Fund of the week: Ligand Pharmaceuticals

Investment Thesis and Business Strategy

Ligand Pharmaceuticals operates a "royalty aggregation" business model, building a diversified portfolio of drug royalty interests and licensing assets. The investment thesis is that Ligand can generate stable cash flows from marketed products while maintaining upside from a broad pipeline of partnered drug candidates—a "shots on goal" approach that spreads risk across many programs.

By investing in or acquiring rights to numerous drug royalties and licensing its proprietary technologies, Ligand aims to create a scalable platform for long-term growth without the expense of full drug development.

Key Strategic Elements

Royalty Monetization

Purchasing existing royalty rights from inventors, academic institutions, or companies provides immediate exposure to revenue streams from marketed drugs. For example, Ligand acquired rights to Novartis's Promacta (eltrombopag) royalty and later sold those rights to Royalty Pharma for $827 million in 2019, demonstrating its ability to unlock value from mature assets.

Project Finance and Synthetic Royalties

Providing late-stage development financing to biotechs in exchange for negotiated future royalties on their drug candidates creates synthetic royalties if the drug succeeds, without Ligand bearing full R&D risk. A recent example is a $50 million funding of Castle Creek's Phase 3 gene therapy (D-Fi) in 2025, for which Ligand will receive a mid-single-digit royalty on future sales.

Special Situations & Incubation

Acquiring or restructuring companies with valuable drug assets, then incubating or partnering those assets to realize their value. Ligand has a proven track record of such deals:

• Pharmacopeia (2008) – yielded the sparsentan program (now Travere's FILSPARI)
• Metabasis (2010) – led to the creation of Viking Therapeutics (Ligand held equity and royalty rights)
• Vernalis (2018) – provided Verona's ensifentrine program (approved as Ohtuvayre in 2024)
• Pfenex (2020) – added the Pelican protein-expression platform and five major commercial programs (including Merck's Capvaxive and Vaxneuvance vaccines, Jazz's Rylaze, Serum Institute's Pneumosil vaccine, and Alvogen's Teriparatide biosimilar)
• Novan (2023) – brought in the nitric oxide platform and ZELSUVMI (a dermatology drug approved in Jan 2024)
• Apeiron Biologics (2024) – acquisition yielded the Qarziba (dinutuximab beta) oncology royalty

Platform Technology Licensing

Developing or acquiring drug discovery platforms and licensing them for royalties. Ligand built a portfolio of technologies such as Captisol® (a solubility enhancer enabling drugs like Gilead's remdesivir and Amgen's Kyprolis) and the Pelican Expression Technology for protein production. These platforms generate revenue via material sales and license fees. (Notably, Ligand's antibody discovery platform OmniAb was spun out as a separate company in 2022.)

Strategic Positioning

Overall, Ligand's strategy is to be a capital-efficient provider of financing and tools to the biotech industry. By leveraging its experienced investment team and flexible deal structures, Ligand fills a funding gap for biotech programs in exchange for royalties. Management emphasizes that this model is highly scalable, given strong demand for non-dilutive capital in biotech and the advantage of doing due diligence under confidentiality (access to non-public data) when structuring deals.

The company targets assets with near-to-mid term commercial potential (often Phase 3 or recent approvals) that have strong efficacy data and intellectual property protection, aligning investments to favorable risk-reward profiles.

Ligand's diversified portfolio now spans 90+ partnered programs (over 30 already approved drugs) across multiple therapeutic areas. This diversification reduces reliance on any single product. The investment thesis for shareholders is that Ligand can continue to grow royalty revenues at a high rate by adding new royalty streams (via acquisitions or licensing deals) and by seeing partnered pipeline drugs reach the market.

In 2024, three new Ligand-partnered drugs with blockbuster potential were approved (Verona's Ohtuvayre for COPD, Travere's FILSPARI for kidney disease, and Merck's Capvaxive vaccine), exemplifying how Ligand's prior investments translate into new royalty sources. Management expects "multiple value-creating milestones" in 2025 as more pipeline candidates advance and launch.

Fund Structure and Capital Model

Ligand is structured as a C-corp (Nasdaq: LGND), but operates in many ways like an investment fund within the biotech arena. Its capital model blends reinvestment of operating cash flows with external financing when needed:

Funding Sources

Operating Cash and Asset Sales

Ligand has historically generated cash from royalties, license fees, and material sales, which it reinvests into new deals. It also isn't shy about monetizing assets for lump sums to redeploy capital. The prime example was the sale of its Promacta royalty to Royalty Pharma for $827 million in 2019, which greatly boosted Ligand's cash reserves to fund acquisitions and share repurchases. Similarly, Ligand sold its Vernalis unit's service business in 2020 and spun-out OmniAb in 2022, simplifying the balance sheet and focusing on core royalty assets.

Convertible Debt

Taking advantage of low interest rates, Ligand issued $750 million of 0.75% convertible senior notes due 2023. This sizable financing (issued in 2018) provided capital for acquisitions like Pfenex and for general corporate purposes. Ligand managed to retire the convertible notes by maturity—repurchasing a large portion in 2022 and paying off the remaining ~$77 million at maturity in May 2023. The convert was never converted to equity (the stock stayed below the $206 conversion price), so Ligand effectively used cheap debt financing and then repaid it in cash. After this payoff, Ligand has no significant debt outstanding; its capital structure is primarily equity and cash.

Equity and Internal Funding

Ligand generally has not relied on frequent equity issuance. Instead, it recycles capital from its cash-rich balance sheet. As of year-end 2024, Ligand still had $256.2 million in cash, equivalents and short-term investments, providing dry powder for deals. It does opportunistically use equity in specific cases (for example, the OmniAb spin-off distributed equity in the new entity to Ligand's shareholders, and historically Ligand has sold equity stakes in partner companies like Viking Therapeutics to realize gains). But ongoing operations and prior monetizations have largely funded its investments.

Co-Investment and Syndication

Ligand sometimes shares financing with partners to leverage its capital. For instance, in 2025 Ligand led a $75 million royalty financing round for Castle Creek's therapy by contributing $50 million and bringing in $25 million from co-investors. In the Channel Therapeutics/Pelthos deal, external investors provided the majority of the $50.1 million in new equity while Ligand invested $18 million. This syndication model allows Ligand to amplify its reach—investing alongside others to finance more opportunities than it could alone.

Financial Strategy

The funding strategy is thus a blend: harvest cash flows from existing assets, monetize or spin-out when prudent, and tap low-cost financing when available. This approach has kept Ligand well-capitalized. Even after significant acquisitions (like $100M for Qarziba rights in 2024), Ligand raised its earnings guidance and noted the deal would be immediately accretive, reflecting disciplined use of cash. The company also maintains a portfolio of marketable securities (e.g. holdings in partners like Viking, Primrose Bio) which it can liquidate for cash—indeed, gains from selling such stakes have augmented Ligand's adjusted earnings in some periods.

Organizational Structure

From a structural standpoint, Ligand's lean organization (only 68 full-time employees as of end 2024) and low in-house R&D spend underscore its asset-light model. Rather than deploy capital into large labs or clinical trials internally, Ligand's expenditures are mainly deal-making, diligence, and managing partnerships.

Even so, the company will incur one-time charges for certain deals structured as R&D funding: for example, the $50M Castle Creek investment was accounted for as a R&D expense in Q1 2025 (creating a one-time $44.3M charge under GAAP). These accounting effects can introduce volatility in reported earnings, but the underlying intent is to generate future royalty income without ongoing cost obligations.

In summary, Ligand's capital model emphasizes financial flexibility. It utilizes a hybrid of internal cash generation and strategic financing (debt or equity when advantageous) to fund acquisitions. By carefully managing its balance sheet—exemplified by paying off debt and maintaining liquidity—Ligand can continue to pursue its strategy of acquiring royalty assets and funding late-stage drug programs.

Financial Performance Highlights

Ligand's financial profile reflects the transition to a pure-play royalty company following recent spin-offs and asset sales. Below we review the latest available financial results—focusing on the most recent quarter (Q2 2025) and the latest fiscal year (2024)—with an emphasis on revenue composition (royalties, Captisol material sales, and contract/license income), profitability, and key expense trends. All figures are from continuing operations (post-OmniAb spin-off) and are in USD.

Recent Quarterly Results (Q2 2025 vs. Q2 2024)

Ligand reported solid growth in Q2 2025, driven by surging royalty revenues from new product launches. Table 1 summarizes key quarterly metrics:

<small>*Core adjusted figures exclude one-time items, and in 2024 exclude gains from equity sales. n.m. = not meaningful.</small>

Q2 2025 Revenue rose 15% year-on-year to $47.6 million. This was primarily driven by a 57% increase in royalty revenue to $36.4M. Royalties now form the majority of Ligand's revenue (>75% in the quarter). The surge reflects new royalty streams coming online and growth in existing products:

• New launches: Partner Pelthos launched ZELSUVMI™ (an antibacterial) in 1H 2025, and Verona's COPD drug Ohtuvayre™ (ensifentrine) was launched in late 2024—both generating initial royalties. Merck's agreement to acquire Verona is expected to further accelerate Ohtuvayre's rollout.
• Portfolio growth: Royalties from Travere's FILSPARI (sparsentan, for IgA nephropathy) ramped up after its full FDA approval in Sept 2024, and Recordati's Qarziba royalty was newly added after the Apeiron acquisition. These contributed significantly to year-over-year growth, as indicated by the Q2 2025 royalty jump.

Captisol® sales were $8.3M in Q2 2025, up from an estimated ~$7.4M in Q2 2024 (Ligand noted a timing-related increase). Captisol (a chemically modified cyclodextrin used in injectable formulations) revenues can fluctuate based on customer order timing. The Q2 2025 increase reflects higher ordering by partners, possibly related to stockpiling or new product manufacturing schedules.

Contract revenue and other income was $2.9M, down from $10.9M in Q2 2024. The prior-year quarter included substantial milestone payments (notably a $19.2M milestone from Verona upon Ohtuvayre's approval, part of which fell in Q2 2024). In Q2 2025, fewer milestone events occurred, leading to a drop in this category. Ligand's milestone and license fee revenue tends to be episodic, tied to partner achievements.

On the profitability side, Ligand swung to a GAAP profit of $4.8M in Q2 2025, from a large loss in Q2 2024. The Q2 2024 GAAP net loss ($51.9M) was driven by non-cash charges, chiefly a $26.5M impairment of a financial asset (due to Takeda discontinuing the Soticlestat program) and other fair-value adjustments, as well as high expenses tied to building the investment team. By Q2 2025, such charges did not recur, and higher revenue lifted results.

On an adjusted basis, Core EPS was $1.60, up +14% year-on-year. Ligand's operating expenses in Q2 2025 were generally stable, aside from investments in new initiatives. Notably, R&D expense remains low relative to revenue (Ligand invests only in platform upkeep and certain incubations); G&A has grown as the company added staff and incurred costs for its Pelthos spin-out and other activities. The company's adjusted operating margins are high given the royalty model (gross margin on royalties is essentially 100%). Core profitability improved thanks to revenue growth leveraging a mostly fixed cost base.

Management highlighted that Q2 2025 was a "strong quarter" validating the robustness of Ligand's royalty portfolio. They noted the commercial launch of Zelsuvmi and Merck's planned $10B acquisition of Verona Pharma (Ohtuvayre) as key developments that could drive even greater royalty revenue in upcoming quarters. Captisol sales also met expectations in the quarter.

Encouragingly, Ligand raised its full-year 2025 guidance after Q2 results, projecting $200-$225M in total revenue (up from $180-$200M prior) and adjusted EPS of $6.70-$7.00. This implies a strong second half expected, with royalties for 2025 now forecast at $140-$150M (versus ~$108.8M in 2024). The guidance raise was attributed to better-than-expected royalty ramp-up in products like FILSPARI and Ohtuvayre.

Full-Year 2024 Financial Results

Ligand's FY 2024 results showed significant growth, though GAAP earnings were impacted by special items. Table 2 presents an overview of the full-year performance versus 2023:

Ligand achieved 27% revenue growth in 2024, with total revenue of $167.1M. The primary engine was royalty revenue, up 28% to $108.8M, which reflected new royalty streams and strong sales of partnered drugs:

• Royalty gains were "primarily attributable to royalties earned on Qarziba and increased royalties on Filspari". Ligand added the Qarziba royalty in mid-2024, contributing in the second half. Filspari (approved Feb 2023) saw accelerating sales in 2024 after full approval for a broader indication, translating to higher 9% royalties for Ligand. For context, Travere reported Filspari FY 2024 sales of $132M, yielding about $12M in royalty to Ligand.
• Other significant royalties in 2024 likely came from Kyprolis (Amgen's multiple myeloma drug, where Ligand has a tiered 1.5-3% royalty) and Rylaze (Jazz's leukemia drug, low-single-digit royalty), as well as continued albeit declining royalties from older products.

Captisol sales of $30.9M grew 9% in 2024. Captisol demand was elevated in 2020-2021 due to remdesivir; in 2024 it stabilized with moderate growth due to normalizing order patterns. Ligand's guidance for 2025 puts Captisol sales at $35-$40M, similar to 2024, indicating a steady contribution.

Contract and other revenues were $27.5M, up 53%. This category includes upfront license fees, milestone payments, and material sales unrelated to Captisol. The jump in 2024 was driven by milestone income—notably $19.2M earned from Verona Pharma upon approval and launch of Ohtuvayre (ensifentrine). Such milestone windfalls can cause year-to-year swings. Excluding milestones, underlying license fees were relatively stable.

On a GAAP basis, 2024 net loss was $4.0M (-$0.22 per share), a sharp drop from +$53.8M profit in 2023. The GAAP loss is entirely explained by one-time and non-cash charges:

• Ligand recorded a $30.6M impairment of a royalty asset in 2024 related to Takeda's decision to halt soticlestat (an epilepsy drug) development.
• A $15.1M fair-value loss was also recorded on partnered program investments (due to certain Agenus programs being discontinued).
• Additionally, Ligand's short-term investments fell in value—e.g., a $38.6M decrease in the carrying value of its stake in Primrose Bio and others. These mark-to-market losses contributed to GAAP net loss.

However, excluding these anomalies, Ligand's underlying performance was very strong in 2024. Adjusted net income (continuing ops) was $156.0M, up 45%, and core adjusted EPS was $5.74, up 41%. The adjustments primarily add back the impairment, fair value losses, and exclude any gains from stock sales. The core results demonstrate the high profitability of Ligand's operations: Adjusted EBITDA margin was robust given the high-margin royalty revenues.

Key expense trends for 2024:

• R&D expense was $21.4M, actually down from $24.5M in 2023. Ligand reduced internal R&D after spinning off the Pelican Expression business into Primrose Bio in late 2023. Most of Ligand's R&D now is support for technology platforms and occasional one-off funding deals (which, as seen in Q1 2025, can spike if accounted as R&D). Generally, R&D is a small fraction of revenue for Ligand.
• General & Administrative (G&A) was $78.7M in 2024, a large increase from $52.8M in 2023. The rise was "primarily driven by higher stock-based compensation expenses associated with certain executive departures, plus investments in building out the business development and investment team." Also, costs to incubate new ventures like Pelthos Therapeutics contributed. While high, these expenses reflect Ligand's expansion as an active royalty investor (more deals = more staffing and deal costs). Stock comp spikes (e.g., CEO transition costs) are non-recurring.
• As noted, significant impairment and fair-value losses (totaling ~$45M) hit 2024 GAAP results. These highlight the risk in Ligand's portfolio approach—when a partner's program fails, Ligand may have to write down its investment (as with soticlestat). The company emphasizes that discontinued programs can potentially be re-partnered and still yield value later, but accounting rules force immediate loss recognition.

Despite the GAAP loss, Ligand ended 2024 in a strong financial position. It had $256.2M in cash and short-term investments on December 31, 2024, even after spending $100M on the Apeiron acquisition in July. This liquidity, combined with ongoing cash inflow from royalties (which exceeded $100M in 2024), leaves Ligand well-capitalized for further deals.

In 2025, Ligand initially guided for $180-$200M revenue and $6.00-$6.25 adjusted EPS, representing continued growth. After the strong first half of 2025, guidance was raised as mentioned. The growth is underpinned by multiple new products hitting the market that Ligand has royalty interests in (e.g., Zelsuvmi's launch mid-2025, potential expansion of FILSPARI and Ohtuvayre, a new pediatric cancer indication launch for Qarziba, etc.), as well as stable Captisol sales.

Bottom line: Ligand's financials illustrate a high-growth royalty company: 2024 saw revenue up 27% and core earnings up ~40%. The company is transitioning after the OmniAb spin-off to a more focused royalty investment business, and the numbers reflect the ramp of royalties from assets acquired or developed in recent years.

Investors should be mindful of GAAP noise from one-time charges, but the underlying cash generation is robust. Ligand's royalty revenue CAGR is on track to meet or exceed ~22% as outlined at its 2024 Investor Day, showcasing the power of its portfolio model.

Key Royalty Agreements and Recent Deals

Ligand's business is defined by the royalty agreements and deals it strikes. These include acquisitions of royalty streams, licensing of its technologies for royalties, and strategic spin-offs or joint ventures. Below, we highlight major deals—particularly recent ones—that have shaped Ligand's royalty portfolio. Table 3 provides a summary of select key deals and their structures:

Key Recent Royalty-Bearing Products and Agreements

Qarziba (dinutuximab beta)

A monoclonal antibody for high-risk neuroblastoma. Ligand acquired the royalty rights (mid-teens percent royalty on sales in Europe and other regions) by buying Apeiron in 2024. Recordati markets Qarziba, and sales are growing as it's the only immunotherapy for this rare pediatric cancer. This deal instantly added a commercial, cash-generating asset to Ligand's portfolio (accretive by ~$1.00 EPS annually).

FILSPARI (sparsentan)

An oral drug for IgA nephropathy (chronic kidney disease). Ligand's 9% royalty on sparsentan is notable. The drug gained full approval in 2024, and Travere is expanding it (a supplemental NDA for a second kidney indication, FSGS, is in progress). FILSPARI could reach blockbuster sales, making Ligand's royalty very valuable.

Ohtuvayre (ensifentrine)

A first-in-class dual PDE inhibitor for COPD, developed by Verona Pharma. Ligand earns a 3% royalty on Ohtuvayre's sales, stemming from a legacy Vernalis license. Approved in mid-2024, Ohtuvayre is in early launch; Merck's $10B acquisition of Verona (announced 2025) underscores its potential. Merck's resources could accelerate Ohtuvayre's uptake, benefiting Ligand's royalty stream.

Zelsuvmi (SB206)

A topical nitric-oxide releasing gel for a viral skin infection (molluscum). FDA-approved Jan 2024, it addresses an unmet need in dermatology. Ligand carved this asset out via Pelthos, securing a 13% royalty on sales while sharing launch costs with new investors. If Zelsuvmi gains traction (it's the first approved therapy for molluscum), Ligand will earn significant royalties plus Pelthos equity upside.

Captisol-Enabled Drugs

Ligand continues to generate revenue from Captisol supply and some royalties where deals include a royalty component. For example, Ligand receives material sales revenue for Gilead's Veklury® (remdesivir) and Amgen's Kyprolis® (such revenue was particularly high in pandemic years). In some cases, Captisol deals have small royalty or profit-sharing components (e.g., Evomela® in China had a 20% royalty/licensing fee, and an Alvogen teriparatide injection involves a 25-50% profit share). Captisol remains an important part of Ligand's offering, enabling partners' formulations and providing a steady income base.

Pelican/Primrose Equity Stake

Post-spinout, Ligand owns ~31.4% of Primrose Bio (as of end 2024). Primrose is advancing the Pelican expression platform (with partnerships like Jazz's Rylaze, Merck's Vaxneuvance & Capvaxive tied to it). Ligand's stake could yield future returns if Primrose succeeds (via dividends or eventual exit), and Ligand may get royalties from any new products Primrose's technology enables.

In addition to the above, Ligand manages dozens of legacy royalty agreements. Some notable ones: a tiered 1.5-3% royalty on Amgen's Kyprolis®; a low-single-digit royalty on Merck's Vaxneuvance™ pneumococcal vaccine; low-single-digit royalties on Jazz's Rylaze and Merck's upcoming V116 vaccine (Capvaxive™); a 0.5-2.5% royalty on Pfizer's Viviant® (osteoporosis drug); and a residual royalty on Bandeiraea simplicifolia lectin (a niche compound).

The breadth of Ligand's royalty portfolio (90+ programs) means new deals are continually supplementing revenue as older products reach end of life. For example, Ligand previously earned substantial royalties on Promacta and Onyx's cancer drug ibrutinib, but those either were sold or expired—replaced by newer assets like sparsentan and ensifentrine.

In summary, Ligand's recent deals show a pattern: acquire late-stage or marketed royalties (Qarziba), invest in promising late-stage programs (Castle Creek, Verona milestone), and spin out or partner non-core assets (OmniAb, Pelican/Primrose, Pelthos). This dynamic approach refreshes the portfolio and supports long-term royalty growth. The company's "major commercial products" count has grown—by early 2025 Ligand cited 12 key commercial products driving its royalties, up from just a few a decade ago.

Typical Royalty Rate Ranges

Ligand's royalty agreements span a range of royalty rates depending on the deal type, product, and Ligand's contribution. In general, Ligand secures low- to mid-single-digit royalties on partnered drugs developed using its platforms or via financing deals, and higher single-digit to low-teens royalties on assets it originates or acquires outright. Table 4 outlines typical royalty rate ranges with examples:

In practice, the majority of Ligand's current royalties fall in the single-digit range. According to Ligand's portfolio disclosure, key marketed products yield royalties such as 1.5-3% (Kyprolis®), ~3% (Ohtuvayre™), low-single-digit (several vaccines, Rylaze®), 9% (FILSPARI®), and mid-teens (Qarziba®). A few outliers exist at higher rates (20% Evomela, though that is a niche market).

It's also worth noting the tiered structures in some agreements:

• Kyprolis: 1.5% on lower sales tiers up to 3% at higher sales.
• Pfizer's Duavee: a menopausal therapy with 0.5% royalty up to $400M sales, 1.5% for $400M-$1B, 2.5% above $1B (though that product's sales are modest).
• Tiering is less common in Ligand's newer deals; many are flat-rate.

On average, one could say Ligand's deals secure mid-single-digit royalties (5% range), but as seen, there is a spread. The blended average royalty rate on Ligand's total portfolio revenue in 2024 can be estimated: $108.8M royalties on partner sales of those drugs. If we consider FILSPARI ($12M royalty implies $133M sales at 9%), Kyprolis ($10M royalty implies >$400M sales at ~2.5%), etc., the blended rate might be in the low-to-mid single digits.

Licensing platforms vs. asset royalties: When Ligand licenses a technology platform (like OmniAb or Captisol), royalties tend to be low single-digits on any resulting product (e.g., OmniAb-derived drugs often carried 3% royalties to Ligand; post-spin, OmniAb as an independent company continues that model). When Ligand out-licenses a proprietary drug candidate, royalties are higher (mid-to-high single digits or even low teens, plus milestones).

And when Ligand purchases a royalty (like Qarziba), the rate is whatever the original licensor negotiated (in that case, quite high, reflecting an orphan drug with a small initial market).

In summary, typical royalty rates Ligand earns range roughly from ~3% up to ~10%, with some exceptional deals on either end. Low-single-digit royalties are common for big pharma-partnered products, while ~9% has proven attainable on novel drugs Ligand helped develop (sparsentan). The company has shown willingness to pay up for double-digit royalties if the asset is high value (Qarziba).

These rates are in line with industry norms for royalty finance deals and biotech licensing:

• By comparison, Royalty Pharma (a larger peer) often buys mid-single-digit royalties on blockbuster drugs, and XOMA (another peer) acquires low- to mid-single-digit royalties on pipeline assets.
• Ligand's historical portfolio even included a very high 20% royalty on Promacta, but that was an unusual legacy from when Ligand discovered the drug (that lucrative royalty was monetized in 2019).

Thus, Ligand's secured royalty rates are generally sufficient to provide a strong revenue share while leaving ample incentive for its partners to commercialize the drugs. The balanced approach to royalty percentages helps Ligand close deals across a range of scenarios—whether it's funding a late-stage trial (where ~5-8% might be negotiated) or licensing out a proprietary compound (8-12% with milestones).

Strengths and Weaknesses (Blue Team vs. Red Team Analysis)

To evaluate Ligand's position, we consider an internal "Blue Team" perspective highlighting the company's strengths and a critical "Red Team" perspective focusing on weaknesses and risks.

Blue Team: Internal Strengths and Opportunities

Diversified and Growing Royalty Portfolio

Ligand boasts one of the industry's largest and most diverse royalty portfolios, with over 90 partnered programs and 30+ approved products generating income. This diversification means no single drug's fortunes will make or break the company. In 2024, Ligand had 12 key commercial revenue streams (e.g., Kyprolis, Evomela, Rylaze, FILSPARI, Ohtuvayre, Qarziba, Pneumosil, etc.). The breadth of indications (oncology, rare diseases, respiratory, vaccines, etc.) provides resilience against sector-specific downturns.

Scalable, Capital-Efficient Business Model

Ligand's royalty aggregation strategy allows it to generate high margins and cash flow without the typical costs of drug R&D and commercialization. Gross margins on royalties are essentially 100%, and even including Captisol manufacturing, the cost of goods is low. The company operates with only ~70 employees, focusing on deals and partner management.

This lean model scales well—adding a new royalty doesn't significantly increase operating costs. As royalties from recent approvals ramp up, most of that revenue drops to the bottom line. Ligand's 2024 core operating margin was strong, and adjusted EPS growth (35%+) outpaced revenue growth, demonstrating operating leverage.

Proven Ability to Source and Execute Deals

Ligand's management (headed by CEO Todd Davis since late 2022) has demonstrated deal-making prowess. In 2024 alone, the company reviewed 200+ investment opportunities and signed 50+ NDAs, leading to multiple successful transactions. The team's deep industry relationships allow Ligand early looks at opportunities (often under CDA) and creative structuring (e.g., the Pelthos transaction to launch Zelsuvmi with external capital).

Historical deals like Vernalis, Pfenex, and recent ones like Apeiron show Ligand can both identify valuable assets (e.g., Qarziba's underappreciated potential) and negotiate acquisitions at accretive prices.

Robust Financial Position

Ligand is well-capitalized with no major debt. After paying off its convertible notes, Ligand ended 2024 with $256M in cash/investments and subsequently raised additional cash from operations in 1H 2025. This provides ample liquidity to seize new deals without needing to dilute shareholders or take risky debt. The company's profitable core operations also generate cash (2024 operating cash flow was strong, and 2025 is on track for higher). In 2025, Ligand even increased its revenue and EPS guidance mid-year, reflecting confidence in its financial trajectory.

Embedded Growth from Recent Approvals

A number of Ligand's partnered drugs just hit the market and are at the beginning of their life cycles. FILSPARI, Ohtuvayre, Zelsuvmi, Capvaxive, Qarziba (new indication)—all approved in 2023-24—have significant room to penetrate their markets. For example, FILSPARI could become standard of care for IgA nephropathy, potentially reaching peak sales in the high hundreds of millions (Ligand's 9% royalty could exceed $40-$50M annually mid-decade).

Ohtuvayre's COPD indication (now backed by Merck) targets a large population. Zelsuvmi addresses an unmet need in dermatology with tens of thousands of patients. These blockbuster-potential assets position Ligand for organic royalty growth without needing any new deal. Management highlighted that three portfolio products with blockbuster potential launched in 2024—a major inflection for future royalty streams.

Innovative Platforms and Pipeline Optionality

Ligand still holds valuable technology platforms (Captisol, Pelican via equity, NITRICIL) and pipeline "options" through equity stakes and CVRs. For instance, Ligand's 31% stake in Primrose Bio means if Primrose develops new high-value biotech products, Ligand shares in that success. Ligand also has economic rights to future milestones from deals (e.g., up to $28M from Qarziba earn-outs, milestones from sparsentan beyond the approval milestone, etc.). Additionally, the Shots-on-Goal strategy—having many programs in development—gives chance for positive surprises.

For example, Ligand holds royalties on drugs in Phase 2/3 that could become the next wave (such as VK2809 for NASH at Viking, or lasofoxifene for breast cancer at Sermonix with a 6-10% royalty). This provides long-term upside beyond the current commercial portfolio.

Resilient Strategy in Biotech Cycles

In a challenging biotech funding environment (as seen 2022-2023), Ligand's model stands out as resilient. The company can benefit from tighter capital markets: when small biotechs struggle to raise money, they increasingly turn to royalty financing or licensing, which plays into Ligand's hands. CEO Todd Davis noted that Ligand's model is particularly valuable in "today's challenging financing environment".

Ligand has the cash to invest when others can't, letting it negotiate favorable deals. Meanwhile, its revenues are largely from marketed drugs (less volatile than biotech R&D funding).

Shareholder-Friendly Moves

Ligand has a history of taking actions to unlock shareholder value: e.g., the OmniAb spin-off gave shareholders direct ownership in that high-growth antibody business. Ligand also used the bulk of the Promacta sale proceeds to retire debt and repurchase shares (in 2019-2020, Ligand bought back a substantial amount of stock, though exact figures not in our sources).

The company's focus on accretive deals and non-dilution aligns management with shareholder interests. Insiders have meaningful equity (the prior long-time CEO, John Higgins, and new CEO Todd Davis both have incentive to drive the stock long term).

Red Team: External Weaknesses and Risks

Concentration and Reliance on Key Partners

Despite a broad portfolio, a significant portion of Ligand's near-term revenue is concentrated in a few products/partners. For example, in 2024 roughly 20%+ of royalties came from a single partner product (Kyprolis, which is mature, plus the new big contributors FILSPARI and Qarziba). If Travere were to face issues with FILSPARI (e.g., safety concerns or competition) or if Merck/Recordati falter in marketing Ohtuvayre/Qarziba, Ligand's royalty streams would underperform expectations. The success of Ligand's model is largely out of its control—it depends on partners like Novartis/Recordati, Amgen, Merck, Jazz, Travere, etc., to effectively commercialize the drugs.

Any partner strategic shift or lapse (e.g., Travere getting acquired or re-prioritizing, Amgen facing generic Kyprolis sooner than expected) poses risk. The Red Team would note that Ligand is essentially "carried" by its partners—it does not influence sales force effort, pricing, etc.

Patent Expirations and LOE

Royalty streams are inherently finite—tied to patent lives or exclusivity periods. For instance, Kyprolis faces U.S. patent expiry by 2029 (and generics possibly as soon as 2027 via settlements), which will erode that royalty. Other products will see competition or patent cliffs in coming years.

If Ligand cannot replace or augment expiring royalties with new ones at equal value, overall revenue could decline. The Red Team would point out that Ligand must continually "feed the shark" with new deals just to maintain revenue, let alone grow—a treadmill that can be challenging, especially if credit markets tighten or valuations rise.

Deal Execution and Integration Risks

Ligand's aggressive M&A and investment pace could lead to missteps. Not every deal will be a winner. For example, paying $100M for Qarziba's royalty—critics might argue this was expensive for a niche pediatric drug (Qarziba sales were not huge, and uptake could be slow). If Qarziba or other acquired assets underperform projections, Ligand may not realize a good return on investment.

Additionally, the company's foray into operational ventures like Pelthos (essentially launching a dermatology product via a startup) exposes it to execution risk it historically avoided. Pelthos's success is not guaranteed, and Ligand now has an active role (albeit through ownership) in a commercial launch—a new challenge. There's also complexity in accounting and managing these myriad investments (Primrose, Pelthos, equity stakes, etc.), which a small organization must handle.

Heavy Use of Non-GAAP Adjustments

Ligand's GAAP earnings have been quite volatile and often negative, masked by heavy use of "core adjusted" figures. The Red Team would scrutinize quality of earnings. For example, in Q1 2025 GAAP loss was $42.5M while core income was positive, due to excluding a $44M R&D charge.

In 2024, GAAP was near breakeven only after large adjustments. Frequent impairments (soticlestat, Agenus programs) and reliance on equity sales gains (e.g., selling Viking stock in 2023) might raise questions.

Is the underlying business truly profitable on a cash basis, or is Ligand propping it up by excluding various costs? A skeptic could argue that Ligand's true economic profit is lower once one factors the cost of acquisitions (which often get amortized or impaired). Additionally, core earnings exclude stock-based comp and one-time costs that still affect shareholder value.

Market Perception and Short Attacks

Ligand has in the past faced notorious short-seller criticism. For instance, Citron Research and others alleged around 2014-2018 that Ligand's model was unsustainable, overly dependent on Promacta (at that time), and that it would face financial distress—which did not materialize.

While those bearish theses were largely discredited (even leading to SEC action against one short-seller for false claims), it highlights that Ligand's complex story can be misunderstood. The stock has historically been volatile, swinging with news on key drugs or short reports. Any concentrated short-and-distort campaign could pressure the stock again. Management must continue to build credibility by hitting targets and improving GAAP results to silence skeptics.

High G&A / Expense Growth

Ligand's operating expenses, particularly G&A, have ballooned. A ~50% jump in G&A in 2024 (even excluding one-offs) is concerning. While some of this was one-time (severance, stock comp), the ongoing cost base is higher due to hiring an "investment team" and incubating new businesses.

Red Team analysts might worry that Ligand could lose its lean cost advantage if it continues expanding headcount and ventures. At ~$78M G&A vs $167M revenue, Ligand's overhead is not trivial (~47% of revenue). If revenue growth falters, the high fixed costs would squeeze margins. Maintaining discipline on expenses as cash flows grow is crucial; any signs of bloat or poor capital allocation (e.g., too much money into high-risk incubations) would be a red flag.

Regulatory and Clinical Risk in Pipeline

While Ligand doesn't conduct trials, its future royalties depend on partners' R&D success. There are still important pipeline events that carry risk. For example, sparsentan still needs full approval (confirmation of clinical benefit); if the Phase 3 confirmatory data had failed, the accelerated approval could be revoked (thankfully data was positive in 2023). Other programs like VK2809 for NASH or various oncology assets in Phase 2 could fail to reach market, meaning Ligand's "shots on goal" might not translate to revenue.

The discontinuation of programs like soticlestat (which led to an impairment) illustrates that not all pipeline bets pay off. Essentially, Ligand's model externalizes R&D risk but doesn't eliminate it—it shows up as volatility in which programs pay out. If a few anticipated big programs flop, projected royalty growth would slow and earlier investments could be written off.

Competitive Landscape for Royalties

Ligand operates in a competitive space—there are other royalty investors and licensors. Larger players like Royalty Pharma can outbid others for prime royalty assets. Smaller peers like XOMA, DRI Capital, or hedge funds are also hunting for deals. As competition intensifies, valuation multiples for buying royalties could increase, making it harder for Ligand to find accretive deals.

Ligand's ability to maintain its historical ROI on deals could be tested if, say, Royalty Pharma aggressively pursues mid-size orphan drug royalties (encroaching on Ligand's sweet spot). Additionally, biotech companies may have alternative financing options (convertible debt, collaborations) that bypass royalty selling. If the market environment changes (e.g., biotech funding improves greatly), Ligand might find fewer attractive opportunities.

In summary, the Red Team view is that while Ligand has a clever model, it is not without vulnerabilities: the company relies on partners' performance, must continuously invest to replace revenues, and carries some financial complexity. Managing growth without letting costs or bad deals creep in will be key. Any stumble in execution, partner performance, or deal discipline could expose Ligand to downside.

Competitive Landscape and Benchmarking

Ligand is often compared with other players in the pharmaceutical royalty sector and biotech royalty aggregators. The space includes both specialized investment companies and larger financial entities. Below is a light benchmarking of Ligand versus two notable peers: Royalty Pharma plc (RPRX) and XOMA Corporation.

Comparison with Royalty Pharma

Scale and Focus

Royalty Pharma is the industry leader with a market cap around $20+ billion, focused on acquiring royalties on approved, blockbuster drugs. In 2024, Royalty Pharma had $2.8 billion in royalty receipts—over 16 times Ligand's revenue. RPRX's portfolio includes royalties on mega-drugs like Vertex's CF franchise, Biogen's Tysabri, J&J's Tremfya, etc. It typically deploys billions per year (spent $2.8B in 2024 on new royalties).

Ligand, in contrast, is smaller (~$1.5-2B market cap) and operates in the middle market—targeting orphan and mid-size drug royalties and late-stage pipeline, rather than the ultra-large assets Royalty Pharma chases.

Ligand's 2024 revenue of $167M is a fraction of RPRX's receipts, but Ligand's growth rate (27% in 2024) exceeded Royalty Pharma's (13% royalty growth in 2024). This reflects Ligand's focus on emerging products (higher growth potential) versus RPRX's more mature portfolio.

Business Model Differences

Royalty Pharma is essentially a pure financial acquirer of royalties—it does not operate drug discovery or hold labs. It buys from others (academia, biotechs, pharma) and often provides cash to drug owners in exchange for a slice of sales. Ligand also buys royalties, but additionally originates royalties via licensing and R&D investment.

Ligand actively creates royalties (e.g., by funding Castle Creek's trial or licensing its IP like Captisol). This hybrid model means Ligand sometimes takes on development risk (Castle Creek, Pelthos) for higher future reward, whereas Royalty Pharma usually avoids direct clinical risk (preferring approved or near-approved assets).

Consequently, Ligand's portfolio skews earlier-stage than Royalty Pharma's, with more pipeline optionality but also more risk of product failure. From a financial perspective, Royalty Pharma's cash flows are larger and more stable, allowing it to pay a dividend and lever up; Ligand reinvests cash and doesn't pay a dividend, aiming for capital appreciation.

Performance Metrics

If one compares profitability, Royalty Pharma's EBITDA margin is ~88%, extremely high due to scale; Ligand's adjusted EBITDA margin would be lower (perhaps ~50-60% range) because of its higher relative G&A and R&D costs to manage many small programs. However, Ligand's growth could lead to margin expansion.

In terms of portfolio concentration, Royalty Pharma's top 5 assets are ~50% of its receipts (CF franchise, Tysabri, Imbruvica, etc.), while Ligand's top 5 likely also ~50% (Kyprolis, FILSPARI, Qarziba, Captisol sales, Ohtuvayre maybe). So both have some concentration, though RPRX's are larger, lower-risk assets on average.

Comparison with XOMA

Scale and Focus

XOMA is a smaller royalty aggregator (market cap ~$300M) focusing on early to mid-stage biotech royalties. Its model is closest to Ligand's special-situations approach. XOMA acquires partial royalties or milestone rights, often from cash-strapped biotechs. For instance, in 2023 XOMA paid $5M for rights to a mid-single-digit royalty on Merck's Phase 2 cancer drug Miplyffa (ladiratuzumab).

XOMA's portfolio is heavy on future contingent payments (it often buys a mix of milestones and royalties).

As a result, XOMA's current revenue is very low (only a few million a year) and it operates at a loss, essentially a royalty venture capital model waiting for big payoffs. Ligand is more advanced—it already has substantial ongoing royalties funding operations. Where XOMA might have, say, 1-2 products on market (and more in pipeline), Ligand has 30+.

Strategic Differences

Ligand's approach is also broader; it has proprietary tech (XOMA sold its own tech and now purely invests). That said, both Ligand and XOMA target similar deal sizes (the $10-50M range typically) and sometimes compete.

Ligand arguably has a better track record (XOMA's previous big royalty—on Novartis's gevokizumab—never paid off, whereas Ligand's deals like sparsentan did). Financially, Ligand is solidly profitable (adjusted) and XOMA is not yet, highlighting Ligand's lead in execution.

Other Competitors

There are other royalty-focused entities: HealthCare Royalty (HCR), Dr. Justinian Capital (DRI), Sagard Healthcare Royalty, OMERS/Oscar etc. Many are private funds. Also, Big Pharma and big investors sometimes do royalty deals (e.g., Blackstone's life sciences group).

Ligand's niche is a bit unique because it's an operating company as well (with some in-house assets and labs for Captisol, etc.), whereas most royalty investors are purely financial and don't maintain labs or in-licensing operations. This can be strength (deal flow via unique channels) or a complexity.

Market Positioning

Stock market perception: Ligand has historically been more volatile and sometimes viewed as a hybrid biotech/investment play. Royalty Pharma is seen as a more stable, lower-risk investment (correlated with pharma sector health broadly). XOMA is high-risk, thinly traded. Over the last couple of years (2022-25), Ligand's strategic moves (OmniAb spin, new CEO) have been aimed at narrowing this gap, positioning Ligand as a disciplined royalty company deserving of a strong valuation.

Brief Benchmark Summary

Royalty Pharma (RPRX):

• Size: ~$2.8B revenue, ~$30B assets
• Focus: Late-stage/marketed blockbuster royalties
• Growth: Low-teens
• Strength: Access to huge deals, low cost of capital
• Comparison to LGND: Much larger and more diversified; however, LGND's growth rate is higher off a smaller base and it can target deals too small for RPRX. LGND also uses more creative structures (spin-outs, equity stakes) whereas RPRX is straight cash-for-royalty.

XOMA:

• Size: ~$5M revenue, operating loss
• Focus: Early-stage royalty purchases (often oncology/ophthalmology)
• Portfolio: ~30 programs, but mostly pre-approval
• Strength: Pure-play royalty investor in biotech
• Comparison to LGND: Ligand is ahead in having current cash-generating royalties funding its model, whereas XOMA's value is mostly in potential future royalties (e.g., XOMA bought a royalty interest in Roche's Vabysmo (eye drug) for $40M in 2022 and a larger $140M deal in 2023—if Vabysmo sales surge, XOMA will reap rewards, but near-term it's cash flow negative). Ligand is more balanced between current and future royalty streams.

Valuation Considerations

One can also look at valuation metrics: Royalty Pharma trades around ~12-14x EBITDA (reflecting its scale and stability), while Ligand (with lumpy GAAP earnings) might trade more on revenue multiples or core earnings multiples. If Ligand delivers $140M+ royalties in 2025, at a growth stock multiple maybe it's valued around 10-12x royalties (just conceptual). XOMA trades at the speculative value of its pipeline bets, not meaningful multiples.

In terms of strategy differentiation: Ligand distinguishes itself by being an active creator of royalties (licensing technology, incubating companies) rather than just a passive acquirer. This gives it potentially higher returns (as it takes on more early risk) but also requires more specialized capabilities (scientific evaluation, managing spin-outs).

Royalty Pharma is more akin to a large cap financial institution in this space, whereas Ligand is like an entrepreneurial boutique firm. XOMA is closer to a micro-cap version of Ligand but without proprietary tech or profitable operations to bankroll it (XOMA raises capital via equity offerings to do deals).

Competitive Outlook

The royalty sector has been growing as more investors appreciate the stable cash flows from drug royalties. Ligand faces the challenge of competing with larger capital pools for deals, but its niche focus and creative structures often let it avoid head-to-head bidding wars. For instance, Royalty Pharma tends to chase very large deals (nine-figure+), while Ligand can do smaller or more complex deals (like funding a trial for future royalty, which Royalty Pharma historically hasn't done at small scale).

Ligand also occasionally partners—e.g., the $75M Castle Creek was syndicated, which is something Royalty Pharma also does for huge deals but Ligand did for a smaller one.

Overall, Ligand appears well-positioned relative to peers: it has meaningful current revenues (unlike pure early-stage players) and higher growth prospects than the mega-royalty funds. However, it must execute carefully to keep its edge. The benchmarks show that Ligand, while smaller, is punching above its weight in innovation (OmniAb spin, multiple new assets) and could be viewed as a potential mid-tier RoyaltyCo with unique capabilities.

Maintaining double-digit growth will differentiate it from a steady-state Royalty Pharma. On the flip side, Ligand lacks the sheer stability and lower risk profile of Royalty Pharma; investors in Ligand must be comfortable with biotech development risk and occasional earnings volatility.

Conclusion

Ligand Pharmaceuticals has successfully established itself as a capital-efficient pharmaceutical royalty company with a diversified portfolio spanning 90+ partnered programs and 30+ approved drugs. The company's business model—combining royalty acquisitions, synthetic royalty creation through project finance, platform technology licensing, and special situations investing—has demonstrated strong results with 27% revenue growth in 2024 and projected royalty revenue of $140-$150M in 2025.

The investment thesis rests on several pillars: a scalable, asset-light model with high margins; proven deal-making capabilities evidenced by 200+ opportunities reviewed and 50+ NDAs signed in 2024; robust financial position with $256M in cash and no debt; and embedded growth from recently approved products like FILSPARI, Ohtuvayre, and Zelsuvmi that are just beginning their commercial lifecycles.

However, investors must carefully weigh these strengths against meaningful risks: dependence on partner execution for commercial success; finite royalty streams subject to patent expiries (notably Kyprolis facing potential generic competition by 2027-2029); deal execution risks as the company pursues more complex transactions; significant non-GAAP adjustments that obscure GAAP earnings quality; and elevated G&A expenses (~47% of revenue) that could pressure margins if growth slows.

Ligand's competitive position sits between the mega-scale of Royalty Pharma (which deploys billions annually on blockbuster-drug royalties) and the early-stage speculation of XOMA (which operates at a loss awaiting future payoffs).

Ligand's hybrid model—actively creating royalties through technology licensing and development financing while also acquiring established streams—provides differentiation but requires specialized capabilities to execute successfully.

The company's typical royalty rates range from low-single digits (3%) on large pharma partnerships to high-single digits (9%) on proprietary developments, with occasional double-digit rates (mid-teens on Qarziba) for acquired royalties. This structure provides meaningful economics while maintaining partner incentives for commercialization.

Looking forward, Ligand's success will depend on:

(1) continued disciplined deal sourcing and execution in an increasingly competitive royalty market;

(2) successful commercialization by partners of key growth drivers like FILSPARI and Ohtuvayre;

(3) replacement of maturing royalty streams (particularly Kyprolis) with new assets of equal or greater value;

(4) maintaining cost discipline as the organization expands;

and (5) converting pipeline "shots on goal" into approved products that generate meaningful royalties.

For investors seeking exposure to pharmaceutical royalties with higher growth potential than pure-play acquirers but more established revenue than early-stage ventures, Ligand presents a compelling albeit complex proposition. The company's track record of value creation through strategic transactions (OmniAb spin-off, Promacta monetization, Apeiron acquisition) demonstrates management's ability to navigate this model successfully.

However, the inherent volatility in biotech development, partner dependence, and financial statement complexity require investors to maintain realistic expectations about both the opportunities and risks inherent in Ligand's royalty aggregation strategy.