We are initiating coverage of Ligand Pharmaceuticals, Inc. (NASDAQ:LGND) and assign a valuation of $128 per share. This valuation is based on applying a multiple to our 2025 earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings estimates.
Ligand is a biopharmaceutical royalty aggregator targeting late-stage development assets and operating low capital intensity platform technologies. The company holds 12 major commercial stage royalty revenue generating assets and over 90 active programs that provide economic rights in its portfolio. It also owns Captisol, a technology that is used to improve solubility and stability in sixteen FDA-approved products with additional approvals expected in the future. The company owns equity interests in other assets including Primrose Bio, Pelthos Therapeutics and Viking Therapeutics which are expected to provide capital for future investments and returns for shareholders.
Ligand’s diversified portfolio generates revenue from royalties, milestones and Captisol material sales, which is reinvested into high-value royalty asset opportunities. Trailing twelve-month operating cash contributions of over $46 million along with $227 million of cash on the balance sheet as of June 30, 2024 provides substantial firepower to augment this effort. Ligand has a credit agreement that can provide up to $125 million in additional funds and access to an At-the-Market equity sales agreement to increase capital on hand. The company is evaluating an ever-growing pool of 100+ prospects to deploy an estimated $200 to $250 million per year in capital. Investment opportunities abound as capital markets have been less open recently for development stage companies, despite broad scientific advances in life sciences programs.
Prospects are generally late stage, just before or in active pivotal trials and with expected revenues within a few years following investment. The company seeks to invest from $20 to $40 million per asset and plans to be a long-term holder with the flexibility to make strategic sales when opportunities arise. While our Peers and Competitors section lists many other biopharmaceutical-focused royalty aggregating competitors, few compete in the $20 to $40 million infusion range, leaving Ligand as the go-to royalty provider in this bracket.
Ligand targets biopharmaceutical assets in all therapeutic areas, particularly those that address a significant unmet need with well-understood risk. Rare disease and gene therapy are other attractive domains for investment given available accelerated pathways to market, longer market exclusivities and strong pricing power. Ligand boasts an experienced portfolio team with medical experience in the targeted indications. As part of its due diligence process it consults with key opinion leaders to help guide the allocation of capital. This has produced a portfolio with a tilt towards oncology, vaccines and rare disease among other categories.
Ligand’s key commercial royalty assets include Amgen’s Kyprolis, Travere’s Filspari, Recordati’s Qarziba and Jazz’s Rylaze which drive a material amount of topline revenue. Recently approved programs such as Merck’s Capvaxive and Verona’s Ohtuvayre will also be contributors as these products launch later this year. Development stage assets such as Agenus’ BOT/BAL, Takeda’s soticlestat and Palvella’s PTX-022 are important for future growth and are expected to support the 20%+ royalty revenue topline trajectory that we have forecast. Indication and geographic expansion with Filspari and Qarziba may also add to revenue growth.
As of June 30, 2024, Ligand reported $227 million of cash and short-term investments on its balance sheet. The company is expected to generate $100 million of free cash flow in 2025 and it has access to an At-the-Market equity sales agreement with Stifel Nicolaus for $100 million and a revolving credit facility with Citibank for $125 million which may be increased to $175 million. Following the end of the second quarter, Ligand announced the cash purchase of Apeiron Biologics for $100 million. Ligand has identified many investment opportunities that exceed its cost of capital and we believe that in addition to the resources we have mentioned there are other sources of funds that could support new investments.
Key reasons to own Ligand Pharmaceuticals’ shares:
➢ Diversified portfolio of revenue generating royalties
o Twelve commercial stage royalty streams
➢ Royalty pipeline
o Over 90 active programs providing economic rights
➢ Captisol platform
o Owned formulation technology used in 16 approved and many in-development products
➢ Diversified biopharmaceutical asset exposure
o Cash flows non-correlated with financial markets
o Thorough due diligence process including confidential disclosure agreement (CDA) access to underlying data
➢ Royalty investments provide benefits to capital providers as they
o Provide long cash flow durations
o Are non-dilutable
o Align investor interests with sponsor
o Offer a large pool of investment opportunities
➢ Royalty lending provides attractive form of capital to developers
o No financial covenants
o Non-dilutive to borrowers equity
o Available for development, acquisition or divestiture
o Structure can be tailored to individual needs
This initiation report provides an introduction to life sciences royalty aggregators (LSRAs) which use their expert, industry-specific portfolio teams to identify superior reward to risk investments. We explain what they buy, who is participating and how it works. The LSRAs create a curated portfolio in a favorable investment class that avoids financial dilution risk and provides capital to development companies. We review the most important assets in Ligand’s portfolio beginning with revenue generators, then development products and end with existing and prior platforms. The following section presents peers and competitors in the life sciences investment space, with a focus on LSRAs and mention of other important specialized investors.
We next provide a historical review of Ligand, beginning with its founding as an R&D company advancing technology out of the Salk Institute in the 1980s to its evolution to a royalty investor today. Key senior management figures are introduced and risks for life sciences companies in general and for Ligand specifically are discussed. We wind down our initiation report with valuation work and a discussion of the assumptions supporting our model. The target price assumes long term double digit growth driven by existing and new investments. We initiate Ligand Pharmaceuticals, Inc. with a valuation of $128 per share.
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