- Last week, Grant’s Interest Rate Observer published a thoughtful piece of journalism that suggested a $20 price target on Ligand Pharmaceuticals. For copyright purposes we cannot republish, but even Ligand management cannot question the credibility and neutrality of Grant’s.
- The article came out as Citron has spent months working on Ligand to get a better understanding of their “shots on goal” business model to determine whether the company’s pipeline is legitimate or nothing but a pipe dream.
- Citron will expose some of the dirtier secrets of Ligand and will explain why Ligand is a company designed for the “lazy investor” whose stock price has 80% downside from its current levels once people READ.
Q3 hedge fund letters, conference, scoops etc
Background
- Ligand began as a biopharmaceutical company that initially tried, but failed, to successfully develop its own drugs. After over a decade as a public company (and an SEC investigation, a delisting from Nasdaq, and several management changes), Ligand changed its strategy to one of acquiring candidate drugs/technologies and forming partnerships to develop them further.
- The value proposition for Ligand is that it is a “smarter” drug company – run by former investment bankers – that farms out the risk and costs of later stage drug development and R&D and commercialization to strategic partners with the expectation of receiving licensing fees when the drugs successfully reach the market.
- We have heard “The Better Mousetrap Pharma” before and you know how that ends.
While Ligand has managed to generate some consistent royalties, they are mainly generated from just four approved drugs with one accounting for over 75% of royalties though it will soon begin to lose patent exclusivity.
This chart from a recent Goldman Sachs research report shows the trajectory of their legacy business.
After modeling out Ligand’s future cash flows and adjusting for NOLs and cash, Citron gets to a current valuation of the base business at $20 per share.
So, if the Core Business is Worth $20? Why Is the Stock Here??
The Myth of the Big 6
In every corporate presentation and sell side report, the company discusses the meat of their pipeline/future revenues as coming from “The Big 6”. Instead of giving a proper attribution chart of their pipeline with real figures, the company relies on this misleading information.
“Big 6” has become a term that’s easy for investors to digest, regardless of its validity.
Here is a slide from their recent corporate presentation at Stephens.
Viking Therapeutics and Vernalis
As suggested by Grant’s, and proven by Citron, the Big 6 is one big lie. While the company likes to use Lilly and Bristol-Myers in their presentation, the reality is that over 60% of their “milestones” comes from Viking Therapeutics and Vernalis… and wait until you read about them.
Citron Will Now Present The Truth that Ligand attempted to hide from investors. On the next two pages are charts of attribution of dollars and percentages of Ligand’s “Shots on Goal”.
As you look at the charts notice these takeaways that Citron will detail below:
- Viking Therapeutics alone is over 50% of Ligand’s milestones or over $1.5 bil while it a $290 mil enterprise value company.
- Vernalis is a company that Ligand bought for $11 mil and Citron did the digging to expose their oversized contribution of “pipeline”.
Citron Publishes the Smoking Gun Charts.
When a company wants investors to buy a stock based on pipeline/milestones but refuses to ever disclose them on a percentage basis that is a warning that should come with skull and crossbones. While Ligand was busy telling investors about the “Big 6”, Citron went into every partnership and has backed out the truth that Ligand does not want you to see. Neither Ligand nor any sell side research analyst has done this level of work on their questionable milestones.
As further partial consideration for the grant of the rights and licenses to us by Ligand under the Master License Agreement, we have agreed to pay to Ligand certain one-time, non-refundable milestone payments in connection with Licensed Products containing (1) VK5211 or any other SARM Compound, in an aggregate amount of up to $85.0 million per indication (for up to a total of two indications) upon the achievement of certain development and regulatory milestones and up to $100.0 million upon the achievement of certain sales milestones; (2) VK2809, VK0214 or any other TRß Compound, in an aggregate amount of up to $75.0 million per indication (for up to a total of three indications) upon the achievement of certain development and regulatory milestones and up to $150.0 million upon the achievement of certain sales milestones; (3) VK0612 or any other FBPase Compound, in an aggregate amount of up to $60.0 million per indication (for up to a total of four indications) upon the achievement of certain development and regulatory milestones and up to $150.0 million upon the achievement of certain sales milestones; (4) any EPOR Compound, in an aggregate amount of up to $48.0 million per indication (for up to a total of three indications) upon the achievement of certain development and regulatory milestones and up to $50.0 million upon the achievement of certain sales milestones; and (5) any DGAT-1 Compound, in an aggregate amount of up to $78.0 million per indication (for up to a total of two indications) upon the achievement of certain development and regulatory milestones and up to $150.0 million upon the achievement of certain sales milestones. Additionally, we will pay to Ligand a one-time, non-refundable milestone payment of $2.5 million upon the occurrence of the first commercial sale of VK0612 or any other FBPase Compound by one of our sublicensees. We will also pay to Ligand royalties on aggregate annual worldwide net sales of Licensed Products by us, our affiliates and our sublicensees at tiered percentage rates in the following ranges based upon net sales: (a) upper single digit royalties upon sales of VK5211 or any other SARM Compound, (b) low-to-middle single digit royalties upon sales of VK2809, VK0214 or any other TRß Compound, (c) upper single digit royalties upon sales of VK0612 or any other FBPase Compound, (d) middle-to-upper single digit royalties upon sales of any EPOR Compound, and (e) low-to-middle single digit royalties upon sales of any DGAT- 1 Compound; in each case subject to reduction in certain circumstances.
Viking 2017 10-K Page 13 under “Agreements with Ligand”
Viking, while left out of the Big 6, accounts for over $1.5 bil or over 50% of potential milestones, Citron will state the obvious why we believe Ligand is not being forthright with investors.
- If Ligand thought the Viking pipeline was even remotely realistic, they would not be buying back their own stock, rather they would buy Viking Stock or the whole company.
- Instead, Ligand has been selling Viking stock as recently as September 25, 2018.
- Viking insiders don’t believe the “pipe dream” as they have been net sellers of their stock over the past year.
- There are enough smart investors on Wall St that if in fact any of these projections were even in the ballpark of reality, the share price of Viking would be 10x its current price.
Vernalis, while left out of the “Big 6”, accounts for $364 mil or over 12% of potential milestones, despite the whole company being bought for $11 million. Let’s look closer.
In October of 2018, Ligand completed the acquisition of Vernalis and the deception started immediately with the headline “Ligand Makes Offer to Acquire Vernalis, a Leader in Structure – Based Drug Discovery.” A leader?
Citron didn’t even know you could buy a drug company for $11 million.
Here was the chart of Vernalis stock before the company got acquired – on its way to 0.
The two primary drugs Ligand discussed for Vernalis were CPI-444 and RPL554 (shaded below). RPL554 failed Phase 2 earlier this week. https://investor.ligand.com/press-releases/detail/362/ligand-announces-the-close-of-its-acquisition-of-vernalis
With a primary Vernalis drug failing its trials and the acquisition price for the entire company being slightly more than a public
shell, Citron has broken down the busted pipeline of the $11 mil Vernalis that is supposed to bring in $364 mil of “potential milestones”. Citron has done the digging and has discovered how Ligand is making these ludicrous claims about Vernalis.
Roivant
Citron has already knocked out over 60% of Ligand’s Pipeline so now let’s get to 80% using one of the names in the “Big 6”: Roivant.
Roivant, led by controversial pharmaceutical exec Vivek Ramaswamy, accounts for $528 mil or 18% of potential milestones for Ligand. This is from the license of RVT-1502 into Metavant, one of the many “vant” companies under Roivant.
Vivek is known to throw out big numbers that excite investors without much substance. This has nothing to do with AXON. Just look at Metavant, the same “vant” that Ligand is depending on.
Metavant’s pipeline consists of two programs. One program, RVT-1502, licenses a drug from Ligand while the other is a partnership to develop the drug Imeglimin with Poxel. http://metavant.com/our-pipeline/
Roivant agreed to pay Poxel up to $600 million in milestone payments in addition to a $35 million upfront payment and $15 million equity investment, more lucrative than the deal Roivant did with Ligand. https://www.genengnews.com/news/roivant-to-codevelop-poxels-t2d-candidate-imeglimin-in-up-to-650m-partnership/
Yet, Poxel still only has an enterprise value of $41 million. It seems that Poxel investors have look past the hype even though Poxel appears much further along in development than RVT-1502. These drugs are for diabetes, which requires large expensive patient trials. Poxel has a fully enrolled study in Japan with 1,100 people. There are 4 FDA listed studies for RVT-1502 but there are only 264 enrolled patients across the 4 studies.
Management Credibility
So, now that Citron has questioned over 80% of the “shots on goal”, let’s go to the credibility of management with their announced partners.
As highlighted by Grant’s, the following questionable companies can be included in the remaining 20% of Ligand’s pipeline.
Sermonix Pharmaceuticals – licensee of lasofoxifene, a well-traveled drug that Pfizer walked away from around the time the FDA warned that the drug put patients at higher risk for death. The business address of Sermonix is a mail box in a UPS store in Columbus, Ohio.
Chiva Pharmaceuticals – Ligand partner that represents $100 million milestone payment that shares the same office address as a telemarketing firm which is a house in Los Altos Hills, CA whose drugs have regressed in the pipeline.
It should be noted that when Grant’s asked Ligand about these partners no response was given.
Well, Citron is now ready to take this a few steps further as we know that a picture is worth a thousand words.
If Ligand had legitimate “shots on goal” then why would they pull stunts like this as recently as a month ago.
iMetabolic BioPharma
On November 21, 2018, Ligand announced a partnership with iMetabolic Biopharma. In the press release, we are told that Ligand “received an up-front license payment and is eligible to receive a tiered royalty on future potential sales of up to 6%.”
https://investor.ligand.com/press-releases/detail/366
iMetabolic Biopharma’s address is listed as 2155 E. Conference Drive Suite 115, which is the same address as a Fertility Treatment Center.
To confirm our suspicions, we sent our team to the office address.
We found no signs that the company exists. We asked the receptionist and she said she’s never heard of iMetabolic BioPharma and that only Fertility Treatment Center occupies the office space.
We then called the phone number attached to iMetabolic and found out that they are looking to complete their seed funding round of $1 million and they had $900K left.
This is not an “early stage” company worthy of a press release… this is a science project.
Seelos Therapeutics
Here is another fun Milestone Company left out by Grant’s.
In 2016, Ligand signed a partnership with Seelos Therapeutics which Ligand touts as representing possible future cash milestone payments of $145 million plus net sales royalties ranging from 4% to 10% for the various programs licensed.
YET
If we look at a recent SEC filing that contains Seelos’ financials for 2016, 2017 and the first 9 months of 2018, we see that Seelos has total assets of less than $525K and liabilities of over $4 million.
Seelos has spent a grand total of $847K in R&D over this period. Of that amount, we believe that $650K were payments related to a relationship Seelos has with another drug company, Vyera Pharmaceuticals (the former Turing Pharmaceuticals).
https://www.sec.gov/Archives/edgar/data/1017491/000114036119000398/ex99_1.htm
https://www.sec.gov/Archives/edgar/data/1017491/000101749118000081/apris-4.htm
Seelos also lists an office address in NYC at the back of the S-4. This same address is listed on the company’s website. However, we visited the address and were told that Seelos had not occupied the office space for more than a year while the 25th floor is only occupied by law firms.
Does that sound like the sources of $150M+ in milestone payments and royalties?
Insider Selling
All the while as the company has announced these “Shots on Goal” management has been a consistent seller of the stock.
What about Lilly and Bristol-Myers?
Despite being scattered over Ligand promotional investor material and considered a part of the “Big 6”, those larger names only account for less than 7% of total milestone payments. Even though the probability of Ligand receiving all of these milestones is slim – we will give it to them.
Though Sage Therapeutics announced positive phase III SAGE-217 data last week which could impair sales of Zulresso – we will still
give Ligand the benefit of the doubt.
Lastly, though last week, Retrophin provided a corporate update that looks very bearish for Sparsentan as Retrophin even removed
commentary on the slope of the study, we will still give Ligand partial credit for this “shot”.
With all the benefit of the doubt given to Ligand, Citron assigns a price target with shots on goal of $35.
Conclusion
As for shots on goals, Wayne Gretzky famously once said:
“You miss 100% of the shots you do not take”
Well The Great One also said:
“It’s easier to lose than to win”
…and nowhere is that more true than in drug development.
It is time for Ligand Management to disclose to Wall St the attribution of your pipeline/milestone payments from specific companies and increase your disclosures about the true viability of the pipeline. Once investors see that they do not own a pharma ETF but rather a collections of the lazy man’s sub par assets, Citron expects Ligand stock to reflect its true value.
Cautious Investing to All
Article by Citron Research
