Hello and welcome to Ligand's First Quarter of 2020 Financial Results and Business Update Conference Call. My name is Kathryn and I will be your event specialist today. All lines have been placed on mute to prevent any background noise and please note that today's webcast is being recorded. During the end of the presentation we will have a question-and-answer session. [Operator Instructions]It is now my pleasure to turn today's program over to Patrick O'Brien, SVP Investor Relations at Ligand's Pharmaceuticals. Patrick, the floor is yours.

Thank you, Kathryn and welcome everyone. Consistent with recommendations for social distancing, all of our speakers for today's call are in separate locations. So we apologize in advance for any background noise or technology difficulties that we might run into. Speaking for Ligand today will be John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO. We will be using slides to guide our discussion today. We will also use non-GAAP financial measures and some of our statements will forward-looking.Additional information concerning risk factors and other matters concerning Ligand can be found in our Ligand's earnings press release, slides and periodic filings with the SEC. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.I would now like to turn the call over to John Higgins.

Thank you, Patrick and good afternoon and thanks for joining our call. These past few months have been an extraordinary period, unlike anything, any of us has ever seen in business. The COVID-19 pandemic has created some extreme challenges for companies, yet all things considered, I am pleased to report that Ligand is doing well.We have a set of slides to go with our presentation today and I'd like to start with Slide 4 is the backdrop. We talk about Ligand and how innovation is driving value. The three main focuses of our business or elements of our business is focused on technologies that underline our partnerships, our portfolio and financial growth. We believe we can run a successful business by being dedicated to extraordinary customer service and in times like these that cannot be more true. And finally our team, we've got a fantastic team and I am so proud of what they are doing.Before going any further, I just want to make a few remarks given the current environment. Our Ligand team is highly talented. They are deeply committed and a team that has adapted very well to the current business environment. We're making good progress with our internal programs and advancing new licensing deals. And we recently closed an important new acquisition of Icagen.Notably we are devoting an intense amount of time at work to support our partners' needs for the scale up in manufacturing of remdesivir. I'm proud of our team and very inspired by their efforts for going above and beyond in all they do. It is strengthening our company in an otherwise very difficult period.As for my business commentary, I will frame my remarks in context of the pandemic. We're in uncertain times and we're operating in a world defined by restrictions no one…

Thanks John. The first quarter of 2020 was a fantastic quarter for Ligand, with strong financial performance driven by our Captisol material sales. For the quarter, total revenues were $33.2 million with significant growth of our continuing royalties and a sizable increase in Captisol material sales.Similar to our Q4 report three months ago, royalties again grew nicely up 23% year-over-year in Q1 2020 versus Q1 2019 excluding Promacta. Adjusted EPS was $0.89 or $0.40 higher than Q1 2019 excluding Promacta. In addition, we generated about $17 million in cash flow from operations in Q1 2020. Our revenue and cash flow generation exceeded our expectations.In addition to the strong business performance in the first quarter, we used our balance sheet to close one acquisition and to opportunistically repurchase both stock and convertible bonds. On the convertible front we retired over $234 million of face value bonds for approximately $203 million thereby saving about $31 million of cash that we otherwise would have been required to repay towards the principal amount of the notes in May 2023.On the common stock side in Q1 we spent $73 million on share repurchases retiring an additional 870,000 shares. We currently have about $253 million remaining on the $500 million share repurchase authorization that we have in place. As we will disclose in the 10-Q when filed we now have about 16 million shares outstanding and the recent stock price is about 16.5 to 17 million fully diluted shares outstanding.We finished the quarter with $739 million of cash, cash equivalents and short-term investments. In addition to the capital structure and capital return we remain focused on identifying acquisitions across several types of target companies.Digging now a little deeper into the Q1 performance, on revenue, total revenues for the first quarter of 2020 were $33.2 million and…

Thanks Matt. So I'll start with Slide 22. And Slide 22 shows a traditional snapshot of a portion of our partnered pipeline that as John already described is diverse and growing. It's our technologies that form the foundation of the portfolio at Ligand and this afternoon I'll review some of our technology specifically highlighting the Vernalis design platform or VDP and Icagen, our OmniAb platform and then our Captisol technology.Starting with VDP and Icagen, our team in the UK joined Ligand just 18 months ago, and we've been very pleased with their progress and their productivity. We recently entered a license deal with a startup called Neuritek Therapeutics for a VDP molecule called V158866. 866 is a novel oral selective fatty acid amide hydrolase or FAAH inhibitor, and Neuritek plans to develop the drug for posttraumatic stress disorder, and other CNS diseases.We receive an upfront license fee and are eligible to receive a financing related milestone, development and commercialization milestones of more than $240 million in tiered royalties on sales ranging from 6% to 8%. At the end of Q1, Neuritek announced that it secured approximately $27 million in capital commitment from the GEM Group, which we think positions them well for entering a Phase 2 trial in PTSD within the next few quarters.Neuritek is also currently pursuing a public listing in Europe. It's also been a busy time as we've welcomed and integrated our new colleagues from Icagen following the closing of that acquisition in early April. We're pleased to say that the integration of Icagen has gone extremely well and that's a testament to both the Ligand and Icagen teams.With Icagen we added some fantastic new colleagues with unique expertise, along with great technology, and high value partnerships with Roche, the Cystic Fibrosis Foundation, and a number of…

[Operator Instructions] Your first question is from the line of Matt Hewitt. Your line is now open.

Good afternoon and congratulations on the strong quarter, and everything that you're doing. We appreciate everything that you're doing to help Gilead obviously, given the uncertainty right now. A couple of questions, I guess related to the Captisol. The first one, the company has talked about in the past 24 hours about looking for partners internationally to help on the distribution and on the manufacturing front. And I'm just curious, how does your contract with Gilead affect your ability to contact with those partners or just kind of walk us through that situation, please?

Yes, Matt, this is Matt Foehr. As I said, we've got a fantastic partnership with Gilead. We are very aligned with them in the global planning. Our relationship with them was struck back in 2015. It is non-exclusive and permits us to supply others. But as I said we're aligned with them as they roll this out, both in the U.S. and globally.

Got it. All right, and then and I don't know if this is possible, but is there a way to break out the contribution from Gilead versus your other partners not - I don't - don't not. You don't need to get into the specific components other than if we could get what the Gilead component is versus the others. That would be helpful.

Yes, Matt I'll comment and then Matt Korenberg may want to comment as well on the financials. Generally, we don't break down partner-by-partner. That's not something we've done previously. Obviously, when we originally increased guidance around Captisol, we attributed that to supply for Remdesivir. So there's that and obviously we've made those statements publicly. I don't know if Matt Korenberg may want to add as well.

Yes, I think that's right, Matt. I think it's fair to say that the bulk of the increase in our guidance on Captisol side, both originally and now are largely tied to the Gilead remdesivir sales.

Okay, that's helpful. And then quick question on the - Matt Korenberg may be you could on the royalty side, Kyprolis numbers are obviously just from Amgen, but they came out were very strong. We don't have Ono yet, but even if that's flat, you've got a really strong first quarter for that product. Is the lower guidance, is that a function of some of the others or is there some anticipation that maybe Kyprolis flat lines over the course, co if you could just help us understand what the moving parts were there?

Yes, good question, Matt. And it's important to note that we don't have control over any of the sales. So we really are estimating the impact of COVID-19 on the remainder of the year across all products, but specifically with Kyprolis even now they are the two largest contributors, what we've estimated without any input or knowledge really from our partners, but what we've estimated is that the impact in Q2, we felt the most.So we are estimating a decline in Q2, and then a return to sort of normalcy towards the back half of the year in terms of scripts. Obviously, as you pointed out, Q1 for Kyprolis was the best quarter they've ever had, or close to the best quarter they've ever had a very strong one. So it certainly is possible that we are being conservative, but we're just doing our best to estimate what's going to happen with the slowdowns and stay at home orders for the rest of the year.

Understood, okay. Maybe one last one from me, there has been talk here recently about Gilead seeking additional form factors for remdesivir obviously the IV solution. It's great to have a treatment, but it's not ideal that it's IV. They have publicly commented I believe about seeking alternatives. Maybe walk us through whether or not Captisol plays a role beyond the IV solution? Thank you.

Yes Matt, thanks this is Matt Foehr. The Captisol, the safety database has been built up over many years, IV data, oral solutions, inhalation, subcutaneous, a variety of forms and that's all been put into our drug master file over time. When a molecule is insoluble, generally it's going to need that solubility and delivery technology for other modes of delivery as well. And we've got a long history of generating data in inhalation formats and others. So, when a molecule has solubility issues it's going to need a solubility solution like Captisol and Captisol is well suited to provide those sorts of solutions.

That's great, thank you very much.

Your next question is from the line of Balaji Prasad. Your line is open.

Hi, good afternoon and thanks for taking my questions. Firstly, I have to call out your statement on the fact that you're not laying off a single employee on the back of COVID. So congratulations on that. As well as I have few follow-up questions on Captisol itself. Firstly, while we are conscious of what this means for 2020 and Gilead, I also want to take a step further ahead and see how should we think about recurrence of Captisol sales in 2021 or beyond that? Are you seeing greater inbound calls of partners seeking to look to tie up with Captisol? And maybe I'll start with that and follow-up further? Thanks.

Yes Balaji, this is Matt Foehr. Yes, absolutely we're seeing increased inbound calls for Captisol. Captisol is obviously a well established technology. Remdesivir is obviously a very high profile drug, but yes, we are seeing increased inbound. As we look out, part of the reason why we're comfortable making capital investment is that as we look ahead, we see the need and that's part of the reason we're making investments we are.

Fantastic.

This is John, I'll just add a little more color Balaji, I appreciate the questions. The earlier question that Matt asked, but is somewhat related. As we've described, we are truly following Gilead's lead. And that's important for everybody to understand that they really are driving the planning around this, but we are there with them very, very closely. And over the last year or two, we've seen the announcements that they are working on international coalition of partners to help them plan and produce.We will be with them as they coordinate that and it's not only ensuring that there's drug to manufacture, but that all the elements are brought together responsibly in an organized manner. So we can all imagine the complexity of doing this, but Gilead is driving this and we are right there with them. And so as companies are calling us these other parties around the globe and want to participate we are getting those calls. We are very active in those discussions. But ultimately, again, this is being quarterbacked, if you will by Gilead.The other element of this is that Gilead we think responsibly is describing the challenges, but how they've risen to the challenge to deliver very substantial quantities of drug and they're trying to give a roadmap for what they believe they can produce this year and then in the next year. They've had a range of public statements and there's commentary on their website, their goal to have certain amount of courses produced by the end of this year, and then even more multiple of that quantity, potentially in 2021. Given the fact, they are describing this as a six-month lead time to manufacture, of course they have to get their materials in order and we have shipped them a substantial quantity of material so far. And obviously that’s baked into our guidance that we're giving today.But if the clinical data support this and if they can stay on their production timelines, again what we are going to continue to monitor is how they can ramp up and then continue to meet that supply requirement, as we mentioned in the late 2020 and early 2021. If Gilead continues to ramp up and they build this international coalition, we fully expect that we will be shipping and selling more Captisol to support their campaigns.

Thank you, John that's very helpful. Just leading on that, can you help us understand how much or what quantity you have shipped till now? And also on the capacity side, but you had said in the past that you have adequate capacity to meet any requirements. Could you give us a sense of what is your total capacity on this? Also is Hovione your sole contract manufacturer for Captisol or do you have anyone as backup?

Yes, thanks Balaji. Yes, so we've spoken in the past, a lot of different ways to calculate capacity, but well over 100 metric tons of capacity we've been increasing that and we've got plans to continue to do that. We have two manufacturing plants that manufacturer Captisol end-to-end. They are in the Hovione network. We are we distribute out of five distribution facilities spread out around the globe. And, and we are looking at involving others in manufacturing as well. So, I think that probably summarizes it.

Great, one final question on service revenue, the fact that you're breaking this out so separately, should I interpret this as a statement that this will be growing meaningfully going forward and will be assumed real significance?

Thanks Balaji, yes it's a line that we will be growing as we add new partners, but it's more stable, generally speaking and predictable than the rest of the lines. The contracts as I mentioned in my prepared remarks, tend to be multiyear contracts with parties. And so, we have good visibility on that year-to-year. And a large portion of it is repeat customers. Any one contract is a relatively significant portion of the business particularly on the Vernalis and Icagen sides.And so we'll continue to monitor it and report out to customers to investors I should say, on kind of what we see over the forward looking 12 or 18 month period. But it'll be a substantial portion of the revenue lines for the foreseeable future.

I understood. Thank you so much.

Thanks, Balaji

[Operator Instructions] Your next question is from the line of Larry Solow. Your line is open.

Yes hi, it's Pete Lucas for Larry. You guys covered a lot of the stuff. Just a quick one on Kyprolis. I know, you mentioned the potential estimates you had there for the impact of COVID. Just wanted to know if you can comment on when we can expect Phase 3 data for multiple melanoma and how much do you think that could cause the target market to grow?

Yes, thanks. You are referring to the additional Phase 3 data in multiple myeloma. We are seeing data that is planned to come out at ASCO. There are more Phase 3 data that will be presented at ASCO. Also frontline data that is in progress and Amgen continues to supply updates for status of those programs and we expect that data to be coming.And they actually recently, just last week on their earnings call updated that they have a November 15 PDUFA target action date for the Phase 3 for the CANDOR data being added to the U.S. label and then that label is also being under review or is also under review in the EU as well.

Great, thanks. And then just one more from me, a general question in terms of priorities for use of cash. You mentioned in the slides, business, support the business and you touched on a few M&A opportunities. Just wondering how share buybacks would rank in that given that you have been aggressive there, but you still leave a chunk on the repurchase?

Yes thanks Pete, as we've said a few times over the last couple of quarters, when we ended up with about $1.5 billion of cash on the balance sheet, our stock price was at a place where we thought it was not particularly well valued. And so we set out on a campaign to essentially return about $0.5 billion dollars to investors, through share repurchase. And we've basically completed that having actually done closer to $600 million now.What we said coming into 2020 was we'd monitor the markets, and then opportunistically buy back shares if we felt like the trading dynamics of our stock where we're out of whack with where we thought the fundamental business was going. Clearly, no one foresaw the COVID-19 impacts on the markets or business. But we did opportunistically buy some during Q1 as I mentioned.We'll continue to monitor as we go forward, but our focus really has mostly shifted to the M&A front. We'll still monitor both the stock and the bonds for chances to buy opportunistically. But at this point, the balance of the $750 million of cash that we think is useful for M&A will focus mostly on the M&A front and other product investments.

And I guess just on top of that, in terms of the M&A front, you mentioned a few possible candidates or areas that you'd look at. Has COVID impacted valuations there at all or anything different that you're seeing?

I think COVID impacted valuations across the board. What typically happens in a crisis like this, I should say in a stock market decline like this, is it takes a while for boards and management's to reset on their views of where current value is, and what appropriate value is. So a lot of the ongoing M&A discussions slowed down a bit and new discussions are slower to pick up. And that's what we've seen. That doesn't mean that our shopping list is any shorter or that ourattempt to have these dialogues is any slower.From our standpoint, we are ready to go, but as the buyer, we're in a unique position. As the sellers get more accustomed to current values, we'll start to see the activity and ability to consummate these transactions, I think pick up a little bit more. So lots of activity on the financing front. Our product financing effort is quite robust right now.Certainly, in a market like this, you get a lot of companies that struggle to finance themselves and end up stuck in what we've traditionally called broken biotech, really companies that have portfolios of programs that are either unpartnered and partnerable are already partnered. We're seeing a lot of activity in that space. The larger technology platform acquisition stuff, the larger public companies, those dialogues are ongoing but likely will take a little bit longer than before to materialize.

Very helpful. Thank you.

Next question is from the line of Dana Flanders. Your line is open.

Hi, great. Thank you for the questions. I've got a couple if that's okay, related to Captisol. First, can you just speak to as the - just relative weighting of Captisol sales to Gilead and remdesivir increase? Just what you expect that to do to the overall kind of gross margin profile of material sales this year and next year?My second question, if you could just speak to the level of investment that you're making to increase supply of Captisol just from a cash outlay perspective? And then thirdly, and I apologize if I missed this, how much Captisol has Gilead purchased relative to that $1 billion or $1 million treatment course targets that they have by year-end? I mean, how much more volume does Gilead need to purchase to kind of get there? Thank you.

Thanks, Dana. I'll start on the margin question and then turn it over to Matt for some of the capital investment and supply chain stuff. I think as investors know, our P&L includes a cost of goods line that historically and going forward is tied only to Captisol sales. So our royalty income in our - now our service revenue and our contract payment lines all are 100% gross margin. Any of the costs associated with the service line are actually just salaries down and mostly salaries and other lab expenses that are done in R&D.So, investors can certainly track historically where our margins have been on the Captisol side if they'd like. And we don't see that changing materially in the short-term from the Gilead side. Gilead has very favorable pricing from us, and we continue to believe that going forward, the margin profile of the Captisol business will be in line with where it has been historically. What that translates to overall corporate gross margins really just depends on where Gilead lands, where the world lands on the need for remdesivir and ultimately therefore Captisol.I think you can do your own math, but I think if you scale up the Captisol sales to the different orders of magnitude that the production levels that Gilead is talking about might imply, you can you can sort of calculate the margins. I've mentioned in my prepared remarks that based on what we see so far this year, we see the margin coming down from a 90% overall margin prior to this to somewhere between 85% and 90% for the overall business. And Matt, do you want to make some comments on the [indiscernible] side?

Yes, sure. Yes, on the CapEx Dana, I'll generally characterize it and say its millions of dollars, but it's an investment we're happy to make. We do not see it impacting other elements of the business or other things we want to do in the business, but it's an investment that's important. And we're happy to make. As John said and as Gilead has said publicly, they're positioning to produce several million treatment courses in 2021 if required. We've got a line of sight on what may be needed and as described, we would need to ship more material late this year and early next in order to help them do that.

All right, thank you.

Your next question is from the line of Scott Henry. Your line is open.

Hey, can you guys hear me?

Yes Scott.

Hey, just real quick one here. So I'm looking at the Kyprolis estimates from the Amgen analysts after the quarter and they all went up for the year. So how are you thinking about your expectations from Kyprolis royalties, out of that royalty reduction. So if you're reducing here $5 million, $6 million out of that, how much are you assuming Kyprolis gets the cut?

Yes, Scott, we mentioned that we see royalties down about 15% or so. And we mentioned earlier on this year that our original estimates for Kyprolis for the year that factored into our $38 million estimate for the year, we're included about $1.2 billion of Kyprolis sales. So we've backed that off by about 15% for the total year. I think you can compare that to the math you're running on your side and figure out where you believe will land.

Okay. Thank you. I appreciate it.

We have time for one more question. Balaji Prasad, your line is open.

Balaji?

Hi, sorry, I was on mute. So thanks for the follow-up. Just wanted to check with you on the role of IV luminespib in trading COVID-19, what is the way forward and what milestones do we need to look out for?

Yes, thanks Balaji. That is interesting. Luminespib is a program that came to us through our acquisition of Vernalis. It is an Hsp90 inhibitor that was previously evaluated in cancer. It came up in some third party academic screens as potentially having utility in COVID. It is post that publication obviously had some inbound interest in our talking to potential collaborators, potential partners, who have an interest in potentially taking that forward.

Thank you.

No further questions.

Well, thank you. This is John Higgins and to wrap up. I want to thank everybody we had a great turnout today on the call. We're seeing the people who dialed in. So I appreciate your time and attention today. It's obviously a very busy time for the company. We operate in a lean business to start with. It's a very efficient corporate structure. Of course, the pandemic environment and the change to workflow obviously has impacted every company and then on top of this of course, the work that we're doing with Gilead has created a tremendous additional amount of work.I want to thank the team. I'm really proud of this team. We're doing outstanding work. And frankly, it's inspiring to see not only the usual high level of productivity, but the team is stepping up above and beyond. We have a slide inviting people to join us on Twitter. It's a simple concept, but we have so much news flow coming out of partners that it is a great way to keep track of developments.And of course, we often flag prominent news stories that relate to the remdesivir program that we link to Twitter as well, so we encourage you to sign up there. We will be at two conferences. These are virtual, but one is the Craig-Hallum Conference at the end of May and then the Benchmark Healthcare Conference in mid June. And we already have very full schedules for both of those. Thank you for calling in today. And we look forward to staying in touch as the weeks roll on.

Thanks to our participants for joining us today. This concludes the webcast, you may now disconnect. Have a great day.