Thank you for standing by. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ligand Second Quarter 2023 Earnings Webcast. [Operator Instructions] Thank you. Simon Latimer, Head of Investor Relations, you may begin your conference.

Thanks, Brian. Welcome to Ligand’s second quarter 2023 financial results and business update conference call. Please note that there are slides accompanying today’s call. For those dialing in on the phone lines, these can be accessed by going to the Investors section of our corporate website, where you can find the link to the webcast on our IR Calendar page. Today, when discussing our financial results, we will use non-GAAP financial measures and some of our statements will be forward-looking, including those related to our financial condition, results of operations, financial guidance, and the impact of the COVID-19 pandemic. Please review our disclosures and forward-looking statements here on Slide 2. Additional information concerning risk factors and other matters concerning Ligand can also be found on our earnings press release and our periodic filings with the SEC that can be found on the Investors section of our website at ligand.com. We undertake no obligations to revise or update any statements to reflect events or circumstances after the date of this conference call. A reconciliation between the non-GAAP financial measures we discuss and the closest GAAP financial measure can be found in our earnings release issued earlier today. Speaking today for Ligand will be Todd Davis, CEO; Tavo Espinoza, CFO; and Matt Korenberg, President and COO. I would now like to turn the call over to Todd Davis.

Thank you, Simon, and good afternoon, everyone. Thanks for joining our second quarter 2023 earnings call. I’m pleased to have the opportunity to speak with you today and share some of my thoughts on the company’s performance and recent developments. Let me begin with a snapshot of where Ligand stands today. Over the past several years, we have created a growing and diversified portfolio of royalties with a high-margin operating model. Those investments have created our current strong balance sheet and a large portfolio of biopharmaceutical assets, including 7 major commercial stage products that are delivering on our current growing financial performance, multiple key late-stage assets that have near to intermediate-term potential to further grow our commercial royalty base and what we call our farm team with over 75 earlier-stage assets that will feed into our later-stage pipeline and drive long-term growth. This portfolio is driving our performance, including a solid second quarter, both operationally and financially. As Tavo will describe in detail here shortly, today, we are raising our adjusted EPS guidance to $4.85 to $5.00 when compared to guidance introduced at the beginning of the year of $3.10 per share to $3.30 per share. This increase is driven by $0.20 to $0.25 per share from the strength of our operating income and an additional $1.50 per share from the sale of Viking stock. Revenues for the second quarter of 2023 were $26 million, highlighted by over $20 million in royalty revenue. We ended the quarter with cash and short-term investments of $219 million. We have paid off the remaining balance of the convertible notes and are now debt free. Tavo will go into greater detail on our financial performance and developments. There were several positive developments across our commercial stage and pipeline products during the second quarter as…

Thanks, Todd. As Todd mentioned, the second quarter of 2023 was a strong quarter financially with continued impressive performance in the royalty revenue line. Total revenue for the quarter was $26.4 million, which is a 10% increase when excluding contributions from COVID Captisol sales in the prior year period. Total revenue for the second quarter of 2022, including COVID-19-related sales, was $50.1 million. Royalty revenue increased 15% to $20.4 million from $17.8 million a year ago. This growth was driven by strength in Amgen’s Kyprolis as well as growth in sales of drugs using the Pelican platform, namely Pneumosil, Rylaze and Vaxneuvance. Captisol sales were $5.2 million for this quarter versus core Captisol sales of $3.3 million in the same quarter of last year, with the increase due to the timing of customer orders. Total Captisol sales in the second quarter last year were $29.5 million with $26.2 million of that related to COVID-19. We did not have any COVID-19-related Captisol sales this quarter. Contract revenue for Q2 ‘23 was $0.7 million versus $2.8 million last year. The decrease was driven primarily due to the timing of partner milestone events. We continue to focus on maintaining a lean operating structure and maintaining – and managing costs to maximize our operating margins. In Q2, aggregate G&A and R&D operating expenses decreased by 12% when compared to the prior year quarter. G&A expenses in the second quarter of 2023 were $11.3 million versus $12.1 million in the second quarter of 2022. The decrease is primarily due to a decrease in headcount-related expenses as well as lower legal and accounting costs post the OmniAb spin out. R&D expenses in the second quarter of 2023 were at $6.9 million versus $8.5 million in the second quarter of 2022, with the decrease attributable primarily to…

Thanks, Tavo. Today, I’m going to cover three primary topics. I’ll review some of the key revenue drivers that are driving our second quarter results, I’ll provide several updates on our key pipeline assets, and I’ll discuss our recent acquisition proposal for Novan. Slide 12 displays our key commercial and late-stage pipeline assets. Our portfolio of over a 100 partnered programs is highlighted by the 11 we list here on Slide 12. The products listed are currently approved or in Phase 3 development. Our current commercial portfolio contains over 25 programs, but seven of those are significant enough that investors should focus on them in the near-term. There are also multiple key pipeline programs that we see as potential drivers of growth over the medium-term. Turning now to Slide 13. This slide provides the details about the key commercial programs currently driving our growth. I’ll touch on a few of the key highlights from the second quarter. In February, Travere received approval for FILSPARI in IgA nephropathy and immediately began marketing the drug. We earn a 9% royalty on sales, and we expect that this will be a significant driver of long-term growth for our royalties. Travere reported sales of $3.5 million for Q2, which was their first full quarter of commercialization. Travere has indicated that the full IgA nephropathy PROTECT trial data, which is expected in Q4 2023, should be a catalyst for a change in the label and a ramp in adoption. Despite that, Travere disclosed that they had 146 new patient forms submitted in Q1 and 417 in Q2. The significant growth in potential new patient forms provides good evidence of the successful product launch and ramp. IgA nephropathy affects an estimated 150,000 patients in the U.S. and a similar number in Europe. Approximately 30,000 to 50,000…

Thanks, Matt. Ligand offers public equity investors with an opportunity to gain unique exposure across a broad array of products, technologies, disease areas, and indirectly, through the transactions, industry participants without incurring a typical pharma and biotechnology category challenges with highly concentrated event risk. For value creation, it is important to convey that our overarching and core metric for both the assessment of the existing portfolio as well as new and additive deals is to achieve attractive returns and to increase actual earnings per share for shareholders. Our aim is to do so in a manner that has the risk distributed across a multitude of assets, therapeutic areas and counterparties. In that manner, we are then in a position to provide attractive total shareholder returns for our equity holders. We do this while helping to bring innovative products to market that can address unmet needs and benefit patients and physicians. We are excited for a productive second half of the year. We will now open the call for questions, operator?

[Operator Instructions] Your first question comes from the line of Joe Pantginis from H.C. Wainwright. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the questions. So, first, I’d like to ask about Captisol overall. What does the current mix look like between research and commercial? And also, do you envision Captisol for remdesivir essentially hitting a baseline that could maybe address the choppiness of how you report the numbers, as it’s zero this quarter, but we know there is obviously use.

Thanks, Joe. Yes, good questions. First, on the mix between commercial and clinical Captisol. We’ve disclosed that number over time in our K’s and Q’s. I don’t know if we disaggregated this year in the quarterly Q. But I think the way to think about it is, the commercial products that are on the market are all effectively still growing, either stable or growing. And so, we’re seeing increased commercial use, but we’re also seeing increased clinical use, as a lot of the programs move through the clinic and reach the later clinical stages. We can certainly look at the number and think about providing the details to investors in the future. But my sense is that commercial products have taken more than half the share of the Captisol business at the current moment, but those numbers bounce around as folks start bigger clinical trials and the commercial products continue to grow. On your second question, on Captisol for COVID and the sales related to remdesivir or Veklury from Gilead, we have not had any sales this year related to COVID and that’s in stark contrast to the last 3 years. But if anyone pays attention to both the trends in hospitalizations as well as Gilead’s quarterly reports, you can see that they continue to use significant amounts of remdesivir for patients that are hospitalized. So, at some point, I do think we’ll get to a steady state, lower number that is keeping enough on hand for the hospitals. But for exactly the reason that we don’t provide any guidance on it, it is the same reason I can’t really predict what level that will be or when we’ll reach that steady state. The pandemic seems to move up and down without any real ability to know which way it’s going.

No, that’s completely fair. And then I guess I just have two, I guess, logistical or operational questions. So first, with regard to your announced repurchase program, is it relatively safe to assume that, that would be – I mean, since it goes through 2026, relatively spread out to not really have meaningful impacts on your cash balance for shopping purposes. And number two, just wanted to sort of get a sense of the size of your Boston footprint. Thanks a lot.

Sure. I’ll take the share repurchase comment, then maybe Todd will make some comments about our Boston office plans and footprint. So, investors will remember that over the last 8 years or so, we’ve had three different share repurchase plans in place. The first one was a couple of hundred million dollars put in place in late 2015 through September of 2018. Under that plan, I don’t think we retired very many shares at all. If I remember, just a handful on tied to the convert – the original convert and maybe a few others here and there. The second plan we put in was another couple of hundred million that after we had sold Promacta and had several hundred million dollars of excess proceeds on hand, we used to eventually retire between that plan and the third plan, over $600 million of stock in a 2.5-year period or so. Following the separation with OmniAb and the sort of establishment of our go-forward plan here with Todd in as CEO, we discussed with the Board and internally a plan of what made sense for a size of repurchase plan, and we offer just the $50 million based on the amount of capital we want to deploy on the M&A side as well as the cash flow and current cash balance. We see it just as good corporate hygiene to have both a share issuance, ATM type plan in place as well as the share repurchase plan in place at any time. We don’t have any specific plans to use the repurchase plan immediately. We will monitor the markets and prices and consult with management and the Board to determine when exactly to use the plan.

Yes. And I would just add that I think there is robust investment opportunity in the market right now, and so that’s a competing interest. But we do want to have that in place, as Matt said, for general corporate hygiene purposes. With regard to the question, Joe, on the Boston footprint, we basically have five folks that are based out of the Boston office right now. So, pretty small from a headcount perspective, but it’s a skilled deal team and it’s a good base in general for our East Coast operations, where there is a lot of activity, as you know, in the pharma space. And some of our senior executives, a couple are in Pennsylvania. One of our senior executives is in Connecticut. So, this allows us to coordinate in a non-virtual manner, and I think execute more efficiently in the deal scenarios that we are engaged in.

Got it. Appreciate all the color guys.

Thanks John.

Your next question comes from Matt Hewitt of Craig- Hallum Capital Group. Your line is open.

Good afternoon and congratulations on the quarter. I have got a couple of different questions here. But maybe first up, one of the things we have been hearing, I guess so far this quarter is that pharma and biotech companies have kind of been shifting priorities, focusing more on later-stage opportunities. I am just curious how that impacts some of your portfolio of partnerships and what are you hearing and seeing from them and how is that kind of playing out? Is that kind of what’s behind the change in the contract and services line?

Yes. Thanks Matt. So, in general, the industry is shifting to later stage, earlier stage. That has not really impacted our portfolio in any specific way. As I think the investors know, our portfolio consists of over 100 programs in total. It’s spread pretty typically across late-stage programs, mid-stage, early-stage, preclinical, etcetera. And I don’t know that we have any specific evidence of any company in our portfolio shifting priorities off of our program on to later-stage type assets or anything like that. So, so far, we haven’t seen any impact in our portfolio, specifically from that. As it relates to the low contract payment number in this quarter, I think there is always the idea that once we are big enough, this will be a steady state number on an annual basis. But from a quarter-to-quarter basis, we still will see quarters where events just happened to move in or out of a quarter. In this particular quarter, I don’t know that we had envisioned any specific milestones that didn’t hit this year – sorry, this quarter. Overall, for the year, obviously, we have reduced the contract line by $3 million. That’s a result of several milestones that did push out into next year. There aren’t any that we feel are lost. They are just ones that are taking a little bit longer to materialize than we thought. So, so far, no specific other impacts or anything that would fall along the lines that you were thinking.

That’s very helpful. And then regarding gross margin, Captisol gross margin, I think historically, the mix in any given quarter could have a pretty big impact on that, if you are seeing more clinical samples, I believe those carried a higher gross margin versus the commercial. We – I think you mentioned earlier that this quarter was a little bit more leaning towards the commercial side. You saw an uptick in gross margin to 68%. Is that – can we expect or should we see some improvement in, I guess annual gross margins towards the upper-end, upper-60s or how should we be thinking about that? Thank you.

Yes. I would say over the long-term, you should expect margins to improve, I would say, modestly from where we are here. But definitely, we do see underlying cost structure efficiency, so we do forecast that over the longer term, we will see some better margins. But you are right, from quarter-to-quarter, it’s largely influenced by the mix, and it is leaning more towards the commercial side this quarter.

Got it. Alright. Thank you.

Your next question comes from Larry Solow of CJS Securities. Your line is open.

Great. Thank you and good afternoon or good evening. Just a couple of questions on the – just on the royalty outlook, the unchanged outlook, I know it’s not an exact time, but if my math is correct, you are up about 23% in the first half. And the midpoint of your guidance kind of suggests – would suggest pretty flat back half. I know there is a little bit of a range there, and I know things move around a little bit, but I am just trying to see, if you can give any more color on a royalty line that should tier up seasonally, right? So, just trying to figure out how – with the math there or some color there? Thanks.

Yes. I mean a couple of thoughts. Kyprolis have been escalating royalty rate. So, we expect, like we have seen in past years, Kyprolis continue to increase as that royalty – that higher royalty rate kicks in, in the second half of the year. We are still early in the launch of the Pelican platform products. So, we are – I would say we are being conservative. Filspari just launched last quarter. So, there is still a little bit of uncertainty there, and so I would just say we are being conservative and cautious with our guidance.

Okay. No, that works for me. And then just on Pelican, I appreciate some of the updates you guys gave, but could you just remind us – so Rylaze, I think you said it’s at $86 million in Q1. Does your partner have the ability, if we just multiply by four to do $340 million or something like, whatever that would be come out to supply this year, if they got to that? And what is the size of the European market relative to the U.S.?

Yes. Thanks Larry. So, Jazz does not give guidance for its products, and we respect their wishes. So, we don’t make any predictions on the products either. But I think it’s fair to say that if you look at the last year, their quarterly pacing was relatively stable throughout the four quarters. And we have no reason to believe that is looking different this year. It was certainly trending up throughout the year last year, but we will just – I think they will report tomorrow, we will get the number from them tomorrow and hopefully, it’s a good number and we will see where it goes. In terms of the Europe market, I think the patient population is typical to most of the patient population. It’s just disease areas, I should say, it sort of follows the typical population dynamics where Europe is roughly the same number of patients as the U.S. But I think there is pricing considerations as well as competition in Europe that doesn’t exist in the U.S. So, I don’t know how that will translate to sales, but it should be additional sales beyond the U.S., at a minimum.

Okay. And then just lastly, on the Pelican team sticking there, just I think the one product you didn’t update or mention in the prepared remarks was just Teriparatide. I think it had a good start to the year, last quarter, if I am not mistaken, any change there? Any update on – if you could remind us like progress on how you get approval for the biosimilar and the competition from generics, any update there? Thanks.

Thanks Larry. Yes. So, for those that don’t recall, Teriparatide is an alternative to Eli Lilly’s Forteo. It is not therapeutically switchable, currently. There are two generic competitors that are attempting to get a generically switchable version of Forteo approved as well as Alvogen, our partner, trying to get our product approved as therapeutically switchable at the dispensing level. So, at the current moment, there are really only two Teriparatide products available, it’s Forteo and Alvogen’s teriparatide version. And their market share seems to, if you look at Scripps and the data that’s out there seems to have settled in a bit at the current levels, where we are realizing $3 million or so, a little bit more than that million dollars of royalty each quarter. That’s been the last three quarters, I think or maybe the last four quarters for us. But we are anxiously waiting to see how the market dynamics unfold. We don’t have an update specifically around the pursuit of that therapeutically switchable rating as the FDA continues to be in dialog with all three parties.

Okay. If I can squeeze one more and just lastly, any thoughts just on cadence in the back half of the year for just anything different between Q3 and Q4 for the – for Captisol and the remaining R&D revenue?

Yes. No, I think at this time, I think it’s – the best we can do is to take the remainder of the guidance for Captisol and the contract and spread it over the two quarters. The royalty line as you pointed out earlier, will regulate as long as the products continue to grow a bit.

Okay. Got it. That’s great. Thanks. I appreciate that color. Thank you.

Thanks Larry.

Your next question comes from Balaji Prasad from Barclays. Your line is open.

Good afternoon. This is Mikaela [ph] on for Balaji. Thanks for taking our questions. Just a quick one on sparsentan. Given that this asset is waiting conditional approval for IgAN in the Europe and a potential full approval – traditional approval expected in 2024. Given that, Travere is working with commercial partner in EU, so what will be the royalty structure like for sparsentan’s European revenue once it’s approved? Thanks.

Yes. Thanks. For those that don’t remember, sparsentan – sorry, Travere pays a tiered royalty of 15% or 17% worldwide on the Filspari program, and we share that royalty with Bristol, the original originator of the drug. And so we keep 9% of the royalty at both tiers worldwide. So, sales in Europe, even through the partner, travel back to us at those rates, and anything above that is what Travere keeps. So, we do get 9% worldwide.

Got it. Very helpful. Thank you.

Thank you.

[Operator Instructions] There are no further questions at this time. This concludes today’s conference call. You may now disconnect.