Good morning, everybody. Up next, we have Ligand Pharmaceuticals. On behalf of the company, we have Tavo Espinoza, Chief Financial Officer, Melanie Herman, Executive Director of Investor Relations and FP&A, and Lauren Hay, Vice President of Portfolio Strategy and Investments.
Good morning, everybody. I'm Tavo Espinoza, CFO of Ligand. Good to be with you here this morning. I'm going to spend the next 10, 15 minutes talking to you about what we do as a company, our capital deployment strategy and process. I'll also touch a bit on the XOMA acquisition that we closed just a month and a half or so ago. I'll pass it on to Melanie, who will cover our financial profile, and then Lauren Hay will get into a deeper dive on our partnered portfolio. In late 2022, Todd Davis, our current CEO, came off the board to refocus the business on what we're doing today as a royalty aggregator. That royalty aggregator strategy that we're following today is something that we launched in late 2022, early 2023. Since then, as evidenced on this slide here, we've scaled the business significantly.
We've invested in scaling up the business development team. We have significant capital on the balance sheet to continue to execute on our strategy. We're generating more cash flow today than we're deploying, and we've seen a significant increase in the value of the company. We do get the question from investors from time to time, "Do you feel, or do you think that I've missed the boat? Is it too late to get in?" The answer is no. We think, frankly, we're just getting started. We're sitting in a position of strength. The innovation that's in the space, the licensing that's taking place, the team that we've built, the capital that we have available to us, and the portfolio that we've built over time, which creates a bit of a moat, those are all strong tailwinds.
You'll hear more about the catalysts that we have coming up over the next year or so from Lauren, but frankly, from an insider's perspective, we're very excited about where we sit. The valuation of the company has increased meaningfully, but that's also supported by a meaningful increase in profits. Why do we like royalties? There are certain characteristics of the royalty product, if you will, that provide value, high margin, predictable, and profitable growth business for our shareholders. One of the things that we benefit from is that a royalty, which is a share of our partner's sales, a 5% royalty, for example, will result in a $5 million royalty proceed to the company on $100 million in sales from our partners. We do that with a very low cost structure. We call that a corporate lean structure at Ligand.
There's 50 employees, most of them primarily focusing on doing new deals, not managing or maintaining the existing portfolio. There is some of that, but it's a minor portion of our cost structure. The partner is the one that takes care of the manufacturing, the development, the commercial, all of the various functions that underlie the sale of a drug. The royalties are also non-dilutable. Our 5% royalty stays a 5% royalty even when our partner does a subsequent equity financing, and that's not unusual, especially in biopharma. It's quite costly to run a clinical trial, and you often could see a second, third, or fourth round even after our royalty investment comes in. It is a benefit in that sense. It's also a benefit to the partner, the counterparty.
It's a non-dilutable investment or a capital infusion to them in the sense that they may be looking to bridge their capital infusion into a later stage catalyst value-unlocking milestone, a data readout, or an FDA approval, upon which time they could then take advantage of that higher valuation and raise an equity round at a much lower cost of capital. The economics associated with a royalty financing are very beneficial, not only to us, but also to our counterparties. How do we go about acquiring these royalty assets? We go about this in several ways. We could buy an existing royalty. Oftentimes, there's already a royalty held by an inventor, for example. That inventor may be in later stages, they're looking to maybe monetize and finally get that lake house that they've been dreaming of.
They could sell us their entire royalty to create an upfront cash inflow to them for lifestyle purposes, or perhaps they might want to invest in another program or another endeavor, or they may want to maybe liquidate a portion of that. We're able to structure around those. We can also create a royalty, often referred to as a synthetic royalty, where we come in and provide a drug developer capital to advance their drug development. We often also come across situations where a good asset, a good drug, is stuck in a bad situation. It could be, for example, a company that's underfunded, or a company that's been acquired or the asset was acquired, and it's now what we refer to as an orphan asset. We still may have interest in that asset. We can structure around that, and oftentimes this looks like an M&A transaction.
We have examples of that. Over the last couple of years, we've acquired assets in that fashion. Finally, we have two technology platforms that we out-license, and that generates royalty proceeds to us as well. Of course, executing across these approaches requires the right team. I'm going the wrong way. We have a very strong business development team, multidisciplinary team. We don't just underwrite the economics of an asset, of a royalty. We also underwrite the science. Not only do we have folks with private equity, debt restructuring, royalty financing experience, but we also have PhDs on the team. We are led, as I mentioned earlier, by Todd Davis, our CEO. He has over 20 years of royalty financing experience. He was the Founder of HealthCare Royalty Partners, as well as Paul Hadden.
He leads the investment team out of our Boston office, also with significant experience in the space. How do we go about the process of investments? It is a gated process. We do seek to kill opportunities early. We have a very robust pipeline today of investment opportunities, and if we see that they are not meeting our hurdle rates, we will be quick to move on. The opportunity cost here is meaningful. We do have a very defined, very disciplined process, and when it gets to the later stages, the term sheet stages, we put it through an investment committee that is made up of three deal leads, including Todd Davis, our CEO, where we do the final validation and pressure testing of our assumptions. A great example of this approach is the acquisition of XOMA that we closed on in the middle of July.
This acquisition significantly increased our scale. We doubled the size of our portfolio. We now have over 220 partnered programs. It is an immediately accretive transaction. We increased our earnings guidance. We added $0.50 to earnings this year, and we also said that we expect it to contribute at least $1.50 next year. That is largely driven by the top-line contributors. The deal came with seven commercial assets. Three of them are meaningful contributors today. There is also a significant extension in the duration. XOMA had their focus, their strategy was focused. XOMA is a royalty aggregator, by the way. They played in a smaller bite size space than we did or than we do. They tend to focus on earlier stage assets. Now our portfolio is much more diversified, not only across therapeutic area, but also the stage of development.
Before I turn it over, just one quick snapshot here. Over the last three years, we have deployed $1 billion in capital across 19 investments, XOMA being the most significant one, the largest one in our history, in fact. That is just a continuation of the strategy that we have employed. With that, I will turn it over to Melanie that will walk us through the financial profile of the business.
Thanks, Tavo. I will kick it off by just going through our most recent quarterly results. In the second quarter, we recognized total revenue of $64 million, which was a 34% increase over the same period of the prior year. We also recognized $48 million in total royalties. This was primarily driven from growth from FILSPARI, OHTUVAYRE, and ZELSUVMI, with the majority coming from FILSPARI. That program had royalties that were double the prior period as a result of the recent approval in a new indication in FSGS. In the second quarter, our adjusted EPS was $2.37 per share, a 48% increase over the prior period. Turning to the balance sheet, we ended the second quarter with $1.4 billion in cash and investments, following our recent convertible debt financing. We did deploy a significant amount of this capital for the XOMA acquisition, which we closed in July.
Following that acquisition, we did still have $700 million in deployable capital when you factor in our revolving credit facility. To touch on our recent financing, we did take advantage of the strong convertible debt markets in June and executed on a $700 million convert. We were able to secure a 0% coupon rate, and we structured the transaction to be net share settlement to further reduce dilution as we intend to repay the principal amount in cash. We also purchased an up 100% call spread, which will result in no dilution to our stock up to a price of $524 per share. We also repurchased 229,000 shares for $60 million. This represents our confidence in our valuation and also served to alleviate pressure on the stock from hedging during the marketing period.
These proceeds not only lower our cost of capital, but they also strengthen our balance sheet. They are accretive to earnings, and they will allow us to take advantage of investment opportunities in the future. Turning to the XOMA acquisition, one of the things we really liked about this transaction is the operational and financial synergies. XOMA was operating with more than $30 million in operating costs. Under Ligand, this collapses to less than $5 million. This is primarily due to the elimination of public company costs such as the audit fees and SEC reporting fees. We also acquired significant tax attributes of over $110 million in Section 174 R&D tax credits and net operating losses. We expect that we will be able to utilize these within the next three to five years, which will result in significant cash tax savings over that same period as well. Sorry.
We also expanded our portfolio by 120 programs. Seven of these are commercial stage, generating royalties today. Three of them we consider to be meaningful growth drivers today, and those are Roche's VABYSMO, OJEMDA, which is marketed in the U.S. by Servier and by Ipsen ex U.S., and then also Zevra's MIPLYFFA. There are also 14 late-stage clinical programs that we expect to be real near-term growth drivers as well. In the later term, there are over 100 additional preclinical and clinical assets that will be longer-term growth drivers. With these contracts, there are significant milestone opportunities as well. Over $2 billion of milestones within these contracts. These do carry clinical and regulatory risk, but there is an expectation that there will be some economic upside for those in the future. Last is the TREMFYA contingent value right.
Ligand is entitled to 25% of any proceeds from the TREMFYA litigation between Janssen and XOMA, and there is no legal cost that Ligand bears, so it is all upside to the P&L for us. Real quickly, just touching on financial guidance for the full year. This past quarter, we did raise the lower end of the range of our adjusted EPS guidance from $8.50 per share up to $9 per share while maintaining the upper end at $9.50. We left royalty revenue and total revenue guidance unchanged, so this increase is primarily to reflect the additional interest income and lower share count as a result of our convertible debt financing. For our longer-term outlook, at our Investor Day in 2025, we did provide a long-term outlook of our royalty receipts, which showed an expected CAGR of 23%.
We have had several positive developments within our portfolio since that time that I'd just like to point out here. Lauren will go into more detail on all of these in her section, but I'll just briefly touch on three. The first is the approval of FILSPARI in FSGS. FILSPARI was previously approved in IgA nephropathy and had quickly become our largest royalty. The expansion into FSGS, for which there are no other approved therapies, is expected to be a real significant commercial opportunity for Ligand. The second is Palvella. They announced positive phase III results for their microcystic lymphatic malformations program, and plan to, or actually, they're filing a rolling NDA submission, which is expected to be complete by the end of this year, and they're preparing to launch in the first half of 2027 if that product is approved.
The last is the acquisition of XOMA, which is immediately accretive and also carries those late-stage clinical programs that have significant catalysts that are expected to be real near-term growth drivers as well. We plan to update this chart at our Investor Day in December, and we look forward to providing you with that update at that time. With that, I'd like to turn it over to Lauren for a portfolio update.
Great. Thanks, Mel, and thanks everybody for being here today. I'm going to go through a brief update on our portfolio. We have 15 key commercial partnered royalty programs. Three of these came over from the XOMA acquisition, Roche's VABYSMO, OJEMDA, and MIPLYFFA. As you can see, we're well-diversified across therapeutic category, indication, and partner. We do get a lot of questions in terms of, are you focused on a certain sector? The answer is no. We are therapeutically agnostic. However, one of our key investment criteria is that we're looking for opportunities for products that really address an area of clear unmet medical need. We view that as being an important kind of competitive dynamic with regards to other pipeline competition, but then also to really solidify the value proposition with payers.
As a result of that focus, we do end up with a lot of oncology and rare disease exposure. However, you'll see other programs like OHTUVAYRE in our portfolio in COPD that are much larger indications as well. I think it's important to point out that of these 15 partnered commercial programs, nine of them represent new investment activity or approval since 2022 when Todd Davis came on as CEO. To the question that Tavo Espinoza referred to in his remarks, have you peaked? Have we missed the boat? The answer is no. I think you can really see the momentum building in our commercial portfolio. Shifting to the key pipeline partnered programs, again, nice diversification across therapeutic areas. I think also important to emphasize that all of these opportunities have been new investments since 2022.
A lot of the work that has been going on behind the scenes for the last three years has really been building out our late-stage pipeline through our BD investment activity. We are kind of setting up for a real important point of inflection in this business where we are going to see the data readouts on these assets in the near term and really continuing to further develop the momentum in our portfolio. What could this late-stage pipeline translate to in terms of incremental royalty revenue? Collectively, these select late-stage programs represent an incremental $400 million in peak royalty revenue to Ligand. I will emphasize that these are all phase III assets. In general, the probability of success for an asset is around 53%. We do not expect all of these to be positive. We are looking for new investments that we believe represent above average probability of success.
I think just collectively, it really kind of speaks to the volume of growth that we have lying ahead for us in this business. We had two major catalysts this year. As Melanie mentioned, the first was the approval of FILSPARI in FSGS. FILSPARI is our single largest royalty on an annualized basis. We get a 9% royalty here. It has historically been approved in IgA nephropathy, a rare progressive kidney disease, and then subsequently in April received approval in FSGS. The first quarter of sales for FILSPARI post FSGS approval far surpassed analyst expectations. We are pretty bullish about the launch here for a couple of reasons. First, there are no FDA-approved alternatives, so FILSPARI is the first and only FDA-approved treatment.
This is a really rare, even more rare than IgA nephropathy and more progressive kidney disease, and it does affect pretty young patients including pediatric patients as well, so the unmet need here for any treatment for these patients is very high. Additionally, because Travere had already launched FILSPARI and IgA nephropathy, they already had all the commercial infrastructure in place. All the reps were trained, all the payer contracts were in place. All of the sort of infrastructure that takes a long time to build up for a new launch was already in place, and really the overlap in terms of the prescribing audience between IgAN and FSGS was around 80%-90%. They kind of had a head start in terms of building out all that sort of sales and marketing infrastructure. We think that this asset is really posed for pretty significant growth.
It is continuing to grow in IgA nephropathy as a foundational kidney-directed treatment, despite the introduction of some new competitive entrants into the marketplace. We are pretty optimistic about what the coming quarters hold for this product. The second major catalyst was the phase III data for Keytruda and rapamycin. This is Palvella's microcystic lymphatic malformations drug. This is a topical rapamycin. Microcystic lymphatic malformations is a rare dermatological condition where you can get leakage of blood and lymphatic fluid from the lesions that are on top of the skin. When you talk to some of these patients who are more severely affected, they will talk about getting dressed for work, and you have to change your shirt two or three times because you are getting so much leakage in terms of fluids.
The available treatment options are procedural based in nature, and so they are quite ineffective and burdensome for patients.
Palvella announced this data in February. They had given guidance to the street in terms of what their expectations were with regards to a base case outcome and an upside outcome, and they just hit a home run here. They far surpassed their upside scenario, both on the primary endpoint and secondary endpoints. Really well-tolerated drug. Importantly, one of the things that sometimes gets lost in here is that 98% of patients who completed the efficacy period opted to continue receiving the medication in what's called an open enrollment period. I think that really speaks to how happy patients were with their treatment and how they're likely to persist and continue treatment once the drug is approved. As Melanie alluded to, they're in the process of filing now.
We hope and anticipate that this will be approved in the first half of next year. We do get a tiered 8%-9.8% royalty here. While FILSPARI is currently our largest royalty revenue driver, Palvella is probably not far behind. The nice thing for us is that we get exposure to revenue from mTOR and rapamycin across any indication, and that's true for really any royalty investment here. What Palvella is doing is they're, you'll hear this term sometimes, a pipeline in a product, where it has really robust application beyond the initial lead indication. Palvella is developing this also in phase III in cutaneous venous malformations, which is a couple of years behind, and they're in phase II for clinically significant angiokeratomas. All of these are rare, burdensome dermatological diseases.
You can see here, analysts currently expect that in aggregate, this is a $1 billion-$3 billion franchise, which would translate just this product alone in potentially $100 million-$300 million in annual royalty revenue to us. They've a great team in place. We're really optimistic about the launch, and they're quite busy getting all of that prepared. To wrap things up, when we think back to the catalyst for this year, we had one pivotal study readout, which was Palvella. Last year, we didn't have any pivotal study readouts. By the end of 2027, we have as many as seven reading out, which you can see here. Several of these did come over from the XOMA acquisition, OJEMDA, mezigimab, Osavampator, volixibat, and Ersodetug.
We're expecting one major FDA approval with mTOR and rapamycin, and then we have continued geographic expansion for Ohtuvayre in China, which is a quite significant and large market there. FILSPARI with potential approval in Japan, where IgA nephropathy is quite prevalent, and then OJEMDA in pediatric low-grade glioma. To kind of close things off, circling back to Tavo's opening remarks, we're poised for a period of pretty dramatic growth here, not only from our existing commercial portfolio, but thinking through what's going to happen in the next, say, 12-18 months with these catalysts. With that, I think we can turn things over to Q and A.
Question. How sensitive are your revenue potential to reimbursement costs from things like early claims, how sensitive is your cash flow as well from that sort of thing?
Yeah. So it's a great question. How sensitive is our cash flow to pricing and reimbursement risk? A royalty is effectively a percentage of top-line net sales. If a company reports $100 million in net sales and our royalty rate is 5%, we get $5 million. So it's paid on that reimbursed amount. When we're underwriting a new investment, we generally spend a couple of months in what I would characterize as like M&A-level due diligence, and we're working really closely with the company to understand their plans in terms of pricing. We're looking at analog drugs in the marketplace for something like mTOR and rapamycin and saying, "All right.
What other rare dermatological diseases provide sort of proxies of companies that have been successful with various price points?" Then we're doing our own kind of diligence on pricing and reimbursement, depending on if it's a Part B or Part D drug. That's a key component of what we're looking at.
Imagine you were putting together a product that is first to market and you have a probability of success. I'm sure it's a bit more difficult with that whole kind of pricing thing, like unique things that you might like.
Yeah. One of the important things about royalty investing is that we are doing our diligence under CDA. We are in confidential discussions with our partners. We are getting not only access to their plans in terms of pricing and what payer research they have done to support that, but then also looking at FDA correspondence, all the manufacturing materials, all this wealth of information that we are able to get that ultimately helps us get to that conviction around an above-average probability of success.
[inaudible]
Well, I think the XOMA acquisition probably tilts that significantly towards the acquire. I mean, it doubles the portfolio, right? That aside, we are deploying between $150 million to $250 million to acquire these high-value royalty assets. We like to keep that under $100 million per asset. That could yield anywhere from, let us call it two to six assets per year that we go out and we acquire, either by directly funding a trial or acquiring an existing, monetizing a royalty. But we have acquired assets through M&A transactions in the past. It is hard to say today what the kind of the mix is, but it is a mix. Yeah. So we have the same issue that any other biopharma company, pharmaceutical company has, that these assets do have an end of life.
The loss of exclusivity tends to expire after the initial patents are filed early on in the development. The U.S. FDA, I believe, give you 20 years, and so by the time it gets close to commercial, which is kind of when we come in, we are looking at potentially 8- 12 years of cash flows to us. So we do have this same kind of patent cliff issue or loss of exclusivity patent cliffs that other biopharma companies have. We do not see anything meaningfully other than what we have shared publicly with our largest drug just a couple of years ago. That is no longer the case with KYPROLIS, Amgen's multiple myeloma drug. It is coming off patent at the end of 2027, and we expect that generic competition is going to come in aggressively, but we are going to grow right through that.
The next real meaningful cliff is into the 2030s. Yes, that's right. The royalties will continue. Typically you see the life cycle of a drug kind of ramps, and then it hits its peak sales, and it kind of hovers around there, and then the loss of exclusivity comes in. That's when the generic competition then takes market share, and you see a pretty aggressive drop. In the meantime, we have the benefit of time between now, let's call it 2035, to take the cash flows that we're generating, which are growing at a 20%-30% annual compound growth rate, to redeploy that, to plant new seeds, if you will, to give the fruit in the future.
What happen [audio distortion].
Every asset is a little different, honestly. Sometimes it's just a step down of 10 years or 15 years from that.
I have to be careful how I say this because it's going to invite the competition, but it's green space. It's green space for us. There are other royalty aggregators out there that are playing at a much higher level, and we have not run into them yet. XOMA, you could say, was a competitor. They were deploying $5 million-$15 million to acquire earlier-stage assets. They're now part of us, but it is really green space for us here. The size is our advantage. That's correct. The under $100 million space is. We do face the alternatives, the equity, the debt markets, that's a capital alternative to our partners, so that's competition in a sense, but not in the royalty space. It's a very dynamic environment. There's innovation not only in the technology, as you referenced with AI. There's new modalities, new ways to attack these targets.
We safeguard against that by staying disciplined to our criteria, right? We're seeking assets or drugs that meet high unmet need. That in itself protects us in many ways. We also have a limit to how much we will deploy. We don't want any single asset to overexpose us, so the diversification of the portfolio is also part of the moat, if you will. But it is a very dynamic environment, as you referenced, and I don't know, Lauren, if you.
Yeah. I am happy to add on that. I think most of what is happening right now with AI is in the drug discovery arena, and I think the ultimate hope, and it would be great for us, is that it will lead to fewer failures, right? If you have better targets initially, you have better drugs initially, then you should see fewer things fall out along the way. It makes our job a lot easier. We are looking at late-stage clinical, and when you look at the whole life cycle of drug discovery through commercialization, the expenditure and time is focused on the clinical stage, and that is not going to change, right? If the FDA wants to see your drug tested for six months or 12 months, AI is not going to change that.
The portion of the sector that we are focused on is kind of insulated to a threat from AI. In any regard, it should hopefully, over time, over the next 20 years, enable our diligence to be a little bit more streamlined. Yeah, it is a great question. I do not have specific numbers, but what I will say is if you think about, again, the life cycle of a drug, it is very rare that a company will say, "I am going to invent a drug from the very earliest days, and we are going to keep this drug in our company all the way through commercialization.
We are not going to pay any manufacturing royalties, any sort of pharma tech services royalties." The average drug, I would just say if you are talking about the typical phenotype of a drug, is it is discovered in academia, it gets licensed to a small biotech, and then it gets licensed to a big pharma. Then maybe there is another residual royalty for somebody who did formulation work or manufacturing work. So that is three potential royalties per program. Again, Pfizer does discover their own drugs and bring them all the way through, but for the most part, there is a lot of fragmentation in this industry, and some companies are really good at doing the earlier stage stuff. Some companies are really good at doing the commercial stage stuff, and that benefits us because all that changing of hands just generates new licensing activity.
I describe it as an ocean of assets out there, that it is on us to build the tools and the proprietary databases that in fact we have or we are out there seeking where are the fish, and we have the radars to be able to identify so that we could then enter into relationships with these counterparties early on. So as they are advancing their drugs, they know we exist. They know when they need that capital to reach out to us. So that is something that we are very active in today.
Absolutely. [audio distortion].
Most of the incoming interest that we get, a lot of that gets killed early, either through terms or just not meeting our criteria. As you can imagine, it is inbound, so it is all coming in without our screening. When it comes to outbound, we have a much higher hit rate with screening.
In terms of mining the universe, there is FDA websites or databases of drug developers that have information in the public domain that we could reach into. Separate from that is actually just tracking the developers and the relationships that we're entering into over time, because it is in part a relationship business as well. Okay.