Intro

Ligand Pharmaceuticals (LGND) is a company that caught my eye with its incredible growth. Last quarter, it’s sales increased 36.8% from $33.7 million to $45.6 million and it’s net income grew 699.5% from $8.4 million to $67.4 million. (Data from the 10-Q)

I discovered that Ligand focuses on early-stage development of drugs and helps other companies develop blockbusters. It has partnerships with over 100 pharmaceutical and biotech companies, including the likes of Eli Lilly, Pfizer, Merck, and Amgen. For a full list of their partnerships – refer to their company’s website.

Business Model

Ligand is a biopharmaceutical company focused on developing and acquiring technologies that help pharmaceutical companies discover and develop medicines.

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Here’s a quote from their 2017 10-K statement:

“Our business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Our goal is to offer investors an opportunity to participate in the promise of the biotech industry in a profitable, diversified and lower-risk business than a typical biotech company. Our business model is based on doing what we do best: drug discovery, early-stage drug development, product reformulation and partnering. We partner with other pharmaceutical companies to leverage what they do best (late-stage development, regulatory management and commercialization) to ultimately generate our revenue. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to later stages of drug development. “

“Our revenue consists of three primary elements: royalties from commercialized products, license and milestone payments and sale of Captisol material. “

I really like Ligand’s business model. I view their model similar to the way I view technology companies, like ServiceNow (NOW) or Adobe (ADBE). Similar to ServiceNow or Adobe, Ligand licenses its platforms to its customers. Ligand charges them annual licensing fees. In addition to licensing fees, their customers pay Ligand milestone payments and royalties if their drug discovery efforts are successful.

Stats (as of 12/28/2018)

  • Closing Price: 135.84
  • Trailing P/E: 18.50
  • Quarterly Revenue Growth (yoy): 36.80%
  • Quarterly Earnings Growth (yoy): 699.50%
  • Total Debt (mrq): 815.98M
  • Total Debt/Equity (mrq): 116.65%
  • Current Ratio (mrq): 2.20
  • Levered Free Cash Flow (ttm): 136.27M
  • Forward Annual Dividend Yield: N/A

Stats referenced from Yahoo Finance.

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Chart Action

Ligand stock has been hammered since this bear market began in October. It’s sitting close to it’s 200 week moving average and it’s .786 fibonacci retracement. I see this as a decent area of support. The next area of support would be it’s November 2016 low.

 

Risks

The 3 main risks I’m concerned about are competition, change in leadership, and platform adoption.

Competition

Currently, Captisol is Ligand’s lifeblood. From Ligand’s website, “Captisol® is a patent protected, uniquely modified cyclodextrin, whose chemical structure was rationally designed to enable the creation of new products by significantly improving solubility, stability, bioavailability and dosing of active pharmaceutical ingredients (APIs).”

If Captisol alternatives are discovered by other companies, this could mean big trouble for Ligand.

Change in Leadership

According to Wikipedia, John Higgins has been the CEO of Ligand since January 2007. He led the company through the Great Recession. It appears that a lot of Ligand’s recent successes can be attributed to his leadership. Therefore, if he were to leave the company, I’d consider selling.

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Platform adoption

Ligand lists 4 technology platforms in their 10-K (OmbniAb, Captisol, LTP, and SUREtechnology). So far, Captisol is used by over 45 partners and OmniAb is used by over 30 partners. I’m looking for these partnership numbers to grow. Any stagnation in the growth of their partnerships could be worrisome.

Should I Buy?

Ligand could be a great addition to a portfolio that needs some exposure to the Health Care Sector

Be sure to do your own research and determine for yourself if Ligand is a good stock for your portfolio.

How Much Should I Buy?

Here are some portfolio guidelines we Wolves try to live by:

  • Thou shalt not hold more than 35% in any one particular sector
  • Thou shalt not invest more than 10% of principal into 1 individual stock
  • Thou shalt not place a buy order using more than 4% of my portfolio

For an our updated portfolio management guidelines, click here.

The Bottom Line

Ligand is a growth story that could be a good addition to a portfolio that needs some health care stock exposure. At it’s last closing price of 135.84 and a P/E of 18.50, I think it’s a buy.

Disclosure

I/we own shares of stock in LGND

Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.

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