Ligand Pharmaceuticals: Struggling Along (NASDAQ:LGND)

In March of this year I concluded that the moving parts were moving along for Ligand Pharmaceuticals (NASDAQ:LGND). Ligand is a very special and almost intriguing company because of its differentiated business model. This is driven by the essential belief that not all R&D programs in the biopharmaceutical space carry the same risk-reward.

Following that belief, the company aims to foster collaboration between all players in the ecosystem, connecting patents, data, and the exchange of critical knowledge, often in exchange for royalty streams, but many other flexible enumeration options are possible.

Some Background

Ligand has been a hugely successful investment in the 2010s. Just a $10 stock at the start of the decade, the stock rallied to the $300 mark in 2018. This was driven by very strong growth in the business as the company was involved in $2.3 billion in underlying product sales (on which it fetched royalties) as it had hundreds of drugs in the pipeline together with its partners.

The company itself generated about a quarter of a billion in sales at the time, little over half from high-margin royalty revenues, some $30 million in material sales and nearly $100 million in lumpy license and milestone payments. Posting adjusted profits of nearly $170 million, margins were incredibly high and earnings came in at $7 per share, as valuations were still very demanding at $300 at more than 40 times earnings.

Despite the high valuations there were some moving parts as well, including the decision to sell IP rights of Promacta in a $827 million deal. This deal caused 2019 results to be cut roughly in half, yet of course the company obtained a huge net cash position as well, as the company acquired Pfenex in a $438 million deal, with little imminent contribution seen to the business.

Even as shares fell towards the $100 mark in 2020, I was cautious given that earnings power was stuck around $4 per share, and many moving factors taking place at the company as well.

What Happened?

With exception to a quick move higher early in 2021, shares have largely traded in a $100-$150 range, and by now they actually trade hands around the $80 mark. 2020 sales rose from $120 million to $186 million, yet this included a massive $111 million Captisol sales contribution, in part used in pandemic related medications. While a $4.50 per share earnings number was solid, more than half of revenues were tied to the pandemic, as I was fearful to extrapolate or alone continue these revenues in my modeling.

As it turned out, 2021 sales rose to $277 million which included $164 million in Captisol revenues, or just $113 million in non-Captisol revenues. A near $6.50 per share adjusted earnings number looks compelling, but as it excluded about two dollar per share in stock-based compensation, as well as Captisol profits, realistic earnings were likely minimal. With net cash (adjusted for convertible debt) close to zero, I was cautious at $114 earlier this year as the outlook was highly uncertain with 2022 revenues seen down anywhere between $147 and $172 million.

With so many moving parts and volatility in the business operations, I found it very hard to get involved with Ligand, as the moves were a bit too aggressive for me.

Moving Down

Since spring shares have lost further ground, now trading around the $80 mark which is actually a small bounce from the lows in the low-seventies seen earlier this summer.

On the corporate front, activities slowed down a bit since March other than regular quarterly reporting. First quarter sales were posted in May with sales down from $55 million to $45 million as Covid-19 related Captisol sales fell from $30 million to less than $6 million. The modest decline in total sales was the result of strong growth in royalty sales and to a smaller extent contract revenues, quite encouraging.

The company posted adjusted earnings of $0.76 per share, essentially cut in half compared to the first quarter of last year. With this earnings number excluding $0.53 per share in stock-based compensation and various other items, realistic earnings came in around the flat mark.

Second quarter sales came in at $57 million and change, this time including a $26 million Captisol revenue contribution related to the pandemic. Even as adjusted earnings came in at $1.03 per share, I was not too comfortable with this number was well, as it excludes $0.56 per share in stock-based compensation expenses with Captisol related revenues tied to Covid-19 boosting earnings by $0.69 per share as well, as otherwise the business is posting small losses.

Amidst a rather flattish net cash balances and earnings close to being non-existing, the valuation of Ligand becomes hard to establish. The 17 million shares now represent a just over $1.3 billion equity valuation at $80, and while the company posts solid sales from a variety of sources, the lack of real earnings (outside the pandemic, and not adjusted for stock-based compensation) makes the situation highly lumpy and uncertain. This remains the case, even as the company hiked the full year outlook to $169 and $188 million for the year.

Part of the upside might have to come from OmniAb, a business belonging to Ligand. This business is very small, posting sales at just $30 million run rate, yet this business is spun out of Ligand. The deal is set to close in the fourth quarter and will be key as a $850 million valuation is equal to $50 per share in terms of Ligand’s stock and will be distributed. If this were to happen, the remaining activities of Ligand represent just a $30 per share, or half a billion valuation. Of course, there is large uncertainty on this value, as the structure through which OmniAb will get its own listing will be a SPAC, which seems quite unusual.

What Now?

The truth is that the situation has become a lot more uncertain as there are many moving targets here. Right now, the potential appeal has to come from monetization of OmniAb which represents more than half of the value of Ligand here, while being responsible for a far a smaller revenue share.

If this separation is really going to happen at this valuation, the potential is most certainly there, leaving me anxious to see the developments unfold in the coming quarters, yet for now I have no reason to get involved just yet.