Expanding Royalty Portfolio And Calculated Acquisitions Set To Skyrocket Revenue And Margins

Key Takeaways

• Significant investment in new opportunities and acquisitions, including Apeiron Biologics, aimed at increasing royalty revenue and diversifying the revenue base.
  
• Projected strong growth in revenue and earnings, underpinned by a robust royalty portfolio expansion and the commercial launch of ZELSUVMI, enhancing shareholder value.
  
• Heavy reliance on key product approvals and strategic acquisitions introduces significant risks to earnings and operational efficiencies if these ventures underperform.

Catalysts

A biopharmaceutical company, engages in the development and licensing of biopharmaceutical assets worldwide.

• The commitment of $175 million to 2 new investment opportunities and the addition of commercial stage products, including products with blockbuster sales potential, will likely significantly increase royalty revenue in the near future, positively impacting total revenue.
  
• The expansion of the royalty portfolio to include 12 major commercial stage products, doubling the key marketed products within a year, symbolizes a strengthened and diversified revenue base, expected to boost overall financial health and shareholder value, reflecting positively on revenue streams.
  
• The acquisition of Apeiron Biologics, with royalties on QARZIBA exceeding EUR 20 million in the past 12 months and the asset's near 100% profitability, is anticipated to be immediately accretive, bolstering net margins.
  
• Anticipation of the commercial launch of ZELSUVMI in Q1 2025, with substantial equity and royalty rights for Ligand in the newly formed entities, suggests potential for significant revenue and earnings growth once the product hits the market.
  
• Forward-looking statements about exceeding a 22% compound annual growth rate in royalty revenue with an existing portfolio alone supporting a royalty CAGR of 18%, and future investments projected to add at least another 4%, indicates strong expected growth in revenue and earnings, benefitting from operating leverage gains from a lean corporate cost structure.

Assumptions

• Analysts are assuming Ligand Pharmaceuticals's revenue will grow by 19.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.6% today to 46.7% in 3 years time.
• Analysts expect earnings to reach $107.0 million (and earnings per share of $5.68) by about October 2027, up from $42.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $81.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.8x on those 2027 earnings, down from 50.1x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The significant reliance on a few regulatory approvals and commercial launches (e.g., CAPVAXIVE and Ohtuvayre) for revenue growth introduces concentration risks, which could impact future earnings if these products underperform in the market.
  
• High operational costs linked to incubating new businesses like Pelthos Therapeutics and expanding the business development team might squeeze net margins if revenue growth from new investments doesn't keep pace.
  
• The $26.5 million impairment related to the soticlestat investment highlights the risks inherent in drug development, potentially impacting future net income negatively if other assets fail to meet clinical or regulatory milestones.
  
• Ongoing challenges with pipeline investments, such as the setbacks mentioned for soticlestat in clinical trials, pose a risk to expected future revenue and earnings if promising assets fail to advance or achieve market approval.
  
• A substantial amount of Ligand’s strategic focus and capital deployment in acquisitions (e.g., Apeiron Biologics) and additional royalty investments may expose the company to significant risks if these assets do not perform as expected, potentially impacting earnings and operational efficiency.

Valuation

• The analysts have a consensus price target of $129.38 for Ligand Pharmaceuticals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $157.0, and the most bearish reporting a price target of just $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $229.0 million, earnings will come to $107.0 million, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 5.8%.
• Given the current share price of $115.53, the analyst's price target of $129.38 is 10.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.