Points of Consideration for Ligand

by Travis Johnson, Stock Gumshoe | June 17, 2014 12:20 pm

Those who are Irregulars know that I own shares of Ligand (LGND) and suggested it last summer in the mid-$30s, and have nibbled personally on the way up.

My reasons for liking Ligand are basically two: They have a royalty-driven business model that provides potential upside with low capital needs; and they have a focus on cash efficiency.

The streamlined business model, which they essentially switched to under pressure from investors, after being a weak, cash-hemorrhaging company for many years, is predicated on partnering the compounds that they own or that use their proprietary drug delivery platform Captisol (for solubility), and getting those compounds off of their books as soon as possible so they don’t spend much money on them.

Their goal is to build a portfolio that delivers milestone payments and royalties as those drugs are developed and commercialized… and that, unlike most younger biotech companies (Ligand has been around for a long time, but really completely rearranged itself a few years ago) it is financially savvy. The company is really run by financial folks, not by science folks. That doesn’t mean they’ll necessarily do better, of course, but it provides a different mindset.

The reasons for buying them last year, as growth was just heating up, were the breakout performance of the two drugs that provide most of their royalty revenue, Promacta (GlaxoSmithKline) and Kyprolis (Amgen), and the increasing cash flow from those royalties… added to the fact that they have multiple other potential programs that might make it through the development pipeline.

I don’t have any news from the company, other than that their latest results indicate more possible label expansion ahead for Promacta, continuing efforts by Amgen to move Kyprolis up to getting expanded indications in multiple myeloma, and the initial (extremely early) results from their unpartnered diabetes drug were promising, and… well, that’s about it. They have a half-dozen partnered drugs that generate small royalties, but their only newish drug that has fairly high potential (but also extreme uncertainty) is Duavee from Pfizer, the estrogen drug for hot flashes that is supposed to reduce cancer risks versus straight premarin… but I’ve seen no indication of what the sales of that might be (that one’s controversial too, and came to market about a decade behind schedule after being written off by most people).

The big news, though, is a strongly-worded analysis from a short seller that was published on SeekingAlpha that argues Promacta will be worthless because of Gilead’s Hepatitis C drug taking over that market, and that the company has been a failure for many years and should be worth nothing because Promacta will collapse and the company is otherwise too risky.

I think it’s a typically slanted analysis from a hedge fund that has shorted the stock, and the Roth Capital analyst reportedly called the short argument “foolish”[1], but that doesn’t mean their points shouldn’t be taken into consideration… and Lemelson is not just an anonymous blogger trying to slam a stock, the hedge fund is substantial and has real money in the short bet. Ligand shareholders should certainly read the report, which is available in pdf form here.[2]

One of our readers also asked Dr. KSS, who writes a column about biotech stocks for us and participates very actively in the subsequent discussions, what he thought of Ligand/Promacta following this report, and Dr. KSS questions the premise of the short article in part but is not a fan of LGND or Promacta either — you can see his comments here.[3]

Ligand is quite obviously a risky and richly-valued stock — it trades at 100 times earnings, and it is very dependent on Promacta for their earnings and will remain so for quite some time (not because Promacta is such a huge drug, but because Ligand’s royalty rate is very high on that drug). I continue to hold it for the same reasons I’ve written of in past months, and I don’t expect Ligand’s revenues to collapse quickly because Gilead’s HCV drug negates part of the demand for Promacta (Promacta is used in some HCV patients, and that has been a key growth area for them over the past year, but it isn’t really an HCV treatment), but I am not at all an expert on the science behind the drugs or the future viability of those drugs.

I bought the stock because the finances were perking up, Promacta sales were rising and GSK has invested heavily into expanding the indications for the drug, and because a dozen more drugs might generate royalties for LGND over the next several years without LGND investing in those drugs. None of their other drugs, unless Duavee takes off shockingly fast, will be material to results compared to Kyprolis and Promacta in the near future, so if you see little hope for those drugs than Ligand is very likely to be unappealing for you.

I’ll be spending some time looking through the negative analysis by Lemelson and thinking it over, and also watching to see if LGND chooses to respond to the points made (particularly with reference to what percentage of Promacta sales are related to HCV and to interferon therapy in HCV patients, the portion of the market that should really be negated by Gilead’s Sovaldi). It was obviously a very slanted piece, but the fact that they downplay any potential positives doesn’t mean their conclusions are wrong (Lemelson’s record as an investor has been good of late, in part because of a huge short bet against World Wrestling Entertainment this year — they shorted it from $30 down to $12 or so and then bought shares and urged management to shake up the business)… but since several folks have asked about it and the report did already impact the stock by a few percentage points I thought it important that the Irregulars who may own the stock or be considering it take that report[4] and Dr. KSS’s scientific opinion[5] under consideration. I generally find that knee-jerk reactions to scary-sounding analysis are a mistake for me, but short sellers can also often provide an excellent counterpoint to the bullish arguments and you should, as always, make your own decisions. I’ll let you know if my opinion changes.

  1. Roth Capital analyst reportedly called the short argument “foolish”: http://www.benzinga.com/analyst-ratings/analyst-color/14/06/4639641/shares-of-ligand-follow-parabolic-curve-amid-responses-s
  2. available in pdf form here.: http://amvona.com/images/blog-images/The%20Short%20Case%20for%20LGND.pdf
  3. see his comments here.: http://www.stockgumshoe.com/2014/06/microblog-of-needles-haystacks-and-the-needle-in-a-haystack-cancer-diagnostics-nanocap-that-may-belong-in-your-portfolio/#comment-1724740
  4. that report: http://amvona.com/images/blog-images/The%20Short%20Case%20for%20LGND.pdf
  5. Dr. KSS’s scientific opinion: http://www.stockgumshoe.com/2014/06/microblog-of-needles-haystacks-and-the-needle-in-a-haystack-cancer-diagnostics-nanocap-that-may-belong-in-your-portfolio/#comment-1724740

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