Ligand Pharmaceuticals Inc. 17th Annual Midwest IDEAS Conference

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.