Ligand Pharmaceuticals Inc (LGND) Q3 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Ligand Third Quarter Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Melanie Herman, Head of Investor Relations. Melanie, please go ahead.

Good morning, everyone, and welcome to Ligian's third quarter 2026 earnings call. With me on the call today are CEO Todd Davis, Chief Financial Officer Thabo Espinoza, Vice President of Portfolio Strategy and Investments Lauren Hay, and Paul Haddon, Senior Vice President of Investments and Business Development. During the call today, we will review the financial results released earlier today and provide commentary on our recent business development activity and partner portfolio, followed by a question and answer session. Before we get started, I would like to point out that we will be discussing non-GAAP results, which exclude certain items, such as stock-based compensation, amortization of intangible assets, amortization or impairment of financial royalty assets, transaction costs, and gains or losses from derivative assets and marked market changes in investments, amongst others. I encourage you to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, which can be found in today's release available on our website. Reconciliations of forward-looking non-GAAP measures are not provided because of the unreasonable effort associated with providing such reconciliations due to the variability in the occurrence of the amounts of certain components thereof. We believe these suggested measures provide valuable insight into our core operating performance, both historically and moving forward. Our earnings release and a link to today's webcast can be found in the Investor Relations section of our website at ligand.com. This call is being recorded, and the audio portion will be archived in the investor section of our website. On today's call, we will make forward-looking statements regarding our financial results and other matters related to the company's business. Please refer to this safe harbor statement related to these forward-looking statements, which are subject to risks and uncertainties. We remind you that actual events or results may differ materially from those projected or discussed, and that all forward-looking statements are based upon current available information. Ligon assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Ligon files with the Securities and Exchange Commission, or SEC, that can be found on Ligon's website at ligand.com or on the SEC's website at sec.gov. And with that, I'd like to turn the call over to our CEO, Todd Davis.

Thank you, Melanie, and good morning, everyone. We appreciate you joining us today. The third quarter was an important one for Ligand, with royalty revenue growing 51% year-over-year to approximately $70 million. Filspari, O2Vair, and the addition of the Zoma commercial assets, Vibaismo, Ojemda, and MyPlaifa led that growth, with the Filspari launch and FSGS being a primary growth driver as well. We are also raising our adjusted diluted EPS guidance to a range of $9.50 to $9.75 per share, up from our previously stated range of $9 to $9.50 per share. We have scaled our portfolio meaningfully over the past few months, closing the Zoma acquisition on July 14th, which added three key commercial assets and more than 100 pipeline programs. We also made two new investments this quarter, Avancel, an investment in a next-generation CAR-T platform technology, and Rijunia, a commercial royalty investment in Santan's Pediatric Myopia product. We have scaled our investment team, expanding our deal capacity while continuing to apply a disciplined approach to every investment. Our pipeline remains strong, with more than 180 opportunities reviewed so far this year. We are entering an extremely catalyst-rich period at LIGAND and anticipate up to seven pivotal readouts across the portfolio through 2027, five of which came from the ZOMA acquisition. I'll use the next few slides to cover the team we've built, what we've accomplished over the past several years, and then Tavo will walk you through the financials. Lauren will provide an update on our portfolio, and Paul will provide you an update on new investments and the origination pipeline. Over the past few years, we have built an investment team with deep relationships across the biopharmaceutical industry and extensive investment experience in the space. Those relationships are a meaningful part of how we source opportunities, and the team's technical, clinical, and legal depth is what supports the rigorous diligence we apply to every investment. The team was expanded this year to add two new deal leads, Dr. Pete Renahan and Lee Brown. We also built out a systematic portfolio management system, led by Lauren Hay, to drive value into our development stage partnerships. We're now focused on more proactively communicating with our partners and doing what we do best, identifying new opportunities within the portfolio, which may offer attractive investment opportunities, As well as increasing portfolio yield and the probability of success on existing portfolio assets. Over the past three years, LIGEN has committed more than $1 billion across more than 20 investments using three distinct approaches. Royalty monetization, project finance, and special situations. The third quarter built on that momentum with the $730 million Zoma deal, which is the largest transaction in our history, as well as the Rejunia and Avancel investments. This slide shows the results and growth that our strategy has delivered. In 2022, we began shifting to a pure royalty aggregation model by spinning out the OmniApp platform and then Fenix, a recombinant protein expression platform now referred to as Primrose Bio, which we spun out in 2023. This pivot transformed us into a capital-like business model with an efficient cost structure built around a seasoned deal team. From 2022 to the midpoint of our 2026 guidance range, we anticipate royalty revenue would grow at a compound annual growth rate of 34%. Over the same period, adjusted EPS would grow at a compound annual growth rate of 41%. This growth was achieved by simultaneously cutting our core OPEX from $92 million in 2022 to an expected $50 million in 2026. With that, I'll turn the call over to Tavo for the financial update.

Tavo? Thank you, Todd, and good morning, everyone. Before I get into the numbers, there is one change I want to share with you. Starting this quarter, we're reporting earlier than we have in the past, and we plan to keep that schedule through 2027. The reason is that many of our royalty interests are accounted for as financial royalty assets. In fact, after the ZOMA acquisition, our financial royalty asset balance has increased from approximately $200 million as of last quarter to $800 million this quarter. For those assets, the income we recognize each period is driven by our long-term forecast of the royalty cash flows over the life of each asset, rather than by a single quarter of partner-reported sales. So waiting for every partner to report adds little information. There's more detail on that accounting in our Form 10-K. For partners that have not yet reported product sales when we closed the quarter, our royalty revenue and income for partners is based Based on our estimates, which are informed by sales side consensus and may differ from actual results. If results differ, they will be adjusted in the following quarter. I'll begin with our third quarter results and the drivers behind the year over year changes, and then turn to our balance sheet, including our convertible notes and our guidance. Royalty revenue was $70.3 million in the quarter, an increase of 51% over the prior year, reflecting We've seen the contribution from ZOMA and continued momentum across our legacy portfolio. Adjusted diluted earnings per share was $2.67, compared with $3.09 in the prior year quarter, which included $24.5 million of one-time SellZoofMe out license income. On a GAAP basis, we reported a net loss of $1.43 per share, which I'll walk through shortly. We ended the quarter with approximately $450 million in cash, cash equivalents, and short-term investments, compared with approximately $734 million at December 31, 2025. The change primarily reflects the proceeds from our $700 million 0% coupon convertible notes, net of the cash we paid to acquire ZOMA. Including our equity holdings and our credit facility, we have approximately $750 million of deployable capital available for additional royalty acquisitions and strategic investments. Looking at royalty revenue, legacy royalties grew 25% to $58.1 million, and the Zoma-acquired assets added $12.3 million in the roughly 11 weeks since the July 14th close. Filspari is now our largest royalty asset at $16.8 million estimated for the quarter, up 85% a year ago and overtaking Kaipralis at $10.5 million. The Filspari estimate is based on sell-side consensus. Trevere has not provided us with a royalty amount or Q3 revenue yet as they report Monday, November 2nd after market close. Any difference from our estimate We expect growth to continue across IGIN and FSGS, which was approved in April. Ojemda and O2Bear followed at $7 million each. Turning to our detailed financial results, total core revenue was $78.7 million, down 9% from $86.9 million last year, Which included $24.5 million of sales who may out license income recorded on the sale of the Pelfost business. Excluding that, core revenue grew 26%. Research and development expense was $2.8 million compared with $21 million in the prior year. Which included a $17.8 million charge related to the R&D funding arrangement for the AVM therapy royalty rights we acquired from Orchestra Biomed. G&A expense was $72.6 million, compared with $28.4 million. Of that increase, $35 million related to one-time ZOMA transaction and integration costs, with the remainder reflecting our expanded business development and investment team. Non-operating expense was $28.3 million, primarily non-cash, mark-to-market adjustments on our equity investments, which are excluded from Adjusted net income. As a result, gap net loss was $28.5 million, or $1.43 per share, compared with net income of $117.3 million, or $5.68 per share last year, which included $53.1 million of PELTHO's divestiture-related income. Adjusted net income was $57.5 million, or $2.67 per diluted share, compared with $63.8 million, or $3.09 in the prior year. The decline reflects the absence of last year's $24.5 million sell-zoom-me-out license income. I'd like to highlight that while GAAP GNA rose this quarter on ZOMA transaction costs, our core cash operating expenses for 2026 remain on track at approximately $50 million, including ZOMA. On our convertible notes, we have $460 million of 75 basis point notes due 2030 and $700 million of 0% notes due 2031. Both were paired with call spreads and our net share settled, so principal is repaid in cash and dilution comes only from the warrants, and only above their strike prices of roughly $294 for the 2030 notes and $524 for the 2031 notes. At a $400 share price, for example, the warrants would add about 600,000 shares or approximately 3% of shares outstanding. Turning to guidance, we are reaffirming our full year 2026 revenue guidance. Royalty revenue of $225 to $250 million, total revenue of $270 to $310 million, cap to sell revenue of $35 to $40 million, and contract revenue of $10 to $20 million. We are also raising our adjusted diluted earnings per share guidance to $9.50 to $9.75 per share, up from $9 to $9.50 per share. I want to point out that we expect our 2026 revenue to be weighted more heavily towards the fourth quarter. There are two reasons. First, Q4 will include a full quarter of royalties from ZOMA, whereas Q3 included only a pro rata portion following the July 14 close. Second, many of our royalty arrangements include tiered rates that step up as sales grow, and the higher tiers are typically not reached until later in the year. I would also note that timing remains the most challenging variable in providing guidance. The timing of customer orders affects Captasol material sales, and the timing of milestones across our growing portfolio can shift revenue between quarters. Our updated EPS range reflects our strong results through the first nine months while keeping appropriate room for that timing. With our expanded portfolio following the ZOMA acquisition, there are also a growing number of clinical and regulatory events whose outcomes and timing are inherently uncertain and which we do not rely on in setting guidance. Because many of these events carry milestone payments, positive outcomes would represent potential upside to our guidance. And we look forward to updating you as they occur. Finally, as we noted last quarter, the business today is materially different from the one we reflected in the five-year framework we introduced at our 2025 Investor Day, which targeted a 23% royalty receipt CAGR. We are not updating that outlook today. We'll do so at our Investor Day on December 8th. Three major developments will factor into that update. First, the Zoma acquisition, which will shift a larger amount of future expected royalties from the future investment section of the chart to the commercial and farm team sections of the chart. Second, the approval of Filspari in April as the first FDA-approved treatment for FSGS, which expands its opportunity beyond IGAN and is already contributing to Filspari royalties. And third, Palvela's NDA acceptance and priority review of cutorin repamycin and microcystic lymphatic malformations. The FDA has assigned a PDUFA target date of February 28, 2027. Ligand will earn a tiered 8% to 9.8% royalty if approved. With that, I'll turn the call over to Lauren for an update on our royalty portfolio and pipeline.

Thank you, Tavo, and good morning, everyone. Following the acquisition of Zoma Royalty and our September investments in Raijunia and Avancel, our portfolio now includes more than 200 commercial, clinical, and preclinical royalty assets. I'll start with our commercial programs, then turn to the pipeline and the catalysts ahead. The Raijunia acquisition adds our 16th key program to the commercial portfolio. Of these 16 programs, 10 stem from royalties tied to new approvals or investments made since 2022 when we pivoted to a lean royalty aggregation model. Together, they span a wide range of therapeutic areas and partners, reflecting a diversified, durable, and growing royalty revenue stream. There were several updates from our commercial partners in the quarter. Ojemda was approved in Japan in September, as announced by Ipsen. We expect Filspari to continue its strong launch in FSGS and show sustained IGAN growth, and O2Veer and ZylSuvme continue to show significant growth in product sales as well. Pelfost reported that more than 25,000 patients have been prescribed ZylSuvme since its launch in July 2025. Turning to a snapshot of our key partnered pipeline programs, this slide highlights what we believe are the most significant late stage opportunities, though it's just a subset of our broader development stage portfolio. As these assets advance through clinical development toward approval, they will further contribute to our growth and portfolio diversification. Importantly, every program on this slide represents a new or follow-on investment we have made since 2022. We often get asked which assets are the most exciting in the Zoma development stage pipeline, so I'd like to touch on a few of those here. Starting with the Takeda programs, mezagitimab is being developed in both ITP and IG nephropathy, with Phase III results expected between late 2027 and early 2028. Peak sales are estimated at more than $1.5 billion, which would represent a royalty of more than $30 million to ligand. Osovampator, which is being developed by Neurocrine under license from Takeda, is in Phase III and major depressive disorder. with results expected in the second half of 2027. Based on limited available analyst estimates, peak sales are estimated to be between 500 million and 1.8 billion, representing a royalty of up to 80 million dollars to Ligand. Felixabat, which Miram is developing under license from Takeda, was granted breakthrough therapy designation for primary sclerosing cholangitis in August. A pre-NDA meeting has been held, and additional discussions are planned before a potential NDA submission in the first half of 2027. In primary biliary cholangitis, enrollment is complete in the pivotal Phase IIb Vantage study, with top-line results expected in the first quarter of 2027. Peak sales are estimated above $1 billion, representing a peak royalty of more than $45 million to ligand. And finally, Ojemda, which is marketed by Cervier and Ipsen, has a Phase III trial in frontline pediatric low-grade glioma with results expected in 2027. That indication is estimated to represent peak sales of approximately $500 million or a peak royalty of approximately $25 million, on top of the royalty we already earn on the marketed indication. Next, I'd like to discuss some of the positive developments we have seen in 2026 across our portfolio. First, Phil Spari's FDA approval and commercial launch in FSGS has been one of the largest growth drivers in the second and third quarters of this year, and we expect that momentum to continue. Additionally, Phil Spari's marketing partner, Chugai, announced regulatory submission in Japan. Second, yesterday, Palvela announced NDA acceptance and priority review for cutorin-rapamycin in microcystic lymphatic malformations. The FDA assigned a PDUFA target action date of February 28, 2027. If approved, Palvela is expecting a U.S. commercial launch in the first half of 2027. We congratulate our partner, Pauvela, on this important milestone, which brings this potential new treatment one step closer to patients who currently have no FDA-approved therapies. Additionally, in May, Pauvela announced initiation of its Phase II trial of cutarin rapamycin in clinically significant angiokeratomas and also plans to begin a Phase III trial in cutaneous venous malformations in the fourth quarter of this year. With our tiered royalty of up to 9.8% on all cutorin-rapamycin indications, we expect this pipeline in a product to be a sizable near-term growth driver. Third, at Orchestra Biomed, the FDA granted AVIM therapy a second breakthrough device designation in patients with uncontrolled hypertension despite antihypertensive medication who are indicated for a pacemaker, And on October 1st, ORCESTRA announced that the BackBeat Global Pivotal Trial surpassed its full enrollment target of 316 randomized patients. We look forward to top-line results from ORCESTRA in the second quarter of 2027. I'd also like to highlight new additions to the portfolio this quarter. The acquisition of Zoma, including three commercial assets, Ojemda, Vapaismo, and Maiplaifa, and two new royalty investments, Avancel and Santens Rejunia. Our interest in Sotiklastat was also revitalized in August. Ovid announced that Mistral Bio, a newly formed portfolio company backed by Perceptive Advisors, acquired global rights to the asset from Takeda. So, Ticlistat narrowly missed its primary endpoint in the Phase III Dravet Syndrome trial. Ligand is entitled to a share of royalties and milestones received by Ovid. We are excited to see this new investment in this asset by Perceptive and are reminded that one of the benefits of royalty investing is that our interest stays with the asset, even as it moves from one clinical development partner to another. We are also pleased that our partner, Emedica, announced that they will advance the development of IV genoxalone for the treatment of refractory status epilepticus and plans to initiate a new Phase III study in 2027. RSE is a life-threatening neurological emergency in which ongoing seizure activity does not respond to at least two different anti-seizure medications. There is a significant need for therapies that could rapidly control seizures and reduce the need for escalation to IV anesthesia. Amedica acquired the global rights to ganoxolone through its acquisition of Marinus Pharmaceuticals in 2025. The decision follows an extensive review of the available clinical data and productive interactions with the FDA, which have provided a clear regulatory path forward for the program. Emedica is now progressing the activities required to prepare and operationalize the new study, including finalization of the study design, manufacturing of clinical trial material, and clinical site planning. Looking forward to the remainder of the year and into 2027, we believe we are in the most catalyst-rich period in our company's nearly 40-year history. Through 2027, we anticipate up to seven pivotal trial readouts, including important assets from the Legacy Ligand portfolio, as well as programs more recently added through the Zoma acquisition. We also have the potential FDA approval of cutorin-rampamycin and MLM, which, if approved, would be a major growth driver, as well as potential geographic expansion for commercial-stage products already generating royalties today, including Filspari and Otuvir. Of course, biopharmaceutical development carries inherent binary risk, and we do not expect every one of these studies to be positive. The strength of Ligand's model is that we have intentionally built a diversified portfolio that is resilient to that risk, so that no single readout or approval determines the outcome for our shareholders. With that, I'll now turn the call back over to Paul for an investment update.

Thank you, Lauren. Turning to our investment activity for the year, our pipeline of investment opportunities remains robust. We have reviewed more than 180 investments so far in 2026, which puts us on track to exceed prior years. Of those, 115 moved to sign a confidentiality agreement, a 60% conversion rate, and the highest number of CDAs signed in the past four years. What matters just as much is our discipline on the other end of the funnel. We closed six investments, or roughly 5% of the CDAs we signed. That selectivity is deliberate. We look at a very wide set of opportunities precisely so that we can be selective about where we commit capital. The six we closed this year are Zoma, Zerion, Agenis, Primrose, Avancel, and SideNexus. Some were large in size, while others were smaller follow-on or platform investments. But each fits the profile we've described before. Differentiated assets, experienced management teams, and structures that give us attractive economics. We expect our review activity to continue at this pace through the fourth quarter, and we remain confident in our ability to deploy capital at the same standard. In September, we acquired a royalty and milestone interest in Santens Raijunia from SideNexus for $23 million up front. Rhygunia is a once-nightly low-dose atropine eye drop and is the first and only approved pharmacologic treatment to slow pediatric myopia progression in the European Union and the United Kingdom, approved by the European Commission and the UK MHRA. Under the agreement, we acquired 100% interest in SideNexus' payment rights under its Santan license, which includes a tiered, low-double-digit to high-teens royalty on net sales in Europe, the Middle East, and Africa, plus certain milestones. SideNexus retains the U.S. and all other non-Santan territories. Myopia is a large and growing condition. Santan estimates that 14 million patients in Europe were affected in 2025, and Santan has identified myopia as a key strategic growth area with a strong ophthalmology presence across Europe. That gives us confidence in the long-term commercial potential of Rajunia, and it becomes the 16th key program in our commercial portfolio. Also in September, we entered into a financing agreement with Avancel Therapeutics for up to $47 million, which includes up to $41 million of royalty financing and up to $6 million in a concurrent Series C investment. The first tranche includes both royalty and equity for an initial investment of $9 million. What makes this transaction distinctive is that it is a platform royalty. In exchange for our commitment, we receive a mid-single-digit to low-double-digit royalty on worldwide net sales of all current and future Avancel pipeline assets, with the applicable rate determined by the total amount ultimately funded. The capital is deployed in four tranches, the first to closing, and the remaining three tranches tied to clinical milestones and other conditions, which aligns our capital with the progress of the programs. The lead asset, AVC201, is an anti-CD123 CAR-T in a Phase I-B expansion study in relapsed refractory AML, one of the most acute and fatal cancers, and one for which there are no approved cell therapies. AvonCell is also advancing AVC203, a Phase I-A program in B-cell malignancies. The platform combines CRISPR-engineered allogeneic CAR-T cells with a switchable feature that enables the therapy to be turned off, providing greater control over CAR-T activity. It is an off-the-shelf approach with potential across hematologic malignancies and other diseases. We were encouraged by the data generated to date with ABC 201 and look forward to working with the Avancel team as they advance the pipeline. For both of these profiled investments, our team had long-standing, pre-existing relationships. And with that, I'll turn the call back over to Todd for closing remarks.

Thank you, Paul. Stepping back, this quarter marks an important moment for Ligand. Our results demonstrate the strength of our business, now including the Zoma portfolio. We have achieved a 51% year-over-year growth in royalty revenue, Constructed a diversified portfolio of more than 200 assets and have $750 million of deployable capital to continue building our portfolio. Put simply, we have the capital, the people, the process, all focused on a very robust market opportunity. We believe that positions LIGAN to drive growth well into the next decade. I would like to thank the LIGAN team for their outstanding execution and our partners, whose progress in developing treatments for patients is what ultimately drives our success and results. Thank you for joining us today. I will now turn the call back over to the operator for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Please limit yourself to one question and one follow-up. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Hewitt with Craig Hallam Capital Group. Your line is now open. Please go ahead.

Good morning, and congratulations on the strong quarter. Maybe first up, now that you've kind of had some time to dig through the Zoma portfolio a little bit deeper, I'm just curious if there's Incremental assets. I think initially when you valued the transaction, it was just on a handful. Obviously, it's a much larger portfolio than that. So as you've dug in deeper, are you finding maybe some hidden gems, and how does that transaction feel today?

Thanks, Matt. That's a great question. There is. I mean, when you are valuing a portfolio the size that Zoma had created, you really use a triage approach to valuation around those assets that you have the most information on that carry value. And so that was really a small subset of their total asset base. And as we have begun to dig through that over time, of course, there's a number of news flow on things that we had underwritten, frankly, to zero that are developing quite nicely and have positive information. We believe that it has come out. There are real shots on goal. And other, you know, portfolio assets that Zoma had that we have the follow-on capital capability to support those companies, which improves their probability of success, as well as represent very good investment opportunities for us. So we are, you know, kind of farming through that portfolio carefully with Lauren in the lead there and assessing each asset, and we are uncovering a lot of, I would say, option value on things like the Resolute assets, Biloxabat, et cetera.

That's super helpful. And then maybe just kind of sticking with the ZOMA, I think initially your guidance contributed $0.50 to ZOMA to earnings this year, $1.50 to next year. As you've gotten a little bit more comfortable with the portfolio, do you still see that as being the contribution, or has there been any changes to that initial thought? Thanks.

Yeah, no changes to that. I'll let Tavo follow up here. But significant changes in our views on the viability of very promising assets within the portfolio. Tavo?

Yeah, that's right, Todd. No changes to what we've said in terms of immediate accretion in 26 and then the $1.50 in 27. Now that the dust is settling on the acquisition, I am pleased to say that the cost synergies are coming in a tad better than we had expected. So we're very, very pleased to see that come through, but to no change. And we'll talk about the contribution, our updates to the contribution next year when we meet at Investor Day. We'll talk about it more specifically at that point.

Great. Thank you. Thanks, Matt.

Your next question comes from the line of Dave Reisinger with Leerink Partners. Your line is now open. Please go ahead.

Yes, thanks very much. Just wanted to add my congrats on the quarterly results. So, my question relates to the news flow ahead. So, specifically, can you talk about the Qtoren, Rapamycin, Padufa, and the prospects for the sales for that drug over the long term, And remind us about the royalty opportunity for Ligand, please. Thanks very much.

Sure. As everybody may have seen, they yesterday got very good news at Palvella and are expecting a PDUFA date in February. That's very big news for us. The sales potential here is, you know, high several hundred millions to a billion dollars in kind of when you take all territories into consideration. And our royalty rate on this scales pretty quickly at lower levels of sales up to just under 10 percent at 9.8.

Great. Thank you very much. Thank you, Dave.

Your next question comes from the line of Jason Zemensky with Bank of America. Your line is now open. Please go ahead.

Hi, this is Jackie on for Jason. Congrats on the quarter, and thank you so much for taking your call. So as you look towards 2027, how are you thinking about the pace of capital deployment? And given the growth of the existing portfolio, how much do you need to deploy annually to sustain it? Thank you.

Yes, thank you, Jackie. I think the rate of deployment here is accelerating. We think somewhere below $200 million or $200 million deployed per year sustains our growth for a significant period of time. Obviously, in the far, far outer years beyond 2040 or so, the scale of our investment activity must be significantly higher than 200. But, you know, for the next three to five years or so, that pace will sustain our growth significantly through the mid 2030s. And we're deploying at that rate. I would say that, you know, we've added two deal leads over the last 12 months, and they've come on board very rapidly, are highly productive, along with the other three folks that are leading deals, and so the pace probably does increase, and that will increase our option value. The pace could go up, or the selectivity could go up, but either way, I think that works very well for us.

Great. Thank you so much. All right.

Your next question comes from the line of Glenn Santangelo with Barclays. Your line is now open. Please go ahead.

Oh, yeah. Good morning, and thanks for taking my question. Just two quick ones for me. I just want to focus on the royalty revenue guidance. I mean, you basically just maintain that guidance on what was a pretty strong quarter here. And if I look at the implied sort of royalty revenues in the fourth quarter, I think it's 64 to sort of 89 million. And given the things, Tavo, that you sort of talked about, you know, having zoned for the full quarter to step up in the royalty rates, you know, and all those reasons why revenues would be more weighted towards the fourth quarter, the bottom end of that range just feels unrealistic, particularly given what we're seeing out of Phil Spari. So I was wondering if you could just sort of comment on that. And then secondly, you know, as we look to the Analyst Day coming in December, I'm just kind of curious, you know, how you think about this, this PDUFA now in QTOR and, you know, all the data readouts that we're expecting in 2027 and how that shapes your thinking in providing that updated five-year guidance at Analyst Day. Thanks so much.

Go ahead, Tom.

Thanks for the question. You do raise a good point, in particular, the lower end of the implied royalty for Q4. I agree. It does imply a measured approach. We definitely have a certain amount of confidence, a high level of confidence that will approach the mid to higher end. If not even exceeded, we are being a little cautious, in part, as I announced in my prepared remarks, we are still waiting for many of our partners to report. And, you know, we feel good about the range, in particular, the upper side of the range. So we'll leave it at that.

Any thoughts on the analyst day and how you formulate that five-year plan, given all the data that we're expecting?

Yeah, so we'll update our long-term outlook. Like I mentioned, and also in my prepared remarks, there's a number of positive events, news flow, and catalysts that have happened throughout the year, and in particular, the Palvella news, the Zoma acquisition obviously will inform that. But yeah, we're very much looking forward to updating that long-term outlook when we present Thank you.

Your next question comes from the line of Annabelle Samimi with Stiefel. Your line is now open. Please go ahead.

Hi, all. Thanks for taking my question, and congratulations on the progress. Had a couple here. So thinking about Zoma and some of the capabilities that they brought, I'm curious if this changes the technological complexity, level of innovation, or clinical risks that you're going to take in some of the deals that you're pursuing right now. And I guess the second question goes to the deal flow, you signed 115 CDAs, six investments were closed. So I'm curious to know what results in those other deals not closing, and if there's any Any level of competition that you're seeing, that could be a reason for that. Thanks.

Okay. I think that, you know, in terms of our investment strategy and the addition of Zoma, the strategy has not really changed at all. We're focused on, you know, positioning our capital in late-stage clinical development, sub-$100 million deal sizes, where we're going after very high We're therapeutically and scientifically agnostic on the approach and focused really on the risk-reward of each specific situation, which we analyze typically with access to confidential information and very competent experts with deep levels of expertise in the given area of science. Anytime you're running an investment business, of course, it's 80-20 in terms of your capabilities on the inside when you're assessing opportunities and culling through your pipeline. But we always go outside of Ligand in our confirmatory diligence stage to some of the deepest expertise in the world around a given therapeutic area, around a given scientific base, et cetera. So that's best practices, and the acquisition of Zoma hasn't really changed that. And in fact, you know, there's, they did a great job kind of building the company. But this is just such a highly synergistic business with us that we really brought over two employees, one full time and one in a consulting arrangement. So the synergies around that acquisition are very high. And our capabilities are quite broad. And on the deal flow front, Paul, if you're on the mic, I'll let you take that one.

Yeah, thanks, Todd and Annabelle. Yeah, I think the deal flow is definitely upticking. I think you can see from the CDA sign, I think we signed about 69 last year, so it's up quite considerably, and I think that's reflective of the additional deal leads we've brought on. So we're quite comfortable with the activity level and also just the pace of deployment, and we're anticipating having a very good year next year. So we're excited for what's to come.

Okay, thank you.

Your next question comes from the line of Yigal Nochomovic with Citi. Your line is now open. Please go ahead.

Hi, thank you very much for taking the questions. Just a question, one, on the risk model and how you think about, you know, probability-weighting success. Obviously, with the Pauvela Priority Review and the PDUFA, you know, you've passed a certain mark in terms of risk reduction. So do you embed that in your forecast now in terms of probabilities? And then how do you think about the option to, you know, acquire royalty in a different topical candidate now that you've got a little bit more confidence with respect to Pauvela's path to approval? Thank you.

Yeah, I think that the original Pauvela investment was done relatively early stage for us, but there was significant third-party evidence and evidence of the potential safety and efficacy on that particular drug. What we really invested in there originally was the formulation risk and the team, which is outstanding. So that's kind of how we looked at the risk originally. It was earlier, but de-risked in many ways that are typically earlier stage compounds or not. But we're constantly assessing both the probability of success, which we defined as an approval and launch, and then obviously discounting the commercial risk over a significant period of time. And in general, that's how we approach that. And what was the second part of your question, Yacol?

I was just curious about, you know, how you think about options, acquiring additional options on some of their other topical candidates, given the royalty you have there.

Yeah, there's no tangible discussions ongoing right now, and Pavela has very strong, significant access to capital, but of course, we're always engaged with our partners. You know, we work hard on the origination effort with the deal teams to meet new management teams, assess the assets and the team's ability to execute. And of course, we're doing that within our own portfolio as well. And the Palvella team is outstanding. So of course, we're always willing to engage with partners like Palvella and put follow on capital. In fact, since your original investment, which don't quote me on this, I could be wrong, I think it was 2019 when Ligand came into the deal, we have followed on in every single round of investment, including the equity rounds. So we're using, we're not really an equity finance strategy, but we will use equity as a tool to support our partners because that helps, you know, get rounds syndicated. It shows support from the inside. And, of course, it makes our royalties more valuable. So there's a self-serving element to that, but that's paid off for us very nicely as well.

Got it. Thank you.

Your next question comes from the line of Leland Gershall with Oppenheimer. Your line is now open. Please go ahead.

Terrific. Good morning. Thank you for taking our questions. Just wondering, in terms of the cost synergies post ZOMA, just wondering, I think maybe it was on your last earnings call you had mentioned that those may be even better than you had originally expected. So just curious, you know, if you could give us a sense of what is or what you see to be kind of the quarterly ongoing run rate for G&A, you know, as you remove, you know, 1x costs and transaction integration costs and so forth. You know, where do you stand on the ZOMA cost synergies? Thank you.

Go ahead, Tavo. Thanks, Leland, for the question.

So we acquired a business that had a cash operating expense run rate above $25 million. When we announced the acquisition and then reaffirmed when we closed the deal, that we would bring that down to approximately a $5 million run rate post-acquisition. What we're seeing today is that that's going to perhaps be a tad better than that. So modeling out the future, I'd keep it to just under $5 million per year in additional incremental cost as a result of the acquisition. So it's been a very nice outcome in that regard. Okay, great.

And then just want to ask another question with respect to Q4. It does seem you're being conservative here on the top line. I'm just wondering if there's any particular driver for that conservatism. Is it, you know, just, you know, estimates from the sell side that may change with the true-up? Just wondering what's striking a conservatism in Q4. Thanks. Thanks.

Yeah, you know, we have line of sight on a lot of the below the line items, operating expenses, share count, tax rates, and things that we have more direct control in. And that's what inspired the move in the earnings per share guide. On the top line, like I mentioned in my prepared remarks, the order flow from Capasol customers, the regulatory clinical milestones, there's some uncertainty there. And so, again, just taking a bit of a measured approach there and also seeing what we learn from our partners here over the next couple of weeks, I think that's the primary driver behind our measured approach on the top line. Great. That's very helpful. Thank you.

Your next question comes from the line of Sahil Dhingra with RBC Capital Markets. Your line is now open. Please go ahead.

Hi, good morning. This is Sahil for Dugmeen. Thank you so much for taking your questions. My questions are related to your two recent acquisitions. So, first on Wright Jr., so we are aware there is an outcome for the drug in the U.S., despite the clinical trial meeting both endpoints. So, my question there is, does the U.S. regulatory skepticism pose any read-across risk to European prescriber confidence or any reimbursement negotiations for the drug, or do you view that EU and UK approval are sufficiently independent? And also, is there any risk of unregulated compounded atropine in the regions where it is approved? Yeah, go ahead, Paul.

Yeah, so, Sahil, thank you for the question. To answer the first part first, no, we don't view any read-across as a risk. The product has been approved in Europe for a few quarters now, independent of what's been happening in the U.S. Obviously, the adcom will be on Friday, but we feel comfortable and have conviction that Santin will continue to roll out the product. And with respect to your second part of the question, there are compounding pharmacies that have been distributing atropine, but that dynamic is moved now that they have an approved product that's regulated and obviously being distributed by a very formidable ophthalmology company in Santin. So we feel comfortable there. Okay.

Thank you. That's helpful. And then my second question is related to the IRR and risk profile. So could you speak to the targeted IRR on the two acquisitions, and how does the risk return compare to a preclinical stage asset and the commercial product for Bidra Junior? And I'll leave it there. Thank you. Yeah.

Yeah. Yeah. So on every deal, we basically are assessing the risk and estimating what we think is an appropriate risk rate. And then we price in excess of that because our objective is to create alpha for our investors. Also, we realize there are estimates. And so you want to price in excess of your risk assessment to make sure you've got some buffer there and are delivering appropriate returns. You know, typically in the commercial stage royalty space, you're seeing returns on investments of between kind of 9% and 12%. There's a lot of royalty capital in that space. It's highly competitive. Usually there are multiple bids on a given asset or a financing situation, which is why, you know, for us, I think we're typically underwriting, you know, well in excess of that. Usually, that's for structural reasons, like, for example, the acquisition of a Pyron in 23. That was a commercial asset, but we needed to buy the entire company and restructure the asset. So, we delivered returns, you know, in the high teens is what we underwrote that, and it's overperforming, so that'll deliver kind of in the low 20s and took a similar approach here on the Santan situation. And that's why our special situations approach is quite important. We have significant operating capabilities, and that allows us to execute and differentiate our approach in more complex situations, which generates superior returns for our investors.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.