Ligand Pharmaceuticals Inc (LGND) - An Evalua

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Ligand Pharmaceuticals Inc (LGND) - An Evaluation

Who is Ligand Pharmaceuticals?
Ligand Pharmaceuticals Incorporated (Ligand), located in La Jolla, CA, is a biotechnology company that operates with a business model focused on developing or acquiring revenue generating assets and coupling them with a lean corporate cost structure. The Company’s technology CAPTISOL is a formulation technology that has enabled seven United States Food and Drug Administration (FDA) approved products including Kyprolis and Noxafil-IV and is being developed in several clinical-stage partner programs. The Company is engaged in the development of product candidates indicated for the treatment of diseases, such as hepatitis, multiple myeloma, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, epilepsy, focal segmental glomerulosclerosis (FSGS) and osteoporosis.

How did you learn about them?
A stock screen search for stocks with high earnings growth and high profit margin.

Let’s look at criteria? Are they growing Revenue?
For a look at Revenue:

2010: 23.5M
2011: 30.0M
2012: 31.4M
2013: 49.0M
2014: 64.5M
2015: 75M to 76M estimated in November

Sequential YoY increases are 28%, 4%, 56%, 32%, ~17%

How about earnings?

2012: 0.15 per diluted share
2013: 0.92 per diluted share
2014: 1.52 per diluted share
2015: 3.34 to 3.37 estimated in November by Company

Sequential YoY increases are 513%, 65%, ~121%. With a PE of 9.07 this gives a 1YPEG of 0.07!

Is there a reasonable PE?
It’s about 9.07 as of this writing.

Tell me more what they actually do?
They are a biotechnology company with a business model based on developing or acquiring assets which generate royalty, milestone or other passive revenue for Ligand and using a lean corporate cost structure. By diversifying our portfolio of assets across numerous technology types, therapeutic areas, drug targets, and industry partners, we offer investors an opportunity for broad exposure to multiple pharmaceutical and biotechnology assets without the risk associated with developing only one or a limited number of drugs. These therapies address the unmet medical needs of patients for a broad spectrum of diseases including thrombocytopenia, multiple myeloma, hepatitis, ventricular fibrilation, muscle wasting, Alzheimer’s disease, dyslipidemia, diabetes, anemia, asthma, focal segmental glomerulosclerosis (“FSGS”), menopausal symptoms and osteoporosis. Our partners include several of the world’s leading pharmaceutical companies such as Novartis, Amgen, Merck, Pfizer, Baxter International, and Eli Lilly.

Do they have a moat?
They already have 125 programs (25 of them being very recently added) with 72 different companies. Quotes from John Higgins, Chief Executive Officer of Ligand on Nov 18th: “$1.8B in partner R&D to be spent on these programs during 2016, up from $1.1B in 2015; and projections for 24 commercial products in 2020. …This momentum supports our expectations for a revenue compound annual growth rate of 36% for the years 2012 to 2017, all against a relatively flat expense structure.”

What is your overall impression?

They have an impressive track record over the last few years and the 5 year price chart shows over a 1000% increase in that short time. But you look over the past 10 years and it is only up 50%. To me this warrants more investigation into what happened to them to lose 75% in 2007.
I believe they are only a 19 person company, but they seem to think they can take on the new products with virtually no increase in costs to operate. It is currently a very profitable business model with a strong partnership of companies that is executing well. They just signed a new 7 year lease for the business with an option for 5 additional years. It’s a still a buy to me given the low PE and high earnings growth. They also were ranked 19th in the Fortune Inc 2015 Fasting Growing Companies list (beating SKX by only 2 ranks).

I welcome other thoughts and knowledge on them… Have a Profitable New Year!

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Hi F1Fun, This is obviously worth looking into, but it looks too good to be true. The first question has to be, why is everyone so skeptical about this company that it has a PE of 9. Are you using nonsense GAAP earnings, where they released all their NOL’s this year and are showing a lot of earnings that aren’t really there? Or did they sell a subsidiary or a building or something? There’s something very wrong about an increase of earnings of 126% on an increase of revenue of 15% or so. And it smells like fake GAAP earnings. JMHO. We’ll have to see.

Saul

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F1Fun,

Interesting company and thanks for bringing this to the board. One thing to look into…

Their GAAP earnings for last quarter were $10.46 compared to adjusted EPS of $0.56.

The GAAP earnings were much higher due to a net income tax benefit. Here is the company’s reasoning behind it…

Ligand has accumulated a usable portfolio of net operating loss carryforwards (NOLs) and other tax assets of more than $700 million, through a combination of operations and acquisitions. Through the interim financial statements dated June 30, 2015, Ligand has maintained a valuation allowance offsetting the entire balance of the NOLs due to the uncertainty of future use prior to expiration. After an analysis of our recent history of cumulative earnings and forecasted future taxable income, we have determined it is more likely than not that we will utilize substantially all of the NOL balance prior to expiration and therefore are releasing substantially all of the valuation allowance effective September 30, 2015. The net income tax benefit from valuation allowance release increased our GAAP net income by $217.3 million or $10.12 per diluted share for the third quarter of 2015 and $10.29 per diluted share for the first nine months of 2015. $217.3 million is the estimated tax benefit Ligand will have by utilizing its more than $700 million of NOLs.

If we use adjusted EPS for the last 4 quarters, we get TTM EPS of $3.30. At the current stock price of $110.80, we get a PE of 33.6.

Assuming the tax benefit is a one time event, this is a classic example of why Saul uses non-GAAP, adjusted earnings versus GAAP.

In this case, it appears management recognizes this as a one time event as they are filtering the income benefit out of the non-GAAP earnings.

Take care,
A.J.

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Hi again F1Fun,

I know you are just starting out, but you can learn from this. It’s not an accident that I guessed what it was without looking, and the AJ found it and confirmed my guess. To avoid that kind of embarrassment, and especially to avoid investing in a company under false pretenses, a quick look at the press releases would have alerted you to this. When a company that has been earnings 50 or 60 cents a quarter all of a sudden announces $10.00 for the most recent quarter, and on just a small revenue increase, there has to be something wrong. Take a look at The KnowledgeBase for why I avoid GAAP earnings. It’s for exactly situations like this, when companies are forced to report GAAP results that have nothing to do with reality.

Best

Saul

For Knowledgebase for this board
please go to Post #9939.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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Thanks for the feedback A.J. and Saul. I did use Non-GAAP adjusted EPS values. I just didn’t calculate my own P/E ratio and used the one TD Ameritrade reports for the company which must be using the GAAP earnings. Otherwise, everything else should be per the knowledge-base. If not, that is why I am posting - to make sure I can do it correctly. I’ll calculate the P/E ratio myself next time. Sounds like the company has had a very large tax advantage due the NOLs which will no longer help them going forward since they used all of the NOL carryforward balance.
Thanks again.

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