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New Issue Analysis: Ligand Pharmaceuticals $225 Million Convertible Senior Notes 0.75% 2019-08-15

|Includes: Ligand Pharmaceuticals Incorporated (LGND)

Ligand Pharmaceuticals priced a $225 million, 5-year convertible bond issue on Tuesday, with up to $200 million of the proceeds to be used to repurchase stock. LGND stock peaked at $80 earlier in the year, but has drifted down to the mid-$50s recently. Thin liquidity (only 22 million shares outstanding) and a lack of top-tier analyst coverage have accentuated the volatility. Ligand occupies an interesting niche within the biopharmaceutical space. Instead of spending hundreds of millions of dollars attempting to develop and commercialize new drugs, Ligand takes a low-cost, highly diversified approach. Ligand buys drug delivery or formulation technologies and then licenses them to drug developers in exchange for development milestones and royalties on potential product sales.

At first glance, it can be difficult to understand why a company with a small revenue base ($5 million in 2Q royalty revenues) and virtually no R&D spending should be valued at a $1 billion market cap. However, Ligand is currently receiving royalties on five approved products in the early stages of growth and expects to have five more "revenue-generating programs" by the end of this year. Also, with partners footing the clinical development bill for all of Ligand's 90+ programs, incremental margins on additional revenue are essentially 100%. Indeed, management has highlighted holding operating costs flat since 2011. Royalty revenue concentration is a near-term risk given the current reliance on Promacta and Kyprolis sales growth, but this issue should be alleviated over time as new partnered products are approved.

If consensus revenue estimates of $90 million for 2015 are to be believed (caveat: small sample size alert), Ligand could generate $50 million of cash flow. This should comfortably support the credit, especially given the solid growth outlook.

Optically, LGND's new deal makes AEGR look attractive. But that's before considering the relative deal sizes and market capitalizations, as well as the way Ligand's licensing revenues should drop to the bottom line. We're not thrilled about the likelihood of Ligand using most of the proceeds to buy back stock, but that's the world we live in.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.