Royalty Aggregation Shift And XOMA Deal Will Elevate Long-Term Risk Exposure

Catalysts

About Ligand Pharmaceuticals

Ligand Pharmaceuticals focuses on acquiring and managing a diversified portfolio of biopharma royalty assets rather than running its own large-scale drug development operations.

What are the underlying business or industry changes driving this perspective?

• The shift to a pure royalty aggregation model with a much smaller internal cost base concentrates results in a relatively small set of high-contribution royalty streams. Any slower uptake, payer pressure or competitive entries in key programs such as Filspari, Ohtuvayre or Qarziba could weigh disproportionately on royalty revenue growth and adjusted EPS.
• The pending acquisition of XOMA Royalty significantly increases exposure to development and regulatory risk across more than 120 additional assets. Any delays, trial setbacks or narrower labels on late stage or earlier stage programs could reduce expected royalty and milestone inflows that are embedded in higher revenue and earnings expectations.
• Reliance on external partners to fund, execute and commercialize complex rare disease and specialty programs, including Palvella's QTORIN rapamycin and Mirum's volixibat, means Ligand has limited control if partner priorities shift or funding tightens. This could cap long term royalty contributions and pressure earnings growth assumptions.
• The emphasis on continued dealmaking, with a target of US$150 million to US$250 million invested annually in new royalty opportunities, exposes Ligand to the risk that future transactions are completed at richer terms or on less favorable structures. This could compress future returns on capital and dilute operating margins.
• Greater dependence on tax attributes and long dated royalty rights, some extending past 2040, is used to support projections for cash flow and adjusted EPS. This leaves the company vulnerable if tax law changes, utilization limits, or slower than expected product sales reduce the practical benefit of net operating losses and Section 174 R&D tax credits.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Ligand Pharmaceuticals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ligand Pharmaceuticals's revenue will grow by 13.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 67.9% today to 60.2% in 3 years time.
• The bearish analysts expect earnings to reach $255.2 million (and earnings per share of $10.95) by about August 2029, up from $197.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.8x on those 2029 earnings, down from 29.4x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 15.1x.
• The bearish analysts expect the number of shares outstanding to grow by 2.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Royalty revenue is already growing strongly, with first quarter 2026 royalty revenue of US$43 million up 56% year over year. This shows the current Ligand Pharmaceuticals model is generating higher cash inflows that could support earnings and potentially reduce pressure on net margins and overall earnings.
• The shift to a focused royalty aggregation approach has reduced operating expenses from about US$90 million to about US$40 million and cut the workforce from almost 200 employees to approximately 40. This increases operating leverage and may support higher long term profitability and net margins even if some assets underperform.
• The acquisition of XOMA Royalty adds more than 120 commercial, clinical and preclinical assets, including 7 marketed products. Management expects it to be immediately accretive with an additional US$0.50 of adjusted EPS in 2026 and US$1.50 in 2027, which could increase total revenue, diversify cash flows and support adjusted earnings.
• Key partnered products are addressing rare diseases and other areas of high unmet medical need, such as Filspari in IgA nephropathy and FSGS and QTORIN rapamycin in microcystic lymphatic malformations and cutaneous venous malformations. These indications have large estimated patient pools and premium orphan pricing, which could support royalty revenue growth and help sustain or expand earnings.
• Ligand Pharmaceuticals reports significant balance sheet resources with approximately US$780 million in cash and investments plus US$200 million of undrawn revolver capacity. The company also expects around US$300 million of combined operating cash flow in 2027 supported by tax attributes, which provides financial flexibility to continue investing US$150 million to US$250 million annually in new royalty deals and may help support future revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Ligand Pharmaceuticals is $267.25, which represents up to two standard deviations below the consensus price target of $343.8. This valuation is based on what can be assumed as the expectations of Ligand Pharmaceuticals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $388.0, and the most bearish reporting a price target of just $247.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $424.0 million, earnings will come to $255.2 million, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $293.15, the analyst price target of $267.25 is 9.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.