Executive Summary / Key Takeaways

• Strategic Transformation Driving Growth: Ligand Pharmaceuticals has successfully transformed into an asset-light, royalty-focused biopharmaceutical company, delivering profitable compounding growth through a disciplined investment strategy and efficient operational structure.
• Robust Financial Performance & Raised Guidance: The company reported strong Q2 2025 results, with royalty revenue surging 57% year-over-year and adjusted EPS increasing 14%, leading to a raised full-year 2025 guidance for total core revenue to $200 million - $225 million and adjusted EPS to $6.70 - $7.00.
• Diversified Portfolio & High-Value Assets: Ligand's portfolio of over 90 assets, including commercial successes like Ohtuvayre, Filspari, Qarziba, and Capvaxive, alongside strategic investments in Pelthos (Zelsuvmi), Orchestra BioMed , and Castle Creek (D-Fi), underpins a projected 22%+ compound annual growth rate in royalty receipts through 2029.
• Technological & Strategic Moats: Proprietary platforms like Captisol and NITRICIL provide significant technological differentiation, enhancing drug solubility and delivery, while a "special situations" investment strategy allows Ligand to capitalize on undervalued assets in challenging biotech financing markets.
• Strong Capital Position for Future Growth: With approximately $450 million in deployable capital, Ligand is well-positioned to continue its opportunistic investment strategy, targeting high-clinical-value assets that address unmet medical needs, thereby mitigating industry-wide pricing pressures.

The Royalty Architect's Blueprint

Ligand Pharmaceuticals Incorporated, founded in 1987, has evolved into a biopharmaceutical company with a distinctive business model. It acts as a royalty architect, enabling scientific advancement by providing financing, licensing proprietary technologies, or both, to support the clinical development and commercialization of high-value medicines. This strategy aims to generate a diversified portfolio of biopharmaceutical product revenue streams, all supported by an efficient and low corporate cost structure.

Since the fourth quarter of 2022, Ligand has undergone a significant transformation, streamlining its operations to become an "infrastructure-light" organization. This strategic pivot has resulted in a remarkable reduction of over 50% in cash operating expenses and a cut of more than two-thirds in headcount since 2022. This lean structure allows Ligand to achieve high operating leverage, translating top-line growth more effectively to the bottom line. The company’s core focus is on identifying and investing in highly differentiated royalty assets and leveraging its proprietary technology platforms.

The broader biopharmaceutical industry currently faces a challenging landscape. Descending price pressure has been a persistent trend for the last 15 years, with expectations of pricing parity with European markets eventually reaching the U.S. Additionally, a difficult financing environment, characterized by fewer IPOs and private funding challenges, has created a paradox: while it pressures many biotech companies, it presents a "positive tailwind" for Ligand. This environment increases demand for royalty financing, allowing Ligand to be highly selective and secure attractive terms for its investments. Regulatory changes, with new FDA leadership expressing intent to reduce unnecessary regulation and accelerate approvals for severe and rare diseases, could also prove beneficial for Ligand's development-stage portfolio.

Technological Differentiators: Ligand's Core Moat

Ligand's foundational strength lies in its proprietary technology platforms, which offer tangible benefits to its partners and contribute significantly to its competitive moat.

The Captisol platform technology is a chemically modified cyclodextrin specifically designed to optimize the solubility and stability of drugs. Solubility and permeability are two of the biggest challenges in drug delivery, and Captisol addresses the former with remarkable efficacy. It is arguably the "most prolific single drug delivery platform in history to have 16 approved products." This dominance stems from its broad applicability and ease of use, allowing any chemist in the pharmaceutical industry to readily work with it. The technology's ability to solve complex formulation problems makes it a highly attractive partner for pharmaceutical companies, securing Ligand recurring revenue from material sales and licenses.

Complementing Captisol is the NITRICIL platform technology, which facilitates tunable dosing. This allows for an adjustable drug release profile, enabling proprietary formulations that target a broad range of indications. Zelsuvmi, a recently launched product, is the lead asset from this platform. Ligand retains the intellectual property rights across multiple potential therapies derived from NITRICIL. The company is actively evaluating approximately three additional therapies for future development, with an expectation to yield "at least two commercial products out of this, but hopefully three or four." This platform has wide applicability and promising clinical data in other products, offering significant long-term royalty potential.

Competitive Positioning: A Niche of Strategic Advantage

Ligand occupies a specialized niche within the biopharmaceutical market. Unlike large, integrated pharmaceutical companies such as Pfizer (PFE), Amgen , or Gilead Sciences , Ligand focuses on enabling technologies and royalty monetization rather than end-to-end drug development. This allows it to maintain an asset-light structure and avoid the heavy R&D and operational costs associated with traditional pharma.

Compared to a pure-play royalty company like Royalty Pharma (RPRX), Ligand's active role in technology licensing and its "special situations" investment strategy provide a unique edge. While RPRX excels in acquiring passive royalty streams (with a 2024 Gross Profit Margin of 100% and Operating Profit Margin of 57%), Ligand's Captisol technology offers a direct, value-added solution in drug development. This can lead to exclusive deals and potentially faster innovation cycles for its partners. Ligand's 2024 Gross Profit Margin of 88.81% reflects its asset-light model, although its TTM Operating Profit Margin of -18.27% and Net Profit Margin of -40.44% indicate the impact of specific non-cash charges and investments made during its transformation phase. In contrast, large pharmaceutical companies like PFE (2024 Gross Profit Margin 66%, Operating Profit Margin 26%) and AMGN (2024 Gross Profit Margin 62%, Operating Profit Margin 22%) have lower gross margins but benefit from immense scale and diversified product portfolios.

Ligand's strategic focus on "high unmet clinical need" products also provides a robust defense against payer pressures, a challenge that affects all players, including large pharma. By investing in drugs that deliver significant clinical value, Ligand's partners are better positioned to negotiate reimbursement, which in turn secures Ligand's royalty streams. The company's low Debt/Equity ratio of 0.01 (TTM) highlights a strong balance sheet, providing financial flexibility for opportunistic investments, a key advantage in the current capital-constrained biotech environment.

Financial Performance: A Royalty Engine in High Gear

Ligand's strategic transformation is yielding tangible financial results, as evidenced by its recent performance. In the second quarter of 2025, total revenue and other income increased 15% year-over-year to $47.6 million. Adjusted EPS rose 14% to $1.60 per share, reflecting solid execution and continued operating leverage.

Royalty revenue, the cornerstone of Ligand's model, was particularly robust, surging 57% from $23.2 million in Q2 2024 to $36.4 million in Q2 2025. For the first six months of 2025, total royalties grew 51% to $63.9 million. This growth was primarily driven by the strong performance of several key partnered programs:

• Ohtuvayre (Verona Pharma ): Ligand receives a 3% royalty on worldwide net sales. Verona reported a 45% sequential increase in Q2 2025 sales to $103 million. This product is described as the "strongest COPD launch in history" and is "on track to achieve blockbuster status by 2027," two years ahead of previous projections. Analysts now forecast peak sales of $5 billion to $6 billion, representing significant upside for Ligand.
• Filspari (Travere Therapeutics (TVTX)): Ligand earns a 9% royalty on global sales. Filspari continues to show strong commercial momentum, with Q2 2025 royalty revenue of $6.6 million and YTD 2025 revenue of $11.9 million. Its usage is expanding into earlier-stage patients, and upcoming regulatory catalysts, including a PDUFA date of January 13, 2026, for the FSGS indication, could "significantly expand Filspari's market opportunity, potentially north of $1 billion in FSGS alone." This could make it Ligand's "largest royalty generating asset approaching $50 million in annualized royalties by mid-2026."
• Qarziba (Recordati ): Ligand earns a high teens royalty. Sales grew 12% in the first half of 2025, reaching EUR 78.5 million, "significantly outperforming initial underwriting assumptions." Recordati (RCDA.MI) has increased its peak sales guidance for its oncology franchise, which includes Qarziba, to €300-€350 million.
• Capvaxive (Merck ): This vaccine generated $129 million in Q2 2025 sales, a 21% sequential increase after more than doubling in Q1. Merck expects it to gain "majority market share in the adult setting," further bolstered by the CDC's ACIP recommendation for adults 50 years and older.
• Kyprolis (Amgen (AMGN)): Royalty revenue was $8.8 million in Q2 2025 and $13.5 million YTD 2025. Ligand receives a tiered royalty rate, reaching the maximum 3% in the second half of 2024.

Captisol sales also contributed positively, increasing 10% year-over-year to $8.3 million in Q2 2025 and 30% to $21.7 million YTD 2025, primarily driven by customer orders and demand from Gilead Sciences (GILD) for Veklury. Contract revenue, however, decreased 73% in Q2 2025 and 46% YTD 2025 due to the timing of partner milestone events.

Operating expenses saw some fluctuations. Research and development (R&D) expenses were $6.6 million in Q2 2025, while general and administrative (G&A) expenses were $20.2 million. For the first six months of 2025, R&D expenses were $56.7 million, including a significant $44.3 million one-time charge related to the Castle Creek royalty financing agreement. However, GAAP operating expenses are expected to decrease in the second half of 2025 following the deconsolidation of Pelthos. GAAP net income improved significantly to $4.8 million in Q2 2025, compared to a net loss of $51.9 million in Q2 2024.

Ligand maintains a strong liquidity position, with $245 million in cash and investments as of June 30, 2025. Factoring in its $125 million undrawn credit facility (which was increased from $75 million on July 8, 2024), the company has approximately $450 million in deployable capital. This capital is crucial for funding ongoing operations, strategic investments, and potential stock repurchases, although management prioritizes investing in high-value royalty assets.

Strategic Initiatives & Portfolio Expansion: Building for Tomorrow

Ligand's recent strategic initiatives underscore its commitment to expanding its royalty portfolio and unlocking shareholder value through innovative deal structures.

The Pelthos Therapeutics transaction exemplifies Ligand's "special situations" strategy. Ligand acquired Novan's (NOVN) nitric oxide platform, including the lead asset Zelsuvmi, out of bankruptcy for $12 million. After securing FDA approval for Zelsuvmi in early 2024, Ligand incubated Pelthos as a wholly-owned subsidiary. The merger of Pelthos with Channel Therapeutics was completed on July 1, 2025, raising $50.1 million in equity capital, with Ligand investing $18 million. Ligand is now entitled to a 13% royalty on worldwide net sales of Zelsuvmi (excluding Japan) and received a $5 million milestone payment upon its commercial launch on July 10, 2025. Pelthos' initial forecast estimates peak sales of $175 million in the U.S. market alone, which would translate to approximately $23 million per year in royalties for Ligand. This transaction not only provides an attractive royalty stream but also retains strategic ownership of the broader NITRICIL platform for future product development.

In August 2025, Ligand made a $25 million strategic capital investment in Orchestra BioMed's late-stage partnered cardiology programs, AVIM therapy and Virtu SAB therapy, with an additional $15 million to be funded later. Ligand will receive a high teens royalty on the first $100 million in annual commercial revenues and a mid-single-digit royalty on revenues exceeding $100 million. Both programs have received FDA breakthrough device designations, highlighting their potential to address significant unmet needs in cardiovascular care. AVIM therapy, partnered with Medtronic (MDT), is in a pivotal trial for hypertension in pacemaker patients, leveraging existing device capabilities. Virtu SAB, partnered with Terumo (TRUMY), is nearing pivotal study initiation for arterial diseases, including coronary in-stent restenosis, utilizing a proprietary non-coated MicroPorce balloon for drug delivery.

Ligand also led a $75 million financing round for Castle Creek Biosciences' D-Fi, a Phase 3 gene-modified autologous cell therapy for dystrophic epidermolysis bullosa (DEB), committing $50 million. Ligand will receive a mid-single-digit royalty on global sales if approved. D-Fi is an injectable product, expected to be "meaningfully differentiated and also complementary" to Krystal Biotech's (KRYS) topical Vyjuvek, offering less frequent dosing and potentially broader treatable surface areas for the "few thousand" U.S. patients with this devastating rare disease.

The planned $10 billion acquisition of Verona (VRNA) by Merck , announced in July 2025, is expected to "further accelerate the launch trajectory" of Ohtuvayre. As a royalty holder, Ligand will continue to participate in the product's performance, benefiting from Merck's (MRK) "global scale and commercial strength." This highlights a key advantage of Ligand's royalty model: it allows participation in blockbuster drug success without the direct operational risks or the exit limitations faced by equity investors in an acquisition.

Further pipeline developments include Agenus' (AGEN) alignment with the FDA on the Phase III trial design for its BOTBAL program, with initiation anticipated in Q4 2025, and Palvella Therapeutics' completion of full enrollment in its Phase III SELVA trial for microcystic lymphatic malformations, with results expected in Q1 2026.

Outlook & Risks: Charting a Course for Sustained Value

Ligand's management has expressed strong confidence in its future prospects, reflected in its recently raised full-year 2025 financial guidance. The company now expects royalty revenue between $140 million and $150 million, Captisol sales between $35 million and $40 million, and contract revenue between $25 million and $35 million. This translates to total core revenue guidance of $200 million to $225 million and core adjusted EPS of $6.70 to $7.00 per share. These upward revisions are attributed to the impact of the Pelthos transaction and "strong underlying growth and increased visibility into our royalty streams, particularly from Ohtuvayre, FILSPARI, Qarziba and Capvaxive."

The long-term outlook remains ambitious, with a projected 22% or greater compound annual growth rate for royalty receipts from 2024 through 2029. The existing portfolio alone is expected to support an 18% CAGR, with future investments contributing an additional 4% or more. Management anticipates sharing a refreshed long-term outlook at its 2025 Analyst Day in December, as current projections for key assets like Ohtuvayre and Filspari already suggest "meaningful upside."

Despite this optimistic outlook, investors should consider several risks. The pharmaceutical industry's "descending price pressure" and a "challenging payer market" could impact the profitability of Ligand's partners, indirectly affecting royalty streams. However, Ligand's strategy of investing in drugs that deliver "very high clinical value and solve big problems" is seen as the "best defense" against these pressures. Program failures, such as the discontinuation of Takeda's (TAK) soticlestat program (which led to a full impairment of Ligand's related financial royalty asset), highlight the inherent binary risks in drug development, though Ligand's royalty economics would remain intact if such programs are re-licensed. Regulatory uncertainties, including PDUFA dates and evolving FDA policies, can also influence timelines and market access. Furthermore, the company's effective tax rate can vary due to the mix of foreign and domestic income and non-deductible items. Ongoing legal proceedings, such as the "National Prescription Opiate Litigation" and a breach of contract claim, also present potential, albeit currently deemed immaterial, risks.

Conclusion

Ligand Pharmaceuticals has successfully executed a profound strategic transformation, repositioning itself as an agile, asset-light royalty powerhouse in the biopharmaceutical sector. By focusing on high-value medicines, leveraging its proprietary Captisol and NITRICIL technologies, and employing a disciplined "special situations" investment strategy, Ligand has built a diversified portfolio poised for sustained growth. The company's strong Q2 2025 financial performance, coupled with a raised full-year guidance and an ambitious long-term outlook, underscores the effectiveness of its model.

With a robust pipeline of commercial and late-stage development assets, including the rapidly growing Ohtuvayre and Filspari, and strategic new investments like Pelthos' Zelsuvmi and Orchestra BioMed's (OBIO) cardiology programs, Ligand is well-equipped to capitalize on the evolving biotech landscape. Its strong capital position and unique approach to providing differentiated capital solutions allow it to selectively invest in opportunities that address significant unmet clinical needs, thereby mitigating industry-wide challenges like pricing pressure. For investors seeking exposure to the biotech industry through a profitable, diversified, and operationally efficient model, Ligand presents a compelling investment thesis, driven by its technological leadership and strategic acumen.