estimate as the worst-case scenario and the average estimate as the base case. For 2014, we know the growth rate in 1Q2014 was 30% so we will use that as the base case. For the worst case we will use a growth rate of 20% for 2Q and 3Q, which are the last two quarters that will hit 2014 revenue for Ligand since they recognize royalty revenue offset by one quarter. For the sake of simplicity and given the uncertainty in the forecasts, we are only applying the one-quarter offset correction for year 2014 (royalties based on revenues from 4Q13 through 3Q14).

The major difference in the worst case and base case is a significant slowing of growth in the next two years, 15% vs. 35% in 2015 and 4% vs 14% in 2016.

Projected Promacta Sales and Ligand Royalty Revenues through 2018

Scenario

2013 (Actual)

2014

2015

2016

2017

2018

Worst case estimate

340

390

405

425

435

Ligand royalty

22

25

27

28

30

Base case estimate

355

480

550

610

620

Ligand royalty

16.5

23

34

40

46

47

Ligand Royalties on Promacta Sales

Annual Sales

<$100 million

$100-200 million

$200-400 million

>$400 million

Royalties

4.7%

6.6%

7.5%

9.4%

Source: Ligand web site

Bottom line regarding Promacta:

  • Promacta will continue as a significant revenue driver for Ligand for the next decade based on the ITP indication. GSK 10-K indicates they have patent exclusivity to 2022 in the US and 2025 in the EU.
  • New growth will come from indications for aplastic anemia, a pediatric indication for chronic immune thrombocytopenia, and oncology-related thrombocytopenia.
  • GSK does not break out revenues by indications, but current revenues from HCV treatment are likely low and will become a negligible portion of revenue for Promacta in the future.
  • Amgen's Nplate has a single indication in ITP and had sales of $427 million in 2013, demonstrating this is a viable stand-alone indication for this class of therapeutics.
  • The assertion by Amvona that Promacta sales "are going away" is not credible.

Kyprolis - The Wild Card

Kyprolis is a 3rd line treatment for multiple myeloma. Originally discovered by Proteolix and developed by Onyx, Kyprolis is now an Amgen asset after their purchase of Onyx in Oct 2013. Multiple myeloma is a huge market but still has significant unmet medical need. Velcade, a reversible proteasome inhibitor approved in 2003, is 1st line therapy and had revenues in 2013 of $2.6B. Revlimide, an immunonodulator, is 2nd line therapy with sales in 2013 of $4.3B.

Kyprolis is an irreversible proteasome inhibitor that works by a similar, but distinct, mechanism from Velcade. It is a potent inhibitor that is more selective than Velcade with less off-target activity, giving it a superior toxicity profile. Notably, Kyprolis is active against Velcade-resistant cell lines. For the interested reader, in depth reviews of proteasome inhibitors can be found here and here.

Kyprolis was approved by the FDA in July 2012 based on a phase 2 study of 266 refractory/relapse patients with a response rate of 24%, median duration of 8 months, and median overall survival of 15.6 months. While these results seem very modest, the patients in this trial failed other therapies and had no other options to treat their worsening cancer.

A recent article on Kyprolis in Motley Fool had a negative tone, noting the drug was approved without demonstrating an improvement in survival and commenting on the serious side effects, such as heart failure, ischemia, and hypertension. This report was latched onto by Amvona for their bear analysis. However, the article failed to point out the following:

  1. Clinical studies of Kyprolis have demonstrated durable anti-tumor activity in patients with relapsed/refractory multiple myeloma.
  • In a Phase 2 trial involving 165 patients with relapsed or refractory multiple myeloma, "Kyprolis provided one of the highest single-agent response rates and longest response duration reported in this patient population." www.themmrf.org/living-with-multiple-mye...
  • Based on posters and presentations at the Dec 2013 American Society of Hematology meeting, "Kyprolis-based combinations appear to have higher response rates, or deeper responses, than the equivalent Velcade-based combinations."

(http://www.myelomabeacon.com/news/2014/01/28/kyprolis-carfilzomib-ash-2013/)

2. For the Phase 2 registration study, patients had gone through 2 or 3 rounds of harsh treatment with other cancer agents and, prior to starting treatment with Kyprolis, were facing serious morbidities arising from those treatments in addition to their worsening cancer.

3. First line Velcade therapy is poorly tolerated due to development of peripheral neuropathy (up to 30%) as well as becoming ineffective due to drug resistance.

4. Clinical trials are in progress to evaluate Kyprolis for first line use, which is particularly relevant for patients with preexisting peripheral neuropathy who are not good candidates for Velcade.

5. Kyprolis has a better toxicity profile than both the first line (Velcade) and second line (Revlimid) therapies.

I am not advocating for Kyprolis, just acknowledging that multiple myeloma is a tough disease to treat and none of the approved treatments is fully effective nor well tolerated. According to the FDA label on Kyprolis, 3% of patients (16 of 526) in the Kyprolis clinical trials died for reasons not related to cancer progression that may have been drug-related. While this is unfortunate, it is not unusual for clinical trials for advanced cancer patients. Certainly the full profile of tolerability and effectiveness for Kyprolis could not be established in the clinical trials prior to approval, which included only 500 patients across several studies. However, the FDA considered the therapeutic window was compelling enough to approve the drug to treat patients with no other options on the basis of only a single Phase 2 study. The upcoming larger trials, as well as more widespread use as an approved treatment, will provide more clarity on the benefits or disadvantages relative to other therapies.

Amgen is studying Kyprolis in 3 studies that will define the role this drug will play in treating multiple myeloma. Two key studies, ASPIRE and FOCUS, should have data read outs any day that may move the Ligand stock price by 10-15%.

The ASPIRE trial (N = 700) compares Kyprolis plus Revlimid-dexamethasone vs. Revlimid-dexamethasone alone in relapsed patients. The primary endpoint is progression-free survival. Two previous studies suggest prospects for a positive outcome are good. Firstly, in an earlier Phase IB study using this same protocol, the objective response rate (ORR) was 55% for the Kyprolis arm. Secondly, as Amgen management has noted, Velcade co-treatment with Revlimid/dexamethasone produced additional clinical benefit. This suggests this drug class is effective as a combination treatment. The independent data monitoring committee is expected to provide an interim analysis soon.

The FOCUS trial (N = 302) in relapsed/refractory patients evaluates Kyprolis monotherapy vs. the best supportive care used in Europe, which tends to be older medicines not generally used in the US anymore. The primary end point is overall survival, the gold standard in cancer treatment. The intent of this trial is to secure approval of the drug in Europe. The final analysis of this study is expected soon.

The ENDEAVOR trial (N=888) is a head to head study vs Velcade to support use of Kyprolis as first line therapy. The primary endpoint is progression free survival. The trial is on-going and Clinicaltrials.gov indicates the primary data collection will be complete in Jan 2016.

In addition, Amgen is carrying out a large number of Phase 1 and 2 studies in newly diagnosed and refractory/relapsed patients in combination with a number of other cancer drugs.

Additional trials in which Kyprolis is currently being investigated in combination therapy are shown in the following table.

Kyprolis in combination with…

Patient type

Phase of development

Revlimid, low-dose dexamethasone

Newly diagnosed

Phase II

Clarithromycin (Biaxin®), Revlimid®, dexamethasone

Newly diagnosed, elderly

Phase II

Melphalan, prednisone

Newly diagnosed, elderly

Phase I/II

Cyclophosphamide, dexamethasone,Thalomid

Newly diagnosed

Phase I/II

Revlimid, low-dose dexamethasone

Relapsed

Phase I

Doxil® (liposomal doxorubicin)

Relapsed/refractory

Phase I/II

Panobinostat

Relapsed/refractory

Phase I/II

Revlimid, Zolinza® (vorinostat), dexamethasone

Relapsed/refractory

Phase I/II

ARRY-520

Relapsed/refractory

Phase I/II

Pomalyst®

Relapsed/refractory

Phase I/II

Source: www.themmrf.org/living-with-multiple-mye...

Altogether, the Onyx/Amgen team is pursuing Kyprolis in a variety of settings to establish the appropriate patient population and combination therapies for optimum results. While many of these studies will likely not succeed, the proven ability of Kyprolis to effectively treat multiple myeloma and proven effectiveness of this class of drugs strongly suggests Kyprolis will be an important drug in the future to treat this type of cancer.

Kyprolis Revenue Estimates

Sales of Kyprolis were a modest $263 million in 2013. In addition, 1Q14 sales of $68 million were below analyst estimates of $82 million, making some wonder about the true potential of this drug. As shown below, analyst estimates for the drug range from $1.5 -3.3B in 2020. As we have seen from the revenues of Revlimid ($4.3B in 2013) and Velcade ($2.6B in 2013) the opportunities in this disease are huge.

Source: Ligand presentation at Roth Healthcare conference, June 24, 2014

To be conservative, for the worst case scenario we will assume both Phase 3 trials show minimal effectiveness and that most of the other clinical trials show minimal advantage over standard care. We will use a flat $300 million for all years 2014-2018 for the worst case scenario. For the base case, we will use the low end of the analyst estimates instead of the consensus estimates to be on the conservative side. For the upside, we will use the average range of estimates instead of the top of the ranges, although these targets could be achieved in the best case scenario.

The revenue for Ligand ranges from just 4.7 million in 2018 in the worst case scenario to 43.5 million for the upside. As we will discuss in more depth at the end of this article, we believe this difference results in a $33 range in valuation for Ligand share price, underscoring the importance of this drug to the future growth of the company.

Projected Kyprolis Sales and Ligand Royalty Revenues through 2018

Scenario

2013

(Actual)

2014

2015

2016

2017

2018

Worst case estimate

300

300

300

300

300

Ligand royalty

4.7

4.7

4.7

4.7

4.7

Base case estimate

300

500

750

1000

1200

Ligand royalty

3.5

4.7

8.7

15

22.5

28.5

Upside case estimate

300

750

1100

1500

1700

Ligand royalty

4.7

15

25.5

37.5

43.5

Ligand Royalties on Kyprolis sales

Annual Sales

<$250 million

$251-500 million

$501-750 million

>$750 million

Royalties

1.5%

2.0%

2.5%

3.0%

Source: Ligand corporate web site

Other Royalty Products - Duavee, Conbriza, Nexterone, and Avinza

Pfizer received approval for Duavee in late 2013 and launched the product in early 2014. Duavee is a combination of their selective estrogen receptor modulator (SERM) bazedoxifine and Premarin (estrogen). Sales estimates vary widely, from $200 million to >$1B. Ligand receives royalties of only 0.5% up to $400 million in sales and 1.5% from $400 million to $1B. Ligand will thus likely only receive $1 - 3 million per year over the next 5 years.

Ligand does not break out individual sales and royalties for the other products from which they receive royalties. However, their royalty revenue can be determined based on the total royalty reported of $23.6 million in 2013. Based on reported sales of Kyprolis and Promacta, royalties for these 2 products can be backed out as $20.0 million. This leaves $3.6 million for their other products in 2013. A similar analysis for 2012 affords a royalty revenue of $3.8 million for this group in 2012. Given the similar royalties for 2012 and 2013, we will assume this group remains flat over the next 5 years. We expect most of this revenue will be derived from Nexterone which is expected to grow to a $150-200 million product, while Avinza sales are declining.

Recent Launches and Near Term Pipeline Products

Noxafil IV. Merck received approval of Noxafil IV early in 2014. Ligand sells Merck Captisol for this product but does not receive a royalty. Ligand received a $1 million milestone payment on NDA approval.

Carbamezapine. Lundbeck filed an NDA for Captisol-enabled carbamezapine for epilepsy in early 2014 and expects approval by the end of the year. Ligand has provided no details on royalties in their 10-K but they do list it as a drug they expect to receive royalties.

Hospira mystery product. Ligand has an undisclosed product being developed by Hospira that is anticipated to launch in 2014. No details on compensation have been released by the company. It is likely a Captisol-based product.

MelphalanIV. Spectrum recently announced a positive Phase 3 outcome for Melphalan IV and plans to file an NDA in 3Q14. Approval can be expected in mid-2015. Ligand could receive over $50 million in potential milestone payments and royalties from 15% to 25%. The current IV formulation of Melphalan, which uses propylene glycol for solubility and has been associated with renal and cardiac side effects, had annual sales of $130 million in 2013 with an annual increase of 3.3%. Given the improved toxicity profile, we expect Melphalan IV to capture a significant portion of this market. Our model assumes Ligand receives 15% royalty and Spectrum captures 20%, 35%, and 50% of the market from 2016, 2017, and 2018, respectively.

Delafloxacin. Melinta is targeting filing of delafloxacin in late 2014 with a launch in late 2015. No details have been provided on royalty rates.

Fablyn. Ethicor will be marketing Fablyn (lasofoxifene ) as an unlicensed medicinal product for the treatment of osteoporosis in Europe and India. Ligand will receive double digit royalties.

Royalties From Other Products to 2018

Product

2013

(Actual)

2014

2015

2016

2017

2018

Conbriza, Nexterone, and Avinza

3.6

3.6

3.6

3.6

3.6

3.6

Duavee

0

0.5

1.0

1.5

2.0

3.5

MelphalanIV

0

0

0

4.5

8.0

12

Carbamezapine

0

0

0.5

1.0

1.5

1.5

Delafloxacin

0

0

0

0.5

1.0

1.5

Fablyn

0

0

0

0.5

1.0

1.5

Total

3.6

4.1

5.1

11.6

17.1

23.6

Milestone payments and Other Revenue

Ligand receives one-time payments at completion of major milestones such as NDA approvals. Milestone and other revenue were $6.3 million in 2012 and $7.9 million in 2012. The company has guided to expect $5-10 million per year. We will model a steady $7.5 million for the next 5 years.

Captisol Revenue

The other major revenue generator for Ligand is Captisol, which is a beta-cyclodextrin appended with a number of sulfobutylether moieties. Captisol is used to solubilize compounds that are not soluble in water, enabling IV, intramuscular, and subcutaneous formulations of these drugs. Seven drugs are currently marketed that use Captisol and Ligand reports that 30 drug candidates are in development. Sales of Captisol have grown significantly over the past 3 years but management is only guiding to $15-20 million in revenue for year 2016. Captisol got off to a good start in 2014 with sales of $5.7 in 1Q so it seems the trend is still toward increasing revenues. They are also guiding to 55% gross margins for Captisol for years 2014-2016 although margins have been above that for the past 3 years. We will conservatively model slight gains in revenue over the next 5 years with 60% margins.

Projected Captisol Sales and Costs through 2018

2011 (Actual)

2012 (Actual)

2013 (Actual)

2014

2015

2016

2017

2018

Revenue

12

9

19

20

21

22

23

24

Cost of Goods

4.9

3.6

5.7

8

8.5

9

9.5

10

Is Captisol Supply In Danger?

Amvona brought up a major concern that Captisol is single-sourced and subject to supply disruption. However, Captisol has been uneventfully single-sourced for 10 years from the supplier Hovione in Portugal. Based on information provided in their 10-K, Ligand has in place contingency plans in case issues arise at the vendor.

  • Maintain significant inventory of Captisol, which has a five-year shelf life, at 3 geographically spread storage locations in the US and Europe.
  • In the event of a Captisol supply interruption, designate and qualify one or more alternate suppliers.
  • If the supply interruption continues beyond a designated period, Ligand may terminate the agreement with Hovione.
  • If Hovione cannot supply Ligand requirements due to an uncured force majeure event or if the unit price of Captisol exceeds a set figure, Ligand may obtain Captisol from a third party.
  • In 2012, Hovione qualified a site in Cork, Ireland, to provide back-up and increased capacity to the Portugal site.

Bottom line, the worry about supply disruption is not a credible concern. We note that many drugs are single sourced.

Putting it all together - revenue and EPS estimates for Ligand through 2018

Below we provide 4 tables for various scenarios for revenues and EPS - worst case, base case, base case with Kyprolis upside, and base case with Kyprolis downside.

Regarding the cost structure, the company is very lean. Royalties generate 100% margins and overhead is low as the company has only 18 employees. Research is outsourced and can be dialed back in case revenues do not expand as expected and costs have to be cut. The other major expense is material costs for production of Captisol, which the company has guided as 45% of Captisol revenue. In the tables below we are using the expense estimates provided by the company. We also note the company will pay almost no tax for the next 5 years due to credits for past losses.

For 2014 there is not much difference between the base case and worst case. The $1 million difference reflects a potential slowing of growth of Promacta in 2Q and 3Q to 20% in the worst case scenario vs. 30% growth for the base case. We note 30% growth occurred in 4Q13 and 1Q14. The base case scenario for revenue is $59.5 million, which is below the company target of $62-64 million. This is based on the revenue for Kyprolis in 1Q14 reported by Amgen, which came in below analyst estimates. Until the results of the Phase 3 studies are completed in 3Q, we believe sales of Kyprolis will remain soft, resulting in Ligand revenues about $3 million less than expected.

Worst Case Revenue and non-GAAP EPS Projections Through 2018

2013 (actual)

2014

2015

2016

2017

2018

Revenue

Royalties

23.6

31

35

43

50

58

Milestones, other

6.3

7.5

7.5

7.5

7.5

7.5

Captisol

19.1

20

21

22

23

24

Total Revenue

49.0

58.5

63.5

73

80.5

89.5

Expenses including tax

31

32

34

36

38

40

Income

18.5

26.5

29.5

37

42.5

49.5

EPS from continuing operations

0.90

1.28

1.42

1.79

2.05

2.41

EPS discounted 10% per year

0.90

1.28

1.28

1.45

1.49

1.58

Base Case Revenue and non-GAAP EPS Projections Through 2018

2013 (actual)

2014

2015

2016

2017

2018

Revenue

Royalties

23.6

32

48

67

86

99

Milestones, other

6.3

7.5

7.5

7.5

7.5

7.5

Captisol

19.1

20

21

22

23

24

Total Revenue

49.0

59.5

76.5

96.5

116.5

131.5

Expenses including tax

31

32

34

36

38

40

Income

18.6

27.5

42.5

60.5

78.5

91.5

EPS from continuing operations

0.90

1.33

2.05

2.92

3.79

4.42

EPS discounted 10% per year

0.90

1.33

1.85

2.37

2.76

2.90

Base Case with Upside Case for Kyprolis

2013 (actual)

2014

2015

2016

2017

2018

Revenue

Royalties

23.6

32

54

77

101

115

Milestones, other

6.3

7.5

7.5

7.5

7.5

7.5

Captisol

19.1

20

21

22

23

24

Total Revenue

49.0

59.5

82.5

106.5

131.5

146.5

Expenses including tax

31

32

34

36

38

40

Income

18.6

27.5

48.5

70.5

93.5

101.5

EPS from continuing operations

0.90

1.33

2.34

3.40

4.52

4.90

EPS discounted 10% per year

0.90

1.33

2.10

2.75

3.29

3.21

Base Case with Downside for Kyprolis

2013 (actual)

2014

2015

2016

2017

2018

Revenue

Royalties

23.6

32

44

56

68

75

Milestones, other

6.3

7.5

7.5

7.5

7.5

7.5

Captisol

19.1

20

21

22

23

24

Total Revenue

49.0

59.5

72.5

85.5

98.5

106.5

Expenses including tax

31

32

34

36

38

40

Income

18.5

27.5

38.5

49.5

60.5

66.5

EPS from continuing operations

0.90

1.33

1.86

2.39

2.92

3.21

EPS discounted 10% per year

0.90

1.33

1.67

1.94

2.13

2.11

For our models we have likely underestimated 2017 and 2018 revenue as we model no revenue for products that are expected to be approved in 2016 and beyond. Management is estimating revenues >$200 million in 2018 but we do not see assets in the pipeline that are going to produce that kind of revenue, especially since most of the early stage pipeline has a low probability of success.

In the table below we summarize the revenue and EPS estimates from the 4 models and compare to management guidance and to external analyst projections. For 2015 there are a number of analyst estimates available but for 2016 to 2018 we are using the estimates from Capital IQ that are included in FastGraphs.

Comparison of worst case, base case estimates vs. Management guidance and Analyst estimates on revenue and non-GAAP EPS

2013

(actual)

2014

2015

2016

2017

2018

Revenue

Worst Case

49

56.5

63.5

73

80.5

89.5

Base Case

49

59.5

77.5

96.5

116.5

131.5

Kyprolis upside

49

59.5

82.5

106.5

131.5

146.5

Kyprolis downside

49

59.5

72.5

85.5

98.5

106.5

Company Guidance

49

62-64

>81

>106

--

>200

Analyst estimates

63

90

--

--

--

EPS

Worst Case

0.90

1.18

1.42

1.79

2.05

2.41

Base Case

0.90

1.33

2.05

2.92

3.79

4.42

Kyprolis Upside

0.90

1.33

2.34

3.40

4.52

4.90

Kyprolis Downside

0.90

1.33

1.86

2.39

2.92

3.21

Company Guidance

0.90

1.40 -1.45

>2.13

>3.18

--

--

Analyst Estimates

1.44

2.54

3.43

4.91

6.38

Based on the comparison of analyst estimates with the 4 scenarios we generated, they are expecting the upside case for Kyprolis since their targets are well above our estimates for the base case scenario, as shown in the chart below.

Summary and Valuation

Based on our analysis, the prediction that Ligand will soon go out of business out appear completely unfounded. Specifically:

  • Promacta sales are not dependent on HCV patients but will continue to grow with the ITP indication plus new indications under study. In particular, the indication for thrombocytopenia in cancer patients appears to be a significant opportunity and is the likely reason Novartis wanted this drug as a part of the asset transfer with GSK.
  • Even if Kyprolis does not turn out to be a blockbuster, it will still contribute meaningful revenue to Ligand. If even a few of the on-going clinical trials are positive, Kyprolis will be a major revenue driver for Ligand.
  • Other products in the portfolio will each provide small revenues but, collectively, make a significant impact to the bottom line.
  • Concerns about Captisol supply are completely unfounded. Captisol revenue should be a steadily growing asset for the next decade.

Based on the worst case scenario, where Promacta sales growth slows and Kyprolis revenue does not grow, revenue CAGR over the next 5 years is anticipated to be 13%. Because expenses are so low with the royalty model, this modest revenue growth translates to 22% CAGR for EPS.

Based on the base case scenario, with very modest estimates for Kyprolis that are below consensus estimates, revenue CAGR is 22% and EPS 38% over the next 5 years.

The outcome of the upcoming Kyprolis Phase 3 studies will be impactful for Ligand. In the two scenarios where the base case is assumed for all other revenue, but Kyprolis is modeled for worst and best case scenarios, the revenue difference in 2018 is $40 million which translates to a $1.7 difference in 2018 EPS (see chart below) and a $1.1 difference in discounted EPS for 2018. Assuming P/E of 30, this is a $33 impact on share price.

For valuation for a rapidly growing small company we applied a P/E of 30 based on 5th year discounted EPS.

Valuation of Ligand based on 4 scenarios

Scenario

EPS 5 yr CAGR (2014-2018)

Share Price ($)

Worst case

22

47

Base Case

38

87

Base Case with Kyprolis Downside

29

63

Base Case with Kyprolis Upside

40

96

Using a conservative base case estimate, we think a reasonable stock price for Ligand is $87 based on rate of growth and applying a 30 multiple to discounted 2018 EPS. This is a P/E of 37 based on next year's projected EPS.

For the worst case scenario, in which Promacta sales stall and Kyprolis Phase 3 results are profoundly negative, the share price should be capped at $47 on the downside. We think this scenario is unlikely.

We believe the market is largely discounting any positive outcome for Kyprolis. In the scenario where we model the downside for Kyprolis with the base case for other revenue, we generate a share price of $63, which is close to the current price. Based on the multiple small Phase 1 and 2 studies that have been completed to date, we feel there is a very good chance (80%) that at least one of the FOCUS or ASPIRE studies will be positive and 50% chance that both will be positive. We believe the likelihood of a positive outcome in at least one of the two phase 3 trials, which will be reported soon, could boost the share price of Ligand by 10-15%. While negative results will likely cause a price decline, we believe the share price has a negative outcome already priced in and will therefore be a buying opportunity.

Source: Ligand Pharmaceuticals - The Bull Case

Additional disclosure: The author is not a financial advisor and this article is not intended as financial advice.