Ligand Pharmaceuticals Inc Q4 FY2021 Earnings Call

Good day and thank you for standing by and welcome to the Ligand Pharmaceuticals Q4 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. Please be advised that this call is being recorded. I would now like to hand the conference over to your host today, Simon Latimer, Head of Investor Relations. You may begin.

Thank you, Justin. Welcome to Ligand's fourth 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. 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 and plans for OmniAb to become a standalone public company. Additional information concerning risk factors and other matters concerning Ligand can be found in our earnings press release and our periodic filings with the SEC. We undertake no obligation 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 measures can be found in our earnings release issued earlier today. With that, I'd like to now turn over the call to John Higgins.

Simon, thank you and good afternoon. Thanks for joining our fourth quarter 2021 earnings call. 2021 finished strong financially and operationally. We are very pleased with our report to shareholders today and our progress and momentum in all areas of the business reinforces our plans to split Ligand into two separate public companies. First, as for our financial performance, 2021 was our best year ever in terms of top line performance. Revenues of $277 million were driven by robust Captisol sales, along with strong growth in both royalties and contract payments. Record revenues produced significant earnings and cash flow per share and we are pleased to see a substantial number of late-stage and commercial events highlighting the progress by our partners. The business today is at a special inflection point. We have more partners, more programs under development and more diversity to our business than ever before, as well as tremendous financial momentum. It is from this position of strength and knowing the needs of the business and how to keep driving success that motivates us to split the company into two businesses. As I said on our call in November when we introduced the topic of splitting the company, given our success to growth and the evolution of the business, it has become increasingly clear that Ligand would be better positioned to drive value for partners and our shareholders by operating as two separate independent companies. Our core business model at Ligand is built around technology licensing, coupled with a sharing in the success of our partners through royalties. We are now at the point where we anticipate significant top line growth by existing and new royalty streams that should fuel superior bottom line results and cash flow, as we manage a lean operating structure. At the same time, progress and success with our OmniAb platform has far exceeded our expectations. OmniAb is now a substantial established technology leader in antibody discovery, with a strong and well-earned reputation within the industry. OmniAb is performing at a level well beyond our expectations just a few years ago. The opportunity to further invest in and expand the business is clear and the potential for investors to realize value will be better served with a focused business and investment narrative. Now in terms of the separation process, we initially outlined plans that favored pursuing an OmniAb IPO, while also evaluating other listing alternatives. We made a lot of progress over the past several months exploring those paths and engaged with dozens of high-quality investors. Both existing Ligand holders and potentially new investors have shown strong interest in our plan to operate two independent public companies. Given our confidence in OmniAb's ability to thrive as an independent publicly traded company and Ligand remaining company's current trajectory, the positive feedback we've received from investors, as well as the volatility in the markets over the past several months, we've decided to move down a direct spin-out path that will result in the separation occurring in the soonest possible execution window as compared to other alternatives, as indicated by our advisers. Our plan now is for Ligand to directly fund the OmniAb business with $70 million at the time of the spin out. We are confident this investment along with the financial outlook for OmniAb will provide a secure capitalization for OmniAb. The path we are on for a direct spinout requires a Form-10 filing with the SEC, which we anticipate will be made in the coming weeks. Our goal is to complete the spin out and distribute the shares to Ligand's stockholders during the second quarter of 2022. There's still considerable work to be done including full SEC review and final board approval. But we are outlining our current thinking so our shareholders have a basic understanding of how the process is evolving. The businesses are well-suited to be run as two separate companies. OmniAb will be led by Matt Foehr as CEO and I will continue as CEO of Ligand. I've worked with Matt for over 20 years and have no doubt he will make a fantastic CEO. And shareholders, you know Matt. He is a dynamic inspirational leader. He capably manages any level of detail and also sees the big picture and has a good instinct for strategy and investment. More information will be made public soon about the Board of Directors and how the current Ligand Board will split as well as new directors who have signed on to join the OmniAb Board. The executive leadership of OmniAb is nearly fully built out and there will be a comprehensive transition service agreement to facilitate a smooth transition to getting everything up and running. While we are pursuing the path to spin out the OmniAb antibody business from a position of strength, it's equally clear the remaining company has never been better positioned to thrive, given our product roster, revenue diversity and portfolio. We had a well-timed major acquisition of Phoenix and we have seen a steady flow of partner data readouts and product approvals. The culmination of these developments positions post-spin Ligand to have a highly diverse set of assets and programs to drive financial growth. We look forward to serving our partners, customers, and investors under two separate companies. I will now turn the call over to Matt Korenberg for a review of our financials and more discussions about the plans underway. Matt?

Thanks, John. Fourth quarter of 2021 was a very strong finish to a successful 2021 year for Ligand. Financially, we reported record annual revenues with meaningful contributions from across the business. Operationally, we fully integrated our acquisition of Phoenix in what's now branded as the Pelican Expression Technology. We saw good pipeline progress by partners with product advancements across multiple programs and approvals for Rylaze, VAXNEUVANCE, zimberelimab, and sugemalimab. And we made significant progress with our plans to separate Ligand into two separate publicly traded companies. The goal of the separation is to unlock value and allow the two distinct management teams to create value through focus on the OmniAb antibody platform and the remaining core Ligand businesses respectively. We look forward to completing the separation in 2022. Turning first to our quarterly financials. Total revenues for the quarter were $72.5 million, up from $70 million a year ago. Royalty revenue increased 59% to $17.6 million from $11 million a year ago. Royalty revenue is comprised of many products and we are now seeing noteworthy contributions from five principal programs: KYPROLIS, EVOMELA, Teriparatide, PNEUMOSIL, and Rylaze. Our growth in royalty revenue reflects strong sales for these products with increasing contributions from the three programs backed by our Pelican Expression Technology, which is Rylaze from Jazz, Pneumosil from the Serum Institute of India, and Teriparatide from Alvogen. Captisol sales were $35.4 million for the quarter as compared to $41 million a year ago, with the reduction primarily reflecting lower sales of Captisol for manufacturing treatments for COVID-19. Contract revenue in Q4 2021 was $19.5 million compared with $18 million a year ago. Our GAAP EPS for the quarter was a loss of $0.30 and adjusted diluted EPS for Q4 2021 was $1.80 and this compares with $1.62 in Q4 of 2020. For the full year, we achieved $277.1 million in total revenue which is an increase of 49% from the $186.4 million in 2020. Within the 2021 total revenue, approximately $34.8 million was attributable to the OmniAb business, the unit we are preparing to spin-off into a separate public company. Adjusted diluted EPS for full year 2021 was $6.42 or an increase of 41% over the $4.55 we reported for 2020. We generated over $75 million in cash from operations in 2021 and we exited the year with approximately $341 million of cash, cash equivalents, and short-term investments. Looking forward to 2022, as John discussed, we're working to separate OmniAb through a direct spin-off of 100% of OmniAb equity to Ligand stockholders with Ligand capitalizing the OmniAb business directly. At the time of separation, we intend to break out the expenses between the two companies more specifically, and to provide information for the 2022 earnings outlook for both the Ligand business and for the business excluding OmniAb. Today, we're providing 2022 revenue outlook for the combined business with some context for how the revenue will be allocated. We forecast 2022 royalties to be in the range of $55 million to $60 million with a couple of million dollars attributable to the OmniAb products. Material sales we forecast to be $40 million to $50 million based on current views of demand size and timing, expected order flow, and production schedules. All of the material sales revenue is expected to remain with the Ligand business following the spin-off. And we forecast $52 million to $62 million of contract revenue, with approximately two-thirds of that amount attributable to OmniAb. Wrapping up the financials I'd like to direct listeners to review our Q4 earnings press release issued earlier today and available on our website for a reconciliation of adjusted financial results with GAAP financial results. Now regarding our corporate strategy, we spent a significant amount of time in 2021 on the separation of the Ligand and OmniAb businesses. However, throughout the year, we continue to evaluate transactions that add new technology platforms to Ligand, add meaningful partner programs to our portfolio, and bring companies and technologies that complement our existing technology platforms. Following the separation, Ligand plans to continue this strategic effort generally with OmniAb expected to focus primarily on any transactions in the antibodies discovery space. Before I turn the call over to Matt Foehr to provide additional details on the OmniAb business and strategy, I'll provide a few updates on some of our key portfolio programs remaining with Ligand. As mentioned earlier, three key Pelican programs are becoming significant drivers of our royalty revenue line. In the middle of 2021, the FDA approved Jazz Pharmaceuticals' Rylaze for the treatment of acute lymphoblastic leukemia or ALL and lymphoblastic lymphoma or LBL. In July, Jazz launched Rylaze and generated sales of over $20 million in the first quarter of launch. Jazz recently announced the admission of a supplemental sBLA to the FDA seeking approval for a Monday, Wednesday, Friday intramuscular dosing schedule for Rylaze as a component of a multi-agent chemotherapeutic regimen for the treatment of ALL and LBL in certain patients. Expectations for this drug are for sales to exceed $200 million annually and we're pleased to see Jazz's progress toward that goal through a continued broadening of the data and the patient population around this important drug. Beyond Rylaze, both Pneumosil and teriparatide are showing commercial progress. Pneumosil is a 10 billion pneumococcal conjugate vaccine marketed by SII in India and neighboring countries. Teriparatide is a biosimilar to Eli Lilly's FORTEO and is marketed in the US by Alvogen. Combined, these two drugs contributed over $3 million in quarterly revenue to our reported numbers in Q4 2021. In addition to those three marketed programs, there are two key future drivers of royalties that I wanted to touch on briefly. Travere Therapeutics announced plans to submit an NDA to the FDA for accelerated approval of sparsentan for IgA nephropathy in the first quarter of 2022 and for FSGS in the middle of 2022. Travere also announced that plans are underway to submit a combined IgA nephropathy and FSGS marketing authorization application in mid-2022 for conditional marketing authorization in Europe. Travere has licensed the marketing rights to Sparsentan in Europe to Vifor Pharma and Ligand is entitled to a 9% net royalty on worldwide sales. In July 2021, also Merck received approval for VAXNEUVANCE and recently announced European Commission approval for the product for adults 18 years of age or older. VAXNEUVANCE is a 15 billion pneumococcal vaccine utilizing Ligand’s CRM197 vaccine carrier protein produced using our Pelican Expression Technology platform. Additionally, Merck announced that the FDA accepted for priority review the sBLA for VAXNEUVANCE in infants and children. On the earnings call earlier this month, Merck mentioned that they had recently launched VAXNEUVANCE in the US. Ligand is entitled to a low single-digit royalty on net product sales and we look forward to Merck making inroads into the $6 billion market for this type of pneumococcal vaccines. With that, I think I'll turn the call over to Matt Foehr, for the update on our OmniAb technology and programs. Matt?

Thanks, Matt. I'm going to focus my comments today on our OmniAb platform and business overall including our strategic goals. The OmniAb technology platform continues to demonstrate its value proposition to our partners around the globe by providing access to diverse antibody repertoires and screening technologies to enable the efficient discovery of next-generation therapeutics. Partners place high value on the fact that our team and technology can connect flexibly into a variety of workflows to meet their and each of their program scientific needs. That flexibility allows us to efficiently grow our portfolio programs while maintaining and investing in what we see as a best-in-class technology platform. At the heart of the OmniAb platform is the biological intelligence or what we call BI of our proprietary transgenic animals, which have been genetically modified to generate antibodies with human sequences. Over 55 partners now have access to OmniAb-derived antibodies and more than 250 programs are being actively developed or commercialized. Today, the number of active clinical or commercial stage OmniAb-derived antibodies has increased by over 50% from roughly a year ago going from 16 to now 25. That's a substantial increase and illustrates the momentum of the platform and that momentum that's been built up especially in the later-stage programs. And there are now over 100 clinical trials that are currently being run or have been run by our partners who are pursuing the development of OmniAb-derived antibodies. Our business development team continues to secure new license agreements and partners are using our platform more than ever in new and scientifically interesting ways. We're now in the process of expanding our BD team, given increasing demand for our platform and our growing partner base and given that we are managing more inbound interest in the platform. Two OmniAb-derived antibodies received regulatory approval during 2021. Those are ZIMBERELIMAB with Gloria Biosciences in China, and sugemalimab with CStone who is also partnered commercially with Pfizer. Also in late December, Janssen announced the submission of a BLA to the FDA seeking approval of teclistamab for the treatment of patients with relapsed or refractory multiple myeloma. Teclistamab is an OmniAb-derived bispecific antibody targeting BCMA and CD3. We're entitled to receive a $25 million milestone payment upon first commercial sale of teclistamab in the US. So that's something we'll be monitoring as time progresses. And recently, our first OmniChicken-derived antibody entered the clinic and is now in Phase 1 trials that are sponsored by Boehringer Ingelheim. We have extensive biological capabilities for Ion channels and transporters that were developed within the Icagen platform over many years. We see these as best-in-class capabilities for viable target to lead delivery and for difficult high-value Ion channel targets. These capabilities were originally established around small molecules and have clear potential in multiple formats and modalities. In Q4, we expanded our existing deal with GlaxoSmithKline, to leverage our Ion channel technology in the targeting of neurological diseases. We received an upfront payment from GSK of $10 million and are eligible for milestones of over $247 million, as well as, tiered royalties on net sales of any drug from the collaboration. With an added focus on our science and capabilities in the Ion channel and transporter arena, we see opportunities to further leverage and expand this area even more broadly across modalities including antibodies and ADCs and many others. In addition, these highly differentiated core capabilities can provide novel reagent generation, proprietary assays, and in silico capabilities that can also support partner discovery programs and can be accessed when pursuing Ion channels and transporter targets in a broad variety of approaches. We track a number of metrics in the OmniAb business, and have been pleased to see growth in all of the key areas that we currently track. Those being the number of active partners, with access to an OmniAb program, now at more than 55, the number of active programs being pursued by partners, which is now over 250 and we also closely track program matriculation and the number of active clinical and commercial programs, which as I mentioned now stands at 25 programs. And lastly, we also track novel antibody patents filed by our partners. This is a metric that our science team monitors closely and I think provides an interesting line of sight into the plans by our partners. And there are now over 60 patents filed by our partners that claim an OmniAb-derived antibody as the invention. Our potential future royalties link back to these patents and this creates a diverse base of intellectual property and potentially lengthy tail upon which potential royalties can be based upon. We've made great progress in building out the leadership team as we prepare for the split of the business in the coming months. And we are also framing our operational and strategic goals for the OmniAb business in 2022 as we prepare to become a separate standalone public company. Once public, our team will be focused on five main areas and they are: first, partnered pipeline development expansion and advancement; also expanding the overall reach of the OmniAb platform and continued workflow versatility initiatives and technology enhancement; as well as new transgenic animals and continued investment there to expand upon our leading position in that element of the landscape. And lastly, the successful completion of a number of operational initiatives including completing a major expansion of our wet labs here in Emeryville, California as well as in North Carolina and significantly expanding our OmniChicken vivarian facilities giving increasing demands from our partners. I look forward to talking more about these elements and updating on our scientific and strategic progress as the year progresses. And with that, I will turn the call back over to the operator for questions.

Thank you. And our first question comes from Joe Pantginis with H.C. Wainwright. Your line is now open.

Hello everyone. Good afternoon. I appreciate you taking the question and I'm pleased with the progress made. It's great to finally have clarity on the OmniAb plan. Matt, I wish you the best of luck in your new role managing the company. To begin, I have two questions regarding the OmniAb spinout. First, do you have any initial thoughts on what the capital structure might look like? Second, and perhaps more importantly, when examining the underlying business, I appreciate the five points you outlined, Matt. Over the next one to three years, do you plan to maintain the current business model regarding partners? Looking ahead to the five to ten-year mark, do you foresee developing any internally created products that you would prefer to retain or possibly keep entirely?

Yes. Thanks Joe. Yes I'll comment on the strategy elements and Matthew Korenberg may want to comment on other elements of process and other things. But on the strategy piece, as I mapped out, we really see what we kind of have coined internally as intelligent expansion of the platform. We see a lot of opportunities to not only remain on the cutting edge but also continue to invest in innovative elements of each piece of our technology that we've assembled around OmniAb to really continue to grow and expand the reach of the platform. Now, clearly, antibody discovery is one of the largest greenfield in the pharmaceutical industry as I think everyone knows in 2020 over $180 billion in revenue attributed to antibodies that's expected to grow to well over $235 billion just in the next few years. So what that's doing is really causing our partners and the industry to quantify cutting-edge tools. So, that's going to be our primary focus is expanding our existing partnerships expanding the number of partnerships. That intelligent expansion of the technology itself that also creates other opportunities for investment which is one of the foundational elements that's informed why we're doing the split.

And Joe on the capital structure, the spin company or OmniAb will be capitalized with the $70 million of cash that Ligand is contributing. And then it will have no debt. So is it a cash and debt-free business, cash positive, debt-free business and the remaining convertible notes and cash will stay at Ligand. So that's generally the split we're expecting.

Got it. Briefly shifting focus, when considering the Kyprolis franchise, it's clear that substantial effort has gone into enhancing manufacturing capacity, particularly in relation to remdesivir requirements. My question is somewhat multifaceted. Kyprolis is gaining new indications, especially in combination with DARZALEX, and we anticipate growth in that area. Additionally, we expect remdesivir demand may not decrease as significantly as previously thought, given the situation with non-hospitalized and hospitalized patients. I'm interested in your current manufacturing capabilities to meet all these demands. Furthermore, considering the current environment, supply chain challenges remain a significant issue, and I'm curious about your strategies to mitigate any potential problems in that area.

Yes, Joe, I can comment on that, and Matt Korenberg may also want to add some insights. We have established a very flexible supply chain for Captisol, having added additional drying sites in recent years. This provides us with significant flexibility and thoughtful redundancy throughout the supply chain. We invested in this long before the pandemic and have been doing so for many years. As a result, we have a supply chain that is both flexible and efficient, which our partners have appreciated for Captisol over time. When developing a crucial IV medicine, Captisol plays a key role in that process, and our partners truly value the care and investment we've made in the overall supply chain. Matt Korenberg might have further comments to share as well.

Yes, thank you, Matt. Joe, I believe part of your question concerns our ability to flexibly meet the potential demands for VEKLURY and other products. The answer is yes. We can adjust our production as needed and we are prepared for any direction the pandemic may take. I think that, along with Matt's points, should help address your concerns.

Yes. Certainly, yes. Thanks a lot guys.

And thank you. And our next question comes from Larry Solow from CJS Securities. Your line is now open.

Great. Thank you and good afternoon everyone. I just wanted to follow up on the spin. At a high level, I understand we have about $40 million in revenues. Can you clarify whether that will be related to the spin itself? Will it be dilutive or accretive to core Ligand?

Yes. Thanks Larry. We're still working through exactly what the expense profile will look like of both businesses. Generally speaking though within Ligand, the business ran close to breakeven. So it won't be materially one direction or the other in terms of impact to the historical financials when we get those breakouts reported into the Form 10 and otherwise.

Got it. That's very helpful. So it's probably a minimal move one way or the other. So core Ligand earnings or bottom line should stay about the same. Great. And then just on the fourth quarter numbers. As you mentioned in the release, remdesivir or VEKLURY material sales were a little less than expected, and that's due to the reduction in COVID hospitalizations or serious hospitalizations. Is there any guidance for material sales for remdesivir still included in your numbers for 2022?

Yes. Thanks, Larry. I think as we've talked about on a number of calls, the demand for the remdesivir and Captisol as it relates to that has been pretty variable over the course of the pandemic. And no one really knows where we're headed. But given that Gilead has given guidance on their quarterly call a week ago or so, where they said that they would expect about $2 billion of end user sales for Veklury this year but the majority of that in Q1 of this year. Anything that you're selling in Q1 this year we sold them Captisol long, long ago. And so that just generally, I think lines up and is reflective of what you'd expect for the guidance we gave for some Veklury-related Captisol sales in our numbers, but not a significant amount at least as we see it at the moment.

Okay. So it sounds like, it's a modest number and it's front-end loaded essentially for you guys even to even – it sounds like most of the Q1, will be satisfied with the stock on hand but maybe there's some residual sales and that would be front-end loaded in your material sales number?

Yes. We'll give more color on that as we go.

And the royalty number was a little bit – looks like it was a pretty decent number at least compared to my expectation. You mentioned it sounds like the Phoenix products Rylaze and then the other two contributed $3 million to that. Just I'm trying to get a better picture. Just on Kyprolis, I guess, that number for you guys because I know after the last quarter they were sort of running a little bit ahead of expectations relative to what you have built into guidance than I think they reported after the quarter. So I'm just trying to – do you have a sense of – you're just building in an expectation of a sequentially flat quarter, or how do you kind of view that?

Yeah. Thanks, Larry. Agreed. Yes last quarter was a real strong quarter from Kyprolis and this quarter was fine. But it wasn't a huge step up from where they had been. One of the things I think people should keep in mind though is we are booking to our expectations but not to actuals when we book these quarters. And I mentioned that specifically, because we don't have any information on what Kyprolis has done in China for this last quarter. So we've not included anything for China. And that's one of the areas that we do think is going to be a significant area of growth for Kyprolis is BeiGene and their team they're launching Kyprolis in China. They report in another week or so and we should get some more information there, which will carry over to the rest of the year.

Okay. And just sticking on the Phoenix side, I think you mentioned Rylaze inevitable target of $200 million. I believe that they've already been no longer selling the prior products. So I guess that $200 million number that target should come sooner than later perhaps potentially in I don't know 2022, but a pretty near-term type target? Is that a fair statement?

Yeah. Good question. Jazz has not reported their numbers yet. So we can't comment publicly on exactly, what we book to. And we're looking at script trends though, and we see nice progress in Q4 compared to Q3 of last year. And just reading through the script trends and some of the comments that you were just referring to where they're now fully replaced their prior predecessor product with this new product with Rylaze, which did almost $200 million on its own last year the previous product. But one could expect that they should be trending towards that even for just this year. But yeah, between that product and the other two teriparatide and Pneumosil all three were nice contributors this quarter to the royalty one.

Here's a quick update on teriparatide. The bioequivalency target seems to have been delayed, but it appears to be performing well on its own, even without the bioequivalency status. Is there a current target for that, or has it not been filed yet? When do you anticipate potential bioequivalence?

Yeah, that's correct. Our partner Alvogen is dealing with the FDA directly on that and – they continue to work with the FDA. They've actually recently submitted additional data that was requested by the agency. And they did that, I think earlier this month and they're just waiting for the FDA's decision. Just a reminder to folks, there's no mandated timeline for their response, but the last one was relatively efficient. So we're hopeful that we hear something in the next few months.

Great. Thanks. Appreciate all the color. Appreciate. Thanks.

And thank you. And our next question comes from Matt Hewitt from Craig-Hallum. Your line is now open.

Good afternoon. Thank you for taking the questions. I have a two-part question. Recently, there has been commentary suggesting that the weakness in healthcare, particularly in pharma and biotech stocks, might lead to some softness in funding for smaller companies in these sectors. My first question is about your exposure to this situation. Are you noticing any effects from it? More importantly, are there potential investment opportunities for you to step in with funding and acquire ownership positions in some valuable assets? Thank you.

Go ahead, John.

Thank you Matt. It's a thoughtful question. Certainly as to our business just to address the impact or what we might be seeing. Overall the majority of our assets are partnered with very, very secure well-capitalized companies. And so it's probably just a numbers but also the most important assets from a financial contribution today are backed by again well-capitalized companies. So I think the quick answer obviously we're looking at the financial markets but we are not concerned about any pullback or change in the capital markets environment as it relates to our business model or our outlook. The second question about does this create an opportunity? Often when we meet with investors, we explain our model where we're a technology company. We provide the tools and the technology to our partners. And we really believe that in any economic cycle our business is really positioned well to thrive. And over the last five years the markets have been tremendous. They've been abundant a lot of capital a lot of new company formation and we've done very, very well with licensing. We don't see a particular change but realistically if there are fewer companies or less funding that may slow down a bit. However, in this market maybe what you're alluding to is that when there is capital retrenchment maybe a pullback, companies are looking for other more creative sources for capital or which Ligand can participate in. We can fund we can buy royalties. We can participate in research stage projects or as we purchased private and public companies that really have been financially distressed otherwise very good companies backed by great science but in a more financially distressed market environment we've been able to come in acquire and integrate those companies into ours. So we really have seen this. I've been at Ligand now over 15 years and we've seen a few cycles. And in every cycle, we've been able to create opportunities and advance our business. We're very pleased with how we're positioned right now.

That’s very helpful. Thank you.

And thank you. And our next question comes from Jacob Johnson from Stephens. Your line is now open.

Hey, thanks. John, following up on your response to Matt's question, you mentioned the investment plan for OmniAb after the spin. Can you elaborate on your interest in incorporating new technologies into the legacy Ligand platform and possibly expanding it further after the spin?

Yes. The remaining Ligand business after the spin will have a fundamentally unchanged business model. We are unlikely to invest in antibodies, as that will be the focus for our colleagues at the new company. Over the past decade, we have made 10 acquisitions of various sizes and we are looking for the technological tools that the industry requires for drug discovery. With over 140 partners, we understand their investment needs, which provides us with guidance for potential acquisitions. We see the market environment generating opportunities for both public and private acquisitions, so we plan to recapitalize the business. As we spin out OmniAb, we will concentrate on our remaining assets and redirect our merger and acquisition targets. Notably, we made a significant acquisition in October 2020, which was the largest in our company’s history regarding people, assets, and purchase price. That acquisition is now well integrated, and we are ready to seek additional assets and platforms to complement our portfolio.

Got it. Thanks, John. And then a question for Matt Korenberg. I certainly understand there's moving pieces around expenses and so you're not guiding to it, but that means I'll still ask a question about it. Just in terms of the product gross margin line any kind of directional indication about how we should think about that in '22 versus 2021 given the kind of vacay probably mix shift of those revenues?

Yes. It's good question Jacob. And the answer is the margins will continue to be somewhat below where they had been historically just as a result of the larger volumes that we continue to manufacture as well as the flow-through of some of the costs that we've spent in the past that go forward. Some of those are the costs on there are non-cash versions of costs. So you'll see cash flow should be better than the margins would indicate on those sales. But I think, last year is probably a good proxy for where those margins might be.

Got it. That's helpful. And if I could just sneak in one more for Matt Foehr. Just a lot of talk about OmniAb being spun out, but Icogen is part of that. Can you just remind me the kind of synergies between the OmniAb discovery assets and Icogen?

Yes, that's a great question, Jacob. The capabilities developed over many years at Icogen, particularly in biological areas focused on ion channels and transporters, are significant not just in the small molecule sector but also in the antibody-drug conjugate area. There are increasingly more partners exploring antibody strategies for ion channel targets. Ion channels play a crucial role in various biological processes that typically involve rapid cellular changes, particularly in cardiac and smooth muscle tissues, and they are key in nutrient transport and T cell activation. This represents a broad range of therapeutic possibilities across cancer, metabolic diseases, pain, neurological disorders, and infectious diseases, with Icogen having built these capabilities over time. These capabilities not only fit well together but also serve as major value drivers. We continue to enter into new agreements focused on these ion channel capabilities, while also recognizing the potential in combining the best biological intelligence from our transgenic animals and acquired screening technologies with these excellent biological capabilities around ion channels. It's truly an exciting area, and the science teams are very enthusiastic about it, highlighting substantial potential for the future.

Awesome. Thanks for taking the questions.

Thank you. And our next question comes from Scott Henry from ROTH Capital. Your line is now open.

Thank you and good afternoon and first of all congratulations to Matt. I think you're going to do a great job. From there, most of my questions have been answered, but I did want to look back at the Phoenix acquisition now that we're kind of over a year past, you've got these big three products. And it seems like it started a little slow, but it's really picked up. When you look back at the time of acquisition, I was just curious, of those big three, what's kind of tracking ahead of your expectations or in line or maybe slower? It certainly seems like Riley seems to have been the strongest but I just wanted to get your thoughts.

Yes, Scott maybe I'll answer that one. I think all of the products out of the Pelican transaction are actually performing incredibly well for us. So we spoke about three of them in terms of their contributions to royalty this quarter. I think the first quarter launch from Rylaze was fantastic and we look forward to the actual earnings report from them in a couple of weeks for the Q4. The teriparatide asset at Alvogen would be for the TE approval, the TE approval may be delayed from where we expected or hoped at the time. But we were never counting on that at the time we bought the deal. That's why we bought the company. That's why we had a contingent value right or earnout payment tied to that happening during the year. And so we feel like it's performing on or ahead of expectations for not having achieved the TE rating which is great. And same for PNEUMOSIL from the Serum Institute of India, they're making great progress on their product in their region. VAXNEUVANCE has not launched yet but the approvals came on or ahead of schedule and we look forward to them ramping up as well. So across the board, I think all four products are doing well.

Okay. Great. Thank you for that color. And when we think about the launch curves, I mean obviously Rylaze is a pretty steep launch curve with the switch there. How should we think about PNEUMOSIL as far as the launch curve? I know vaccines tend to be pretty rapid but outside the US may be a little bit different. Just wanted to get your expectations?

Yes. That one is a little more difficult to predict. It is a lot of government contracts and other group purchasing contracts that they're putting in place. The good news is that the Serum Institute tends to announce when they add these contracts, which tend to be for annual repeating annual contracts of dosage. And so – so far they've done well. And you'll see as the 10-K gets filed next week the numbers that we're reporting here this quarter for Q4 for them look quite strong and we look forward to 2022 that continues along those trends.

Okay. Great. Thank you for taking the questions.

Yes, thank you. I appreciate the people's time and attention today the questions. And we look forward to staying in touch with everyone. The next two, three months is going to be a busy period for us trying to be as transparent as possible with our spinout plans but we feel very good about the feedback we're getting about the business planning that's going into now separating and running the two individual companies. And really on behalf of all of the management and the Board, I just want to say that we are excited to present our investors to public companies. We're confident they'll be both well run, good business plans and assets and really an exciting investment opportunity. So we're pleased with that. We're pleased with our year-end performance at the end of 2021. The numbers speak for themselves. But it really, really was an extraordinary fourth quarter for the business operationally and financially and we're pleased to be able to share this time with you. Thanks. And we will be in touch on our next earnings call if not see you or talk with you before then. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.