Ligand Pharmaceuticals Incorporated
Q3 2015 Earnings Call Transcript

Published: 10 Nov 2015

[Operator:]

Welcome to the Ligand Pharmaceuticals' Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Todd Pettingill, Senior Manager of Corp Development. Thank you, sir. You may begin.

[Todd Pettingill:]

Well Ligand Pharmaceuticals third quarter financial results for 2015 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' call will contain forward-looking statements within the meaning of Federal Securities Laws. These may include but are not limited to statements regarding intents, belief or current expectations of the company, its internal and partner licensed and other programs including Promacta and Kyprolis and it's management. These statements involve risks and uncertainties and actual events or results may differ materially from the projections described in today's press release and this conference call. Additional information concerning risk factors and other matters concerning Ligand can be found on Ligand's public periodic filings with the Securities and Exchange Commission which are available at www.sec.gov. The information in this conference call related to projection or other forward-looking statements represent the Company's best judgment based on information available and are viewed by the Company as of today, November 9, 2015 and do not necessarily the views of Novartis, Amgen or any other party. Ligand under takes to 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:]

Todd, thank you and good afternoon, everyone. Welcome and thanks for joining us for our third quarter earnings call. Ligand posted strong revenue growth this past quarter, strong profit growth and strong growth in cash flow as well. Our largest commercial assets are performing very well and we have had numerous positive updates an developments with our portfolio. Of note Promacta and Kyprolis hit again all-time high revenues in the third quarter which will drive our royalties in the fourth quarter. These products are best in class medicines for serious life-threatening diseases and they are marketed by major and highly respected international companies. Novartis announced Promacta Q3 revenues of $117 million the highest quarterly sales ever and up 11% over the third quarter of 2014. Of note this quarter there was a significant currency impact that impacted dollar wise sales. We monitor U.S. prescriptions to the prescriptions for Q3 were up nicely and drove solid growth in the US. In the past quarter Novartis announced the European commission approved Revolade the name of the product in Europe for the treatment of severe aplastic anemia in adults with certain conditions and Novartis announced the FDA approved an and expanded use for Promacta to include children one year of age and older with ITP. In addition to the continued strong commercial performance of Promacta it's very encouraging to see the continued market and label expansion for the product now under Novartis's commercial business. Another product I will ask some comments about is Kyprolis, as investors who follow us known Kyprolis is an Amgen drug that uses Captisol in its formulation. West have a license agreement with Amgen but are not involved in the commercialization or development of the drug. Now, on Amgen's earnings call last week Amgen announced Captisol third quarter revenue of $137 million. That's a very significant increase over the prior quarter of $119 million and over Q3 of last year of $94 million. Some investors estimated Kyprolis would do about $500 million in revenue in 2015 and by Ligand estimates it looks like the product is on track to exceed that level this year. On their earnings call Amgen also announced that they expect approval for Kyprolis in Europe, Canada and some South American and Asian countries in the fourth quarter of 2015. Now I will comment about the approval stage drug, Evameal [ph] partnered with Spectrum. Spectrum expected FDA approval last months but instead received a complete response letter from the FDA in relation to a third-party manufacturing question. Ligand is only $6 million milestone on approval and we had exclude that amount in our 2015 guidance. We have talked to Spectrum and have monitored their public remarks. It is our strong belief that Spectrum can successful address the issues and we expect the drug to be approved. While we now don't inspect to receive the approval milestone in 2015 we do expect to receive the milestone and see the product launched in 2016. We have enjoyed a few years of strong growth in profits and cash flow and our outlook indicates our cash flow and profits will continue to grow. With this history and outlook now is the appropriate time to release our valuation allowance or our tax assets related to our substantial accrued net operating losses. While the release of the valuation allowance does not impact our core business, it does indicate our strong financial performance and now will more readily call out in our financial statements this significant tax asset we have -- as a result of our past investments in the business and the NOLs we have acquired through M&A. We are hosting an Analyst and Investor Day in New York City next week. The morning of November 18th. We'll discuss the business, provide updates on the portfolio and present financial outlook for the Company. We encourage you to attend in person or at the very least dial in to the webcast. I will now turn it over to Matt Foehr

[Matt Foehr:]

Thanks, John. I'm going to provide some additional highlights on portfolio program developments from the last few months and I'm also going to give a brief update on some progress with our internal unpartnered pipeline and the expanded uses of our capital technology. Starting with our portfolio the team at Viking Therapeutics and have built significant momentum recently. Those of you who have been following Ligand for a while may now Viking was formed around licenses for multiple Ligand assets. They successfully completed their IPO earlier this year and are now in active clinical development. Viking completed a safety tolerability and PK study for their Selective Androgen Receptor Modulator or SARM that they call VK521 in elderly subjects. The study showed that their SARM which was originally discovered by our scientists at Ligand was safe and well tolerated and that the drug demonstrated predictable PK in elderly subjects. Viking then announced just last week that they have now initiated dosing of the SARM in a Phase 2 study in elderly patients who have recently suffered a hip fracture. There's obviously a large and growing medical need for assisting patients with hip fracture after breaking a hip elderly patients are known to lose bone and muscle at accelerated rates placing them at risk for further morbidity, refractures and prolonged disabilities. The profile of SARM suggests it has robust anabolic effect an bone and muscle which indicates that it could meet an important need in this setting. Viking has indicated that they expect to have Phase 2 data for SARM and hip fracture in 2016. Viking also announced that they will be presenting additional data on the SARM program at the International Society of Sarcopenia, Cachexia and Wasting Disorders in early December. Additionally Viking is actively progressing into clinical development their tissue selective agonist of the thyroid beta receptor inpatient with hypercholesterolemia and fatty liver disease. They plan to file an IND for the TR beta program and initiate Phase 2 studies prior to the end of this year and expect to complete the Phase 2 trial in 2016. We are very proud of our relationship with Viking as well as Ligand's scientific heritage related to the drugs that they are developing and we look forward to two Phase 2 data events in 2016. Changing gears, in the third quarter we entered into an expansion of our relationship with Retrophin for Sparsentan as background Sparsentan is a selective dual acting receptor antagonist with an affinity for both [indiscernible] Angiotensin 2 receptors that is in development at Retrophin for focal segmental glomerulosclerosis or FSGS. This drug was originally developed as an antihypertensive medicine by Pharmacopei, a company that Ligand acquired. Sparsentan's mechanism of action show that it can reduce [indiscernible] that are the hallmarks of FSGS which is what led to our partnership Retrophin. As I mentioned we updated our agreement with Retrophin in Q3 specifically, this was in relation to potential expansion into the Asia Pacific region, we did this because we see Sparsentan as a promising drug with global potential. Outside of the U.S. Retrophin announced that the European agency for positive orphan medicinal products issued a positive opinion for orphan drug designation of Sparsentan in FSGS. The final decision that generally follows a positive opinion is expected within the next several months. Retrophin has also indicated that they expect topline data from their duet trial in Q3 of 2016 and we look forward to hearing that outcome at that time. Switching gears to our internal R&D and specifically our glycone [ph] receptor antagonist that we call LGD-6972. It continues to progress towards a Phase 2 trial in patient with Type 2 diabetes. We announced positive Phase 1b data earlier this year at the ADA meeting in a currently completing non-clinical work to position ourselves to start the Phase 2 in 2016. We are excited about the program and we believe we have the potential to have a best in class molecule with a novel mechanism for treating diabetes. I'm going to wrap-up with just a few quick comments about Captisol. The week before last was Annual American Association of Pharmaceutical Scientists meeting which is a meeting that brings together leading pharma scientist and formulators from all over the world. It's generally an important events for our Captisol and this year the interest in visibility for the technology was higher at the conference than it's of been. We were pleased to see presentations that referenced Captisol and specifically will mention one out of Kansas University that showed Captisol stability under very extreme formulation situations and also data out of the University of Mississippi that showed enhanced dermal delivery of testosterone gel formulation that was facilitated by Captisol. It's great to continue to see the growing body of data showing Captisol used in a variety of new and interesting ways and it was fantastic to interact with many of our current and future partners and hear about their experiences with the technology. And with that I'll turn the call over to Matt Korenberg to run through the financials.

[Matt Korenberg:]

Thanks, Matt. I'll started today with a few highlights from our earnings release issued earlier today. Total revenues for the quarter were $17.7 million and included royalty revenue of $9.8 million. The royalty revenue increase of 30% versus the year-ago period largely reflected higher Promacta and Kyprolis royalties. Captisol material sales for Q3 were $6 million and collaborative R&D revenues were $1.9 million both in line with expectations for Q3. On the expense side our cash R&D and G&A expenses were slightly lower compared to the year-ago period due to lower costs associated with business development activities. Now a quick comment about gross margins. We once again saw higher gross margins as compared to the prior period. Our material sales margins are driven by both the mix of clinical versus commercial sales and the volume of Captisol we purchase. As disclosed previously our margins are better on our clinical sales as compared to our commercial sales and our overall costs are lower at higher annual volumes. For the quarter we reported adjusted earnings from continuing operations of $12 million or $0.56 per diluted share compared to $7.6 million or $0.36 per diluted share for the same period last year. The primary driver of the increase is on an increase in royalties from Promacta and Kyprolis combined with a decrease in expenses. In the third quarter we had GAAP net income of $224.5 million or $10.46 per share driven by the release of our valuation allowance related to our NOLs. As we have discussed previously, Ligand has a useable portfolio of NOLs and other tax assets of more than $700 million. Through last quarter we had maintained a valuation allowance offsetting the entire balance due to the uncertainty of when we would use the NOLs in other tax assets. Given the sustained positive performance by the company and analysis of our cumulative historical earnings and forecasted future taxable income indicates that it's more likely than not that will utilize substantially all of the NOLs and other tax assets prior to the expiration and, therefore we are releasing substantially all of the valuation allowance effective September 30th, 2015. The income tax benefit from valuation allowance released net of our current period GAAP tax expense increased our GAAP net income by $217.3 million or $10.12 per diluted share for the third quarter. Roughly the $217.3 million equates to the future tax benefit we'll realize from the utilization of our NOLs and other tax assets. Now that the valuation allowance has been released our GAAP EPS will appear as fully taxed on our income statement going forward at approximately 36% to 38%. That's prior to any adjustments for difference in book and tax deductions other than the NOLs. Taking into account the usage of our NOLs and other tax assets we continue to expect to pay cash taxes of less than 5%. On the balance sheet we ended the quarter with just over $187 million of cash and investments. We generated operating cash flow of $10.4 million during the quarter which is a meaningful increase from the $3.7 million of operating cash flow in the year-ago period. Our growing royalties and top line revenues combined with our relatively stable low cost infrastructure continues to allow for significant cash generation. As John referenced we are adjusting our full year 2015 guidance primarily to reflect an expected delay in the timing of receipt of the $6 million milestone payment due from Spectrum upon approval of [indiscernible]. We now expect that milestone to be earned and paid in 2016 and will provide any updates on timing and outlook at our upcoming Analyst Day. We now expect full year 2015 total revenues to be between $75 million and $76 million and adjusted earnings per diluted share to be between $3.34 and $3.37. This compares with previous 2015 guidance for total revenues to be between $81 million and $83 million and adjusted earnings per diluted share to be between $3.45 an $3.50. As you can calculate we’re adjusting revenue for the full impact of the delay of the milestone but on the EPS line we expect favorable changes to expenses and other items will partially offsets the delay of the milestone. For the fourth quarter of 2015 we expect total revenues it be between 24.3 and $25.3 million and adjusted earnings per diluted share to be between $0.63 and $0.66. Adjusted earnings per diluted share guidance excludes changes in contingent liabilities, mark-to-market adjustments for amounts owed to licensers, noncash stock-based compensation expense, noncash debt related costs, pro-rata of non-cash net loss of Viking Therapeutics and noncash tax expense. With that I'll turn the call back over to the operator and open it up for questions.

[Operator:]

[Operator Instructions]. Our first question is coming from the line of Joe Pantginis with ROTH Capital Partners. Please proceed with your question.

[Joe Pantginis:]

My first question revolves around 6972. I guess the question is, you know, when could you get into the Phase 2 more specifically and are you really looking to run the phase to yourself and build more internal value for the product before potentially out-licensing it or partnering it?

[Matt Foehr:]

As I mentioned earlier remarks we're obviously real excited about the program. We are running some additional non-clinical work to facilitate the Phase 2 program. That work will continue into early next year and then probably in the mid-year time frame we'll keep folks updated as things progress, but is when we would be in a position to start the Phase 2. So we're excited about the program. We feel like we have got a best-in-class med. The more we see data from our program the better we feel about it and we're excited to be moving forward with it.

[Joe Pantginis:]

And I guess you're always very selective and I think that's always helpful with regard to maintaining your low expenses or stable expenses I should say. Is there any other products that you might want to point to now that might be the next 6972 coming out of your platform?

[Matt Foehr:]

Yes. You know, we've got a couple of things obviously that we continue to invest in. We maybe don't talk about all of the time, but I will bring up our small molecule oral GSF, obviously we have got a history of discovery of successful small molecule [indiscernible] not unlike Promacta of course. And those are the kind of programs that are more pre-IND, pre-clinical programs but we feel like we have focused investment we can continue to position. We have also got some Captisol enabled programs where we feel like Captisol can add specific benefit to maybe an active that is off patent and could improve a product profile and we have got some of those at earlier stages as well.

[Operator:]

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

[Matt Tiampo:]

I wanted to start by maybe just asking I think it was pretty well understood that the $6 million that milestone is coming out, but it seems like you're able to weather that pretty substantially on the bottom line at least the majority of it and wondering if the strength there is coming from sort of continued strong gross margins or if the current operating expense level will be the culprit in Q4?

[Matt Korenberg:]

It's a combination of both. You know, I think margins on the gross side are better and that's helping quite a bit and then the expense base is a little bit lower tracking than we had expected compared to guidance or our internal focus on guidance. So yes, it's a combination of both.

[John Higgins:]

You're good to pick that up. There are really two messages, one obviously the Spectrum milestone we do expect to hit. It's a timing issue but again our understanding of the technical issues and the like is that -- obviously we won't see the revenue it's our outlook in 2015, but you're good to pick up on -- I'll say the better than expected performance in the rest of the business when we look at higher gross margins and some other or kind of small changes throughout the rest of the P&L earnings notwithstanding that change in revenue adjustment earnings actually is very strong for the business that we had estimated at the start of the year. So we're pleased with that. As we move into next year, we think a higher volumes will continue to enjoy a bit higher gross margins on Captisol, but we still need to talk about the overall expense structure as it relates to our investment in [indiscernible] done but the business from an earnings and cash flow perspective are really strong.

[Matt Tiampo:]

And then I wanted to ask if you can give us a sense for how Captisol sampling has progressed through sort of the middle part of the year and then also it sounded like there's a pretty solid mix of clinical to commercial and it looks like it will continue to be that way throughout the balancing of the year, but any additional color you can give us there would be helpful as well.

[Matt Foehr:]

As I was saying, just coming off of APS we continue to see increases in the in-bound requests for samples from new partners, new perspective partners and I think a lot of that comes from just the increased visibility of the Captisol technology, the growing safety database in our type 4 and type 5 drug master files that are real big value drivers to new partners in terms of facilitating their dialogue with regulatory agencies and facilitating their projects more quickly. So we are continuing to see good increases, real solid increases in Captisol sampling which we're excited about. And I will say the mix in terms of clinical to commercial Captisol as we said in the past it can vary quarter to quarter. You know, as a partner embarks on a Phase III trial they may need for that program a big bowls of clinical grade material so we do see lumpiness from time to time and quarter to quarter in that mix, but we feel very good about Captisol's prospects.

[Operator:]

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

[Larry Solow:]

Just on Promacta I think you guys said it grew 11% year-over-year. Do you happen to have what prescription did grow and sort of what the underlying growth is and I guess on the currency impact you're subject to that, I assume, right? So whatever reported growth is sort of what royalties would be, correct?

[Matt Korenberg:]

That is correct, Larry. The last points, the currency I'll start with that. It's hard to look at the exact mix of every country and the dollarized impact, but very roughly when we have looked at Novartis' public disclosures the currency impact is -- we have anywhere from 5% to 9% quarter-over-quarter and it's just really an anomaly given what happened in the international credit markets and currencies, but having said that, again, all-time high sales report in dollars and the US since US is not impacted by currencies we saw prescriptions what we're looking off of public report, in Q2 prescriptions were about 10,700 as reported, in Q3 they were over 11,500. So that's just pure RX growth and this is a Bloomberg symphony data. So obviously we monitor the underlying prescription performance. It's solid and the overall momentum of the product is also solid coupled with -- again, the new approval. The new territories, new indication and some large indications and the oncology indications are still to come with more Phase III data and potential filings coming up the next year or so.

[Larry Solow:]

Okay and on the gross margin question I realize a couple quarters don't make a trend, but I know you guys have spoken about some manufacturing improvements and efficiencies in Captisol and was the gain this quarter or the high gross margin surely Captisol and I think you mentioned some other lower cost and some other things and then was it -- you know, did it seem mostly because it was the higher clinical versus commercial sales and it seemed like some of that sustained by realizing on the operating side perhaps hard to say because it could be some timing relation but the gross margin side perhaps you have a little better call on that?

[Matt Foehr:]

The only cost of goods in our business relates specifically to Captisol. The other payments milestone, royalties are 100% gross margin. So Captisol is a factor. The higher volume is driving better pricing or cost for us and this large due to a lot of the good work we're building in efficiencies with our contract manufacturers but the other part as we talked repeatedly every quarter it is mixed. We have some visibility on estimated orders for commercial use throughout the year, but the timing of clinical orders is not perfectly known. So mix does drive a big part of this. The gross margin -- the clinical sales are quite a bit higher. So those two factors, again, there are some other elements throughout the P&L that also benefited the quarter from an earnings perspective, too.

[Larry Solow:]

Okay. And turning to Spectrum and the [indiscernible] it sounds like Spectrum is fairly confidence in its -- a fixable issue and I guess you guys are sort of -- I don't know if you're privy to [indiscernible] yourselves but clearly in the same ballpark as them. Is it sort of a not to pin you down exactly, but do you think it's something that happens more like in a six month time frame or could it be more like 12 months and how much of these sales? I guess you had given some projections out to 2017 in some of your longer-term projections. Did you guys include any meaningful royalties in those?

[Matt Foehr:]

Yes. Larry, I'll comment. Obviously we're following the public narrative from Spectrum obviously direct any detailed questions on to Spectrum but as we understand they have been clear that there are no clinical issues associated with what was raised in the CRL. In general those sort of things are resolvable. They have said they're in dialogue with the FDA and again we see this as an approval and now at this point we see an approval next year. So our view is that things like this are resolvable. It's a real important medicine with real solid exciting clinical data behind it and they continue to produce data actually with a publication -- there will be a publication coming out at as well but again -- at this point we're seeing it as next year.

[Larry Solow:]

Okay. Just lastly on your upcoming Analyst Day, without stealing your thunder any particularities -- how about a little teaser on what we might -- anything new and exciting we might see or learn that you could preview?

[Matt Foehr:]

Well Larry, fair question. Appreciate the invitation. I'll give a general overview and we encourage investors to attend obviously. We won't go through the substance of the format now, but typically for those who are newer to Ligand we do an Analyst Day about once' year. It's not exactly on the calendar, but we really look to have a substantive update as it relates to the body of developments in our portfolio. The past year we've had a significant string of new deal making, we had the Viking IPO, just a number of other new developments not to mention some fairly significant maturation or progress with the portfolio. So beyond the updates it's putting in context for what do these events mean for the company, the size of the portfolio, the late stage, the diversity, and we find its useful at a forum it will be about an hour and a half program to put these events in context and describe what does this mean for Ligand going forward over the next two to three years or so. So that is the general focus. We have invited Brian Liang, the CEO of Viking to join the program. He will have a presentation on some of the Phase 2 stage programs at Viking, which we have done this in the past where we invite a particular partner to come and talk about their programs that we think of interest for Ligand and our investors. So that will be an element of it. We're also having our general counsel join us to discuss our investment in intellectual property and patent state, this is a very important part of our business and with the growing value of our royalties we're going to showcase that and also we're going to have one of our senior scientist join us Eric [indiscernible] to go a little deeper into our glucagon receptor program for diabetes. So it's a program that we're looking forward to and hopefully you will join us next Wednesday.

[Operator:]

Thank you. It appears we have no further questions at this time. So I would like to turn the floor back over to Mr. Higgins for any additional concluding comments.

[John Higgins:]

Well, thank you. Good turn out on the call today. Appreciate the interest and the questions and as we just went through a few minutes ago we'll be back in front of investors in about a week and a half for our Analyst Day. Thanks for joining us

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Again we thank you for your participation and you may disconnect your lines at this time.