Ligand Pharmaceuticals: 2014 Run Not Done With Short And Long-Term Catalysts Coming

| About: Ligand Pharmaceuticals (LGND)
This article is now exclusive for PRO subscribers.

Executive summary:

· Ligand Pharmaceuticals has 85 fully funded programs in trials

· Recently approved Duavive could provide upside to 2014 guidance

· Strong gross margins and low share count provides huge profits for shareholders

· Unpartnered drug provides catalyst for short term

· Alzheimer's drug with Merck could be a huge blockbuster if approved

Back in October, I highlighted a drug company that I believed could provide huge returns for shareholders going forward. Since that time, shares of Ligand Pharmaceuticals (NASDAQ:LGND) have shot up over 60%. It was that same bullishness and new catalysts that gave Ligand a spot on my annual top ten stock picks list. Since the beginning of the year, shares of Ligand are up around 40%. However, with more catalysts coming and a nice pipeline of royalty payments, shares still have further upside in 2014.

I believe the numbers speak for themselves and provide a nice introduction to Ligand. For those unfamiliar, the company owns pieces of individual drugs and enjoys milestone payments and royalties as drugs are approved and sold on the market. Ligand operates with low overhead, as it spends little on actual research and development. The company instead uses its patented Captisol drug treatment and acquisitions to take ownership stakes in potential blockbuster drugs.

Ligand currently has five royalty generating assets. While that number is not huge for the biotechnology company, Ligand does have 85 fully funded programs in the works that could all yield more milestone payments and potential royalty payments down the road. Ligand operates with a "shots on goal" motto and currently is sitting in a great position.

According to Ligand, it may see as many as 79 drugs on the market by 2020. In the short term, Ligand believes it will have as many as four drugs approved in 2014 and 3 in 2015, giving it a cumulative 12 royalty producing drugs by the end of 2015.

The company reported fourth quarter earnings recently and they provided an updated look at what's in store. Comments from the earnings call and the question and answer segment also provided an update to several short and long term catalysts.

Fourth quarter revenue was $14.7 million, an increase of 48%. Of this total, Promacta made up $5.1 million and Kyprolis made up $1 million. The other three approved drugs with Ligand interests (Avinza, Nexterone, Conbriza) combined for around $1 million in revenue. Approved drugs continue to provide significant revenue for Ligand. Sales of Promacta were up 46% in the most recent quarter. Sales of Kyprolis hit $0.25 billion, initiating a new $1 million milestone payment to Ligand from Amgen (NASDAQ:AMGN).

One of the near term catalysts for Ligand is its newly approved Duavive drug with Pfizer (NYSE:PFE). The drug, which is a combination of SERM and Pfizer's Premarin, has strong potential in the women's health market. The drug treats symptoms of menopause, which has a huge addressable market. Consider that Premarin was actually once the world's largest selling drug. There is definitely a market as Premarin saw peak sales of $4 to $5 billion. Duavive won't be a hit blockbuster, but it could provide nice upside for Ligand going forward. For the fiscal year, Ligand has "minimal royalties from Duavive priced in". Ligand receives a royalty ranging from 0.5% to 2.5% on Duavive sales.

Despite the run-up in Ligand's share price, shareholders could see double digit gains once more details are announced from two upcoming catalysts. The first is MK-8931, a potential blockbuster Alzheimer's drug from Merck (NYSE:MRK). While many Alzheimer's drugs have failed to ever hit the market, Merck is getting increasingly further into the trial process with this potential blockbuster. In fact, Merck said recently the drug has "the potential to alter the course of medicine". While those words could be a little self-promoting, they might potentially hold true if Merck and Ligand get an early lead in the Alzheimer's huge addressable market.

The other huge catalyst that is currently awaiting patient shareholders is LGD-6972. This unpartnered Type 2 Diabetes drug could give shares another huge boost when new results are announced or a drug partnership is finally reached. The fact that Ligand is waiting so long to partner on this drug makes me extremely bullish and I think this could be one of the most valuable unlocked assets hiding in Ligand's financials. Phase I trials were started in November, with results expected by the middle of 2014.

One of my favorite catalysts going forward is HepDirect. Ligand has gained valuable assets and royalty streams through its Captisol drug formation. Many companies continue to use Captisol to increase the effectiveness of their own drugs. With HepDirect, Ligand could see similar results. As I pointed out in my earlier article, HepDirect is a proprietary drug treatment that targets drugs to the liver. This technology could prove extremely valuable to companies with drugs tied to that area of the body and Ligand could see a huge revenue stream down the road. HepDirect will be a focus of Ligand's presentation at the EASL Conference in London later in April.

Another long term catalyst could be Ligand's hint from its earnings call. The company said that they "have explored spin-outs consistently the last several years." Ligand believes it could help take private companies public or separate some assets off into a new venture. Ligand will "focus on leveraging the assets to improve the return and the value for our existing shareholders". Ligand ended the year with $14.7 million in cash and a small debt balance. Ligand has stated it will pay off its debt over the next six months.

Ligand continues to put an emphasis on shareholders. Ligand "expects to use cash-flow from business to find opportunistic acquisitions or returns to shareholders." With gross margins of around 90% and newly found royalty streams, Ligand is seeing increasing cash flow that could soon provide a nice income for shareholders. I anticipate Ligand to begin paying a quarterly dividend by 2015, but think it could also be announced sometime in 2014. A dividend payout could go hand in hand with the retirement of all of Ligand's debt

Analysts on Yahoo Finance see Ligand posting earnings per share of $1.31 for the current fiscal year. That figure is expected to rise to $2.26 in fiscal 2015. Revenue is expected to grow 29.5% in fiscal 2014 to $63.4 million and 45.0% to $91.9 million in fiscal 2015. Ligand has provided sales and earnings per share figures as follows:

· 2014: $62 to $64 million, $1.40 to $1.45

· 2015: $81 million, $2.13

· 2016: $106 million, $3.18

· 2020: $200 million

As you can see, earnings per share are expected to rise significantly by the year 2016. In fact, Ligand estimates that royalty revenue will represent 75% of the company's total in 2016. With royalties representing 100% gross margin, earnings per share will continue to rise to a higher percentage overall. A low share count and minimal debt will continue to send huge profits to the bottom line.

While many biotech companies live and die by FDA approvals of one drug, Ligand continues to offer a somewhat safe way to bet on blockbuster drugs. The company has many fully funded trials, cutting down on costs and risks associated with drug approvals. With strong milestone payments and royalties expected down the road, it's not too late to take Ligand for a spin.

Information in this article came from the recent fourth quarter earnings call, which can be found here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LGND over 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.