Ligand Pharmaceuticals' (LGND) CEO John Higgins on Q4 2016 Results - Earnings Call Transcript

| About: Ligand Pharmaceuticals (LGND)
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Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) Q4 2016 Results Earnings Conference Call February 23, 2017 4:30 PM ET

Executives

Todd Pettingill - Associate Director, Corporate Development and IR

John Higgins - CEO

Matt Foehr - President and COO

Matt Korenberg - CFO

Analysts

Drew Jones - Stephens

Matt Tiampo - Craig-Hallum Capital Group

Larry Solow - CJS Securities

Greg Fraser - Deutsche Bank

Gene Fox - Cardinal Capital Management

Operator

Greetings and welcome to the Ligand Pharmaceuticals Quarterly Earnings Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Todd Pettingill. Thank you. Please begin.

Todd Pettingill

Welcome to Ligand's fourth quarter of 2016 financial results and business update conference call. Speaking today for Ligand are John Higgins CEO, Matt Foehr, President and COO and Matt Korenberg, CFO. As a reminder, today's call will contain forward-looking statements within the meaning of Federal Securities Laws. These may include but are not limited to statements regarding intent, belief or current expectations of the Company and its management regarding its internal and partnered programs. These statements involve risks and uncertainties and actual events or results may differ materially from the projections described in today' press release and this conference call.

Additional information concerning risk factors and other matters concerning Ligand can be found in Ligand's earnings press release and public periodic filings with the Securities and Exchange Commission which are available at web www.sec.gov. The information on this conference call is related to projections or other forward-looking statements represents the Company's best judgment based on information available and reviewed by the Company as of today, February 23, 2017 and do not necessarily represent the views of any other party. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

At this time I'll turn the call over to John Higgins.

John Higgins

Welcome and thanks for joining our earnings call. We've wrapped up a strong 2016 are positioned nicely to build on our financial and business momentum as we move into 2017. Last year was a year distinguished by solid financial performance, significant increased investment in R&D, excellent integration of our OMT acquisition at the start of last year and substantial expansion of our portfolio of fully funded programs.

A quick overview in terms of financial performance the business had stellar royalty growth and major contributions from contract payments. Corporate gross margins were 95% for 2016 and the company generated significant cash flow from operations.

Let me provide some highlights for our main royalty financial drivers. Promacta continues to perform very well under Novartis' commercial leadership. As background it is the treatment Ligand discovered for low platelet count or thrombocytopenia. Q4 Promacta revenues by Novartis were $178 million and full-year 2016 revenues were $635 million. That is an impressive 37% growth over full year 2015 revenue and it is especially impressive year-over-year growth given the product has been on the market for eight years.

It is an important product that stands out in its medical category in what it offers its target patients. We expect continued growth of the product with sales eventually exceeding $1 billion annually based on reports by security analysts who cover Novartis. We enjoyed tier royalties on net sales and now with the growing level of sales nearly half of the revenue for the product in 2017 will yield royalties to Ligand at the highest tier which is near 10%.

Moving on to our another product the Kyprolis also continues to perform well commercially and it is an important second line treatment option for multiple myeloma patients. As investors who follow us know, Kyprolis is an Amgen drug that uses Captisol in its formulation. We have a license agreement with Amgen but are not involved in the commercialization or development of the drug.

Amgen reported $183 million in Q4 Kyprolis sales which result in full-year sales of $692 million. In addition, ONO is Amgen's Japanese commercial partner for Kyprolis and ONO launched the product in Japan in August. Sales for the last five months of 2016 were nearly $10 million in Japan, so combined worldwide sales for Kyprolis were $702 million in 2016. The product is doing well by many standards and third-party analysts expect it to continue to grow significantly.

That said, the multiple myeloma market is a very important medical market that serves terminally ill cancer patients and several companies have invested significantly to bring their own products to market with different mechanisms of action. Consequently the category has become very competitive. Kyprolis is still positioned well in the treatment paradigm and Amgen recently announced it will be commencing a major Phase 3 trial exploring the use of the drug in combination with Janssen's drug Darzalex, a leading new antibody drug in the category. 13 analysts cover Amgen and by 2020 the revenue estimates for Kyprolis range from $1.3 billion to $1.7 billion a doubling of revenue from current levels.

On to another product, Evomela is a product formulated with Captisol and commercialized by Spectrum Pharmaceuticals for stem cell transplants associated with the treatment of multiple myeloma. It was approved and launched in 2016, so last year was the first year Ligand earned royalties. It is an important new product and Ligand will earn a 20% royalty on sales. Spectrum has not yet reported Q4 2016 sales for Evomela, but in Q3 the product realized good growth over its initial weeks of launch in Q2. We expect this product to contribute a solid measure of new annual royalties Ligand in 2017 and beyond.

We recorded $27 million of contract revenue in 2016 which consists of license and milestone payments. Across the board it was an outstanding year of partner events and revenue earned by Ligand for contract payments driving record high revenue. We have both an expanding portfolio of partnerships and programs advancing to later stages of development which together are driving both the number and the size of contract payments.

Captisol material sales came in lower than we expected as we closed out 2016 driven by external factors at our partners and some delays with product launches. Overall the Captisol business is doing well. While we would have liked to have booked more orders in 2016 the fact is we have more Captisol customers than ever before. There was continued clinical demand for Captisol and the commercial products that use Captisol are generally early in the commercialized. Matt Foehr will discuss more, but we are seeing record levels of sampling. We continue to sign up new customers and many important partners are advancing towards potential product launch.

A quick remark about cash expenses and investment in R&D, we spent just under $29 million to fund operations in 2016. We view that as our lean operating cost structure supporting a very productive and high growth business. What is impressive is that while costs have moved up modestly over the past few years, we have generally been able to hold general and administrative expenses steady focusing our investment and increased spending on R&D. Specifically we are pleased to be well underway running a major Phase 2 trial for our GRA diabetes program and we've built in new investments in our cost structure supporting our promising and expanding OmniAb antibody drug discovery platform.

Finally, a few remarks about our 2017 financial outlook which we provided in our earnings release. Matt Korenberg will review the numbers, but I will provide some perspective on our guidance given the substantial growth and evolution of our business as we move into 2017. Instead of a specific revenue range for 2017 we are providing projections for what we view as core revenues for the business based on our three main categories of revenue, that are royalties, Captisol and contract payments, plus we will provide some information for additional potential contract revenues.

We see 2017 royalties coming in line with analyst expectations for the major products from which we earn royalties. For Captisol our 2017 Outlook is essentially consistent with 2016 Captisol revenue. We are confident in the strength and growth potential for Captisol, but are calling an outlook flat to 2016 as we await more information on late-stage trial data and product launches.

Finally for contract revenue we are providing revenue outlook for a core amount of revenue we expect will be earned and also provide some general information about potential additional revenue we could earn in 2017. We see a very substantial calendar of more than 60 events where we are entitled to payments potentially happening in 2017. Most likely, all of them will occur and we will provide more information on any additional contract revenue we might book as the year progresses and we learn more about the time and probability of the full range of events.

The number of milestone events we're facing is increasing each year and owing to the later stage of many of those events some of those milestone payments are quite large. As such we are taking this new approach to milestone guidance which reflects the range of external events we face going into the year.

And now with that, I'll turn it over to Matt Foehr to talk about our portfolio.

Matt Foehr

Thanks John. I'm going to start off today reviewing additional key developments with some of our partnered programs and I will also provide updates on our two main technology platforms, Captisol and OmniAb and I'll touch on recent licensing activity and the progress of our Phase 2 diabetes program.

Our partners at Melinta Therapeutics announced that they have been assigned a PDUFA date of June 19, 2017 for Captisol enabled Baxdela. As a general reminder, Ligand has a 2.5% royalty on global net sales of Baxdela. In the latter part of the fourth quarter, Retrophin presented positive data for their drugs sparsentan and focal segmental glomerulosclerosis at the American Society of Nephrology meeting in Chicago. They presented at the High Impact Late Breaking Late-Breaking Clinical Trial Session at the meeting and as expected the data was well received. Retrophin indicated their plans to meet with the FDA to discuss the regulatory paths of the drug and we continue to watch for developments there. Sparsentan is a drug for which Ligand would earn a 9% royalty on potential future net sales.

Last week Merck announced that that verubecestat would not meet its primary efficacy endpoint in a Phase 2, 3 trial that treated patients with mild-to-moderate Alzheimer's disease. I'll note that Merck continues a Phase 3 trial in early-stage or prodromal Alzheimer's patients. They began the second trial called the APECS trial in 2013 and it includes 90 centers globally and 1500 patients with prodromal Alzheimer's which is described as mild cognitive impairment due to Alzheimer's.

The patients in the APECS Phase 3 trial have measurable cognitive deficits along with a positive PET scan performed with an FDA approved amyloid tracer called flutemetamol. But who are not yet functionally impaired, APECS compares two different doses to placebo for a two-year treatment period and will address the outstanding question of whether early intervention is a key to clinical success for this devastating disease.

Earlier this month Merck indicated that they have completed enrollment in the APECS trial and expect data in early 2019. Alzheimer's has clearly been a very difficult indication if not the most difficult area in drug development for a long time and we continue to watch as more data from Merck's first trial becomes visible and to 2019 when the Phase 3 APECS trial in early-stage patients is expected to complete.

Our partners at Viking Therapeutics have continued to build momentum towards readouts this year of two Ligand partnered Phase 2 trial from their pipeline programs, VK5211 and VK2809. First is VK5211 which is an orally available nonsteroidal selective androgen receptor modulator or SARM. It is in Phase 2 development at Viking for the treatment and prevention of lean body mass loss in patients who have undergone hip fracture surgery.

VK2809 is a small molecule thyroid beta agonist in Phase 2 for hypercholesterolemia and fatty liver disease. That Phase 2 is also expected to readout this year. In November Viking presented new clinical data for VK2809 at the American Heart Association's scientific sessions showing statistically significant reductions in atherogenic proteins observed following 14 days of treatment which builds upon previously reported data showing substantial reductions in LDL cholesterol and triglycerides.

Additionally, just last week Viking announced that they are pursuing an additional indication for VK2809 in glycogen storage disease 1a and announced plans and financing around filing an IND and starting a human proof-of-concept study this year. We're very pleased to see the work that Viking has done around added indications for the programs.

Our partner Aldeyra recently announced their updated plans for Captisol-enabled ADX-102. Those plans include Phase 2b and Phase 3 trials in multiple ophthalmology related indications including a Phase 3 start in this year's second quarter.

In January Vertex announced it licensed rights to Captisol-enabled VX-970 to Merck KGaA. We obviously have an existing relationship highly productive OmniAb relationship with Merck KGaA and are pleased to now also have a Captisol related partnership with them as well. VX-970 is the first in class inhibitor of the DNA damage repair enzyme ATR and is currently in nine actively recruiting phase I and phase II oncology trials. Over the years we've seen a number of Captisol enabled assets become important pieces of both M&A or licensing between established companies and VX-970 is one of the latest examples of this.

Our Captisol and OmniAb technologies continue to be important vehicles for further diversification and growth of our partnered pipelines. We invest in intellectual property as we continue to innovate with both of these technologies. We are pleased to receive news from the U.S. patent office that a new OmniAb patent issued in late October. That patent is directed to a novel three prime enhancer regions of OmniAb and effectively extend our U.S. patent protection for OmniAb to April of 2034. We also focus on global IP for the OmniAb platform and very recently were granted a patent from the Korean Patent Office as well.

For Captisol we now hold issued patents in over 60 countries with patent protection through 2033 in major markets including new patents that it just issued in 2016. Interest in Captisol continues to grow substantially. As we expand our drug master file and the technology continues to experience clinical and commercial validation and success globally.

In 2016 we processed over 820 new inbound Captisol sample requests which is a record high. As a comparison in 2011 when we bought Captisol and brought it into Ligand we received less than 200 inbound requests. Over that timeframe we've also entered into over 450 research use and animal use agreements for Captisol which is further indication of the growth and diversity of our base of Captisol users.

We see our technologies as a key element in continuing the growth and diversification of our portfolio of partnerships. Like we continue to do with Captisol we are expanding our reach with the OmniAb platform as well and as a part of that we recently announced a new addition to our team focused around antibodies and large molecules and we're pleased to welcome Dr. Christel Iffland to Ligand. She joined us earlier this month from Merck Serono.

Switching now to licensing, in recent months we disclosed a new OmniAb partnership with Ono Pharmaceuticals. Ono represents our first Japan-based multinational partner for OmniAb and is a respected and well-established player in the antibody space. Under the agreement we're entitled to receive annual access payments on each anniversary of the deal and we'll be eligible to receive milestone payments and royalties on future sales of OmniAb antibodies.

We also recently expanded our Captisol relationship with Novartis entering into a commercial agreement for Captisol enabled pediatric formulation of trametinib which is a MEK inhibitor marketed globally as a mechanist by Novartis. In Q4 we entered into a new commercial agreement with Villa Tech [ph] Incorporated and I'll also briefly mention that just earlier this week we entered into a new clinical license agreement for Captisol with Eisai.

I'll conclude with a brief remark about our internal pipeline specifically our Glucagon Receptor Antagonist or GRA program known as LGD 6972. We've been very pleased with the engagement and progress at our clinical sites that are participating in the Phase 2 GRA trial. Enrollment has continued to progress according to our expectations and we're generally anticipating completion of enrollment in the very near future and to having data in the second half of this year.

I also note that our program in glucagon antagonism were highlighted in a recent Nature Reviews article authored out of Dana-Farber and the Harvard Medical School that reviewed the role and potential management of hepatic glucose metabolism in the treatment of Type II diabetes. We will be providing more details on our platform technologies Captisol and OmniAb as well as our GRA program at our Analyst Day event which is coming up on Tuesday.

And with that, I'll turn the call over to Matt Korenberg to discuss the financials.

Matt Korenberg

Thanks Matt. 2016 was another year of significant growth for Ligand with respect to revenue, royalties and cash flow. Looking forward we continue to pursue significant growth in total revenues coupled with relatively flat cash operating expenses and as a result continued growth of earnings and cash flow.

We expect strong growth in royalties from Promacta and Kyprolis, the addition of royalties from recently launched Evomela and further royalties from potential product launches. And our milestones as John mentioned, and I'll detail in a minute, the contribution from milestone license revenue based on the achievements of our partners developing our portfolio of programs will have the potential to dramatically impact 2017 and beyond.

Turning now to the financials I'll start with a few comments on revenue for the quarter and the full year of 2016. Total revenues for the quarter were $38.2 million and included royalty revenue of $19.6 million. Both of these figures represent record high quarterly numbers for Ligand since the transition to our current business model 10 years ago. Royalty revenue grew 70% over the year ago period and total revenue was up 80%. Royalty growth largely reflected higher Promacta and Kyprolis royalties coupled with the addition of Evomela and CorMatrix to our roster of commercial products that are generating royalty for Ligand.

Milestone and license revenues were $9.5 million versus the $2.4 million for the year ago period with the increase due to the timing of achieving milestones in addition of OMT. Captisol material sales for Q4 were $9.1 million which is one of the largest quarters ever for Captisol despite the delay in orders we saw tied to the launch of certain commercial drugs.

For the full year 2016 total revenue was $109 million versus $71.9 million in 2015. This substantial increase in revenue represents 52% year-over-year growth and more than three times the revenue we regenerated just four years ago in 2012. I mentioned 2012 because that was the first year we were cash flow positive. With the revenue growth since that time and our almost flat cash expense base we've been able to significantly grow our cash flow over that period.

In 2014 cash flow from operations was just over $20 million, in 2015 just over $40 million and now in 2016 it is over $60 million. We at Ligand are proud of this trend and we see it continuing into 2017.

Regarding gross margins, Q4 gross margins for Captisol were lower as compared to Q3 as well as the prior year period. As we've mentioned consistently our mix of commercial and clinical materials can shift significantly from quarter to quarter and year to year resulting in changes in gross margins. Recognizing the Captisol material sales are the only items that generate significant costs. It is also useful to mention of course there are overall corporate gross margins. In 2016 our corporate gross margin climbed to 95% up from 92% in 2015 driven by the strong growth in our 100% percent margin royalty and milestone revenue lines.

On the expense side our Q4 R&D and G&A cash operating expenses were positive as expected and we ended the year with just under $29 million of cash expenses. For the quarter, we reported adjusted net income of $16.1 million or $0.74 per diluted share compared to $12.2 million or $0.59 per diluted share for the same period last year. As a reminder, our adjusted EPS reporting methodology has changed beginning with this fourth quarter as we outlined in our 8-K filed on January 18.

For Q4 2016 and going forward we will no longer adjust our earnings for non-cash taxes that are included in our GAAP earnings. Despite the fact that we pay less than 1% cash taxes as a result of the utilization of our NOLs and other tax assets our GAAP financials reflect a fully taxed number that represents the amount of tax assets used in a given period. Historically we would adjust for these non-cash tax amounts in calculating our adjusted net income and EPS. Going forward we will not.

Given that, I also wanted to mention that we've provided a table in our earnings release that allows investors to bridge between our new method and our historical method both for Q4 2016 and full year 2016. As you'll see in that table adjusted net income and EPS in the quarter under our historical calculation were $27.2 million and $1.25 per share respectively. For the full year 2016 it would have been $72.4 million of net income and $3.33 of adjusted EPS.

On the balance sheet we finished the year with $141 million of cash, cash equivalents and short-term investments fueled by the $63 million of operating cash flow generated. In Q4 alone we generated $21 million cash flow an increase from the $13.7 million of operating cash flow generated in the year ago period.

Lastly, before I move to the financial guidance I just wanted to touch briefly on our GAAP net income for 2016. As outlined in our earnings release GAAP net income for the year showed a loss of $1.6 million. GAAP earnings were impacted by a write-down we took related to the common stockholdings we have in Viking Therapeutics. Given the stock price is sustainable lower book carrying value for a period exceeding 12 months we've effectively marked a portion of the holdings to market.

We've not sold any shares and continue to believe that Viking is executing well on the plan it outlined at the outset of its clinical development work. Combined with the mark-to-market charge in Q4 our share of pro rata losses of Viking's expenses and charges taken related to the dilution of our position in connection with the financing that they completed earlier this year. Viking impacted our GAAP net income by over $20 million in 2016.

Turning to guidance that is detailed in our press release we're providing updated full year 2017 financial guidance. We continue to expect solid revenue and earnings growth for 2017. As John already discussed, we're moving to a forecast focused on core revenue and simultaneously giving our investors a sense of the potential upsides we see. More specifically, our core revenue estimate assumes about $87 million of royalties in line with the consensus of research analysts covering our partner companies about $23 million of Captisol sales and at least $20 million of milestones and license fees.

As I'll detail at our Analyst Day event next week in New York, this year could be significantly impacted by milestones and license fees. Coming off the year in which we saw $27 million of milestone and license revenue we believe that in 2017 we'll see at least $20 million. However, in total we believe there is more than $30 million of additional milestones that could hit in 2017.

In total there are over 60 events that we think have a chance of happening in 2017. Of course not all will be successful and some may not happen in the calendar 2017 window. Our best estimate today though is that at least $20 million will occur and can be recorded in 2017. This all translates to full year 2017 core revenues of at least $130 million with upside for milestones and license fees and adjusted earnings per diluted share to be at least $2.70.

Total now in 2016 we expect about 40% of our revenue and adjusted EPS to fall in the first half of the year. The guidance I have just gone through reflects our historical revenue recognition policies and therefore assumes our royalty revenue will continue to be booked on a one quarter lag. As mentioned in our 8-K filed in January, all companies will be required to adopt the new ASC 606 revenue recognition guidelines in 2018. We currently anticipate adopting the guidelines at the start of 2018 and at that time royalty recognition will move from the one quarter lag to be recognized in the same period the underlying sales are generated.

One final note on guidance for adjusted EPS, as I mentioned were moving to a fully taxed adjusted EPS number. Our adjusted EPS will be calculated using a tax rate reflective of the utilization of our NOLs assuming our taxable income matched or adjusted income. We currently expect that tax rate to be between 36% and 39% and I will provide more details on 2017 guidance and the rest of the P&L at our Analyst Day next week.

Lastly, just a reminder that our adjusted diluted EPS guidance excludes stock based compensation expense, non-cash debt related costs, changes in contingent liabilities, transactions related purchase price amortizations, a pro rata share of net losses of Viking Therapeutics, as well as the fair value adjustments to our holdings in the common stock and convertible notes and warrants, our mark-to-market adjustments for amounts to licensors, the excess converted shares covered by our bond hedge and certain another onetime non-recurring items.

With that I'll turn the call back over to the operator and open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Drew Jones with Stephens. Please proceed.

Drew Jones

Thanks. Good afternoon guys.

John Higgins

Hi, Drew.

Matt Korenberg

Hello Drew.

Drew Jones

Looking at the guidance for 2017 I wanted to dig into a couple of areas of that a little bit deeper, starting with the contract revenue of $20 million can you flesh out the composition of that a little more and specifically OMT contribution there and maybe how much of that is from the partners and how much of that from programs maybe progressing into the clinical stage?

John Higgins

Yes, good question Drew. We’ll certainly have a lot more detail at Analyst Day next week on the specifics of milestones in the buckets, but generally speaking, I think that the milestones across all the 60 events do spread across all the buckets that you referred to, OmniAb, the clinical events, regulatory events and some others just things progressing through development in different ways. We haven’t given specific guidance on OmniAb generally speaking other than the $12 million we mentioned that, the outset of the acquisition that still generally speaking about in line with where we see the composition of that $20 million.

Drew Jones

So the $12 million doesn't really change much even though you guys have added new partners?

Matt Korenberg

Correct, the $12 million reflected some new partners who have done more than we expected, so it will probably be a bit above the $12 million, but it’s around that number still.

Drew Jones

And then just the sort of keep picking at the milestone area, but the decision to exclude the $30 million from guidance now is there less certainty involved, these seem like some potentially significantly larger milestones that are out there, are there any events in particular that may be you could point us to a couple that would be needle moving maybe?

John Higgins

Yes, Drew its John. Some perspectives and for investors and analysts who know the story for the last couple of years, I think will readily recognize these events and now that we're in the calendar year we want to be, one very transparent with the magnitude and the quantum of dollars and the number of events, but also be realistic that they are out of our control. An example, our share is related to Evomela, a product that we partner with Spectrum. In 2015 we expected approval and upon approval we were due at $6 million milestone payment.

The NDA was set for approval in the fourth quarter, October timeframe and we were highly confident the drug would get approved. At that time though, Spectrum got a complete response letter. They had to answer some manufacturing related questions and that approval came the next year in March five or six months later.

So, our outlook, our confidence in approval was very high. We were correcting that it did get approved at the time. This is back in the 2014 we thought it was reasonable to make some assumptions that the $6 million would be included, but this is a good example where there is about a two quarter delay which obviously impacted 2015 revenue and so on.

So that is an example. Another more recent example, Lundbeck, they have a product Carbella, which we thought would approved in September, at the end of September and we are owed a milestone, significant milestone. It actually got approved October 7th about a week or two later after that quarter cut-off.

So these just illustrate the sensitivity of timing. In both cases though, the products were approved and I think in terms of the overall picture, it's really not a consequential impact. When we describe our revenue we did $27 million of contract revenue in 2016, I mean that is a profound amount of revenue. We have over $2 billion of potential payments under contracts with our partners.

Obviously that is spread over a long period of time and based on a lot of events, but when we look at 2017, we feel very comfortable saying we will book at least, at least and that is important at least $20 million. We do believe we will book more than $20 million, but right now early weeks of 2017 we aren’t prepared to call the timing or the probability of this other $30 million of potential milestones.

So that is some perspective. We absolutely have these contracts. We have got visibility on the timing, on the dollar amounts, but we aren’t going to put this into a traditional tight range bounded guidance. We want to just really be illustrative of the potential and we will give more information as the year progresses.

Drew Jones

Understood, thanks guys.

John Higgins

Thanks.

Operator

Thank you. Our next question comes from the line of Matt Tiampo with Craig Hallum. Please proceed.

Matt Tiampo

Hi gentlemen. Good afternoon, I want to follow up on Drew's question just a little bit. Maybe you can give us a sense for what your previous outlook assumed from sort of a methodological standpoint in terms of discounting the potential milestones that were out there right, so I mean it is relatively easy for us to take the 130 base and then walk 30 million across to the greater than 160 previously, but I can't believe that there isn’t some other bucket that is maybe – and maybe it is material stuff that has come down a little bit given that you probably didn’t have 100% contribution from available milestones in that previous guidance? Thanks.

John Higgins

Yes, Matt a good question. I will add some color and then and Matt Korenberg can jump in. Overall three main buckets of revenue that we believe we've got good visibility on the royalties obviously, the majority of our revenue, 100% gross margin and consistent with our practice we are really looking to third-party annual assessments to drive that. I think Promacta is on or maybe ahead of schedule over the last year or two. Novartis is doing very well with with Kyprolis and we're very pleased with its performance, but frankly it is coming in probably lighter than what we or analysts would have expected about a year ago.

It is competitive, the competitive environment obviously there is sharing of revenues, but also they had a setback on one of their trials. They have had very good clinical success but one of their trials that would have supported label expansion did not come in until second half of last year. So some pluses and minuses there, but I think royalties fairly in line with what we have been looking at historically. Captisol, we have talked about this and we are very proud of the fundamentals of Captisol, but because of timing of data and approval, 2016 came in light. We were expecting numbers in the $25 million to $30 million range we came in at around 22.

So as a predicate, as a base value I think Captisol contribution for 2017 very plainly speaking is a bit lower than what we would have expected six or nine months ago. With regard to milestones, we know this year we are looking at a Carbella launch, we are looking at Baxdela approval and launch. We are looking at data from Sage and a potential approval for that product.

There are a number of regulatory events around Sparsentan. So this is a short list, but I presume a very obvious list for investors of major late-stage assets that do have not only milestones, but in some cases Captisol and royalties tied to them that are going to hit in 2017.

So instead of assuming we run the table and over promising on revenue, we want to be completely transparent. We want to layout the information as we see it now and provide more information as the year progresses and I will see if Matt wants to add any other color.

Matt Korenberg

I think the only thing I would add Matt is specific, very specific to your question about maybe the difference in methodology or buckets. I think as John just alluded to this and you can speculate by related to those regulatory events there are a couple larger milestones, a handful of larger milestones that have moved out of the 2017 window and are mined into 2018. And so there are some, it is that is 30 bucket, they were calling 100% of the 30 buckets previously and now we are calling less than it is now. The buckets shrunk just a little and we are being transparent about the size of the bucket.

Matt Tiampo

That is helpful actually. Thank you. In terms of Captisol, would you I mean do you think that that 2017 estimates for Captisol is a little bit lower than you might have clearly lower than you have expected six to nine months ago, do you feel like you have taken an appropriately conservative stance there sort of similar to what you've done with milestones?

Matt Korenberg

Yes, I think that is right and again not to keep plugging Analyst Day, but we have, we will have a little bit more about this next week, but we did sort of a deep dive on customers and buying patterns and things like that and well it is going to continue to be lumpy and we can't predict the timing of everything. We feel like the 23 number is a very good, solid, core for the Captisol number with some upside from some of the products that get launched or moved through the regulatory pathway.

Matt Tiampo

Great, thanks very much guys.

Matt Korenberg

Thanks Matt.

Operator

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed.

Larry Solow

Good afternoon. Not to beat a dead horse, just on the Captisol and I know you guys have a grant, is fair to say with just all the growth metrics and borrowings change or something unforeseen hard to say what growth is this year, but fair to say that over the long term you would expect this number to continue to grow?

Matt Korenberg

Yes, and clearly we do and for two reasons. Today about 40% of our portfolio are tied to our capital base customers. Okay, so the very significant amount of customer base we have 14 revenue generating assets today and about a half of them are still our Captisol base. But we expect the number of approved products to increase meaningfully when you go out let's say to the end of the decade we could have 14 or 15 Captisol based products approved from seven or eight right now.

So now when more products be approved polling out demand for Captisol commercial use, but also as I mentioned in my remarks, the products we have Evomela, even Kyprolis, the existing Captisol products are very early in the lifecycle. So new product launches continue growth for all those reasons demand for commercial use will definitely increase and we expect to drive the core Captisol use.

The clinical side of the business is also a very important part of the revenue contribution, but it's every product is different, the number of patients whether it is 50 patients or 1000 trial sized in number of the amount of Captisol used to solubilise a drug highly variable. The number of trials required to get approval, so that is it is more abstract, it is difficult to talk out three or four years what the clinical demand will be but as Matt said if sampling is gone from 200 a year to 800. If the publications and the interest and success with Captisol is growing we expect there will be continued poll through for clinical use as well.

Larry Solow

Right, just assuming based on our reasonable hit rate, you would assume that should grow unless if there is something compelling, or competitive environment changes or something okay fair enough.

And just in terms of the, again just on license payouts or expected payments, so it sounds like based on that $20 million I mean, I guess some of the $12 million from OMT also has some pushed their milestones in it, but I guess I view significant amount of that is highly visible for you guys right, so I guess the other $8 million is coming from the 60 events and then there is a bunch that you are not including in there, is that the right way to look at it?

Matt Korenberg

Yes, Larry so of the $12 million that we originally called on OmniAb more than half of that is tied to just regular annual renewal and licensing fees, that we've got a good window on that. But the balance of that is products going into the clinical trials. We've said that we expect three going into clinical trials this year. We’re hopeful it's going to be more, but that’s sort of what was included in the original numbers. The balance of the 20 are things that we do have a pretty good window on trials that are lined up ready to start or those sorts of things.

Larry Solow

Got it and then just the growth and expected royalties obviously pretty significant still majority or I mean would there be any material, are you building any material benefits from anything outside of Promacta and Kyprolis are these by themselves, together that the rest of the stuff may be immaterial, but anything material by itself?

Matt Korenberg

Yes, no. The Promacta and Kyprolis and Evomela make up about 95% of royalty still in our projections. Promacta and Kyprolis and Evomela are well covered as John alluded to in his talk that we use the research analyst and make a couple tweaks to those based on whether the research analysts are out of data or what not. But other than that if you just take the consensus of those three the averages are high and low. That gets you to about 80 and change of royalty and then you add CorMatrix and the other products onto that, that’s how we get to the 87.

Larry Solow

Got it and then just lastly your upcoming Analyst Day next week any try to give us a teaser, anything we can look forward to and are you guys going to provide any sort of longer-term financial outlook like you have in years past? Thanks.

John Higgins

Yes, so on the finance side I will comment and then may be Matt will comment on some of the other program highlights, but we will give what we're calling our outlook for 2020. It won't be specific numbers or guidance, but we'll give you some guidelines to work your models.

Larry Solow

Got it.

Matt Foehr

Yes Larry and this is Matt Foehr. We will also do deeper discussion of both OmniAb as well as Captisol which are obviously key technologies that are driving further partnering, diversification, and growth of our portfolio, also a deeper discussion of our GRA program, our Glucagon Receptor Antagonist which is well in its Phase 2 right now.

Larry Solow

Great, Thanks.

Matt Foehr

Thanks Larry.

Operator

Our next question comes from the line of Gregg Gilbert with Deutsche Bank. Please proceed.

Greg Fraser

Thank you. It's Fraser on for Greg Fraser on for Gregg Gilbert. Just one follow again on the material sales guidance. I guess as we are thinking about 2017 Kyprolis sales will be higher, Evomela will be higher, CorMatrix should be launching yet more partnerships for Captisol then ever. I guess all of equal it seems like that line should be higher versus 2016, so just wondering if you could give us some more color there. I know you guys will talk more next week but can you just, any more commentary there would be helpful?

Matt Korenberg

Yes, look we’ve said it before, but I'll reiterate this. You know some of our partners make large purchases well ahead of things like launch and trials and what as we saw dug into the details of 2016 what we quickly realized by the end of the year was that some of our large partners basically have had enough of Captisol to last them through particular trials or launches or whatnot and so we've adjusted for that and we think the core is where it is and we think there is upside as new trials and broken products and things like that.

John Higgins

Yes, I mean just you have a good list. This is John you have a good list of products or commercial drivers. Evomela is a high royalty, excellent royalty it's actually as small user Captisol. So that’s not a major variable under really broad range of revenue scenarios.

When you look at Lundbeck's product Carbella this is an example of a product that again we thought would be approved in September, it came in October. It has not launched yet, they are still working through some timing issues related to launch. We do expect that product to launch in 2017, but the magnitude of orders will be different whether it’s early 2017 or late.

So a couple of variables like that, but overall we feel we do have good visibility on the number of customers we have obviously excellent relationships. Anecdotally, I know Matt is going to go into this a little more next week, but I’ll say ratings as a vendor as a supplier of an excipient has improved significantly.

A few years ago we were a small market cap company, had a much different capitalization and credit rating and frankly we provide excellent service and reliability and this has really changed the inventory requirements held by partners and the like. So overall the business is doing well and we've got some good metrics I think that I will talk about that next week. We’re calling a number that we feel very good about for 2017 and we hope that there is some upside there.

Greg Fraser

Okay, now that’s helpful color. Thanks for that. On the additional $30 million of potential contract payments are there any chunky things in there, and if so, could you call those out?

Matt Korenberg

There are and we're going to try to give a little more information next week just in a larger format and with the benefit of slides and the like, but it’s going to be limited information and the reality is and I think investors who know us we really tried to be as transparent as possible. And this is a royalty based business and this is a contract payment based business. We want investors to know the amount and the event by which Ligand is going to get paid.

Most of our partners though really invoke strict confidentially provisions and don't permit us to talk about that until the payments are either been made or are imminent within let’s say a couple weeks or so. So we will largely describe this is probably tied to type of event Phase 3 data or product filling, approval et cetera, but it's unlikely that we’re going to be able to give much specificity in terms of the dollar amount or the exact product or the event that is tied to.

Greg Fraser

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Gene Fox with Cardinal Capital Management. Please proceed.

Gene Fox

Hi, gentlemen. So I guess the 270 Matt if I do the math would be the equivalent of about 415, 420 something like that in terms of the, the previous guidance, does that make sense?

Matt Korenberg

Yes, taxes is harder to predict than that quite exactly, but by our math it’s closer to 450 or so.

Gene Fox

450?

Matt Korenberg

Yes. Just as we’re just to be clear that’s just at the 130 and then if we have up milestones they come in just below or above that, that obviously all dropped almost 100% straight to the bottom line after tax.

Gene Fox

Well, I guess that's sort of where I was going, it seems like because of your cost management you're actually able to bring more of it to the bottom line than one would have expected given the change and sort of core revenues is that, is that correct?

Matt Korenberg

Yes, you’re exactly right. I think our expense management and otherwise has been a little bit better than we predicted a year ago when we set the guidance.

John Higgins

Yes, margins cost of goods are holding very well if not better than expected. The operating expense, again we’re very pleased with running a very productive high-growth business, but expenses but for research costs are relatively flat. We know share count is very stable it is a very small growth, growing interest rate environment is still very low, but the actual cash tax rate is below 1%.

We are now obviously reporting on a fully tax basis. That was going to be inevitable in the next few years anyway, but we’re doing that now. But I think your general reaction to the math on $130 million of revenue what Matt Korenberg is saying is that, that is allowing for tax exemptions would equate to about $4.50 under the old method a few months ago.

As we've described, as we move through the year and get clarity on timing and probability of other milestone events, we will talk about those numbers and we believe that there will be amounts that were additive to the $130 million which as Matt just said that tax will flow essentially directly to the bottom line.

Gene Fox

Got it. One of the questions and just to finish up that subject, if your cash expenses are about, call it $30 million we are talking about $100 million of free cash flow generation before CapEx which is modest is that fair?

John Higgins

Yes, you're close. The only thing that is also cash expense that's in there is the material sales cost of goods. So at the levels we are talking and the margins we are talking it's going to be $5 million or $6 million.

Gene Fox

So it will be $95 million, okay it makes sense. Talking about the Glucagon Receptor Agonist that you are drawing the Phase II on I believe that you expect results in the second half of the year. If you were to choose to license that business, I assume that you would potentially get an upfront payment there.

Is that something you would have included in the guidance because I guess not because you don’t have the results yet, but so how should we think about if you are successful on that and have the results, would that be something that you would consider or potentially get some sort of payment upfront on?

John Higgins

Yes Gene, that is our business model and plan, to run the trial, get the data, and if the data is positive supports licensing, we would license out. We are getting more detail net week. We've got a nice presentation around the GRA program planned for next week, but the reality is we can't predict positive data with certainty, and we can't predict a deal by the end of the year.

So if we do a deal though, yes we would expect a license fee as investors know, we focus our economics on backing economics. We don’t it's not a small company that relies on these cash upfront payments. We like those certainly, but we would expect some sort of licensing. Generally that GRA program and expected licensing really isn’t contemplated as far as our revenue build for 2017.

Gene Fox

So simply because of timing and where you are, okay.

John Higgins

Exactly and really just we think it is appropriate, it is not recharge on the program at all, it is just proven, we aren’t going to start to build revenue or license fee expectations around an unpartnered program right now that we don’t have the data for.

So that I think speaks to our prudence in guidance information of the business and conservatism around the program, but nonetheless we have got a robust Phase II trial in an important category and the second half of the year will present the data and we are hopeful that that will be the basis for a licensing event over the next six to 18 months or so.

Gene Fox

Got it. I'm still trying to anchor back to your previous guidance. If I do the math right on the $30 million of incremental milestones that would equate to on a cash basis about a $1.30 of incremental earnings which would suggest if you got the model you would have the number of about 580. Now that may not be entirely correct, so would it be appropriate for us to risk those in some way and based on that to come up with the number that we feel comfortable with?

John Higgins

Yes I think the only thing I think I would disagree within your math there Gene is that $30 million tax would be closer to $20 million and so it is more like a buck a share not a $1.30, but otherwise everything you said pretty much holds.

Gene Fox

I was anchoring on the old way of doing it now on the...

John Higgins

Oh sorry, yes under the old way yes that would be correct.

Gene Fox

All I'm trying to do is to try to understand, put myself in your shoes earlier if you would to have assumed that what sort of number would you - it would have been obviously a higher number than $5 than based on sort of the math as we do it obviously on a tax basis it would be somewhat different from that.

John Higgins

That is correct and I think a fair and reasonable way to work through it. Obviously in light of reporting on EPS reflecting fully tax, again our tax, actual cash tax rate is near 0% and it will be for the next few years. But we are now reporting our fully tax. So you are correct on the mathematics and the number would be well north of $5 a share. And I think the big picture, we are being specific about guidance in terms of expected payout of that quote other $30 million.

Realistically, the idea that all 60 we're going to payout this year that's not our expectation. There may be new deals we do, there may be upside elsewhere, we aren’t talking about that, but realistically the idea that we get a perfect schedule of payout is not our outlook. At the same time we feel very, very confident about the $20 million, the core milestone or contract revenue.

And I think the high log of development and publication of data and success rate that the FDA and so on, inevitably we also believe that some, it's may be not all, but some of those payments will hit. But right now given the magnitude and again I'm sure investors can understand this, we've got an impressive roster, over 90 corporate partners, over 150 shotgun goal, over $2 billion of contract payment. As we look at this we simply today aren’t going to make dollar or spot estimates on the quantum of additional revenue. But as the weeks and so as the months roll on we will have more information and we'll be talking about that as the year evolves.

Gene Fox

Thanks John, I'll get back in queue.

John Higgins

Thanks Gene.

Operator

Thank you. Our next question comes from the line of Drew Jones with Stephens. Please proceed.

Drew Jones

Hey guys, one followup from me, what is the Street estimate for Evomela revenue in 2017 that you guys are assuming in guidance?

John Higgins

Yes, so Evomela has not, or Spectrum has not reported yet their quarter, they don’t report until a week or two from now and so we're working off of last quarter's number, last quarter's number as a reminder it was %5.9 million of revenue. Three analysts cover Evomela Spectrum and report on Evomela, those analysts have not really updated the low analyst is still at a number below the one quarter for next year. So they haven t really updated. The high analyst is at $30 million and so we take in sort of a Q3 annualized number of about $20 million a little lower than the analyzed number as our low-end sort of estimate for next year and the high-end of 30 and then taking the average of that to get to the numbers we're including in the, I guess.

Drew Jones

So, Q4 2016 through 3Q 2017 you are $25 million in Evomela revenue?

John Higgins

Yes about that, yes.

Drew Jones

All right thanks guys.

John Higgins

Thanks Drew.

Operator

Thank you. We have no further questions at this time. I would like to hand the floor back over to management for closing remarks.

John Higgins

Right, well thank you. I appreciate your time and questions. Again we are pleased with the business. OmniAb we closed that deal just over one year ago and the founding scientist and our colleague and fellow employee, Dr. Roland Buelow will be with us next week. It is a very exciting antibody technology that is really helping drive the future and growth of the business. We've got a lot more information to talk about, but we look forward to Analyst Day next Tuesday. We hope you can join us, please RSVP if you can and for now we do appreciate you joining our call. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

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