Good day and thank you for standing by. Welcome to the Ligand Pharmaceuticals Second Quarter Earnings Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. I would now like to hand the conference over to your first speaker today the Head of Investor Relations, Mr. Simon Latimer. Please go ahead, sir.

Thank you. Welcome to Ligand's second quarter of 2021 financial results and business update conference call. Our speakers for today's call are in separate locations. Speaking today for Ligand will be John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO.

Good afternoon, and thanks for joining our second quarter 2021 earnings call. Outstanding financial performance and operating execution are the themes of our call today. We are very pleased with the business and how the company is doing. In Q2 Ligand posted one of the highest quarterly revenues in the company's history. Along with that strong top line performance, we're also enjoying robust earnings and strong cash flows. While most of our revenue is currently driven by Captisol, we are very pleased to see the business flourishing across all technology platforms, as Captisol sales are expected to diminish later this year and next, with lower demand for Remdesivir and the evolution of the COVID-19 medical landscape. We're delighted with the turnout for the call today. We've got a number of new investors who are beginning to look at the story and for those who are new to Ligand just a quick background. Our company offers integrated drug discovery services and our service offerings are broader than ever, and our partner achievements with R&D and clinical success have been outstanding these past few months. The value of our service and the technology and inventions we provide result in significant milestone revenue along with royalty economics on high-value medical treatments. Over the past two years, we have increased our investments in our laboratories and expanded our R&D team to provide more customized services to our partners. Our investments are paying off. Driving our investments is a shift in the industry. We are witnessing an evolution in how pharma and biotech partners tackle their R&D projects. Increasingly, they are looking to well-fitted highly qualified partners like Ligand to help answer those needs in a more end-to-end fashion.

Thanks, John. The second quarter of 2021 was another strong quarter for Ligand across the business. Total revenues for the quarter were at $4.7 million, up from $41.4 million a year ago. With respect to royalties, royalty revenue increased to $8.6 million from $7.2 million a year ago. Royalty revenues comprised principally of Kyprolis and EVOMELA royalties, but we look forward to increasing contribution from the four recently approved programs that are backed by our Pelican expression technology, including Rylaze from Jazz, Vaccine Advanced from Merck, PNEUMOSIL from the Serum Institute of India, and Teriparatide from Alvogen. Captisol sales were $62.5 million in the quarter, and this is up from 155% from the $24.5 million a year ago. Our Q2 Captisol revenue exceeded our expectations as we experienced significant urgent demand from India for Captisol for use in the manufacturing of Remdesivir. Our contract revenue in Q2, 2021 was $13.6 million compared with $9.8 million a year ago. The 2021 quarter once again included strong contract revenue from all of our technologies, with significant contributions from OmniAb, Pelican, Icagen, and the NCE portfolio products. We expect the diversity and robustness of our contract revenue line to continue for the remainder of the year with Q3 off to a great start driven by the $5 million milestone earned upon the launch of Rylaze. Adjusted diluted EPS for Q2, 2021 was $1.63 compared with $1 even last year, or an increase of 63%. Our GAAP EPS for the quarter was $1.79 and included a one-time gain of approximately $34 million related to the CVR or contingent value right we structured with our Phoenix acquisition last year. We now believe that Teriparatide TE approval is unlikely to happen in 2021, and therefore we will not be obligated to pay the contingent payment tied to that regulatory event. Accordingly, we have reduced the expected liability associated with the CVR event given that the payment is triggered by TE approval happening prior to December 31 in 2021. The one-time gain is excluded from our adjusted earnings and adjusted diluted EPS as well as from our financial guidance. We exceeded the quarter with approximately $302 million of cash, cash equivalents and short-term investments. This cash balance reflects the repurchase of $45 million of convertible bonds during Q2. We now have about $345 million of face value of convertible bonds outstanding.

Thanks, Matt. As John mentioned, Q2 was a very productive quarter with partner product approvals followed by recent launches, expanding relationships with existing partners, and entering into new deals with new partners. I'll start with OmniAb, which we see as our most valuable platform technology as it continues to provide our partners with a powerful combination of advanced antibody discovery tools. Partners who license our OmniAb technologies are supported by a team of respected scientists and a track record of quickly discovering high-quality antibodies. A few OmniAb partners, Cstone and Gloria Pharmaceuticals, have submitted applications for approvals, and we expect both regulatory decisions later this year. If approved, we believe these will be the first of many to come for the OmniAb platform. CStone's NDA is for sugemalimab which was discovered using OmniAb and is under review by the NMPA for stage 4 squamous and non-squamous non-small cell lung cancer. CStone has stated they expected termination with respect to the NDA this year. And CStone and Pfizer have also formed a strategic development and commercialization collaboration for sugemalimab in China. At Gloria, zimberelimab is an investigational OmniAb-derived anti-PD-1 monoclonal antibody that was discovered using our OmniRat. Korea filed with China's NMPA for relapsed or refractory classical Hodgkin's lymphoma with a determination also expected this year. In addition to the late-stage regulatory work, Gloria is doing here in the U.S. Arcus Biosciences also recently announced encouraging clinical results with zimberelimab treatment in multiple cancer settings. Arcus and Gilead formed a 10-year partnership in 2020 to co-develop and commercialize Arcus's product candidates, including zimberelimab outside of China. And we continue to actively innovate and invest in our OmniAb platform with internal R&D and technology development, expansion of our team and our labs, and through targeted bolt-on acquisitions. We've recently added new team members here in Emeryville and are expanding our lab operations to reinforce our position on the cutting edge of antibody discovery. The OmniAb platform is differentiated by leveraging our increasing artificial intelligence capabilities, along with our deep history of novel genetic engineering and the biological intelligence of our proprietary transgenic animals.

Thank you, Matt. And we have now our first question from Lawrence Solow of CJS Securities. Go ahead, sir.

Hi, great. Good afternoon. Thanks for taking the questions. Just first question, Matt. You mentioned the guidance hasn't changed. I'm just curious, has the mix changed? It sounds like there's going to be a little bit less on the royalty side if I'm not mistaken. It feels that way. Certainly royalties were a little bit below my number this quarter. And I guess part two of that question is, I thought Amgen hasn't reported yet. So, have you have the Kyprolis expectations already or are their numbers running?

Thanks, Larry. So, I think your first question is I mentioned that the combined royalty and milestone numbers should exceed their previous guidance. That's correct. The mix has shifted just a little bit from royalty to the contract side. But if you think about it, both is all as 100% margin business. Overall, we're much better off as we've exceeded those numbers. And then the second part of your question, the Captisol numbers, you're correct. Amgen and Ono have not reported. So, we have an algorithm that uses some of the last quarters mixed with our expectations and then we take a little bit of a haircut to those numbers to make sure that we're in line with a conservative nature. And then from there, just as at any quarter, if our revenues booked is off, we'll have a catch-up or true-up, I should say, in the next quarter, similar to all quarters.

And you're assuming some, I know it was down 10% last quarter. You're assuming some sequential and year-over-year growth on that's probably the biggest clue, the biggest driver by far of your royalty line, right? So, just trying to get a little more clarity on that.

Yes. That's correct. When you see the Q come out, which hopefully is in the next few days, the specific numbers will be in the Q. I just remind investors that it is our assumptions. It's not based on information from Amgen or the same will be true for Ono, so you'll see those numbers in the queue. But they do have a bit of sequential growth as you pointed out.

Okay. Alright. Okay, just a few questions. I know you guys highlighted the recent approval of Rylaze and VAXNEUVANCE from top Phoenix or Pelican as you have renamed it. Could you just briefly give us an idea of this potential market sizes? I guess Rylaze is going to replace or compete against, I guess, in that market? Can you give an idea of that market size and what this could potentially do? And then obviously, the pneumococcal vaccine market is much larger, but can you slice that down and maybe what arbitrage opportunity? It seems like Merck is going for the U.S. only at first, or maybe you can discuss that too. Thanks.

Yes. Thanks, Larry. So, first on Jazz, yes, correct. The new Rylaze product will replace a product that Jazz had been marketing prior to that with Erwinia. That product had done just under $200 million in a supply-constrained market. So, we expect it to be $200 million plus now that they have full access to as much product as needed, and they'll go with to ramp that as quickly as possible. They've talked about a launch or they've already announced the fact that they've launched and so the first couple of quarters here will be initial launch quarters, but we do expect that to start contributing to the royalty line this year. On Merck and VAXNEUVANCE, it competes in the $6 billion plus or minus market with principally Pfizer. There's obviously, as you suggested, a split between that market of adult and pediatric and then U.S. and global, etc. But Merck has been talking about the end of this year as a potential launch following the ACFE conversations towards the end of the year in October.

Okay. And then just the last question, any update on Iohexol?

Yes Larry, this is Matthew Foehr. I can comment on that. Obviously, Iohexol was a capsule-enabled program of a great asset. As we said earlier, we're balancing inbound partner interest and late-stage study design. And so we took a pause on starting the trial and will update more in the future.

Thank you. If I looked at the clinical.gov website, I think it says, maybe that's a mistake, do you guys have a planned trial beginning in January '22? Is that just a placeholder in there? Or did I read that wrong?

Yeah, the timing got wrong on clinical.gov; that's just, we put a pause on that trial for the reasons we described earlier. But that's just the protocol that is out there.

Okay, fair enough. Thanks a lot. Appreciate it, guys.

And our next question is from Joseph Pantginis of H.C. Wainwright.

Hi, this is Sarah on for Joe. I was actually asking also regarding the Iohexol program, if your primary focus at this point, as you previously mentioned, is it really just working on the BD around the program at the moment.

Yes. Again, this is Matt Foehr. As I said, we've received inbound interest around the program, and we're balancing that with the late-stage study design. So, in general, yes, that's the thought.

Thank you.

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

Good afternoon. Congratulations on the strong quarter and for all the color that you provided. Just a few questions for me, maybe first up regarding the news this morning regarding your landing AI partnership. Maybe if he could provide a little bit of color on what drove that relationship? What are your expectations as far as how that relationship can maybe drive some incremental opportunities on OmniAb? Any color would be helpful.

Yes. Thanks, Matt. As with everything around OmniAb, we've been and always want to remain on the cutting edge of antibody discovery tools. Part of that is, obviously, accessing pieces that can further enhance the capabilities we already have. This one is a software relationship specifically related to the exploration platform that we gained through the xCella acquisition last year. We really selected landing AI because they have a unique data-centric approach that really blends very well into the platform that we've built around exploration, and we thought it was an opportunity to also collaborate with high-end folks who are world-renowned in the world of AI and incorporate that into some of the things that we're doing in the lab. That allows us to even increase our throughput even further, support our partners even better, and that's kind of the world we want to remain in. So, it's a software relationship. But it's just, I think, another example of really remaining on the cutting edge with our OmniAb platform.

That's great. Thank you. And then shifting gears a little bit regarding Captisol. With the emergence of Remdesivir and what that was able to provide from a humanitarian standpoint, I know that you commented previously that it drove a lot of incremental interest, and a lot of samples were sent out for customers to trial. How are those proceeding? Have you heard back from some of those customers? Are those translating into new orders? Anything that you can provide on that side?

Yes, Matt. I think the value certainly, the visibility that has been created for Captisol is substantial, anytime a new drug that's been approved for, what, 18 months or so. But it's already treated over approximately 7 million patients globally and obviously had a big impact on human health, and our team is quite proud of the role they've been able to play in that. But Captisol itself, really the differentiating factors are the increase, but really the same as they've always been, our global reach. There are Captisol-enabled drugs marketed globally. We've got a vast intellectual property portfolio, the drug master files, which have our safety data, and then of course the manufacturing and quality and scale that we built over the years and invested in. So, those are the things that partners value. And yes, we do have partners entering into new clinical trials and new forms those require different amounts of Captisol depending on the form, but our team continues to support those scientific efforts. And we're proud of that progress.

That's great. And then last one, given the recent successes you've had with the Pelican platform, I think you've commented a little bit, but are you seeing incremental interest even here over the past month or so for that technology? And what does that pipeline look like? Thank you.

Yes, Matt. As when we first started looking at Phoenix prior to the acquisition, at that time there had been no products approved utilizing or leveraging the Pelican technology platform. Now there were four. And that's a substantial development when it comes to partnering discussions, becomes very important. And so we do see a nice flow of potential partnerships there. As I mentioned, we've expanded some of our existing partnerships. That's always something that validates that those are working with the technology are having success with it. As we disclosed today, Merck's V116, which is another vaccine candidate, is leveraging our technology, and we are seeing additional global big pharma and small biotech partners expand their use of PeliCRM as well. So, yes, we do see a nice interest there and a lot of it comes from the validation, the regulatory validation and the success of our current partners.

That's great. Hopefully we get some of that pretty quick. Thank you.

And our next question is from Balaji Prasad of Barclays.

Hi. Good afternoon, John, Matt, thanks for taking the questions. Firstly on the guidance itself, we seem to have come around a full circle now. Last year around this time you changed your guidance, raising capital and lowering royalties and contract revenues. So, I just want to understand from a time period point of view what is the enrollment on business discussions now and how comfortable are you with the outlook, especially on the royalties and contract revenues side? That's one. And secondly, going back to Captisol, while there was not much doubt that 2021 was a peak year for sales, at least in the near term based on COVID, and we all expected some deceleration the next year. Is your guidance revision signaling a faster pace of disintegration both for the second half and for 2022? Thanks.

Thanks Balaji. Yes. So, I'll take a first crack. And I don't know if John or Matt would want to add any color. But I think, a year ago versus today, I think we're all in a very different place. A year ago, we had no idea when or how vaccines would roll out. We had no idea generally how the virus in the pandemic would play out. And at the time we said some of this on our calls last quarter. There was anticipated stockpiling by governments. There was anticipated need for Remdesivir, of course, and just generally speaking, a lot of uncertainty around where the need for Remdesivir would be and ultimately, therefore, Captisol. Today, I think we have a lot clearer picture. Vaccines have rolled out very successfully thankfully for humans generally. And we're in a place now where the manufacturing has caught up with demand generally, and folks can plan a little bit more so. While there still could be changes in the numbers if things happen in unexpected ways, new variants or vaccines with lower efficacy or something like that as my comments said based on our current understanding of the pandemic and outlook for it, we feel pretty confident in the expected Captisol for the remainder of the year. On the flip side of that, the royalties and contract payments. Similarly, last year we had kind of little certainty on when folks would return to normal doctor visits, and normal patient visits, etc. And that's all now I think even in a world where Coronavirus exists more permanently, the world has figured out how to have those things more regularly and some of the things that people were putting off, whether it's trial starts, trial visits, or actual doctor visits, people are back to understanding how to do that. So, I think you're seeing that in our royalties returning to more normalized levels and certainly our contract business exceeding significantly our expectations. So, I think that's really what's driven the new guidance, and we have high confidence that we will meet or exceed our current guidance. On the Captisol side. I don't think the decline is any more or swift than we expected other than reflected in our guidance here. But I think the message for next year is we see the principal factor for Captisol from 2022 and forward to be kind of the core demand and the core business. So, we're back on trends from there. Is it possible that we may see a tail of some Remdesivir-related Captisol sales? Yes, but we don't plan to guide to it or talk to it. It'll simply be upside to our guidance from this point forward.

Thank you. That's helpful. Maybe just a couple of follow-up on the liability and the change or adjustment in it? Was it based on expectation that there's now not a 2021 event or as overall property itself? And secondly, on Rylaze just a quick clarification that your sales, that your royalty revenues is linked to global sales, and not just the U.S. revenues.

Yes, Balaji. I can give a little more color. I know Matt covered the accounting elements related to Teriparatide. I'll just say our partner Alvogen is a strong and committed partner, they've got a great team doing the work based on recent feedback from the FDA. Alvogen will perform and then submit results from an assessment to address elements related to potential innate immunogenicity. So, they're doing that. And it was really just simply the timing of them doing that work and submitting it that drove the change. I don't know Matthew Korenberg, you may want to comment, other if there are other accounting elements to that.

Now that's it. It's purely a timing issue. There's nothing about the accounting that reflects the probability of it happening at some point. It's purely a probability of it happening in 2021.

Understood.

Okay, and on the Jazz program, yes, it is a global royalty.

Thank you.

And our next question is from Jacob Johnson of Stephens.

Hey, thanks. Good afternoon. Maybe just first question for Matt Korenberg on guidance. On sparsentan, it looks like maybe that'll be pushed for approval in 2022 instead of 2021. I think you have a $6 million milestone from that. Can you just remind us what that milestone is tied to? And is that contemplated in 2021 guidance? Or should we think about that as a 2022 event?

Hey Jacob, good to talk to you. Yes, the milestone you're referring to is tied to filing for approval. And it is just under $6 million, $5.99 million. And it was originally a reason that we increased guidance in 2021, and that is now an event that will happen in 2022. So, despite that moving out of our guidance, we're still tracking well ahead of our contract payment line.

Got it. Super helpful. Thanks for that, Matt. And then for Matt Foehr just on the recent OmniAb deals on the AI capabilities you added via xCella, and it seems like you added to this morning as well. How has that helped business development efforts? Is this something customers were asking for? Does it kind of increase the funnel for OmniAb more broadly? And is this something that's pretty easy to cross-sell?

Yes. Look, we're quite proud of what we've built in what we continue to build around OmniAb, not only through our own internal technology development, but through what we've acquired, and we've done multiple acquisitions related to OmniAb over the last few years. And I'll just speak generally and say every single one of them when they're announced, they're quite technical. So, investors naturally want a little more background, understand a little bit more about the technology, etc. Across the board, our partners, our existing partners, get it immediately. And we've had great success in expanding our relationship with the partners as we've expanded our technology stack, adding new programs. It's been a real source of additional programs. For instance, when we added xCella, I can think of multiple conversations with partners where they've said look we had these other ideas we never thought these types of programs would be possible but now that these technologies are married under OmniAb, we can actually go after these targets that previously we've wanted to but have never tried. And that's one example. We also have seen great success in increasing the speed and throughput of finding high-quality antibodies for our partners. So, the answer across the board is really yes that partners understand that value and it causes them to increase the depth and the breadth with which they're leveraging our technologies.

Got it. Thanks for that, Matt. And then if I just sneak in one more just for Matt Korenberg just on gross margins given that dynamics around Captisol sales I think maybe a little bit impacted. They are a little bit lower this quarter probably due to vaccinations sales. As we think about the back half for gross margins just any help you could give us in terms of how to think about those?

Yes. Thanks. Good question. As you pointed out, the royalty and contract payments are obviously 100% margin, and so our material sales and our Captisol sales specifically are really where all the cost of goods comes and as that's a more significant portion of our overall business, it drives corporate gross margins down. One of the things that we've talked about in the past is that some of our sales to India which were significant in Q2 related to the consortium, those are a bit lower margin than our typical sales just given the logistics and nature of where they're selling and some of the contracts with those parties. So, Captisol margins themselves will be a bit lower this quarter and should rebound over the course of the second half of the year a bit, and then overall corporate margins will continue to be just driven by the make-shift between royalty and contract as it compares to Captisol.

Got it. Super helpful. Thanks, Matt and Matt.

Thank you.

And for our last question, it is from Scott Henry of ROTH Capital. Go ahead, sir.

Thank you and good afternoon. If I could just follow up very briefly on Captisol because it ties into that prior question, and I think you probably answered it, Matt, but I just want to make sure I was interpreting it correctly. From the looks of it to me that the demand went way up in Q2 for Captisol, not just incrementally. When I'm going forward should I think of it as a blend between Q2 and prior quarters or do you think it'll revert all the way back to kind of prior quarter rates?

Hard to tell exactly where the demand will be, but the majority of sales that we've sold to the consortium in India, the vast majority of it happened in Q2. So, we expect continued sales there over the course of the balance here, but based on our current expectations, we've probably sold most of what we expect to sell to India already. So, the next couple of quarters we'll have some in there, but generally speaking, it should be closer to previous margins than this past quarter.

Okay. Thank you. And then you talked earlier about not really expecting a huge tail from Remdesivir, but that would be upside. When we think about back to a steady state run rate, I would assume the new normal isn't going back into the $30 million a year range because of the attention it's gathered. There will always be some Remdesivir use after this. Is that a fair assumption that going back to normal is probably a higher normal than what we saw in 2019?

Yes. It's hard to sort through all of the pandemic impact versus shifting some of the sales to the urgent need for Remdesivir, but generally speaking, I think the business, say, the four or five years pre-pandemic were $25 million to $30 million of demand, and we had just ticked into that $30 million to $35 million per year of demand range. I think, generally speaking, that's where we probably are starting from. And then some of the factors we talked about here, but any sort of increased demand from new partnerships that eventually trickles into Captisol sales and any sort of upside from lingering Captisol for Remdesivir sales would be upside to those numbers.

Okay. And then just a couple of small questions. Rylaze, did you disclose the royalty Ligand receives on that product?

It's not disclosed, but it is a low to mid single-digit royalty.

Okay, and then V116 obviously it's a vaccine. Have you disclosed anything about what it's a vaccine for?

No, Merck has just said it's part of their innovative vaccine portfolio. They've said they're going to have some phase 2 data before the end of the year. They actually talked about it on their call this morning, but that's the extent of what they've disclosed thus far.

Okay. Great. Alright. Final question just with regards to sparsentan. After last quarter, it really feels like that's a core growth driver for the revenue and royalty line going forward. Obviously a little bit of a delay, but do you have the same amount of enthusiasm and confidence for that program in the long run, just perhaps pushed out a year, yeah?

Yes. Scott, good question. We do and obviously the announcement, the data, the regulatory, the clinical presentation we saw earlier this year really I think brought that product back to the forefront. All of us and investors were expecting it would be on a little bit faster regulatory path, but what we're hearing out of Travere and the narrative and all the public disclosure is that while they're answering questions, there is still tremendous medical need. There is high engagement with the FDA. There is a path forward that may be actually a faster path for registration in Europe and since the product qualifies for orphan designation in terms of having a market that they can really develop in terms of the medical potential, that registration and the duration of the market protection does not start until it's actually approved. So, you're right. I think overall we're looking at a bit of a delay, but the milestones we do think it's got a good probability for approval and launch. We're excited about that partnership and product. At the same time, right now, literally the last few months into the next quarter or two we've got two or three new approvals out of the Pelican franchise. We are looking at potential approvals for some OmniAb drugs. So, there's a nice growing base of new royalty-bearing assets that are going to enter the story and start we believe elevating that royalty line and supporting our growth going forward.

Okay. Great. Thank you for the color and thank you for taking the questions.

Thank you, Scott.

And this concludes today's conference call. Thank you everyone for your participation. You may now all disconnect.