Executive Summary / Key Takeaways

• Ligand Pharmaceuticals has successfully transformed into an asset-light, profitable biopharmaceutical company focused on royalty aggregation and strategic investments in high-value medicines.
• The company delivered exceptional financial results in Q3 2025, with total revenue and other income surging 123% year-over-year, driven by robust royalty growth from key commercial products and significant income from the Pelthos transaction.
• Ligand boasts a strong balance sheet with approximately $1 billion in deployable capital, fueled by a recent convertible debt offering and robust operating cash flow, enabling continued aggressive investment in its diversified portfolio.
• A long-term outlook projects a royalty receipts compound annual growth rate (CAGR) of 22% or greater through 2029, supported by existing assets and a rich pipeline of new investment opportunities, particularly in derisked late-stage and commercial programs.
• The company's proprietary Captisol and NITRICIL technologies, coupled with its expertise in "special situations" deal-making, provide a distinct competitive advantage in sourcing and maximizing value from underappreciated biopharmaceutical assets.

The Royalty Engine: A Differentiated Biopharma Model

Ligand Pharmaceuticals, incorporated in 1987, has undergone a significant strategic evolution, culminating in a transformative restructuring in the fourth quarter of 2022. This pivotal shift repositioned Ligand as an "operationally light" biopharmaceutical company, singularly focused on generating profitable, compounding growth through royalty aggregation and strategic financing. The company's core business model revolves around providing financing, licensing its proprietary technologies, or both, to support the clinical development of high-value medicines. This approach allows Ligand to participate in the biotech industry's promise without the extensive infrastructure and operational overhead typically associated with traditional pharmaceutical companies.

Ligand's strategy is built on identifying and investing in highly differentiated royalty assets, primarily in mid- to late-stage drug development and commercial products, where it perceives a superior risk-reward profile. This asset-light model contrasts sharply with larger, more integrated pharmaceutical players, enabling Ligand to maintain a lean cost structure while leveraging the development, regulatory, and commercialization capabilities of its partners. The company's historical journey, marked by strategic acquisitions and divestitures, has consistently reinforced this focus on intellectual property and economic rights over direct operational control. For instance, the divestiture of Vernalis' R&D operations in 2020, while retaining economic rights to programs like ensifentrine (now Ohtuvayre), exemplifies this strategic clarity.

Central to Ligand's competitive differentiation are its two infrastructure-light royalty-generating intellectual property platform technologies: Captisol and NITRICIL. Captisol, a chemically modified cyclodextrin, is designed to optimize the solubility and stability of drugs. This technology offers tangible benefits by enhancing drug performance, potentially leading to improved bioavailability and patient outcomes. For example, Lasix ONYU, an FDA-approved drug-device combination for edema, is the 17th Captisol-enabled product, demonstrating the platform's utility in improving drug formulations. The NITRICIL platform facilitates tunable dosing, allowing for adjustable drug release profiles that enable proprietary formulations targeting a broad range of indications. These technologies provide Ligand with a qualitative edge in partnering, offering solutions that can accelerate development cycles and improve product profiles for its collaborators. This technological foundation contributes significantly to Ligand's competitive moat, allowing it to command favorable terms in licensing and royalty agreements by providing unique value propositions that enhance drug efficacy and delivery.

Strategic Expansion and Portfolio Momentum

Ligand's strategic initiatives have been particularly active, demonstrating a disciplined yet opportunistic approach to portfolio expansion. The company's "special situations" strategy, where it identifies good assets "trapped in bad situations," has proven highly effective. A prime example is the acquisition of the Novan nitric oxide platform, including the lead asset Zelsuvmi, out of bankruptcy for $12 million in late 2023. This complex transaction required significant incubation and restructuring efforts, culminating in the strategic merger of Ligand's subsidiary Pelthos Therapeutics (holding Zelsuvmi) with Channel Therapeutics in July 2025. Ligand invested an additional $18 million and retained an approximate 50% equity stake in the newly public Pelthos Therapeutics (PTHS). Zelsuvmi, the first and only FDA-approved at-home prescription therapy for molluscum contagiosum, commercially launched in July 2025, earning Ligand a $5 million milestone and a 13% royalty on worldwide sales (excluding Japan). Pelthos' initial forecast estimates peak sales of $175 million, capturing a small fraction of the 16.7 million affected patients, which would translate to approximately $23 million annually in U.S. royalties for Ligand. This venture also retains strategic ownership of the broader NITRICIL platform, offering potential for future product development in areas like wound care and atopic dermatitis.

Recent investments further underscore Ligand's commitment to diversifying its royalty streams. In February 2025, Ligand committed $50 million as part of a $75 million syndicate to fund Castle Creek Biosciences' Phase 3 study of D-Fi, a gene-modified cell therapy for dystrophic epidermolysis bullosa (DEB). This represents Ligand's first foray into cell and gene therapy, a focused and derisked program targeting an unmet clinical need. D-Fi is an injectable product, offering a differentiated profile from existing topical treatments like Krystal Biotech (KRYS)'s Vyjuvek, which generated nearly $300 million in sales in its first 18 months. The D-Fi product is expected to offer less frequent dosing and broader treatable surface area, making it a complementary and potentially significant addition to the DEB treatment landscape.

August 2025 saw a $25 million investment in Orchestra BioMed to fund late-stage partnered cardiology programs, including AVIM therapy (partnered with Medtronic (MDT)) and Virtue SAB. These programs have received FDA breakthrough device designations, targeting significant global health challenges like hypertension and arterial disease. In September 2025, Ligand invested $7 million in Arecor Limited (AREC.L) for economic rights to AT220 (a biosimilar with a single-digit royalty) and potential technology access fees and milestones for AT292 (Sanofi (SNY)'s efdoralprin alfa program). Notably, Sanofi announced positive Phase II results for AT292 shortly after Ligand's investment, highlighting the team's ability to identify promising assets.

Robust Financial Performance and Capital Deployment

Ligand's strategic transformation has translated into exceptional financial performance. For the third quarter ended September 30, 2025, total revenue and other income surged by 123% year-over-year to $115.5 million. This impressive growth was primarily driven by a 47% increase in royalty revenue to $46.6 million, fueled by strong sales of Filspari, Ohtuvayre, and Capvaxive. Captisol sales also saw a significant 71% increase to $10.7 million, largely due to the timing of customer orders. Contract revenue and other income experienced a remarkable 320% jump to $58.2 million, predominantly from the $53.1 million income recognized from the Pelthos transaction, which included a $24.5 million Zelsuvmi out-license component and a $28.6 million gain on the sale of the business.

Year-to-date through September 30, 2025, total revenue and other income increased by 68% to $208.4 million compared to the same period in 2024. Royalty revenue grew 49% to $110.5 million, and Captisol sales rose 41% to $32.4 million. The company's operating costs and expenses increased by 24% in Q3 2025, mainly due to a $17.8 million R&D funding arrangement for the Orchestra transaction and Pelthos-related transaction costs. Non-operating income saw a substantial increase, driven by fair value changes in Pelthos and Palvella equity holdings, and higher interest income. The early adoption of ASU 2025-7 on January 1, 2025, also led to the reclassification of certain derivative assets to financial royalty assets, streamlining financial reporting.

Ligand maintains a formidable liquidity position. As of September 30, 2025, cash, cash equivalents, and short-term investments totaled $664.5 million, a significant increase of $408.4 million from the end of 2024. This was primarily due to the successful issuance of $460 million in 0.75% convertible senior notes due 2030 in August 2025, yielding net proceeds of approximately $445.1 million. The company strategically used $113.3 million of these proceeds for a convertible note hedge transaction to reduce potential dilution and repurchased 102,034 shares of common stock for $15 million. Ligand also received $67.4 million from warrant transactions. With an available $124.4 million under its $125 million revolving credit facility, Ligand commands approximately $1 billion in deployable capital. Management emphasizes that the company is "not limited by dollars, we're limited by human capital," indicating a rich pipeline of investment opportunities. This strong financial footing provides the flexibility to pursue high-quality acquisitions and strategic investments, fueling future growth.

Competitive Landscape and Strategic Positioning

Ligand operates in a competitive biopharmaceutical landscape, but its unique business model and technological differentiators carve out a distinct niche. While larger, integrated pharmaceutical companies like Amgen (AMGN), Pfizer (PFE), Johnson & Johnson (JNJ), Merck (MRK), and AbbVie (ABBV) dominate with extensive in-house R&D, manufacturing, and global commercialization capabilities, Ligand thrives as an enabler and aggregator of intellectual property. Ligand's asset-light, partnership-focused model allows it to achieve capital efficiency in R&D, potentially surpassing the efficiency of larger players burdened by massive internal infrastructure.

Ligand's proprietary Captisol technology provides a qualitative advantage in drug formulation, enhancing solubility and stability, which can lead to superior product performance and faster development cycles for partners. This technological edge allows Ligand to compete effectively in targeted segments, even against companies like Merck, by offering solutions that address specific formulation challenges and improve drug profiles. For instance, in the pneumococcal vaccine market, Merck's Capvaxive, a significant royalty contributor for Ligand, has a compelling competitive value proposition, and Merck expects it to gain majority market share in the adult setting. This demonstrates how Ligand benefits from its partners' commercial prowess while its technology contributes to the product's competitive strength.

In the rapidly evolving biopharma industry, characterized by descending price pressure and a challenging fundraising environment for biotech companies, Ligand's model offers a differentiated capital solution. The company's expertise in "special situations" allows it to acquire promising assets that might be overlooked by traditional investors, turning distress into significant value creation. While Ligand may not achieve the sheer scale or overall profitability margins of its multi-billion dollar competitors, its focus on high-value, derisked assets with significant unmet clinical needs provides a strong defense against pricing pressures and regulatory scrutiny. This strategy positions Ligand to capture substantial value in niche markets and through innovative financing structures, complementing the broader industry ecosystem.

Outlook and Growth Trajectory

Ligand's management has expressed high confidence in its future prospects, raising its full-year 2025 guidance for the second time. The company now expects core revenue to be between $225 million and $235 million, up from a previous range of $200 million to $225 million. Adjusted earnings per share are projected to be between $7.40 and $7.65, an increase from the prior guidance of $6.70 to $7.00. This upward revision is primarily attributed to the continued outperformance of its commercial royalty portfolio, including Ohtuvayre, Capvaxive, and Filspari, as well as the income generated from the Pelthos transaction.

The long-term outlook remains robust, with management projecting a royalty receipts CAGR of 22% or greater from 2024 through 2029. The existing portfolio alone is expected to contribute an 18% CAGR, with future investments anticipated to add at least another 4%. Key drivers for this growth include Ohtuvayre, which is tracking ahead of initial forecasts, with Q3 2025 sales growing 32% sequentially and consensus projecting $2 billion in sales by 2029 (up from $1.2 billion previously). Ligand's 3% royalty on Ohtuvayre positions it to benefit materially from this upside, especially with Merck's global commercial capabilities now behind the product. Filspari also continues its strong commercial performance, with Q3 sales growing 26% sequentially, making it Ligand's largest royalty-generating asset on an annualized run rate basis. The potential FDA approval for Filspari in FSGS, with a PDUFA date of January 13, 2026, could significantly expand its market opportunity, potentially exceeding $1 billion in FSGS alone.

Furthermore, the FDA's "new willingness... to accelerate time lines and provide incentives that spur real innovation," particularly for severe and rare diseases, aligns favorably with Ligand's investment strategy. This could potentially shorten review timelines for its development-stage portfolio, such as Palvella's QTORIN rapamycin programs for microcystic lymphatic malformations and cutaneous venous malformations, which analysts expect could reach peak sales of $1 billion across these indications. The recent expedited review for Sanofi's Tzield, nominated for the Commissioners National Priority Voucher pilot program, further highlights this trend.

Risks and Considerations

Despite the compelling growth trajectory, investors should consider several risks. The inherent unpredictability of drug development and regulatory approvals means that actual results for pipeline assets may differ from expectations. Litigation, such as the ongoing disputes related to Captisol patents and the U.S. National Prescription Opiate Litigation, could impact financial performance, although management currently believes these are not likely to have a material adverse effect.

Broader industry trends, including persistent pricing pressure on pharmaceuticals and potential shifts in trade policies, could affect the profitability of Ligand's partners and, consequently, its royalty streams. While Ligand's focus on high-clinical-value drugs offers some defense, a period of "significant short-term disruption" from these policy changes is anticipated. The company's reliance on partners for commercialization also introduces dependency risk, as the success of its royalty assets is tied to the operational effectiveness and market penetration strategies of its collaborators.

Conclusion

Ligand Pharmaceuticals has successfully executed a strategic transformation, establishing itself as a dynamic royalty aggregator and strategic investor in the biopharmaceutical sector. By leveraging an asset-light model, proprietary technologies like Captisol and NITRICIL, and a keen eye for high-value "special situations," Ligand has built a diversified portfolio poised for sustained growth. The company's strong financial position, bolstered by recent capital raises, provides ample flexibility to continue its aggressive investment pace, further expanding its royalty-generating assets.

With a robust pipeline of commercial products outperforming expectations and promising late-stage development programs, Ligand is well-positioned to meet and potentially exceed its long-term royalty growth targets. The company's ability to identify and fund innovative therapies that address significant unmet clinical needs, coupled with its disciplined investment approach, underpins a compelling investment thesis. As the biopharma landscape continues to evolve, Ligand's unique model and technological leadership offer a differentiated opportunity for investors seeking exposure to the industry's growth in a profitable and diversified manner.