Greetings, and welcome to the Ligand Pharmaceuticals' Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Pettingill, Associate Director of Corporate Development and IR. Thank you. You may begin.

Welcome to Ligand’s fourth quarter and full year 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 and its management regarding its internal and partner programs including Promacta and Kyprolis. 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 projections or other forward-looking statements represent the company's best judgment based on information available and are viewed by the company as of today, February 10, 2016 do not necessarily represent the views of 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.

Good afternoon. Thanks for joining us for our fourth quarter earnings call. 2015 was a great year for Ligand and the fourth quarter closed strong with substantial achievements that will continue to drive the business. Ligand is now set up for a momentous 2016 with potentially five new product approvals from partners, advancements and expansion of the license portfolio and significant projected revenue growth. Now, in 2015 the revenues were solid and they were driven by higher royalty revenues. The total underlying revenue for the products from which Ligand earns revenue from exceeded $1.1 billion in 2015. That is up from about $850 million in 2014 and is in line with our expectations. Now of note, Promacta and Kyprolis again hit all-time high quarterly sales in Q4 2015. In the fourth quarter, Novartis reported Promacta achieved $133 million in global sales for a total of $465 million for the calendar year 2015. Promacta continues to grow with new territories coming on line under Novartis’ commercial leadership and the product label being updated with expanded uses. On January 28, Amgen announced that Kyprolis achieved $148 million in sales for Q4 which results in total sales for Kyprolis for the year as reported by Amgen of $512 million. Notably, Kyprolis realized approvals in just the second half of 2015 for use in major new territories and for expanded uses. And investors who follow Ligand know very well Kyprolis is an Amgen product that uses Captisol in its formulation. We have a license agreement with Amgen but Ligand is not involved in the commercialization or development of the product. In our view, the product is early into its growth cycle and third-party analyst project Kyprolis will achieve significant revenue growth over the next few years as the product addresses a critical medical need…

Thanks, John. I am going to start off this afternoon with some additional highlights on partnered program developments and I will also provide updates on our progress and plans around the recently acquired OmniAb technology. And I will also touch on our continued focus on expanding our Captisol technology. Our partners continue to make progress and invest substantially on programs in which Ligand has downstream economic rights. Our portfolio of partnered programs is now the largest that it has ever been with more than 140 shots on goal and over 85 partners. We estimate our partners will spend approximately $2 billion developing Ligand partnered programs this year. Last month, at the JPMorgan Conference in San Francisco, we saw presentations from more than 30 Ligand partners providing pipeline updates and mapping out plants for programs that leverage Ligand technology or intellectual property. I’ll highlight just a few examples briefly. Coherus and Baxalta recently announced - Baxalta recently announced that a pivotal study evaluating their biosimilar of etanercept met its primary endpoint and that they are progressing to filing this year. Marinus announced clinical advancements for a Captisol-enabled intravenous Ganaxolone, and our partners at Viking Therapeutics continue to make great progress and announced the start of a Phase 2 trial of their selective androgen for patients with hip fracture. Additionally our partners with already commercialized assets that are paying us royalties continue to invest in expanding indications and geographic footprint. Promacta, for instance, is being studied in a number of ongoing trials in cancer related and other indications and appears to have potential well beyond the three currently approved indications. Promacta’s label was also expanded recently into pediatric ITP patients down to one year olds and Novartis continues to expand geography and report market share gains and significant growth. We noted also…

Thanks Matt. 2015 was our third consecutive full-year of profitability as we continue to see growing total revenues coupled with relatively flat cash operating expenses providing us tremendous earnings leverage to our P&L. As highlighted in our press release, we look for 2016 to continue this trend. We expect continued strong growth from Promacta and Kyprolis royalties, higher demand for Captisol sales, robust milestone achievement by partners and the additional contribution to revenue and earnings from our newly acquired OMT business. Turning to the Q4 financials, I'll review few of the metrics from our earnings release issued earlier today. Total revenues for the quarter were $21.2 million and included royalty revenue of $11.5 million, which was an increase of 23% versus the year ago period and largely reflected higher Promacta and Kyprolis royalties, despite the currency headwinds we discussed previously. Captisol material sales for Q4 were $7.2 million, which was about $3 million less than expectations for the quarter. As John mentioned, we view this as largely reflecting the timing of orders and not indicative of any underlying trend in the Captisol business. As we said in the past, the business is lumpy and the timing of commercial launches and trial starts which the Captisol business is based on our estimates. Collaborative R&D revenues were $2.4 million versus $615,000 for the year ago period with this increase due to the timing of achievement of milestones. Beyond the mix of revenue, we’re very pleased with the earnings performance for the quarter and the year coming in at the high end of our projected estimates due to lower expenses across the rest of the P&L. Cost of goods, R&D and G&A were all better than expected even after considering some larger one-off items like expenses associated with the OMT transaction. Regarding gross…

[Operator Instructions] Our first question comes from the line of Matt Tiampo from Craig-Hallum. Please go ahead.

Good afternoon gentlemen. And congrats on the strong finish to the year. Matt, I wanted to drill down a little bit more on the Captisol margins. It seems like we've seen sort of relatively sustained uptick, and I think a minute ago you mentioned the higher end of that 60% to 65% product margin range. But maybe you can help us out in the quarter, on what the magnitude sort of the benefit was from mix, and what it was from volume and cost improvements?

Yeah, thanks Matt. So, we don't break out the details of that obviously but some of the orders that we talked about at the end of the quarter were some of the lower margin orders, so the mix was even more favorable than expected for Q4. And the cost improvements that we talked about in November at Analyst Day and that we benefited from the rest of the periods certainly helped as well. And the comments about 2016 really are just that we have a predicted volume for 2015 and that really is what’s driving us towards the higher end of 65% combined with the mix shift that we predict for 2016, but obviously both the volume and the mix shift for ‘16 could change.

Great. And maybe logic, I think would dictate that as we you know of that 40% of your revenue and earnings that falls in the first half of the year, [indiscernible] stronger in Q1 just because of the tiering of royalties. Is that consistent, do you guys think with how we should be thinking about it?

Typically you’re right and I think on the royalty side you’ll see that. The milestones and license fee line will probably swing that closer to an even split this year. I think that's probably fair to say largely driven by the EVOMELA milestone in May if that comes through obviously.

And then, John, you mentioned five new products in 2016. But I think we only touched on, I think we touched on five. I can only recall four off the top of my head? Sorry.

Sure, absolutely well and we’re really pleased with the calendar. This year and those who have followed us closely know not only are we working with the largest portfolio but by virtue of the number of programs and development, it’s just an incredibly robust calendar of clinical and regulatory and commercial events that are potentially on deck to happen in 2016. The five specifically we’re looking at, one has already happened. The Zydus Cadila product. There are now two biosimilars that have been approved and launched by this company over the last six months. One occurred in January. The others we called out specifically. Spectrum's product EVOMELA, Lundbeck product Carbella. Albagen's product, it is a generic Voriconazole. Then also DUAVEE in Europe, pricing authorization and launch. So those are the five and last year, we talked about this. We were surprised slightly disappointed that spectrum’s product EVOMELA was not approved on time. We understand there are some technicalities with the application. We believe Spectrum is addressing that but what this means is that now that’s a product that we think is on path for approval and launch this year. So, we’ve got a robust calendar not all these products are the same magnitude in terms of contribution to Ligand. We’re certainly aware of that but in terms of new commercial revenue generators that‘s the outlook for 2016.

Thank you. Our next question comes from the line of Joe Pantginis from ROTH. Please go ahead.

Hey guys, good afternoon thanks for taking the question and congratulations on the progress. I'm going to ask a couple of real broad stroke questions, and the first one is somewhat rhetorical. John, how does the Company keep up with so many programs? I mean, that's like, it's just about how broad it is, it's quite amazing. But congratulations on that. With regard to the progress that you've had in 2015 and the OMT acquisition, are you still, especially in these turbulent markets, are you potentially still being opportunistic with regard to looking to bring on additional technologies or companies?

Yes. Well, I appreciate the comment, the portfolio is very large in our world, it hasn’t happened overnight, every year we are adding more and more -- in some ways I think we’re getting better and just more efficient at managing the portfolio. But bringing on new systems and the like are also important in terms of managing the data flow, milestone calendar, et cetera. Specific to the market environment, look, there is no doubt that the market is pretty dramatically changing over the last three to six months. Generally speaking, we are a participant obviously in the macro markets and the biotech markets more specifically, but two observations. One because of the diversity of our programming, most of our programs are funded by very deep pocketed partners. They're highly committed financially and scientifically to the programs and because of that commitment and partnerships, the diversity and the breadth of the portfolio, again, we're really a unique company as it relates to the otherwise volatility that individual issuers are experiencing. The second part of this, beyond the diversity, the uniqueness of Ligand's story in that sense, the second part, I want to relate to your question specifically about M&A, we are disciplined in deal making. Not everything is a fit for us. We are disciplined in what we want to add or disciplined we believe in valuation, but what is unique about this is that, if property values across the board for technologies or companies come down, that does create opportunities for us. We don't give guidance as to deal expectations, but generally, the integration of OMT has gone very well. I'd say we're well ahead of schedule in terms of not only on boarding our new team members, Roland Beaulieu and Brian Lundstrom. We've already announced a couple of deals; it really has gone very well. So, once again, we've proven we can acquire and integrate smoothly and yes, we are still looking to acquire or pursue other potential transactions.

That's perfect. Thank you. And then I guess when you look at 2016 and the use of your resources, because obviously you have done, at least in my opinion, a fantastic job of maintaining a relatively stable cash burn, how are you looking to allocate your resources? Obviously there's going to be a lot of internal focus on 6972. But with regard to efforts around Captisol, and are you going to put a lot more effort into OMT now, just sort of like a broad stroke of how you're going to segment your different resources in all of your programs?

Yeah. So, it's a good question at least for newer investors following Ligand. The business -- today, we're 21 employees, we've essentially been at that headcount level and I'll say the general administrative business has been largely unchanged for the last three or four years. We're showing -- we're demonstrating we can scale up the business in revenue, expansion of the portfolio, et cetera without increasing cost. That's unique again compared to a commercial business that has a scale of sales force, marketing, manufacturing and the like. The R&D expenditure has been relatively constant the last few years as well and despite that, we also have been productive with new discoveries, inventions and licensing. Specifically, the two areas that are driving costs up this year in 2016, one is the diabetes program or advancing to Phase 2 trials. We're excited about this molecule, it's a large deal and we believe we've got a path toward a fairly straightforward trial. So we're funding that. Secondly, as you referenced OMT, we've brought on a couple of new staff members, but also we're funding some research projects around that to support new deal making. So aside from those two new areas of investment that may add combined maybe $5 million of expenses this year, the rest of the cost structure is relatively steady state.

That's fantastic. And if you don't mind, the real quick question is, can you identify maybe for Matt, identify a product beyond 6972 that you're most excited about, that you're looking to bring forward from the internal pipeline?

Yeah. Joe, thanks for the question. We've got a few programs in addition to 6972 that we invest in, in a focused manner, the way we think about R&D investment is to drive partnering. We ask ourselves what key questions will drive partnering investments and we've got a few programs we're investing in, one is an oral G-CSF program. We continue to focus work on that towards a potential IND. We also look at Captisol programs and this has been an area, I’ll say Captisol enabled products, because this has been an area that's been quite fruitful for us in doing focused, very focused R&D work to build essentially a data set to drive partnering. In this past year, we focused a little bit on meloxicam, turned that into a partnership with RODES. We're also looking currently at a Captisol enabled acetaminophen, another program where we think could drive potential partnering as well.

Thanks a lot guys.

Thank you. [Operator Instructions] Our next question comes from the line of Larry Solow from CJS Securities. Please go ahead.

Hi. Good afternoon. John or Matt, I'm wondering just if you could maybe discuss a little more on OMT. You mentioned sort of the increased power it likely has under a larger umbrella. Obviously you've only had it for a month or so, and you've already announced a couple of deals. Those may have been in the works already before you acquired it. But just curious if you have gotten some inquiries, or the reception from some of your existing partners, that obviously were maybe not aware of or not as close to the OMT story?

Yeah. Larry, thanks. This is Matt Foehr. Thanks for the question. I'll say the OmniAb technology, as I mentioned earlier, what we learned through the diligence, really, this is a technology among best-in-class, it's got fantastic properties that really enable partners to find the antibodies they are looking for and do it in an efficient way. We've already seen just post the announcement, obviously partners that were already connected to that may have an interest in OmniAb. Just by putting it under a larger platform, much like with Captisol that was, at the time we bought it, with a private company, probably maybe not as visible as it could be under a larger umbrella. So we do feel like that will have an influence on the potential for the technology and we're continuing, as John said, continuing to focus on investing in it to expand the technology and expand deal making.

Okay. Just ballpark, I think at the Analyst Day, you had mentioned that your partners are expected to spend $1.8 billion, and now, I know you threw out the $2 billion number in the prepared marks. Is potentially the difference most of that from OMT, is that fair to say, and then just rounding?

Yeah. Absolutely a contribution of the OMT programs, adding on those OMT partners, generally in the antibody space, when people are going after an antibody, it's a big endeavor, and they're very focused on large markets, that's one of the things we really liked about the business and the programs and that certainly has a contribution.

Okay. Just touching on Promacta, I know you touched on briefly, I think, some of the discontinued trials in CLL and MDS. And you mentioned it doesn't impact your potential. Just taking a step back, the largest potential for the drug in sort of cancer-related thrombocytopenia, and does that mean that a couple of these trials doesn't necessarily hurt the chances of its inevitable approval in some of these other indications?

Yeah. Thanks for the question, Larry. Just to clarify the trial is in advanced MDS patients, it was a trial that was designed by GSK taken over by Novartis. It's worth mentioning that last year, in the spring conferences, positive data was announced in the low and intermediate risk MDS population, showing improved platelets, erythrocytes, neutrophil counts. I believe the increases were as much as 64% in patients. So good high quality data, they continue to invest in that overarching umbrella of oncology related thrombocytopenia, which includes a number of conditions. So as I said, it doesn't change our outlook for the brand and the outlook for where Novartis is taking it if they continue to highlight and we're turning them on.

Got it. Just on the guidance, it's pretty much just a slight increase, it's always a positive to see that, but I don't think that's really a big part of why people are investing today. But what specifically, is that just a little bit, is that on the gross margin benefit? A little more accretion from OMT? Any way to sort of break that out?

Yeah. Thanks, Larry. It sounds like you're asking specifically about the earnings side, but just from a math standpoint, the revenue went up by about $1 million, that's about $0.05 a share and so we've dropped that to the bottom line.

Got it. Got you. Okay. Great. Thanks a lot.

Sure.

Thank you. Our next question comes from the line of Robert Fields with Cardinal Capital Management. Please go ahead. Mr. Fields, your line is live.

Sorry. This is Gene Fox. I'm here with Bob. Matt, could you describe the spending calendar year breakout for the Phase 2 that you're doing on diabetes? Thanks.

Thanks for the question, Gene. So we -- as we talked about earlier, we expect to start the Phase 2 trial in the second half of this year. It's going to be in the later part of the year. We're doing some lead up work obviously leading to that Phase 2 trial that's going on now, but in general, roughly it's about an even spread if you look at the spending through the year that's dedicated specifically to the GRA program and all of that work is focused on us having the Phase 2 data package in 2017 as we talked about in the summer when we received the positive Phase 1b data.

Good, well, thank you. Looks like that completes the list of questioners. Really appreciate the turn out, we can see on our digital screen here, it's the highest turnout we've had in a couple of years I believe. We will give credit to Matt Korenberg, our new CFO and rounding out his first year, first full annual report. In any event, we really do appreciate your support and interest in following Ligand. We're running a company that is -- it's exciting. I mean, the data flow on our partners is gratifying to see. We're pleased with how we're managing the business from tight financial discipline, but at the same time, we believe making shrewd investments, not only in developing our own technologies, but in terms of pursuing new technologies and companies to acquire and bolt on. We'll continue to do that. We have a busy calendar of conferences coming up this spring. Next month, we'll be at the ROTH Conference on the West Coast. We'll be at the Deutsche Bank Conference, which is in Denver in early March. And then, we'll also be at the Bank of America Conference in May. Hopefully, we’ll overlap with some of you there. Thanks for tuning in.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.