Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) Q3 2025 Earnings Call Transcript

Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) Q3 2025 Earnings Call Transcript November 8, 2025

Operator: Thank you for standing by. Welcome to Ligand Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Melanie Herman. Please go ahead.

Melanie Herman: Good morning, everyone, and welcome to Ligand’s Third Quarter 2025 Earnings Call. During the call today, we will review the financial results we released earlier today and provide commentary on our partner pipeline and business development activity, followed by a question-and-answer session. Before we get started, I would like to point out that we will be discussing non-GAAP results, which excludes certain items such as stock-based compensation, amortization of intangible assets, amortization or impairment of financial assets, losses from derivative assets and gain from the sale of the Pelthos business, amongst others. I encourage you to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, which can be found in today’s release available on our website.

We believe these adjusted measures provide valuable insight into our core operating performance, both historically and moving forward. Our earnings release and a link to today’s webcast can be found in the Investor Relations section of our website at ligand.com. With me on the call today are CEO, Todd Davis; Chief Financial Officer, Tavo Espinoza; and Vice President of Strategic Planning and Investment Analytics, Lauren Hay. This call is being recorded, and the audio portion will be archived in the Investors section of our website. On today’s call, we will make forward-looking statements regarding our financial results and other matters related to the company’s business. Please refer to the safe harbor statement related to these forward-looking statements, which are subject to risks and uncertainties.

We remind you that actual events or results may differ materially from those projected or discussed and that all forward-looking statements are based upon current available information. Ligand assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Ligand files with the Securities and Exchange Commission, or SEC, that can be found on Ligand’s website at ligand.com or on the SEC’s website at sec.gov. With that, I will now turn the call over to Todd.

Todd Davis: Thank you, Melanie, and good morning, everyone. Thank you for joining us today to discuss another exciting quarter for Ligand. This quarter was pivotal. Not only did we deliver another quarter of exceptional financial results, we also successfully completed a convertible debt financing, providing us with additional flexibility to pursue strategic opportunities that support our growth initiatives. We are raising our full year guidance for the second time this year. This increase in guidance is a result of the strength of our commercial royalty portfolio, which has continued to outperform our expectations due to products like Merck’s Ohtuvayre and CAPVAXIVE as well as Travere’s FILSPARI. Additionally, I’m proud of our deal team’s ability to create superior risk-adjusted returns through transactions such as strategic merger of Pelthos with Channel Therapeutics that has driven substantial value creation for our shareholders.

When we restructured Ligand in 2022 with the spinout of our antibody operations, we set a new strategic direction for Ligand, one grounded in focus and discipline. Since then, we’ve stayed true to that plan, scaling our deal team to accelerate growth in the late-stage pipeline and build a diversified portfolio of high-margin royalties designed to deliver superior returns. The strategy has played out exactly as envisioned, and I couldn’t be more pleased with the progress we’ve made over the past few years. Royalty revenue grew 47% over the same quarter last year, and adjusted EPS increased 68%, reflecting strong performance across our portfolio. Key drivers contributing to the 47% growth in our royalty portfolio include the commercial launch of ZELSUVMI, strong launch of Merck’s Ohtuvayre and CAPVAXIVE, growth of Recordati’s QARZIBA and the continued ramp-up of FILSPARI.

We ended the quarter with a strong balance sheet, including approximately $1 billion in deployable capital, factoring in our undrawn credit facility, which will allow us to take advantage of our robust business development pipeline. There’s been strong uptake of ZELSUVMI in the early launch phase, and we look forward to the continued momentum. The launch of ZELSUVMI is an exciting milestone for patients with molluscum, who now have an at-home treatment option for this burdensome skin infection. We encourage our investors to listen in on the Pelthos earnings call, which will occur on November 13. We expect a robust update on the launch performance. Our deal team has been busy this quarter, committing $35 million to Orchestra Bio for royalty interest in their AVIM therapy and Virtue SAB.

Ligand has also invested an additional $5 million to help catalyze their equity private placement, which successfully completed a total raise of $111 million, including participation by AVIM partner, Medtronic. We also committed $11 million to Arecor in exchange for royalty rights to AT220 and milestone and technology access fees for AT292, Sanofi’s efdoralprin alfa program. We are pleased to report that just 1 month after our investment, Sanofi announced positive Phase II results from its trial, demonstrating all primary and key secondary endpoints were met in adults with alpha-1 antitrypsin deficiency emphysema, a rare disease. Since restructuring in 2022, we’ve been executing on our current strategy and have seen significant growth across the core revenue as well as adjusted EPS.

I’d like to point out that in 2024, there were 4 FDA approvals of assets in our pipeline: Merck’s CAPVAXIVE, Merck’s Ohtuvayre, Pelthos’ ZELSUVMI and the full approval of Travere’s FILSPARI. With these 4 products all in early stages of their launch, with the potential for both indication expansion as well as geographic expansion, we expect this growth to continue in the coming years. I would like to look ahead now to 2029 and discuss our 5-year royalty receipts outlook, which we first presented at our Investor Day in December of 2024. We believe our long-term royalty growth is on pace to meet or exceed the 22% compound annual growth rate we outlined at that time. The existing portfolio alone supports a royalty receipts CAGR of 18%. Future investments should add at least 4% to this with potential upside on top of the current outlook.

The strength of our existing portfolio is evident across both our commercial and development stage programs. However, we believe that what truly differentiates Ligand as a royalty aggregator is the expertise of our deal team in sourcing and executing high-quality investment opportunities and the ability to drive superior returns with our operating capabilities and our special situations initiatives. It is through the strength of this team that growth across the future investment segment of this chart has the potential to surpass expectations. Turning to the next slide. I’ll highlight a few positive developments since our long-term outlook was presented last December, each of which has the potential to meaningfully enhance our long-term royalty projections.

First, Ohtuvayre is tracking well ahead of the initial forecast and continues to be the strongest launch in COPD history. Q3 sales grew 32% sequentially and consensus forecasts now project $2 billion in sales by 2029, up from $1.2 billion previously. As a 3% royalty holder, Ligand stands to benefit materially from this upside. Second, FILSPARI continues to perform well commercially in IgA nephropathy with Q3 sales growing 26% over the prior quarter. Additionally, there is potential upside if approved in FSGS. If approved, the FSGS indication could significantly expand FILSPARI’s market opportunity, potentially north of $1 billion in FSGS alone according to sell-side analysts. Turning to one of our development stage programs. Let’s look at Palvella’s QTORIN rapamycin programs.

We’ll hear updates on their Phase II program in cutaneous venous malformations in the fourth quarter and their Phase III program in microcystic lymphatic malformations in the first quarter of 2026. Analysts expect peak sales from these 2 indications could be $1 billion. In 2025, we continue to execute our strategy of partnering with life sciences companies to provide innovative, nondilutive capital solutions. Since the beginning of the year, we’ve closed 5 new investments, including the final Ohtuvayre inventor monetization, Castle Creek, Orchestra BioMed, the merger of Pelthos Therapeutics with Channel Therapeutics and our most recent investment in Arecor. These transactions reflect the unique flexibility of our investment strategy and are well diversified across our investment tactics, including royalty monetization, project financing and special situations.

Our investment to fund Castle Creek’s Phase III clinical study of DeFi in patients with dystrophic epidermolysis bullosa is an exciting opportunity to advance an orphan drug designated gene-modified cell therapy for a serious unmet clinical need. This collaboration reflects our commitment to invest in groundbreaking derisked treatments that have the potential to transform patients’ lives, and it also strengthens our late-stage portfolio. Our partnership with Orchestra Biomed also expands our pipeline of development stage partnerships with potential royalties on 2 late-stage partnered cardiology programs. Orchestra’s AVIM therapy partnered with Medtronic and Virtue SAB has received FDA breakthrough device designations and the products target high-risk patient populations with hypertension and arterial disease, 2 significant global health challenges.

Next slide, we have seen record-setting origination activity this year, reviewing more than 130 investment opportunities through the first 3 quarters of the year. We remain disciplined in our approach, prioritizing investments that offer compelling return potential and strategic alignment while deprioritizing those that do not meet our long-term objectives. At present, we have approximately 32 active investment opportunities under review, representing a mix of accretive and pre-approval transactions. I’d like to take this opportunity to remind everyone of our upcoming Investor Day, which will be held on December 9 in New York at the Harvard Club. The registration link can be found on our website. We’ll be evaluating consensus updates and commercial progress as well as clinical progress of our assets in our Pharm team to share a refreshed view of this long-term outlook with you at that time, and we hope you can join us.

I’ll turn it over now to Lauren for a portfolio update.

Lauren Hay: Thank you, Todd. Turning to a portfolio review, I’d like to provide some important updates on Ligand’s key portfolio assets. I will go into more details on Merck’s Ohtuvayre, Travere’s FILSPARI and Palvella’s QTORIN rapamycin program on the subsequent slides, but I’d like to briefly discuss updates on 2 of our key pipeline assets, Sanofi’s TZIELD and Agenus’ BOT/BAL. In October, the FDA nominated TZIELD as 1 of 9 products selected for the prestigious new Commissioners National Priority voucher. These vouchers are designed to recognize and reward products with significant potential to address a major national priority, such as meeting a large unmet medical need, reducing downstream health care utilization or addressing a public health crisis.

This overlaps perfectly with Ligand’s mission, delivering high clinical value to patients impacted by serious disease. The new commissioners voucher program aims to shorten the standard 10- to 12-month FDA review time line to just 1 to 2 months, which is remarkable. While we have heard concerns surrounding volatility at FDA, to date, we have not seen any impact in terms of delays or other issues related to our key portfolio assets. In addition, we have seen a new willingness by the agency to accelerate time lines and provide incentives that spur real innovation. We believe this new FDA orientation is forward-thinking and very good for patients. As a result of receiving the commissioner’s voucher, the supplemental BLA for TZIELD in individuals 8 years and older who have been recently diagnosed with Stage III type 1 diabetes was accepted in October and will be reviewed expeditiously, which is welcome news for patients and their families.

We are excited about TZIELD’s recent recognition and the potential for a significantly expanded indication in the near term. We congratulate our partner, Sanofi, on this exceptional accomplishment. Additionally, our partner, Agenus, plans to initiate a streamlined 2-arm Phase III trial of BOT in patients with refractory non-liver metastatic microsatellite stable colorectal cancer in the fourth quarter of 2025. The Phase II data are highly encouraging, demonstrating deep and durable responses in this difficult-to-treat population, underscoring the meaningful benefit observed in patients who have failed standard therapies. Next, turning to Travere’s FILSPARI. In August, the REMS liver monitoring requirement was relaxed from monthly to quarterly for IgAN patients during the first year of treatment.

FILSPARI is becoming firmly entrenched as a foundational treatment for people living with IgAN and the approval of these streamlined monitoring requirements reflects the strong safety profile of FILSPARI, simplifying treatment initiation for patients. In Japan, our partner, Renalys Pharma completed primary endpoint data collection in its Phase III IgAN trial, and top line results are expected in the fourth quarter of this year. In October, Chugai Pharmaceuticals announced plans to acquire Renalys. Chugai is recognized for its rare disease and nephrology expertise, and we believe they have the ability to accelerate access to FILSPARI for patients. In FILSPARI’s second indication, FSGS, the FDA has assigned a PDUFA date of January 13, 2026, and has informed Travere that an advisory committee meeting is no longer required.

If approved, FILSPARI would be the first and only FDA-approved treatment option for FSGS, and Travere believes the FSGS commercial opportunity could be an even larger one with more rapid uptake as it compared to IgAN. Moving on, on October 7, Merck closed its acquisition of the Ohtuvayre marketer, Verona Pharma for $10 billion. Our 3% Ohtuvayre royalty will now be assumed by the new marketer, Merck, who has significant geographic reach to expand the Ohtuvayre footprint globally as well as robust clinical development infrastructure to accelerate development of Ot2vir in indications such as non-cystic fibrosis bronchiectasis. Moving on, we’re very pleased with the commercial performance and clinical and regulatory updates provided by Merck on CAPVAXIVE at this quarter.

Merck expects that CAPVAXIVE will achieve majority market share in the adult setting in the pneumococcal vaccine category. Merck reported third quarter sales of $244 million, representing a significant increase over the prior quarter as well as a beat to analyst consensus. CAPVAXIVE was approved to prevent pneumococcal disease in Japan in August. And additionally, the FDA accepted Merck’s SBLA for CAPVAXIVE in children and adolescents at an increased risk of pneumococcal disease with a PDUFA date of June 18, 2026. Next slide, Palvella completed full enrollment ahead of schedule in their Phase III trial in microcystic lymphatic malformations in June with results anticipated in the first quarter of 2026. Additionally, Phase II trials in cutaneous venous malformations are expected in December of this year.

Palvella recently announced a third QTORIN rapamycin indication in clinically significant angiokeratomas. Palvella plans to meet with the FDA in the first half of 2026 to discuss this Phase II trial design. I’d also like to briefly discuss the commercial opportunity specific to QTORIN rapamycin for the treatment of microcystic lymphatic malformations. Phase III results are expected in the first quarter of next year, and this promising product has the potential to be the first and only FDA-approved treatment with strong prescriber interest. The therapy targets a concentrated population of over 30,000 diagnosed patients primarily treated at 400 vascular anomaly centers, enabling a lean sales force strategy. Validated orphan pricing models and high unmet clinical needs suggest significant revenue potential in MLM.

With QTORIN rapamycin, Palvella is building a compelling pipeline in a product, which could represent a sizable royalty opportunity for Ligand. This franchise strategy outlines a phased approach targeting rare dermatological conditions, starting with microcystic lymphatic malformations, followed by cutaneous venous malformations and clinically significant angiokeratomas. Palvella’s longer-term plans include expanding to potential future indications, which Palvella believes could potentially grow the addressable patients by a factor of 10x. This represents a significant opportunity for market growth and our 8% to 9.8% royalty extends across any and all approved QTORIN rapamycin indications. With that, I will turn the call over to Tavo.

Octavio Espinoza: Thank you, Lauren. Before getting into the broader overview, I want to start with the deconsolidation of Pelthos since it provides important context for this quarter’s results. The spinout became effective on July 1. And from that date, Pelthos has been deconsolidated from Ligand’s financials. Historical operating costs through June 30 remain on Ligand’s books, but beginning July 1, Pelthos’ expenses are now reflected under the newly merged Pelthos Channel Therapeutics entity, operating independently as a publicly traded company under the ticker symbol PTHS with its own Board and management team. Similar to our equity interest in Viking and Palvella Therapeutics, we hold an equity stake in Pelthos, approximately 50% of its outstanding shares.

These are carried on our balance sheet as a long-term investment and remain restricted until the 6-month lockup period expires on December 31, 2025. The current estimated fair value of our holdings in Pelthos is about $180 million as of yesterday’s close. On July 1, we recognized a $53 million gain related to the Pelthos transaction, reflecting the difference between the $62 million fair value of the consideration received and the $9 million of net assets sold. As noted on our Q2 call, this gain included value associated with the ZELSUVMI out-license, which we’ve now quantified at $24.5 million and retained in adjusted earnings. While the out-license itself is a onetime event, out-licensing is core to our business strategy and the Pelthos equity we received represents tangible value.

For that reason, we included it in core revenue and adjusted EPS. The remaining $28.6 million of the gain, along with the historical incubation costs have been excluded from non-GAAP results to maintain comparability with recurring operations. In addition to the gain on Pelthos, we recorded a $76 million unrealized gain tied to the increase in Pelthos’ share value from $62 million at issuance on July 1 to $138 million at quarter end. This appreciation underscores both market confidence in Pelthos and the strategic value of the transaction to Ligand. I’ll walk through the financial implications of the Pelthos transaction in more detail on the next few slides. Moving now into the quarter’s financial highlights. This was an exceptional quarter for Ligand, marked by record financial performance, driven by the continued strength in several assets in our royalty portfolio and the recognition of the aforementioned ZELSUVMI out-license component following the spinout and merger of the Pelthos business.

We also capitalized on favorable conditions in the convertible debt markets in August, securing a 5-year $460 million convertible note, which further strengthens our balance sheet. Total revenue and other income for Q3 2025 on a GAAP basis came in at $115.5 million, up from $51.8 million in the same quarter last year. Of that, $53.1 million was tied to the Pelthos transaction, including $24.5 million from the ZELSUVMI out-license and a $28.6 million gain on the sale of the business to Channel Therapeutics. As discussed earlier, we’re including the $24.5 million representing the estimated stand-alone value of the ZELSUVMI out-license as core revenue. The $28.6 million gain on sale of the business has been excluded. Therefore, on an adjusted basis, core revenue for Q3 2025 grew 68% year-over-year to $86.9 million.

Other financial highlights to note. Royalty revenue rose 47% year-over-year to $46.6 million, reflecting strong launch trajectory and outperformance across several recently approved products in our portfolio. Adjusted EPS grew 68% from the same period last year to $3.09. Given this strong financial performance, we’re raising full year 2025 guidance. We now expect core revenue of $225 million to $235 million and adjusted earnings per share of $7.40 to $7.65 per share. We closed the quarter with $665 million in cash and investments. That brings total deployable capital to approximately $1 billion, a strong position that continues to fuel a very active business development pipeline. The funnel remains robust. At this point, we’re not limited by dollars, we’re limited by human capital, and we’re planning to expand our business development and investment teams to meet the opportunity ahead.

In August, we executed on a $460 million convertible debt transaction. We were very pleased with the pricing terms and secured a 75 basis point coupon rate and a 32.5% conversion premium. We also structured the transaction to be net share settlement to further reduce dilution. In conjunction with the notes, we executed an up 100% call spread, which will result in no dilution to our stock up to a price of $294 per share. The net proceeds not only bolster our balance sheet, but are accretive to earnings and allow us to take advantage of our robust business development pipeline. Moving on to the next slide. Let me expand on our capital deployment capacity. We continue to generate robust annual operating cash flow now exceeding $150 million on an annualized basis, and our current investment pace ranges between $150 million to $250.

Against this backdrop, our decision to pursue a convertible debt financing was strategic, driven in large part by favorable conditions in the convertible debt markets. As of September 30, 2025, we held $665 million in cash and short-term investments and maintained access to a $200 million credit facility, bringing our total financial capacity to roughly $1 billion, inclusive of our holdings in Pelthos. We own approximately 50% of Pelthos’ outstanding shares carried on our balance sheet as a long-term investment with an estimated fair value of $138 million at quarter end, which we view as another potential liquidity lever. Looking ahead, given the robustness of our business development funnel and the ongoing expansion of our business development function, we may look to incrementally increase our capital deployment pace.

We believe our bolstered balance sheet positions us well to pursue high-quality opportunities that align with our strategic and financial objectives. Moving on to the next slide. Key drivers of royalty revenue growth this quarter include strong performance from Travere FILSPARI, Merck and Verona’s Ohtuvayre, Merck’s CAPVAXIVE and Recordati’s QARZIBA. Expanding briefly on a few of these, starting with FILSPARI, Travere reported third quarter sales of $90.9 million, a 26% sequential and 155% year-over-year increase. They also received 731 new patient start forms during the quarter, showing continued adoption among both new and repeat prescribers. That momentum underscores the expanding use of FILSPARI in IgA nephropathy. As a reminder, Ligand earns a 9% royalty on sales, translating to nearly $9 million in royalty revenue this quarter, including our internal estimate of $7 million from sales generated by CSL Vifor in Europe.

We’re pleased to share that FILSPARI has now become our largest royalty-generating asset on an annualized run rate basis. Turning to Ohtuvayre. We continue to see strong commercial momentum. Verona reported $136 million of Ohtuvayre sales, a 32% sequential increase over the prior quarter. Ohtuvayre sales have beaten consensus in every quarter of 2025, and we anticipate a strong launch trajectory to continue. We are excited to see potential acceleration with this program now benefiting from Merck’s broader commercial organization. Merck’s CAPVAXIVE also grew significantly this quarter, reinforcing Merck’s competitiveness in the pneumococcal vaccine space. CAPVAXIVE generated $244 million in sales, an 89% sequential increase and a 46% increase over consensus.

On Captisol, we recorded $10.7 million in material sales this quarter compared to $6.3 million in the third quarter of 2024. The increase was driven primarily by the timing of customer orders. We recorded $58.2 million in contract revenue this quarter, up significantly from the $13.8 million in the prior year period. This includes the previously mentioned $28.6 million gain on the sale of the Pelthos business and the $24.5 million ZELSUVMI out-license. Turning to operating expenses. For Q3 2025, G&A expenses were $28.4 million, up from $24.5 million in the prior year quarter, primarily due to recognition of transaction costs related to the Pelthos transaction. R&D expenses rose $21 million from $5.7 million in the prior year period, driven by a $17.8 million one-time charge tied to our investment in Orchestra BioMed.

This funding supports late-stage partnered cardiology programs and is accounted for as an R&D funding arrangement fully expensed in the period of investment. Other income for the quarter totaled $86.2 million compared to other expense of $9.5 million in Q3 2024. This year-over-year swing was primarily driven by unrealized gains from the increase in value of our equity holdings in Pelthos and Palvella and higher interest income, reflecting the impact of our strengthened cash position following the convertible note transaction. GAAP net income for Q3 2025 was $117.3 million or $5.68 per share compared to GAAP net loss of $7.2 million or $0.39 per share in Q3 2024. On a non-GAAP basis, adjusted net income was $63.8 million or $3.09 per share, up from $35.3 million or $1.84 per share in the prior year period.

The 68% increase in adjusted EPS was primarily driven by the $14.9 million increase in royalty revenue and the $24.5 million ZELSUVMI out-license component. Turning to guidance. As mentioned, we are raising total core revenue forecast to a range of $225 million to $235 million, and adjusted earnings per share is now expected to be between $7.40 and $7.65, a roughly 30% increase over last year’s EPS of $5.74. With that context, here’s how our revised full year 2025 guidance is shaping up. Royalty revenue is now expected to be between $147 million and $157 million, up from the prior range of $140 million to $150 million. Captisol sales are expected to come in at $40 million. Contract revenue, which is where we capture the value of the sell ZELSUVMI out-license component has increased to $38 million, up from $25 million to $35 million.

Again, to reiterate, total core revenue is now expected to be in the range of $225 million to $235 million, up from $200 million to $225 million, and we’re raising core adjusted EPS to $7.40 to $7.65 compared to the previous range of $6.70 to $7. These updates reflect not only the impact of the Pelthos transaction, but also strong underlying growth and increased visibility into our royalty streams, particularly from FILSPARI, Ohtuvayre, QARZIBA and CAPVAXIVE. That concludes my remarks. I’ll now turn the call back over to Todd for closing comments.

Todd Davis: Thank you, Tavo. We are very pleased with the strong launch momentum across multiple products, including CAPVAXIVE, Ohtuvayre, FILSPARI and ZELSUVMI and believe there are significant opportunities for both indication expansion as well as geographic expansion for these products, which represent further upside for Ligand. We believe that Merck’s global reach will accelerate Ohtuvayre’s rollout and their plans to invest in the ensifentrine pipeline programs will maximize its potential. Additionally, we’re encouraged by the great progress the Pelthos team is making in ZELSUVMI and look forward to watching the continued launch momentum in the coming months. With a solid base of royalty-generating assets and late-stage pipeline, we are well positioned to deliver sustained compounding growth and long-term value for shareholders.

Additionally, our strong origination capabilities, our investment team and our robust investment process is driving meaningful portfolio growth. Our deal team’s ability to identify, access and execute high-quality investments sets Ligand apart. Thank you, everyone, for joining us for today’s earnings call. I will now pass it back to the operator and open it up for questions.

Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Trevor Allred with Oppenheimer.

Trevor Allred: I’ve got a few. First, we’ve seen both Pelthos and Palvella generate enormous value over the past year. Is there anything you can share on the available opportunities and special situations?

Todd Davis: Thank you, Trevor. This is Todd. And I think the opportunity set there is quite robust. Just to kind of frame this, the special opportunities is when one of the kind of the value components is missing, and we need to be more active in the investment in terms of adding team members, restructuring and things of this nature. When we look at any investment, we’re looking at kind of those 3 components, company’s financial strength or access to capital. And if that’s all they need, then we’re usually looking at a royalty investment, a royalty monetization or simply providing capital. The other thing is strong management teams. We really need strong counterparties because we want to have as much operating leverage as possible.

So we’re partnering with people that have the clinical development capabilities and infrastructure, sales and marketing capabilities and infrastructure, manufacturing capabilities and infrastructure. When those — when that portion of the component breaks down, then we have to get more involved than just providing capital, and we’ll bring other complementary management into the mix. And those are restructurings. So there are many opportunities like that out there. And the last component is just general financial strength aside from our financing because we need companies that have strong access to capital, and we have to exist in this ecosystem and equity is a very important component of what we do. Royalty capital needs to be a portion of the company’s capital structure, but certainly can’t rely solely on it or even predominantly on it.

So when these situations arise, if they just need capital, it’s usually not a special situation. The Novan situation where we picked up ZELSUVMI and the nitric oxide platform is a good example. There, you had a very good technical team, which we still work with today. We brought them into a subsidiary at Ligand, and they have what we believe was a great asset. And so we brought that into the subsidiary as well, restructured it and eventually we reset the marketing plan for ZELSUVMI once we got that approved and then relaunched the new company in the form of Pelthos. That’s a situation where the company’s access to capital had broken down, and they needed a more sales and marketing-oriented management team. So that’s where we will get involved in these special situations.

There are a lot of those out there. We’re typically doing those in cooperation with the counterparties, though, where they know those components are missing. And the one other consideration on those is that they are quite consuming. They take a deal team. It takes a lot of attention. And so you really have to go after deep value and significant returns, which we believe we will achieve in the Pelthos situation and in others like that, that we’ve taken on. But there’s — let me put it this way, there’s way more of those to do than we can do, and that’s why we are adding a little bit to our management and deal team, including the operating components that we have, which help us manage through these situations.

Trevor Allred: Got it. That’s helpful. And then my second question is a bit of a 2-parter. Can you comment on how the number of investment opportunities have shifted over the past year? Are you seeing accelerating capital demands? And then can you also comment on how your new cash balance changes either the scope or the size of how you’re approaching deal making, if at all?

Todd Davis: Sure. Yes. So taking the latter first, I think that our diversification strategy right now has us pegged at about, as we’ve been saying, we don’t want to put any more than $50 million into a binary risk situation. and we’re seeking out things that have significant evidence of safety and efficacy and on a relative basis are derisked. But still, we are buying risk, and we don’t want to put more than $50 million right now into a potential binary risk situation. That said, we view diversification by asset. So in multiple asset situations, we can size up the deals very significantly. And we also, as you know, we will use equity as a tool here. And this makes us a very good partner. I think the Orchestra example, which Paul led for us is a good one.

We got what we think is a very good royalty investment in 2 great product development programs there. But we were also able to facilitate or catalyze, if you will, a broader equity round and get the company into a much greater position overall of financial strength. so that we are, in fact, coexisting with significant amounts of equity in that situation at this point. And we believe the company has a great management team and has now much, much better access to capital in the long term as well. So we can be very good partners because we are able to support companies kind of throughout their capital structure. Getting to the overall kind of deal types and demand, I would just say that royalty capital, for lack of a better term, is really 5% or less of the market.

And I would say on the development side, significantly less. And that’s where capital is most needed. So I think there’s a huge opportunity there. There’s way more to do than we can do. So the deal flow does move around a little bit, mostly in style, not in amount. as the capital markets change. For example, when an IPO market opens up, a lot of the late-stage private companies want to get public. So they’re more inclined to do that so they can provide liquidity for their equity investors. But still, even in those cases with very strong companies and strong equity syndicates, as was the case with Castle Creek, they want and there is a rationale for having royalty capital be a component of your total capital structure.

Operator: [Operator Instructions] Your next question comes from the line of Matt Hewitt with Craig-Hallum.

Unknown Analyst: Congrats on the quarter. This is [indiscernible] on for Matt Hewitt. So last week, the FDA announced it wants to speed up the process of personalized gene therapy. How should we think about the Castle Creek investment and general opportunities in gene therapies going forward?

Todd Davis: Yes. I think that’s one of the points that Lauren was making earlier in the call here is that there are some concerns around some volatility and changes at the FDA. But we’re focused, as we’ve said many times, on high-value assets targeted towards severe clinical need that can be really impactful. And that’s kind of the FDA’s core reorientation strategy as well. So we think there’s great overlap between just our investment strategy in general, investing in products that will make the most amount of difference for patients and what the FDA is orienting around in that regard. And so I can’t say that it will have a specific impact on any individual asset or company, although we know that TZIELD has already benefited from that.

But there clearly is an effort to be more pragmatic in severe diseases where there — certainly where there are currently no treatments, but also where there’s marginally adequate types of treatments available. And I think that, that’s a sensible strategy, and they’re talking about shortening the review time lines from 12 months to a couple to a few months, and that’s very positive for us. As you know, our general strategy also is to invest in assets that are within at least 3 or 4 years of a potential approval. And we sometimes will invested in Phase II. That’s where we originally invested at Palvella. And in those situations, we rely heavily on third-party data. For example, off-label use of rapamycin in some of the conditions that Palvella is currently exploiting had existed prior to that investment.

So there’s real-world evidence of efficacy and safety, even though it was, for us, an earlier-stage asset. So we view that as derisked, but it still had the full time line to march through. Now on top of being able to take advantage of those types of repurposed and derisked assets, we also potentially, in general, can be looking at shorter time lines for approval and review.

Operator: And the next question comes from the line of Jayed Momin with Stifel.

Jayed Momin: This is Jayed on for Annabel. Congrats on the strong quarter. I have 2 questions. One, is there any additional color you can provide for the ZELSUVMI launch? I know you talked about it a bit, but is there — what do you expect going forward over the next couple of quarters? And then my second question is if there’s any other details you could provide for the Arecor transaction, specifically for AT292 that’s being developed by Sanofi. What does the royalty rate look like? Any details there would be helpful.

Todd Davis: Sure. I’ll cover the ZELSUVMI launch, and you’ll be disappointed with the additional information I can’t share because I can’t share much more. And then I’ll have Lauren discuss AT292 and our arrangements there. In terms of the ZELSUVMI launch, they’re reporting, I think, on the 13th, where you will get a lot more information. We just followed a general script data. And I can tell you from our perspective, that’s encouraging. That’s something that analysts and everybody else has access to as well. But they haven’t changed their guidance yet going forward. I think that — the general guidance they’ve offered at this point, which is sensible early in a launch because launches are very hard is peak sales of $175 million.

And in general, I think that’s conservative. The management team there is appropriately conservative at this point in the launch. But there will be a lot more specifics available for that on the 13th when they have their earnings call. And with that, I’ll hand it off to Lauren just to discuss the Arecor and AT292.

Lauren Hay: Great. Thanks, Todd. So sure, thanks for the question. On AT292 or efdoralprin alfa, we’re really excited about that asset. We view it as being highly differentiated versus the standard of care. This is a treatment that is designed for patients with alpha-1 antitrypsin deficiency. It was licensed to Inhibrx and then acquired by Sanofi in 2024 for $1.7 billion. So clearly, they have a lot of conviction around the asset as well. What’s differentiated about it is that we’re seeing a potential movement from plasma-derived to recombinant treatments and also a much more convenient dosing regimen for patients. And then as Todd mentioned in his remarks, we were really encouraged to see the Phase II potentially pivotal data released by Sanofi, which was very positive just last month.

So we’re really encouraged by the progress of this asset in the very short time since we’ve closed this transaction. And then with regards to the royalty exposure here, these are actually technology access fees, and that’s what we’re able to disclose in terms of what we will receive on this asset. So thanks for the question.

Operator: And the next question comes from the line of Sahil Dhingra with RBC.

Sahil Dhingra: This is Sahil for Doug. My first question is related to the competition. Have you seen any changes in the competitive landscape for royalty assets as it relates to either on the market products or products that are in clinical stage? And then I have a follow-up.

Todd Davis: Sure. Yes. Just not yet. I think there will be people interested in this space because it makes so much sense. I think that this is a very, very logical place for royalty capital to focus on, and I thought that for a long time. But there was a lot of inertia around the initial funds because they were funded mostly by large debt allocators like pension funds that were following debt metrics and wanted debt levels of risk. So you really couldn’t go into the development side. So I think that will change over time. Our view is that there will be competition. We haven’t seen any yet, frankly. We haven’t been competitive in very many deals at all. Most of the folks that do development stage clinical investing are much, much larger than we are.

That’s one component of it. And then the other component is that in excess of $12 billion of royalty capital that is available, the very significant majority of that is focused on commercial stage assets as opposed to development stage assets.

Sahil Dhingra: That is helpful. And then my follow-up question is related to the recent approval of Lasix ONYU, the product where you have royalties. How do you see that product versus the existing products in the market, specifically FUROSCIX that is marketed by scPharma, which was recently acquired by another company, MannKind. And we also saw a recent approval of a nasal spray in the same category. So could you speak to what are your thoughts on the product and peak sales potential for that product?

Lauren Hay: Sure. Thanks for the question. So yes, we were really encouraged to see the full approval for our partner SQ Innovation. And I think the existing product kind of has validated the potential for moving the treatment from the inpatient setting to the outpatient setting. And there’s a lot of kind of macro momentum around trying to get patients out of the hospital more quickly kind of across the health care spectrum. And so we’re really encouraged to see patients have another treatment option, and we believe that it’s differentiated in several ways, including the size of the device and just sort of the convenience for patients and the commercial rollout strategy. So we’ll look forward to seeing more. At this point, there’s no information regarding guidance or anything like that, but we view this product as a very positive introduction into the marketplace.

Operator: Thank you. And this does conclude our question-and-answer session. I would like to thank our speakers for today’s presentation, and thank you all for joining us. This concludes today’s conference call. You may now disconnect.