Good day. My name is Shikander [ph] and I will be your conference operator for today's call. At this time, I'd like to welcome everyone to Ligand's Fourth Quarter 2017 Earnings Release Conference Call. [Operator Instructions]. I now turn things over to Todd Pettingill, Director of Corporate Development and Investor Relations.

Welcome to Ligand's Fourth Quarter of 2017 Financial Results and Business Update Conference Call. Speaking today for Ligand are John Higgins, CEO; Matt Foehr, 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 partner programs. These statements involve risks and uncertainties, and actual events or results may differ materially from the projections described in today's press release in 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 www.sec.gov. The information in this conference call relates to projections or other forward-looking statements represents the company's best judgment based on information available today and reviewed by the company as of today February 21, 2018, 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 the time, I'll turn the call over to John Higgins.

Thank you. Welcome. I will start things off by providing some brief comments as a year-end review and then I'll add some perspectives for the opportunities we see in 2018 and beyond. First, 2017. This past year, we delivered on all fronts. Financially, it was a very strong year. At the start of the year, our outlook was for $130 million in revenue with some upside potential for contract payments. The year finished with revenue of just over $141 million, driven by higher royalties and higher contract payments. The cash flow from operations also exceeded our expectations. We entered into 10 new license agreement during 2017 and have over 95 partners and more than 165 shots-on-goal or fully funded programs. Our lead royalty-bearing assets are performing very well, and our portfolio model is driving with high-quality programs successfully advancing in the clinic and new programs being added to the portfolio at a good pace. Of note, one important product, EVOMELA, at its first full year of sales, our second product, Baxdela, secured FDA approval. And recently launched and the third drug candidate SAGE's brexanolone completed successful Phase III trials for PPD. Now we reported positive results for our GRA diabetes product in the second half of 2017. This is the leading drug candidate for a novel and potentially major category in the diabetes space. It has shown highly impressive efficacy in type 2 diabetes and has a potential as a treatment for type 1 diabetes as well. We are in discussions with companies for potential licenses for both worldwide and regional rights. While there is interest and demand by companies to license the drug, this is Ligand's largest unpartnered program at this time. So we will be patient to secure the deal that optimizes the potential for our stakeholders. Also…

Thanks, John. I will start off with a review of a few recent developments for select partner programs and general progress of some of our partners at a corporate and financial level. I'll then touch on recent licensing activities and the status of our technology platforms. And I will review the status of our integration of the Crystal Bioscience business following our acquisition in October. Starting with partner programs, in the fourth quarter, SAGE Therapeutics announced that brexanolone achieved the primary endpoints in 2 Phase III trials in postpartum depression or PPD. They reported statistically significant mean reductions in the Hamilton rating scale for depression or HAMD score compared to placebo at 60 hours in both of the placebo-controlled multi-center trials. And they reported that brexanolone provided a rapid and durable reduction over 30 days in depressive symptoms, as measured by HAMD. As a bit of background, PPD is a common biological complication of childbirth affecting a subset of woman typically commencing in the third trimester of pregnancy or within 4 weeks after giving birth. It's estimated that PPD affects approximately 10% to 20% of women giving birth in the U.S. And up to half of these cases may go undiagnosed without screening. There are no approved therapies for PPD, and there is clearly unmet medical need for treatment. We continue to be very impressed with the work that the team at SAGE is doing and look forward to their previously reported plans for an NDA submission this year. Also in November, our partners at Viking Therapeutics announced positive top line results from a Phase II trial VK5211 in patients recovering from hip fracture. The study met its primary endpoint, demonstrating statistically significant dose-dependent increases in lean body mass, ranging from 4.8% to 9.1%, following 12 weeks of treatment. Viking…

Thanks, Matt. 2017 was a year of significant financial and operational success for Ligand. Revenue growth of almost 30% and earnings growth of more than 50% contributed to a year in which we exceeded our guidance and continued our track record of strong annual growth with respect to revenue, royalties and cash flows. Turning to financial results. Total revenues for the quarter were $50.5 million and included royalty revenue of $28.3 million. Royalty revenue grew 45% over the year ago period and total revenue was up 32%. The royalty growth largely reflected higher Promacta and Kyprolis royalties. Milestone in license revenues were $14.4 million in Q4 versus $9.5 million for the year-ago period, with the increase due to the timing of achieving milestones and the contribution from OMT. In particular, I'd like to call up the HanAll sublicensing deals struck at the end of the year. As mentioned in the press release at that time, Ligand licensed the OmniAb technology to HanAll in 2014. OMT helped discover an antibody for HanAll. And now a couple of years later, HanAll has out-licensed the rights to that antibody to separate parties, first in China and then in the rest of the world other than Korea where HanAll continues to develop on its own. These out-licensing deals resulted in over $6 million of payments to Ligand so far. And if the programs advance as expected, there will be more to come. While not all OmniAb contracts include sublicensing sharing, this transaction is one example of the ways Ligand can capture more upside from the platform in the future. Our Captisol material sales for the fourth quarter were $7.7 million compared to $9 million in the Q4 2016, due to timing of orders throughout the year. Regarding gross margins, our Q4 gross margins for…

[Operator Instructions]. And our first question today comes from Joe Pantginis from H.C. Wainwright.

I want to focus a little bit or more than a little bit on OmniAb platform, specifically the BD process involved in signing new partners and with the ultimate goal of getting to your capacity to continue to deliver the kinds of deals that you've been doing. Is it more of a sense of tech transfer and any potential personal needs you need internally?

Thanks, Joe. This is Matt Foehr. Obviously, the selling proposition for OmniAb is a very strong one. We're the only antibody discovery platform with three species. We are the platform with the most partners. We've got strong market protection with and clear freedom to operate. And now multiple partners in the clinic and also some pretty high profile partners in the clinic, which means a lot from a technical perspective. As I said in my remarks, we expect we will do more partnerships we've done till this year. We expect to do more. The addition of the chicken as well is a real important complement to the platform. Our existing partners have -- understand the value that the chicken brings from a fiber genetic distance perspective and what that means in terms of being able to discover antibodies that are probably more difficult to find in rodents. And so we've been successful in signing up new partners or expanding existing relationships and also signing up new partners who are interested in both the rodents and the chicken. So I think the selling proposition is very strong. The beauty of it is that the partners are the ones doing the work down streams. So from a capacity perspective, we feel very well positioned to be able to sign up new partners and send them on their way. The other piece is we're seeing broader use of the platform as well. I referenced in prepared remarks one of our global partners who recently shared that they kicked off campaigns for 16 novel targets at the beginning of the year, and we're seeing similar things with other partners as they expand the use of the platform.

Very helpful, Matt. And question for Matt Korenberg, if you don’t mind. I know we're a little away little about 1.5 years or so, maybe if you could remind us at least what some of your current plans might be revolving your existing convertible?

Sure. Thanks, Joe. As folks probably are aware, we have $245 million convertible note outstanding that comes due in August of 2019. As folks are also well aware, we are significantly cash flow positive and have a couple of hundred millions of dollars on balance sheet today. So unlike many biotechs who sort of view that as permanent piece of the capital structure, we view that as opportunistic get the time, and we'll continue to think about our capital structure in an opportunistic way. If we do not do any significant M&A between now and the majority of the convert, we should have more than enough cash to repay the underlying principle off the balance sheet and any in the money portion that's not offset by the bond hedged we could satisfy in either shares or cash at that time. To the extent we find significant M&A to do between now and then, we'll obviously consider how to finance the company at that time, but I'd expect that we'll figure that out as we go.

Our next question comes from Drew Jones from Stephens Inc.

This is James Rutherford on for Drew. I want to start by digging in on to the 2018 guidance a little bit. Specifically, could you provide more detail and your expectations for Promacta and Kyprolis? It sounds like it's safe to assume over $1 billion revenue for each, but maybe more specifically what you're expecting on those two products?

Sure. So as folks know, we typically look to third-party research analysts for the covering partner companies. So folks are covered, Novartis and Amgen and what they say about the potential for Amgen for Kyprolis and Promacta, respectively. When we look at those numbers today, some are updated, some are not. But we see about $1 billion to $1.50 billion in those numbers at an average or consensus for the folks that are out there for Promacta and Kyprolis. And so that's basically the number that we've got underlying the guidance there.

Okay. Helpful. Just to kind of restart the year out. And then second question, I'll hop back in the queue is, can you give any more color on your GRA partner effort? Should we interpret that patients in that search process as an indication that the process might be on time it was a little bit different than the one that originally laid out? Or how should we think about that coming to around patients there?

Yes. Well, thank you for the question. This is John. We don't know the expectation is by investors for timing to close the deal, but we want to give an update. As we say, we don't give guidance for time lines or specifics for deal expectations. But we simply want to comment, since the data came out last September, that we are in active discussions. There is a genuine interest for worldwide deals as well as regional deals for major markets around the world. And putting deals together is partly a matter of soliciting interest, but also trying to figure out what the best development path and timelines are. So there are a number of elements that go in any general licensing effort. But we wanted to comment on it. We're very pleased with the program, the market is large, and we're excited about the data. And our given guidance for a deal timing, but wanted to reinsure our investors that it is getting our full attention, and we will do our best to put it together the best deal and path forward possible.

And our next question comes from Matt Hewitt from Craig-Hallum Capital.

I guess, you provided a nice update on a couple of the -- I guess, the Big 6 and one of the Next 12. I'm just curious if there is anything in either of those other 2 buckets from your pyramid that we should be, I guess, paying attention to a little bit closer as we look into 2018?

Yes. This is Matt Foehr. Thanks, Matt, for the question. Just a couple, I will point out. In the Next 12, Viking program VK2809, which is what we've called historically, TR Beta, that's another program with Ligand heritage that's expected to see data this year on hypercholesterolemia or NASH. That's a program that I think folks are starting to pay a lot more attention to justifiably given the markets that it can address. Viking is also pursuing a couple of orphan indications for that as well as X-ALD as well as GSD Ia. So we expect to see some clinical trials starts and data for that program. I'll also point to the JNJ-64007957 that's an OmniAb program, we expect an anti-BCMA, we expect to see based on ClinicalTrials.gov disclosures data potentially later this year. Other OmniAb program, the Activo programs and other one that looks interesting and exciting. And then another partnership that's -- the Captisol one that is also more in the antibody space, although it's a Captisol partnerships through the AMG 330 with Amgen, we're probably expand relationships with Amgen last year enter into a new deal for Captisol for their AMG 330 BiTE program that's in development for cancer. So those are ones I'd probably kind of initially point to of top the head.

That's great. And then maybe one additional one on more current opportunity the EVOMELA, how should we be thinking about that ramp. I mean, the way that you typically think about your guidance Promacta and Kyprolis using street estimates, are you going to use a similar type strategy for that drug and maybe what were you thinking for '18?

Yes. It's Matt Korenberg here. So with EVOMELA the coverage for Spectrum is less robust, and those that do cover don't break out the products as many -- it's a higher percentage don't break out the product as for the other companies. So it is a little bit tougher. Last year, when the product had just launched, we basically took Q4 and annualized the number and that was what we used for our guidance last year. This year, it's a little bit more of a hybrid between the 2 of looking at the most recent quarter and then the covering analysts. We, right now, haven't really commented on the specific number, but at Analyst Day back in November, the most recent quarter at that time was about $10 million. And I think we showed at that time $30 million to $40 million range. We still expect it to be somewhere in the middle of that range. But we'll wait until we see the Q4 number from Spectrum and then the updated research analyst and we'll head narrowing on a more specific number for that.

And our next question comes from Larry Solow from CJS Securities.

Just one housekeeping question. Just on the going forward, I guess, logistics behind reporting, like, we have to wait now until your partners report, I guess, for you can provide you numbers, is that how is that's going to be?

Yes. Thanks, Larry. Yes, as a matter of course, we will try and report towards the end of our window to capture as many of the partners reporting ahead of us as possible. As evidenced in this quarter, obviously, Spectrum is reporting after us this quarter. It may happen that they're elsewhere, one or more partners would report after us. We'll still be required to estimate what we think the revenue was in that quarter and what we'll endeavor to do is, is do our best to do that on our own and with the help of our partners behind the scenes on confidential numbers.

Right. And then, I guess, you could just true up at each quarter or at the end of the year or something, right, it's...

Yes. That's exactly, right. Each quarter we'll have a rolling true up where we true up to actual from the previous quarter. And if we're accurate at estimating the number, the true up should become about the same each quarter rolling forward and, therefore, we'll kind of always have the right number or closer to the right number in each quarter.

Got it. Okay. And then just on the guidance, looks like for royalties, you have a growing little like just 30% or slightly above that. I think in November you spoke of like a 15% to 25%, that was a preliminary growth number. Obviously, Promacta is your biggest driver behind royalties and it's hitting the cover off the ball is that the -- so there are other drivers to that sort of increased from the preliminary to what you're -- to your revising -- or now your revised guidance with sort of your formal guidance, if you will?

Yes. Very good question. Folks will remember that at Analyst Day in November, we did some math for folks on the consensus numbers at that time were the high low numbers at that time for each of the main products. And there was a wide range that was well below $100 million of revenue up to about $120-plus million of revenue. And at that time, we said it could be anywhere in this range, obviously, but we expect that it will be $100 million to $110 million range, which was the 15% to 25% growth numbers that we talked about. Obviously, with Promacta coming in with a very nice Q4 and same for Kyprolis, those numbers have come up and with $116 million revenue we're ahead of even where we thought and towards the high end of what were the highest expectations back in November.

Okay. Give us a little more color on the Captisol and the contrast agent market. It sounds like it's three -- you're going to invest $2 million a year for three years, and then, I guess, at that point you'll -- that's sort of your guesstimate and when you'll be able to then have a better idea of what you can do in terms of the out-licensing? And is this sort of, I guess, will this be a shorter or lower hurdle for approvals being at diagnostic or it's still going inside the body?

Yes. This is Matt Foehr. We're excited about the Captisol-enabled imaging programs. Obviously, we are starting with iohexol. It's one of the largest in the imaging market and one of the big issues with imaging is risk of renal damage. And as I said, iohexol, it's a product global sales or over $0.5 billion. And there is a real opportunity there to create an improved product that has reduced incidence for potential nephrotoxicity. So this is something we'll -- as you described, we're going to investing in a targeted way as we've done in the past, picking programs where we think answering some key questions, progressing down initial regulatory path and clinical path can create partner value driving inflection events for partnering. And that's what we're starting off now. So team here is really excited about it. We're progressing. It's kind of a new opportunity for Captisol, both from getting into this device kind of more diagnostic imaging space, I will say, and also leveraging Captisol in new ways. So we are excited about it.

It seems like a different station, and it sounds like -- it seems, obviously, it's a big market. So just quickly on the HanAll Biopharma, the license payment. Was that something that was, obviously, a positive thing. Was that ever potentially your future royalty or license fees that was pulled forward or was that sort of, I'm sure, it was a completely out of [indiscernible], but just trying to get a better graph to that. Just show us, obviously, the power of the OmniAb platform in generating revenue before -- long before anything is commercialized. We're just trying to get a better view of that. And then about $20 million of potential, obviously, you can't give us an exact, but I assume there's sort of a bucket where some are highly likely or maybe there is a portion that's highly likely and then there is some that's very much on the less likely side.

Yes. So, first on HanAll, much like with our own products and programs, we don't budget for M&A or licensing deals or sublicensing deals. But we obviously, we are well aware of HanAll and the program, and it was advancing internally at HanAll. So the milestones generally in the plans for it to proceed internally. When they out-license the program, it shifts to a different milestone and mechanism scheme. And that's really what happened there. So it was a nice positive event, but all along we actually had in the budget that HanAll will go into the clinic last year and they end up doing that in Australia and not surprising that was a value-creating event or event that attracted a partner. On our $20 million of potential upside milestones, I obviously folks will remember that last year we outlined sort of the same dynamic. We outlined potential of $30 million of upside last year. We ended up achieving about 1 out of three of those dollars and that's really sort of as good an estimate as any. We don't know if it'll be a little less or more this year, but these are all kind of para-norm.

And our next question comes from Esther Rajavelu from Deutsche Bank.

Can you maybe give us a flavor for how your OmniAb partnership terms have evolved since the early days. It sounds like there is a lot of interest. And I'm curious to know if the upfront and milestone terms has evolved with the high levels of interest?

Yes. So I think, I'll say commensurate with the fact that we feel like we've got and now with multiple species we have the most partners, there is more discussion of OmniAb at antibody meetings, there was Big Antibody Meeting here in San Diego late last year, OmniAb was very prominent there. So that's allowing us to, I will say, increase -- people understand the increased value proposition and that allows us to command better terms, in general. So we feel very good about the terms we're getting. We find it really interesting. We've got a lot of the global established players, but also a number of new players, venture-funded players who are well-funded and have very interesting biology in terms of what they're going after, who are interested in pursuing OmniAb. So we feel very good about the deals we're working on as well as the partners we have.

This is John. I will add a little bit more color. The -- what a company can charge as a function of value delivered. And generally, obviously, like in higher profile company, a public platform, much bigger team to offer service. So for those reasons alone, we can really operate at a higher scale than what the private predecessor company OMT was doing. But beyond that, we are offering more species, convenience in terms of working with one company. We're continuing to improve the species types. We're advancing our IP. So there's a number of factors that are driving partners to us. Ultimately though, if I can use the expression landgrab, the antibody area, it is the hottest area of medical research. Big pharma, big biotech, small, private start-ups, they are eager to either be first or fast in securing antibodies or they are, I would say, a little bit more desperate to find any technology to help them solve very, very difficult targets. In both examples, Ligand, OmniAb platform is truly a best-in-class alternative. There are a lot of platforms available for licensing, but we are offering it, we're adding value and are able to get better terms, principally in the royalties, looking at tiered royalties moving those rates up a bit. If I will comment, I will say, not only are we entering more licensing deals, we are absolutely ahead of our plan there. Existing customers and again, this is the insider information, the industry insiders, our partners, that we're working with, they don't want publicity around a lot of these undisclosed targets. But we have information that is shown these companies are employing our technology at a much higher level than we expected early on. And thirdly, we are seeing existed partners are exercising options for opting in to access more of this platform. So it is -- it's an acquisition we are proud of with any acquisition you place a bet, you don't know how it's going to work out. We can finally say two years since the deal, this is a profoundly successful acquisition. And in many ways, we really do believe it is securing our future, given the quality of our science and partnerships that it is producing.

Great. That was helpful. And then the DX imaging program up to what stage are you planning to develop it before you seek partners?

Yes. Esther, the key things, as I said, just speaking generally as we want to enter, we want to answer kind of key questions and generally, the path that we expect to follow would be an I&D path where we open an I&D, answer some preclinical and probably initial clinical questions, early-stage clinical questions and then leverage that data into a partnering event. So that's generally how we're thinking about it.

Okay. And then lastly, on the $20 million potential upside for -- to the guidance on licensing revenues. What are some of the key events that we should be looking at for -- to predict that upside?

Thanks, Esther. Much like the buckets of milestones that I described in the $25 million that we've included in our guidance number. The upside falls in the similar buckets. Some of it is tied to licensing and partnering events or financing events at our partners. Some of it is tied to clinical trial success. So as we see more and more OmniAb and other products go into the clinic or products progress that we maybe don't -- aren't sure if they'll hit this year or next year that sort of thing, those type of things. And so there is a bunch of things in there. And of the 70 events or so that make up the potential events, we think this year -- I think much likely ratio of $25 million to the total of $45 million. The number of events splits up almost that way as well. So there's 30-plus events that make up that $20 million or so.

I think for investors and analysts, the big picture, our guidance is $25 million. That is our best estimate right now. Some of the $25 million is committed regarding annual payments. The majority though are traditional milestones but what we estimate to be highly probable milestones that will fit easily within this calendar year or with some very high certainty of achieving. Obviously, we have a lot of undisclosed milestones in our repot that we don't itemize, but we want to be transparent and quantify what the potential is. So that's this other potential $20 million. But to be clear, we don't view that as high probability. We aren't even calling it well. We think 1/4 or 1/3 of that will probably hit. We simply don't know right now. But we quantified it and partly its success-based. And if we just need more data and others we need to see timelines. Sometimes companies are ahead of schedule -- on or ahead of schedule, so fourth quarter payment might hit. Often partners are 2 or 3 months or a quarter or 2 behind, in which case those payments would slip into next year. So, again, that's just a little bit more background, it's our goal to be as transparent as possible, but not create overexpectation for events that we truly do not have [indiscernible] or control over.

Got it. And my last question. Can you give us -- can you help us think to whether some of that $20 million upside is related to the Big 6, Next 12 or are these programs that are outside of those that are less likely?

Yes. It's really spread across the whole portfolio. There are definitely a couple of things in there that are part of sort of Next 12 and less so on the Big 6. But yes, it's really a mix of the whole portfolio.

And our last caller currently in the queue is David Solomon from Roth Capital Partners.

This is David Solomon for Scott Henry. Three questions, one on the revenue side, two on earnings. First on revenue, what new products do you expect to contribute to 2018 royalty income? And on the earning side, with regards to the additional milestone in 2018, how should we think of each additional $1 million milestones earnings, still about $0.03 a share with the new tax laws or is it more? And regarding sequential flow of EPS, can we get any color on the sequential flow throughout the year?

Okay. So let's see. On revenue, launching this year, as Melinta announced at the end of January, is Baxdela. So that will definitely be a new contributor to royalties this year and the more -- the most significant. Over the last couple of years, we've had some of the smaller Selexis' SUREtechnology assets launch each year. And we've made that public information when its happened, but those will be smaller contributors throughout the year. So really Baxdela is the largest launch this year. Next year, we hope that SAGE and brexanolone will -- if they file their NDA this year and get approval and contribute significantly next year. But this year, it's mostly Baxdela. On earnings, in terms of translation, I think you're referring to some comments we made at Analyst Day in the past couple of times where $1 million of extra milestones contribute to the earnings of a few pennies. Yes, it will marginally tick up for the lower tax rate, but it's really just -- it's within the rounding your -- when you're talking about that low of contribution. So it's still $0.02 to $0.03 of EPS added. And then your last question -- excuse me, about quarterly pacing. There's not really much more color we can give. Historically, investors and management were always able to calculate the next quarter's royalty ahead of time because we reported on the 1 quarter lag. Really, all we're doing is shifting back to real time. So investors will announce -- our partner companies will announce and then we'll get on an investor call like this, and we'll be set up digesting the information real time. We've always talked about the same quarter announcements in -- on those calls anyway. We'll just be reporting the revenue that quarter. So from a timing standpoint it can -- in a pacing standpoint, obviously, you can just look at 2017 strengths, as an example, and just take all the quarters and shift them back 1 quarter, and that will give you a pretty good estimate of how the pacing will work on the royalty line. Obviously, when we're talking about overall revenue and earnings, we've got to factor in Captisol and milestones as well. And last year, those items at the outset of the year looked like they would be spread relatively evenly quarter-to-quarter for the first three quarters with Q4 being larger. That still what it generally looks like this year, which is what contributes to that overall breakdown that I mentioned.

Well, thank you. That concludes our call. We appreciate the turn out of the questions here. Just a quick preview, a couple of conferences are coming up. We'll be presenting at the Roth Conference in California in mid-March and the same week, we'll also be presenting at the Barclays Conference on the East Coast. And then later on, this spring, we will be presenting at the Craig-Hallum Conference and at the Jeffries Conference. So hope to see some of you at those events. Again, appreciate your time and attention and will keep you posted as our business develops. Thank you.

This does conclude today's call. You may now disconnect. Thank you very much for your participation.