All righty. Thank you, everyone, for being here. Up next is Ligand Pharmaceuticals, a company known for its diversified drug discovery technologies and its commitment to advancing innovation across the life science industries. Representing the company today is their Chief Executive Officer, Todd Davis, and Melanie Herman, who is the Executive Director of Investor Relations and FP&A.
Thank you, Errol. I need to make sure I know how this clicker works first. Hold on. There we go. Okay. Thank you very much for coming today. My name is Todd Davis. I'm the CEO at Ligand. I spent the first half of my career in operating roles in the pharma industry and the second half of my career in private equity at Apax Partners as the co-founder of HealthCare Royalty Partners, which I was a managing partner at for about 14 years. Most recently at Ligand Pharmaceuticals, which is really an investment strategy. It's often called royalty aggregation, but it is an investment business that we're running. This presentation does contain some forward-looking statements, so please handicap those with your own judgment as necessary.
We are a royalty aggregator, which means we invest capital, but instead of taking typically equity securities, although we'll use equity as a tool sometimes, or debt securities, we create royalty contracts or we monetize and acquire royalty contracts. We right now have a robust portfolio of over 100 partnerships. Twelve of those are major commercial-stage royalty streams that are cash-flowing. We'll do over $150 million in positive cash flow this year. While we are a biopharmaceutical company, and while we do have an operating business, which I'll speak about a little bit here, we're really a very diversified set of cash flows. I think what you really need to understand to understand our business is portfolio math. It's not binary bets and high-risk investments on single assets with high probability of success or failure on either side.
Again, with over 100 partnerships, about 90 of those are pipeline assets that are in development at various stages. Many of those will bubble up and become approved cash-flowing assets, but many of those will fail as well. We're executing our model at scale now. We've got about 44 employees. As a biopharmaceutical company, we have very low SG&A and OPEX in general relative to our revenues because most of our employees are investors. They're supporting the investment process, or they're supporting the corporate management of the company. Very good overall margins in our business because we basically are leveraging manufacturing infrastructure, sales and marketing infrastructure, and clinical development infrastructure that other companies have. We're not building that ourselves. We have a strong balance sheet, which including a $200 million line of credit that we have, we have about $1 billion of investable capital.
As I mentioned, we're generating significant cash flow in addition to that every year. To do this takes a highly experienced team, which I'll talk about a little bit as well. We have a private equity-style investment process. I'm one member of the investment committee. Every deal we have done has been unanimous. We're typically doing about 5-10 new investments per year. Why invest in royalties versus equity or debt? I wouldn't say it's better. It's just different. In fact, we need an ecosystem that contains various parts of the capital structure. One of the criteria we have for picking partners is that they have access to capital. We need competent, capable teams that have access to capital because we want our investments to be as passive as possible where we're just receiving royalty cash flows and have administration management.
Sometimes we'll take on a little bit more operating role, but it's very leverageable. That's one of the benefits of royalty investing is you're getting checks in the mailbox once a quarter. That's your main post-deal management activity. They're also non-dilutable. One of the biggest risks in biotech isn't clinical risk or regulatory risk and sales and marketing risk and risk of payers. It's financing risk because you can invest with equity, you can invest in the right company at the wrong time, and you go through cycles of disappointment, maybe different capital market cycles, subject to significant dilution. Delays hurt us too. It lowers our IRR. If we buy or create a 5% royalty on a product and four years later it's approved after multiple equity rounds, we still have a 5% royalty. There's no dilution to royalties. They also have special protection under the bankruptcy code.
We've had, not here, but when I was at HealthCare Royalty Partners, we had a company go into bankruptcy with an approved asset. When an acquirer acquires those assets out of a bankruptcy, they have to assume your contracts. That is just part of the bankruptcy code. Royalties have real advantages there. As I was referring to earlier, they require minimal infrastructure to manage. To run a business like this, it does not take a lot of people, but it takes highly skilled people, both in terms of science, clinical science, operations, as well as significant investment experience. We have, I think, strong and proper corporate management with our CFO and Chief Legal Officer in the left-hand column there. Andrew Reardon was with me at HealthCare Royalty Partners where he was the Chief Legal Officer there in a private equity fund.
Keith Marschke has over 30 years of chemistry and biology experience and started out in discovery sciences. He heads up our scientific evaluation team. On the right-hand column, Karen Reeves ran clinical development for Advisor and is highly experienced in clinical analysis, prospects of clinical success, as well as clinical applications of pharmaceutical products. We have an operating team around our Captisol business, which is run with seven people. We had three operating businesses. I became CEO about three years ago. We've spun out two of those that required high-level infrastructure. The business we retained, Captisol, requires de minimis infrastructure. We run that business with about eight people. It's basically an intellectual property platform that we out-license and collect royalties on.
In the center column here, just to give you some idea, the two top folks, Paul Hadden and Rich Baxter, they've both invested in private equity funds over $2 billion each. They have significantly strong track records, lots of experience in terms of investment judgment, investment selection, investment origination. Those are both members of the investment committee. It's myself and those two that are on the investment committee. Lauren Hay runs our strategic planning and investment process, but that also includes overseeing portfolio management. She was at Drug Royalty, so also had significant royalty investment experience before she came. Michael Vigilante, we recruited from a growth equity firm out of Boston. He has significant investment experience in growth equity, but he's come up the curve very fast on the royalty side and is actively leading deals now. How do you invest in royalties?
It takes multiple different tactics. One is just a royalty monetization. If you're an inventor or an institution that created intellectual property and you out-licensed it to Merck years ago, Merck may now have that asset in phase three. That is when we show up. We will offer to write you a check in return for your royalty rights. That is a royalty monetization. That is a very smart thing for inventors or institutions to do going into that binary risk of approval because that may be their most valuable asset. From a diversification perspective, it is risky for them to hold. We are including that in a portfolio that already has 100 assets in it. We can absorb a little more risk than they can because of the level of our diversification.
The second way to do this is we'll identify assets that we really like and we'll approach those companies. They may not have a royalty to sell. They may be actively developing the assets themselves. We simply do a project financing and we create a royalty structure, which is how we get our returns. Basically, those are very customized deals. You negotiate them at length. Between the four deal leads, we've probably done 125 to 200 of these types of deals. They're structured very carefully around the returns. There's lots of leverage you can pull. At the end of it, we end up with royalty contracts instead of equity or debt documents. We also have significant operating capabilities.
There's no other royalty fund that can do this, but we will go in and buy assets, restructure the companies, or we'll buy entire companies, restructure them, and hold on to royalty assets. Many companies in the biotech industry, as you know, may trade below cash. They definitely trade below cash and royalty value, which is harder to arrive at and calculate. We're, I think, experts at doing that. We'll go in and buy companies, restructure them, and hold on to the assets. That's our special situations approach. We also have our platform technology. In addition to Captisol, which I already mentioned, we also now have a NITRICIL platform. Why? Because in our special situations approach, we acquired a company called Novan that went into bankruptcy.
We did a DIP loan there for $12 million, and we bought all of their assets out of bankruptcy with a credit bid on that DIP loan. We bought the entire platform for $12 million. We incubated that for about a year. We did a reverse merger to get it public, coincident with a $50 million financing. We now own half of a public company called Pelthos. Our stock is worth about $150 million. We have a 13% royalty in the product. Their lead product is ZELSUVMI, which is for molluscum contagiosum. Any of you with small kids, this is a very common skin infection for which there are no take-home treatments. Now there is a prescription product with a tube. About 16 million patients a year have this. We created that royalty out of a special situation.
That's how we end up with significant equity holdings as well. We also historically have spun out Viking Therapeutics, and we still have a significant holding there. This year has been busy. I'll just cover a couple of these quickly, but we're typically doing 5 to 10 deals per year. We really view diversification not by deal, but by assets. Some companies may have multiple assets, so we'll upsize our deals. Some company may have a single asset we're interested in. Those will be smaller deals. Our per-asset risk tolerance at our current portfolio value is kind of $25 million to $50 million per deal on binary risk. That's how we look at that. All of these will fit into that spectrum. I mentioned Pelthos, which is in the July 2025 row. In February, we closed a deal just as an example of a project finance.
We approached Castle Creek. This is a company with a very blue-chip syndicate out of Chicago. We convinced them to do a royalty financing in lieu of an equity financing to co-fund their phase three study on a gene therapy on a product called D-fi. We have a mid-single-digit royalty. It will take about a year and a half to run that study. It is in a very severe skin disease. They will turn the card when they get data. That will either be thumbs up or thumbs down. Those are the types of investments that we make. When we do those, we are not a public equity investor. We sign a CDA. We read all the regulatory correspondence, all the clinical correspondence. That is why we have 40 employees. I mean, this has gone through in significant detail.
Looking at all the risks, we do a full commercial model to back into our royalty value when we price these things. Everything and all the results from our diligence goes in through the investment committee, which is basically in any investment firm, the quality control mechanism before we decide eventually to make investments. Castle Creek, all of these investments go through that screening mechanism. These are the two platform technologies that I mentioned. Again, we've got about eight employees. I'd call it nine with NITRICIL that are overseeing these. We've outsourced the manufacturing, so we have manufacturing partners. We manage and own the intellectual property. We can conduct licensing activities, which creates new royalties around these assets. Our manufacturing partners can fulfill any manufacturing responsibilities in the deals. I think we are pretty significantly differentiated.
There is a lot of royalty capital out there. And by a lot, I mean probably a little over $12 billion of royalty capital that's raised. A significant percentage of that, significant majority, probably over 85% of it, is focused on commercial stage deals. So commercial stage royalty monetizations. That market is highly efficient. Those deals are typically underwritten to around 10%. There might be a few bells and whistles in those deals that get you to 12% or so. That's what we did at HealthCare Royalty Partners. On the development side, there's very little capital. And in the space that we're focused on, late-stage clinical development on deal sizes, kind of $25 million-$50 million per asset, our competition are the equity markets. We haven't been head-to-head on any deal since I've been here in the last three years. So it's a very strong position.
Is there a perfect moat around our business? There is no such thing as a perfect moat. It is pretty hard to replicate what we do. The various expertise that you have to create, the team you have to build. We are operating off of an existing portfolio now of over 100 assets. That is pretty tough to replicate. It does not mean there will not be more entrants into the business, but I think we are in a very strong position and growing rapidly right now, just based on our top 12 commercial assets. We are growing rapidly. I think we are in a pretty defensible position. With that, I will turn it over to Melanie Herman, who will give you the financial update.
Thanks, Todd. I'll start by going through our most recent financial results and then go into our longer-term outlook as well. I'd like to review our historical results. In 2022, as Todd mentioned, Ligand went under a pretty major restructuring by spinning out our antibody business and bringing in our new CEO, Todd. Since then, we've been really focused on our high-margin, high-growth strategy and keeping operating expenses low. We've seen significant growth both from accretive investment opportunities, such as our acquisition of APEIRON Biologics in 2024 that yielded us a mid-teens royalty on Recordati's Qarziba, as well as new approvals of products in our portfolio. In 2024, we had product approvals of Pelthos' ZELSUVMI, Merck's Capvaxive, and Verona's Ohtuvayre, which was recently acquired by Merck.
These products are all in the relatively early stages of their launch, and we expect this growth to really continue into the future. Next, I'd like to go through our most recent quarterly financial highlights. In Q3, we recognized a total revenue of $87 million. This represented growth of 68% over the same quarter of the prior year. We started the year guiding to between $180 million and $200 million of total revenue. We have recently updated to revise guidance to a range of $225 million-$235 million. Our Q3 royalties came in at $47 million, which represented a 47% increase over the same quarter of the prior year. Our third quarter adjusted EPS also grew 68%- $3.09 per share. We started the year guiding to adjusted EPS of between $6.00 and $6.25 per share and have increased that to $7.40-$7.65 per share.
Over a dollar of increase there. We ended with a strong balance sheet of $665 million of cash and investments. When you include our investment in Pelthos Therapeutics as well as our revolving credit facility, we had over $1 billion in deployable capital at the end of the quarter. Last August, we also took advantage of the strong convertible debt markets and executed on a $460 million convertible debt transaction. We were really pleased with how the transaction priced. We secured a 75 basis point coupon rate and a 32.5% conversion premium, which represented the best of both ends of the range for both coupon and conversion premium. We also structured the transaction to be net share settlement to further reduce dilution as we intend to repay the principal in cash. We also purchased a call spread for about 10% of the proceeds received.
We purchased an up 100% call spread, so we'll have no dilution to our stock up to a price of $294 per share. These net proceeds not only bolster the balance sheet, they're accretive to earnings and will allow us to take advantage of our robust business development pipeline. I touched on our updated guidance briefly before, but I'd like to go into a little more detail here. There are essentially two reasons for our updated guidance. The first is that several products in our royalty portfolio have been outperforming. Those include Ohtuvayre, which has had the strongest launch in COPD history. Merck's Capvaxive has also had a really strong launch as well. Travere's FILSPARI has been outperforming our expectations also. We also increased our contract revenue guidance due to the recent out license and first commercial sale milestone of Pelthos' ZELSUVMI.
We spent the last year and a half incubating the Pelthos business, which we bought their predecessor out of bankruptcy, built a management team around it, merged them with Channel Therapeutics, and they're now a separate publicly traded entity that Ligand owns about half of the outstanding common shares of. That's valued at around $150 million today. On top of that, we'll earn a 13% royalty on ZELSUVMI going forward. Turning to our longer-term outlook, this is our royalty receipts outlook for the next five years. We're on pace to meet or exceed a 22% CAGR. We previously shared this at our analyst day last December, and we'll be updating it at our analyst day this December. The majority of this growth comes from our existing commercial programs, which are expected to grow at a rate of about 13%.
On top of that, we have our farm team, which consists of development stage programs that are risk-adjusted, and that's expected to contribute to an additional 5%. Last, we have our future investments, which we expect to make with cash that we're generating. We're currently generating around $175 million per year. One thing I'd like to point out is that there have been a lot of positive movements since we presented that chart last December. The first is Ohtuvayre. When we presented that chart, Ohtuvayre peak sales consensus was about $1.2 billion. It's now over $3 billion. In the hands of Merck, a lot of people think it could be a $5 billion-$6 billion drug. Additionally, the sell side has been gaining conviction around the likelihood that Phosphory will be approved for FSGS. It's currently indicated for IgA nephropathy. There's a PDUFA date.
It's under review with the FDA right now for FSGS, for which there are no approved therapies. Travere has stated that they think that the opportunity in FSGS could be as large as IgA nephropathy. We do get a 9% royalty on Phosphory. The last is Palvella's QTORIN Rapamycin programs. They've been getting a lot of attention on these programs, and we expect it will be a significant contributor in the future. They're currently pursuing three different indications for rare skin diseases, and Ligand receives an 8%-10% royalty on any QTORIN Rapamycin product. I think that pretty much wraps it up for me. Thanks for joining to hear a little more about Ligand. With that, I think we can open it up for Q&A.
Yeah. Often there'll be questions about the strategy. It is a little bit odd. Not everybody's seen this before, so we just want to make ourselves available for any questions about how this works, why this makes sense, whether we're crazy. Anything you've got. Yes, sir.
[Audio distortion] Essentially, no competition.
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Let me clarify one thing. We compete with the equity alternatives and debt alternatives that those companies have. We are typically, our counterparties have to have strong management teams. That is one of their key asset selection criteria is the team, because we do not want to have to manage like a venture capital. They will take board seats. They get very active. PE firms have large, sometimes operating groups that descend upon the companies and operate them. We can do that. We know how to operate companies. There are many operators inside the company. It makes us very leverageable if we partner with blue chip teams that are really good and we do not have to do anything. It is just 100% margin. Those teams, by definition, have access to capital. They can go do an equity round, and they can go raise debt if they want to.
There is pressure in the negotiation. We do not just get to write checks at any price we want. That is really where the competition comes from. It is all their other alternatives.
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Let me answer that kind of broadly by just painting the landscape. As I mentioned, early-stage investments typically done by VCs. These commercial royalty monetizations, there are seven or eight firms that matter that are investing significantly, and they are commercially focused. That is about $12 billion. One of those could decide to come back into the development stage. Competition could come from there. Just having been at one of those firms as a co-founder, it is very difficult. There is a lot of inertia around your strategy, which is restricted by your limited partner agreements. Your investors, in that case, are usually debt allocators, because commercial stage royalties have a lot of debt characteristics, but higher returns. Those funds, it is never easy to raise a fund, but we raised our first fund at HealthCare Royalty and had the first closing in the summer of 2007.
That was six months after we launched our fundraising. That does not happen if you are raising a growth equity fund. It just takes longer. That is because there was significant demand from the debt allocators. That is why that space grew so rapidly. There is a lot of inertia around that money. Who are the actual competitors in the space or the people that operate? Blackstone does this. Royalty Pharma, which is a very large and very capable royalty aggregator, they do it as well. They are also really big. They are much larger than we are. Our deal sizes are 20%-10% of kind of their target deal size, I think. I do not know what their minimums are, that is why we do not run into them. Somebody could start a business here. I do not know when they will do it.
It's going to take a lot of investment to do that, to build a team like this. It is also a lot easier to do it with an aggregated set of portfolio assets that you're adding new products into. That's an advantage, as well as the existing financial strength. Thank you. Yes, sir.
Could you comment a little more on your expertise in-house? You've got a mixed blend of talents here, it seems to me. Maybe there are a few like yourself that can talk both languages, but you've got some expertise in the medical side and the financial side.
Yeah. Yeah, that is, I mean, that's really key in any pharma company. I had a discussion with somebody today about modeling real options, because we really have a real option portfolio. And I was taught how to do that. You don't use that in pharma. Why? Because modeling and predicting risk is a communication exercise. Your extremely bright clinicians and biologists don't know anything about real options or what that even means. Everybody understands what the probability of success is. I just found early on that it's much easier to integrate these different skill sets if you create a common language. We talk about when we're doing diligence at the end of the day, okay, what's the probability that when this drug is submitted to the FDA, that they get an approval for marketing? We're looking for pretty high approval rates.
70%, 80% . You have a probability-adjusted discount on every deal we do. We use commercial analytics to determine the discount rate depending on how risky the market is. That's just an example, but you kind of have to approach these different varying levels of expertise and develop a common language. It's all super bright people, much smarter than I am. I mean, all of these folks have kind of come from either significant biological and chemistry expertise or clinical development expertise or finance expertise. Even our finance guys, Rich Baxter, like me, he started out in the commercial pharma roles. He was a product manager at GSK, Chief Commercial Officer at several companies, Chief Operating Officer at one. He transitioned into private equity when he founded Fortress's Structured Finance Group.
If you're going to be in kind of an investment position in a role like this, I think it really helps to have a diverse background so that you can exercise some judgment over the types of risk that you're buying. That's a good question. Yes, sir, you had a question as well.
Yeah. Are most of these companies providing capital? Are they private companies or are they publicly traded? If they're publicly traded, why wouldn't they do a secondary offering? That's all that we're stopped by as to undergrad.
Yeah. Great question. We are agnostic, public or private. What we care about is the risk of the asset. At the end of the day, we are asset investors. We do do late-stage companies. The company I mentioned that is developing a product for a rare skin disease, Castle Creek, that was a late-stage private company. Super blue chip syndicate out of Chicago, Valor Capital, Fidelity, Jeff Aronin, who runs Paragon Capital. These are very knowledgeable, capable people and deep enough pockets where they could have done their own inside round if they wanted. They really feel like the royalty is part of the capital structure and appropriate. It is not always a cost of capital issue. We are underwriting deals at equity-like returns because we are taking equity-like risk if it is binary. We have to, or obviously the investment strategy would not make sense.
There are many other advantages for them to, for example, not do a follow-on. We do not want, unless we have to, we do not want a board seat. If you are a private, a lot of times another round will come in. If it is a down market, you are going to do a down round. There is going to be preferred stock with liquidation preferences and all of that over the top of you. Quite often, there are governance changes, new board seats, Series D investor rights. On the private side, there is a high motive to avoid sometimes an additional equity round in lieu of a royalty financing beyond just the cost of capital. Ultimately, I mean, I would just tell you that self-selection is a big thing in our industry. To be a biotech CEO, I think you have to be an optimist. Most of them are.
By definition, whether it's a good market or a bad market, they all think their equity is undervalued. We compete when we do our deals against the perceived cost of equity, which can be different than the actual cost of equity. Plus, there's a lot of levers in our deals. If they think that they're undervalued because maybe they think that their lead product has the potential to be a $5 billion revenue drug, and we think it's $1 billion. If we were investing equity, it's hard to bridge that gap. There's going to be a big valuation difference. As a royalty investor, there are so many different levers in these deals.
We can just say, "Hey, look, we'll do a 9% royalty up to $1 billion in sales, and then we'll step it down to 1% above that." And we're giving up what we think is perceived upside or sleeves off of our vest. Yet they view our cost of capital then as much more favorable relative to equity cost of capital in their internal company models. There are a lot of things you can do to bridge gaps in our deals. They are all very bespoke, highly customized. Yes, sir.