Earnings Labs

Ligand Pharmaceuticals Incorporated (LGND)

Q1 2017 Earnings Call· Tue, May 9, 2017

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Transcript

Operator

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

Analyst

Welcome to Ligand’s first quarter of 2017 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’s 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, May 9, 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

Analyst

Good afternoon and thanks for joining the call. The first part of 2017 was a very solid quarter financially, coming in line with our expectations and setting us on a path to achieve our core revenue outlook of at least 130 million for the year. We signed a few important new licensing deals during the quarter and on the OmniAb business our antibody discovery technology continues to perform very well. Now of note, royalty revenue was especially strong coming in just over 24 million for the quarter, that’s an increase of close to 70% over Q1 2016. Captisol sales were just over 1 million as we expected given the timing of annual orders. It’s worth noting as a reminder that Captisol sales were 9.1 million in the fourth quarter last year, which was one of the highest quarterly revenues for the material since we acquired six years ago. The large Q4 followed by lower Q1 is the patent we've seen in last few years. And license and milestone payment came in at about 4 million, a strong quarter for contract revenue, but lower than the comparison period last year due to the significant $6 million payment we received as a result of the EVOMELA approval milestones in Q1 2016. Now the EVOMELA is on the market, we are booking revenue both in the royalty line, as well as revenue in the Captisol material sales line. Ligand opened the year strong and both our financial and operating performance reinforces that. Financially we continue to show very high efficiency in our income statement. In addition to exceptional growth in royalties, which represents our main revenue category. We had 99% corporate gross margin this quarter. As high given the revenue mix and net licensing revenue is essentially a 100% gross margin. And we…

Matt Foehr

Analyst

Thanks John. I’ll start today by reviewing recent developments for some of our partner programs and I will also provide updates on our Captisol and OmniAb platforms in related licensing activities and I’ll discuss our Phase 2 clinical trial for our Glucagon Receptor Antagonist or GRA diabetes program. We're continuing to see late-stage positive progression by growing number of our partners. Our partners at Melinta Therapeutics presented data from the Baxdela clinical program at Europe Congress of clinical microbiology and infectious diseases or ECCMID conference in late April. Baxdela has completed Phase 3 testing and it is a subject of a new drug application that is currently under review at the FDA for the treatment of patients with serious hospital treated skin infection. The presentation that ECCMID included data from the Phase 3 program and demonstrated that back stellar [ph] is comparable to [indiscernible] as treated in the en-combo therapy in the treatment of patients with acute bacterial skin and skin structure infections. Importantly, this was demonstrated not only in the global study population, but in three key sub groups, patients with diabetes, patients with renal impairment and obeahs patients. The action date for the back stellar NDA is June 19, so about five weeks from now, if approved Ligand will earn a $1.5 million payment given Captisol's use in the IV form of the drug. Melinta also recently announced the execution of a license agreement with Menarini Group for exclusive rights to commercialized back stellar in 68 countries, in EU, in Asia Pacific and other ex U.S. regions. Menarini is a global leading pharmaceutical company with over 16,000 employees worldwide and with a presence in more than 100 countries, including a direct presence in more than 70 countries. As generally remainder, Ligand has a 2.5% royalty on global net…

Matt Korenberg

Analyst

Thanks Matt. I'll start my remarks today with some financial highlights from our earnings release. Total revenues for the first quarter of 2017 were 29.3 million and included royalty revenue of 24.2 million. Royalty revenue increased to 68% versus the year ago period reflects higher Promacta and Kyprolis royalties as well as the addition of Evomela and CorMatrix royalties, captured on material sales for Q1 were 1.1 million and license fees and milestone for Q1 were 3.9 million. As John mentioned, our corporate gross margins were almost 99% this quarter. Our royalty revenue and our licensing milestone fees are reported net on a revenue line with a 100% gross margin. For the year, we continue to expect overall corporate gross margins in the mid-90s as we look for material sales to be a larger portion of the revenue mix for the balance of the year as compared to Q1. On the expense side, our cash R&D and G&A expense came in right line with our expectations at just under 10 million this quarter. This quarter was expected to be heavier compared to the balance of the year due primarily to the ongoing GRA trial and completion of enrollment. For the full year, we continue to be on track with 28 million to 30 million of cash expenses. Turning to cash flow, our cash flow from operations for the quarter was 24.2 million and we continue to track towards 96 million of EBITDA assuming our guidance for core revenue of 130 million is achieved. And we continue to pay less than 1% cash taxes up from both GAAP and adjusted income purposes, we show a fully tax net income. For the quarter, we reported adjusted net income of 12.6 million or $0.57 per diluted share and we had GAAP net income…

Operator

Operator

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Drew Jones with Stephens. Please proceed.

Drew Jones

Analyst

First on Captisol. Just trying to figure out maybe the cadence for the rest of the year. How heavily weighted towards the back end of the year that should be? And then I guess kind of a part B to the question, are there any take or pay components to some of the contracts you have for Captisol out there?

Matt Korenberg

Analyst

Drew, it’s Matt. Generally speaking Captisol as traditional been a Q4 heavily weighted business. And similar to last year, we continue to expect the second half to be heavier than the first half and Q4 to be heavier than Q3. So I think our assumption is we’ll see sort of a steady growth over the next couple of quarters and a bigger Q4. Matt, you want to comment on other Captisol dynamics?

Matt Foehr

Analyst

Yes, there are elements -- Drew to the second part of your question for some contract that will have binding and non-binding windows when people graduate to commercial stage, but on the clinical stage obviously the orders can be lumpy, as people startup trials or have meetings with the FDA that that define the design of their pre-clinical or clinical trials. So still a lumpy element to it.

Drew Jones

Analyst

Perfect, and then second question just on R&D as it relates to the GRA trial, are we still thinking kind of 8 million to 10 million and spend related to that this year, is that right?

Matt Korenberg

Analyst

Yes, so the total trial was 8 to 10 over the course of, from when we started it and through the balance of this year. So most of that will happen in this year, but some of it was last year.

Operator

Operator

Thank you. Our next question comes from the line of Scott Henry with Roth Capital. Please proceed.

Scott Henry

Analyst · Roth Capital. Please proceed.

I miss the first five minutes, apparently some of us got put on a different conference call, so I if repeat anything, my apology. A couple of questions, first to follow on the R&D comments, how should we think about sequential changes in R&D? I mean should 2Q be elevated as well, or just kind of a sense how the pattern of R&D should be throughout the year?

John Higgins

Analyst · Roth Capital. Please proceed.

The R&D number really will be more heavily weighted as it relates to the trials for Q1 and that’s really the bulk of the budget in terms of -- or certainly the biggest line item in the budget for the year. So if you are talking about quarter-over-quarter this year, I'd expect the balance of the year to be roughly similar for each of those the remaining three quarters. So spread evenly for the rest of the three quarters.

Scott Henry

Analyst · Roth Capital. Please proceed.

Okay great, thank you that is helpful. And then with regard to the Retrophin and Sparsentan trial, could you receive a milestone when that trial is started or/and similar question, how should we think about milestone payments throughout the year?

Matt Foehr

Analyst · Roth Capital. Please proceed.

Yes, I can comment on that, Matt can probably add a little more color. There is a milestone payment associated with Phase 3 initiation, so that was closed recently. So there is a milestone payment associate with Phase 3 start of the Retrophin and Sparsentan.

Matt Korenberg

Analyst · Roth Capital. Please proceed.

Yes then in terms of milestone pacing for the year, same answer, we don’t have as much control or visibility into when the timing of those milestones are going to happen, but we do expect a bit more in Q4 this year than if we do in the other quarters sort of similar to last year.

Scott Henry

Analyst · Roth Capital. Please proceed.

And can you remind the amount for that Phase 3 initiation milestone?

Matt Foehr

Analyst · Roth Capital. Please proceed.

Yes, the milestone itself is $1.6 million to Ligand, this is the portion that we owe to VMX [ph] even their heritage with the program, but it's a 1.6 million to Ligand.

Scott Henry

Analyst · Roth Capital. Please proceed.

Okay. And then final question, which is sort of a big picture question. I mean, obviously there is so much going on in the pipeline. If you were going to highlight one or two things that kind of jump out, to make sure we are focusing on where we should be, because there is a lot. It won’t be key kind of takeaways that you would have in your pipeline development where, we should focus most of our attended to?

John Higgins

Analyst · Roth Capital. Please proceed.

Yes. Scott, thanks it John. I’ll add comment to that, Foehr can remark as well. Clearly a lot of interest on program you just asked us for Sparsentan program and also Sage's program. They're developing SAGE-547 for SRSE. Both of these programs are very interesting, there is good data out, I think a lot of clinical and regulatory momentum with the programs. With Sparsentan it's a 9% royalty, it's a significant royalty and it’s an indication that has been described to have a potential for fairly large market size. So that's the data we saw the first-time last fall and obviously we’re monitoring closely Retrophin messaging about timing for when the next trial will start, but at one, SAGE-547, again it’s very interesting, it's being develop by a highly capability team at Sage, tremendous amount of clinical data has come out of it for SRSE, a common related indication and also now it's also PCD. Those are two that have garnered a lot of interest from institutional investors. We have highlighted a few recent developments with our OmniAb program and this is a substantial developing story. We have over 23 partners each one has numerous antibodies in various stages of development. This year we’re seeing several move into human testing. And the eventual potential for any one of these programs plus the royalty rates make these assets a really attractive and growing narrative for Ligand. Although, they are at still earlier stage, so those are two headlines and I’ll just turn it over to Matt to add a little more color.

Matt Foehr

Analyst · Roth Capital. Please proceed.

Yes. Just you’re asking about how looking across the pipeline and I’ll say that the pipeline grows and progresses and has been over the recent quarters. It’s really the diversity that starts to standout in many ways too. There are obviously a number of program, John highlighted a couple that are exciting and there are a number of other ones emerging as well. But as you look across the portfolio, the diversity of underlying technologies between Captisol, OmniAb, those that have underlying intellectual property associated with MCE, as is the case with Sparsentan those that came by way of the [indiscernible] transactions you really start to get a sense of that element of diversity, but also the diversity of therapy area as well in oncology and cardiometabolic, specialty pharma, as well as biosimilars now that are really starting to emerge and graduate and start to get a lot more attend as they become -- I’ll mentioned Coherence program as an example. So a number of those are starting to become more visible. As well as I’ll say Lilly programs that utilize Captisol, Prexasertib, as well as Brexanolone [ph], which is the small molecule, that tiniest inhibitor at Lilly, these are ones that we’re starting to pay more attention to internally.

Scott Henry

Analyst · Roth Capital. Please proceed.

Okay. Great. Thank you for the adding color and thank you for taking the questions.

Operator

Operator

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

Anthony Humphrey

Analyst · Craig-Hallum. Please proceed.

This is Anthony Humphrey stepping in for Matt.

John Higgins

Analyst · Craig-Hallum. Please proceed.

Hi Anthony.

Anthony Humphrey

Analyst · Craig-Hallum. Please proceed.

Also I was one of the people switch into the wrong call, so forgive me I am repeating things. First question is how many -- how has clinical progress and new predictions from your customer in early part of this year influence your outlook for Captisol in fiscal year 2017?

John Higgins

Analyst · Craig-Hallum. Please proceed.

As we said we still see Captisol right in line with where we did at Analyst Day when last week we gave our sort of core revenue estimate and also that the pattern that we see every year is sort of a backend half of the year Q4 heavier buying from our customers and so we expect to see that again this as well. So we are still right on track we Captisol.

Anthony Humphrey

Analyst · Craig-Hallum. Please proceed.

And are you able to give us an update on the progress of some of your OmniAb partners -- have made moving candidates into clinic and any update on the number of products on the clinical as it's defined?

Matt Foehr

Analyst · Craig-Hallum. Please proceed.

Yes, thanks this is Matt Foehr. The folk at J&J Janssen have moved a phase candidate into the clinic, so that -- we are obviously pleased with that progress. We also have a couple of others that are in the clinic now through a Chinese partner, so those are in the clinic in China. Genentech also has a Phase 1 program that entered into the clinic in recent months as well, I’ll note on that program that Genentech actually given early deal with OMT prior to our acquisition of them. So they have a fully paid license. But from a technical perspective, it's been very good to see that program progressing well and begin being highlighted at Genentech. Also I’ll just briefly mention, Aptevo which is the newest names Captisol -- sorry -- named OmniAb antibody that is now progressing its preclinical disciplines, but they highlighted from very impressive data on an antibody that was pulled that OmniAb at the PEGS conference last week in Boston.

Anthony Humphrey

Analyst · Craig-Hallum. Please proceed.

And then last question is what is your take on the path for RTRX in Sparsentan, any insight into what the timeline might look like and what do you think the additional indicators they maybe pursuing might include?

Matt Foehr

Analyst · Craig-Hallum. Please proceed.

Yes, thanks Anthony, we talked a little bit about Sparsentan in prepared remarks and the folks at Retrophin gave an update to say they are finalizing the Phase 3 protocol right now with the FDA. We'll be doing that in the second half of the year, and they expect to start Phase 3 near the end of the year. We're going to bring up at the SC [ph] it's a good point, at their call last week they talked about -- the folks at Retrophin talked about other potential indications for Sparsentan down stream of FSGS, we really don’t have a lot more information on what those indications are, I think it's safe to say there are a number of granular nephropathies where Sparsentan could play an important role. So we'll keep an eye and ear out on Retrophin disclosures there as they explore other indication.

Anthony Humphrey

Analyst · Craig-Hallum. Please proceed.

Okay, great. Thanks. And I apologies again if there is any overlap in the beginning of the call. I appreciate it. And I hope you have a good day.

Operator

Operator

Thank you. Our next question comes from the line of [indiscernible] with Deutsche Bank. Please proceed.

Unidentified Analyst

Analyst

Hi. This is [indiscernible] with Gregg Gilbert. Had a quick question on the performance of CorMatrix and Carnexiv in the first quarter. Where they trending relative to your expectations?

John Higgins

Analyst

So I heard CorMatrix, on CorMatrix they are right on expectations. They continue to commercialize the business in a way that is right in line with our expectations and Carnexiv I'll turn it over to Matt.

Matt Foehr

Analyst

Yes. Carnexiv, a drug that's approved, Captisol-enabled drug, one that got approval in October of last year. We’re still waiting an update from them on launch, they were getting some slight chain elements ready prior to launch. So that’s still pending so big launch.

Unidentified Analyst

Analyst

Thank you.

John Higgins

Analyst

Thank you. We appreciate people to turn out and interest on the call today, I apologies we'll work with the operator, not sure what happened in early minutes of the call. Again, just want to acknowledge those who were disrupted by that, we’ll look in to it. We have a couple of conferences coming up, May 31st will be Craig-Hallum Conference in Minneapolis with investors and then a week later we'll be in New York City presenting at Jaffray’s Conference on June 8th -- I’m sorry June 7th -- June 8th, the conference is on 7th and 8th. We do appreciate your interest and turnout and we look forward to keep you update as the year progresses. Thank you very much.

Operator

Operator

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