Ligand Pharmaceuticals Inc

NASDAQ:LGND

Earnings Call Analysis

Significant Revenue Growth and Positive Financial Outlook for 2024

In Q2 2024, Ligand Pharmaceuticals saw total revenue rise by 58% to $41.5 million, driven by milestones from regulatory approvals and increased royalty revenue, especially from Travere's FILSPARI. R&D expenses decreased, but G&A expenses rose due to new investments. The company expanded its credit facility and held $227 million in cash and investments. Guidance for 2024 includes total revenue between $140 million to $157 million and adjusted EPS of $5 to $5.50. Notable additions to the portfolio include Merck's CAPVAXIVE and Verona Pharma's Ohtuvayre, highlighting Ligand's strategic growth and solidifying its long-term financial outlook.

Strong Revenue Growth Driven by Strategic Investments

In the second quarter of 2024, Ligand Pharmaceuticals reported a remarkable total revenue of $41.5 million, which marked a significant 58% increase from $26.4 million in the same quarter of the previous year. This growth was primarily fueled by milestone payments associated with regulatory approvals of key products like Travere's FILSPARI and Verona Pharma's Ohtuvayre, as well as the Merck-developed CAPVAXIVE.

Royalty Revenues on the Rise

Royalty revenue alone grew to $23.2 million, up 11% year-over-year, propelled by substantial sales of Travere's FILSPARI, which reported impressive sales of $27.1 million in Q2, compared to just $3.5 million in the same quarter last year. Ligand's royalties are projected to continue growing as additional products gain traction in the market.

Navigating Expense Dynamics

Operating expenses exhibited a mixed trend. R&D expenses decreased from $6.9 million in the prior year to $5.4 million this quarter, reflecting a strategic alignment following a business spin-out. Conversely, G&A expenses rose significantly from $11.3 million to $17.6 million, primarily due to a $4.7 million investment in incubating the Pelthos business and building a robust investment team.

Substantial Investments to Boost Future Growth

In line with its investment strategy, Ligand committed $175 million to two new opportunities during this period, aiming to strengthen its royalty portfolio further. The company now boasts 12 major commercial-stage products in its repertoire, double the number at the start of 2023, indicating an aggressive strategy to capture market opportunities.

Guidance and Growth Projections

Looking ahead, Ligand reaffirmed its 2024 financial guidance, anticipating total revenue between $140 million to $157 million, with royalty revenue expected to fall within $100 million to $105 million. Adjusted earnings per diluted share are projected to be between $5.00 and $5.50. The company is optimistic about maintaining a compound annual growth rate (CAGR) of more than 20% for royalty revenue and even faster growth in adjusted earnings per share through 2028.

Market Potential of New Products

Ligand is poised for significant revenue growth from newly approved products. For example, Ohtuvayre, which has been hailed as a groundbreaking treatment for chronic obstructive pulmonary disease (COPD), will target an estimated 8.5 million Americans experiencing this condition. Analysts expect it to become a blockbuster, contributing notably to Ligand's future royalty revenues.

Strategic Acquisitions and Development Efforts

The recent acquisition of Apeiron Biologics was a strategic move that bolstered Ligand’s royalty-generating asset portfolio. The acquisition, valued at $100 million, is projected to be immediately accretive, contributing an annualized $1 per share to earnings. Such acquisitions underline Ligand's commitment to broadening its asset base and maximizing shareholder value.

Strengthened Financial Position

As of June 30, 2024, Ligand held $227 million in cash and short-term investments, with additional access to $125 million under its expanded credit facility with Citibank. This solid liquidity position enables Ligand to continue its investment activities confidently and supports its growth initiatives.

Focused Management and Future Outlook

Ligand's leadership emphasized a commitment to value creation through a carefully managed investment strategy and an efficient operational structure. With ongoing progress in both product launches and portfolio diversification, the company appears well-positioned to capitalize on upcoming market opportunities and enhance long-term shareholder value.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ligand Second Quarter 2024 Earnings Webcast. [Operator Instructions]

I would now like to turn the conference over to Tavo Espinoza, the Chief Financial Officer of Ligand Pharmaceuticals Inc. You may begin.

[Octavio Espinoza, executive]

Good afternoon, everyone, and welcome to Ligand's second quarter earnings call. During the call today, we will review the financial results we released after today's market close, and offer commentary on our partner pipeline and business development activity, followed by a question-and-answer session. 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; Senior Vice President of Investments and Business Development, Paul Hadden; and Senior Vice President of Investment and Head of Clinical Strategy, Dr. Karen Reeves.

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 filed with the Securities and Exchange Commission that can be found on Ligand's website at www.ligand.com or on the SEC's website at www.sec.gov.

With that, I will now turn the call over to Todd.

[Todd Davis, executive]

Thank you, Tavo. On our last several calls, we have spent a fair amount of time talking about the steps we have taken to transform the company and strengthen and expand our royalty portfolio and team. I am pleased to report that during the second quarter, we committed $175 million to 2 new investment opportunities and added several commercial stage products to our portfolio that we believe will be a meaningful contributors to our royalty revenue over the next several years.

This includes 2 notable regulatory approvals of products with blockbuster sales potential: Merck's CAPVAXIVE, the first pneumococcal conjugate vaccine specifically for adults that was approved by the FDA on June 17 and Verona Pharma's Ohtuvayre, the first inhaled product with a novel mechanism of action for the treatment of COPD maintenance in over 20 years. That NDA was approved by the FDA on June 26.

Our royalty portfolio now includes 12 major commercial stage products, many that are marketed by premier global pharmaceutical companies. This is double the number of key marketed products we had in the portfolio at the beginning of 2023 and underscores the capabilities of our business development team and successful implementation of our OpEx slight investment-focused corporate strategy.

As a reminder, we also have more than 90 additional active pipeline programs in our portfolio that are in various stages of development. Paul and Karen will share additional updates on our pipeline later on the call.

During the second quarter, we also added several new team members, which deepened our investment, business development and operational bench. Michael Vigilante joined us in May as Vice President, Investments and Business Development. Michael served in a similar role at a Boston-based life sciences investment firm, and brings significant transaction and company building experience.

We've also added Ruben Flores-Saaib as Senior Director, Business Development in April. Ruben is leading our business development efforts with the inventor community, having spent 12 years in industry and 10 years in the university technology transfer sector before joining Ligand.

On the operations side, we also hired [ Marge Sekovec ] as Head of Human Resources. Marge has over 20 years of life sciences HR experience and will play a key role as we look to bring in additional talent to the company.

These hires follow the additions of Rich Baxter, SVP of Investment Operations; and Dr. Karen Reeves earlier this year. As some of you may be aware, we filed an 8-K on Friday announcing the Ligand's President and COO, Matt Korenberg, has decided to leave the company and pursue other opportunities. Matt has agreed to serve as a consultant through the end of the year. We are grateful for Matt's many contributions to the company over the last 9 years and wish him well in future endeavors.

Tavo will do a deep dive into our financials for the second quarter and the first half of 2024, but let me provide a few financial highlights. Total revenue in the second quarter grew 58%, driven in part by milestone payments we earned following the approvals of Ohtuvayre and CAPVAXIVE, which Karen will discuss in greater detail.

Our royalty revenue growth trajectory continued in the second quarter, increasing 11% over the same period in 2023. We also announced an increase to our 2024 financial guidance in conjunction with the Apeiron Biologics acquisition. We now expect total revenue to be in the range of $140 million to $157 million and core adjusted EPS to be in the range of $5 and $5.50 per share.

Turning to Slide 4, we will discuss Ligand's strategic differentiation. We are a biopharmaceutical company that seeks to offer profitable and compounding growth. Our diversified portfolio of royalty assets generates consistent and predictable revenues. We target late-stage development assets where there is superior risk-reward profile.

There is sizable demand for capital in the life science industry. This allows us to invest selectively as we offer differentiated capital solutions that traditional investors cannot provide. Our strategy is executed on by our highly experienced investment team that can source, diligence and negotiate proprietary investments. Once originated, we can employ customized investment structures and novel tactics to create new investment opportunities. Our acquisition of Apeiron is a prime example of this.

Royalty investing is a small percentage of the total capital that is invested today in life sciences. We believe our model is scalable and offers immense growth potential for years to come.

Turning to Slide 5 for our royalty revenue outlook. We have made substantial progress to meet or exceed the longer term growth goals that we outlined at our Analyst Day in December of 2023. During the second quarter, we saw an increase in Wall Street consensus estimates on several of our partnered products, including Travere's FILSPARI. We also added several major new commercial products to the portfolio, including CAPVAXIVE and Ohtuvayre, which are expected to launch later this year.

We believe our revenue growth is on pace to exceed the 22% compound annual growth rate that we previously shared in December. The existing portfolio alone supports a royalty revenue CAGR of 18%. Future investments should add at least 4% to this with potential upside on top of the current outlook. The operating leverage gain from our lean corporate cost structure is expected to result in adjusted EPS of greater than $10 per share in 2028.

Before I turn it over to Paul, I wanted to provide an update on Pelthos. As I mentioned on our last earnings call, we created a new standalone company earlier this year called Pelthos Therapeutics to commercialize ZELSUVMI, which was approved by the FDA in January for molluscum contagiosum. The Pelthos team is preparing for the formal commercial launch of ZELSUVMI in the first quarter of 2025. We anticipate this will be done in partnership with a capital provider and/or a strategic partner, which is the same approach that we took with Viking Therapeutics and Primrose Bio.

This is consistent with our strategy to reposition and maximize the value of highly differentiated and promising pharmaceutical assets by combining premier management teams and third-party funding sources in return for significant equity and royalty rights in the newly formed entities.

In conclusion, we are proud of all that we've accomplished in the first half of '24, and we are very optimistic about our future prospects.

I will now turn it over to Paul Hadden for a business development update. Paul?

[Paul Hadden, executive]

Thank you, Todd. I would like to take a moment to reflect on a number of exciting milestones we've achieved over the past 18 months. Today, I'm proud to say we have assembled a strong team of investment professionals. Moreover, we have developed a very robust proactive outbound sourcing capability.

On this call, we are showcasing some of the fruits of those efforts such as cross-border M&A and inventor outreach. Our team with decades of investing experience has a number of structural tools in our toolkit. With proprietary sourcing ability, we are able to pursue a robust number of exciting investment opportunities across multiple therapeutic areas within the global biopharma sector.

Turning to Slide 7. We now have an investment office and team that is headquartered in Boston, one of the most prolific life science hubs across the globe. Over the past 18 months, we have committed over $275 million across 12 new investments. I'm very proud of our team in what we've accomplished in such a short time period, and I'm even more excited for the future.

Now let me highlight several of our key investments over the past few months. Turning to Slide 8. On July 8, we announced the $100 million acquisition of Apeiron Biologics, an investment that had been in the works for months. Apeiron was in a privately held Austrian-based biotechnology company that receives royalties on QARZIBA, an approved monoclonal antibody for one of the most common forms of pediatric cancer, neuroblastoma. The product was approved in Europe in 2017. It is now marketed in over 35 countries worldwide and is well entrenched in pediatric oncology treatment guidelines.

Importantly, the royalty rate is a healthy 15% to 20% of net sales. Royalties over the past 12 months were in excess of EUR 20 million, and the acquisition was highly accretive to Ligand given the near 100% profitability. Finally, although Recordati is evaluating a U.S. path to market, our base case projections did not include U.S. sales or approvals.

The acquisition which closed a week later is immediately accretive by $1 per share on an annualized basis. This acquisition was a true team effort, and we thank the Apeiron shareholders for selecting Ligand as their partner.

QARZIBA, with its long-dated IP and lack of near-term competitive threats, will carry Ligand's oncology royalties well into the next decade. We are excited to welcome Recordati, QARZIBA's marketer, as a partner of Ligand and look forward to working with them to support QARZIBA's continued access to young cancer patients and their families globally.

Turning to Slide 9. Karen will discuss Verona's recently approved Ohtuvayre program, but I would like to note that today we are sharing that during the last 6 months, we purchased additional royalties from inventors for approximately $17 million. These acquisitions further strengthen our exposure to the first novel inhaled treatment approved in COPD in over 20 years. This brings our total Ohtuvayre royalty to just under 3% of net sales.

These investments also showcased our team's ability to meet the needs of individual inventors who are seeking to diversify away from single royalty asset risk for wealth planning and charitable endeavors. These add-on investments are very low friction as they are executed on fully diligence products that are already part of our portfolio.

Turning to Slide 10. With respect to our investment in soticlestat, Takeda's President of R&D stated the following on their earnings call on July 31, and I quote: As previously communicated, soticlestat failed to demonstrate clinical benefit in Lennox-Gastaut. Soticlestat also failed to meet its primary endpoint in the Dravet syndrome Phase 3 trial, narrowly missing with a p-value of 0.06. However, the totality of data from the study had a meaningful effect on key secondary endpoints and when combined with the highly significant results from the large Phase 2 study suggest clear clinical benefits for soticlestat and Dravet patients with a differentiated safety profile. Given the large unmet need in Dravet, we are investigating a potential regulatory path forward.

From Ligand's standpoint, while we expected a stronger top line data announcement, we are encouraged by Takeda's continued drive to secure a potential path forward for these rare epilepsy patients who have limited options. As we learn more, we will update accordingly.

Turning to Slide 11. For the second quarter, we had $75 million investment across several clinical stage oncology royalties with Agenus. [Technical difficulty] assets and one synthetic royalty in the lead internal pipeline program BOT/BAL. Having completed their end of Phase 2 meeting with the FDA, Agenus has clarity on their Phase 3 dose, which is an important achievement.

Our team invested based on the strength of existing data, and we will be focusing on monitoring the maturing study. This program has significant potential to be an important addition for metastatic colorectal cancer patients in later lines of therapy as well as other potential expansion indications. Finally, Agenus will likely need to partner to achieve their global development plan and ambitions, and their team has been consistent in that messaging. We are focused on the development of this data and monitoring the partnering process.

Additionally, Agenus may revisit accelerated approval once the data is more mature. We recently learned that select partner programs are being returned to Agenus. Agenus has an obligation to seek to relicense these programs and Ligand will maintain our economics.

Turning to Slide 12. On July 24, our partner, Palvella Therapeutics announced a definitive merger agreement with Nasdaq-listed Pieris Pharmaceuticals, alongside a new and substantial equity raise of nearly $80 million in fresh capital from leading institutional investors. This will capitalize the company into 2027, a significant strengthening and derisking achievement for the company and our interest in their lead asset. We continue to be supportive of Palvella and its breakthrough therapy designation and Fast Track status QTORIN program in MLM. We look forward to their continued progress and success.

[Technical difficulty] 13. Our origination capabilities are foundational to our strategy. Our investment pipeline is strong and populated with multiple proprietary opportunities that cannot be accessed or replicated through the public markets. We have reviewed nearly 100 opportunities so far this year across multiple therapeutic areas.

In closing, we are pleased with the continued progress of our unique investment strategy and our team's performance. Our portfolio continues to strengthen and mature, and we look forward to updating you in the coming quarters.

I'll now turn it over to Karen.

[Karen Reeves, executive]

Thank you, Paul. Today, we'd like to highlight some key commercial products in our portfolio. Turning to Slide 14. Let's look at Travere Therapeutics' FILSPARI. We licensed worldwide rights for FILSPARI to Travere and are entitled to milestones and a 9% royalty on global net product sales. Over the past 18 months, FILSPARI has achieved several major milestones, underscoring the significant potential of this product. FILSPARI is a dual endothelin-1 and angiotensin II receptor antagonist.

In February 2023, FILSPARI received accelerated approval from the FDA for primary IgA nephropathy, which affects an estimated 150,000 people in the U.S. IgAN is a progressive kidney disease that leads to hampered kidney filtering, proteinuria and progressive kidney function loss.

The basis of the FDA accelerated approval was Travere's Phase 3 PROTECT Study, which met its prespecified interim primary endpoint, mean reduction of proteinuria. FILSPARI became commercially available in the U.S. in late February 2023. Travere filed a supplemental NDA in March 2024 to convert the accelerated approval to full approval with an expected PDUFA date of September 5.

The sNDA will provide additional efficacy and safety information to regulators to inform the label. Travere indicates that if they receive a broader label, the addressable IgAN patient population could nearly double from the current level. We see it as positive that the FDA has not requested an advisory committee and that the PDUFA date to determine full approval is on track.

In Europe, Travere and CSL Vifor announced in April that the European Commission granted conditional marketing authorization for FILSPARI for the treatment of primary IgAN. Travere has reported FILSPARI is expected to launch in the first EU markets in the second half of 2024.

In addition, the new kidney disease improving global outcomes, KDIGO, guidelines are anticipated for IgAN in 2024. We believe the new guidelines may potentially underscore the importance of treating proteinuria early and aggressively. Proteinuria is being accepted as the predictor of clinical outcome.

As scientists and doctors better understand the pathogenesis and course of IgAN, combination and complementary therapy may be important for future treatment. Regarding the launch progress, Travere reported net product sales of $27.1 million during the second quarter, which represented strong growth of 37% over the prior quarter. Analysts are projecting peak global FILSPARI sales of $500 million to $700 million.

Turning to Slide 15. Let's look at one of our most recent pipeline wins, Verona Pharma's Ohtuvayre. Ohtuvayre, previously known as ensifentrine, received FDA approval on June 26 and is indicated for the maintenance treatment of chronic obstructive pulmonary disease, allowing for broad use in adults with COPD.

Ohtuvayre is the novel dual phosphodiesterase inhibitor with bronchodilator and anti-inflammatory effects that is administered twice daily via nebulized inhalation. It is the first inhaled product with a novel mode of action approved for the maintenance of COPD in more than 20 years. The primary endpoints in both Phase 3 trials, ENHANCE-1 and ENHANCE 2, were statistically significant for improving lung function.

COPD is the sixth leading cause of death in the U.S. COPD also accounts for nearly 800,000 emergency room visits a year where COPD is the primary diagnosis. Patients with COPD struggle to breathe and even ordinary daily activities can be daunting. Ohtuvayre's broad indication in the maintenance treatment of COPD means it can be used as standalone monotherapy or in combination treatment with other drugs. There is no need to consider blood eosinophilia.

Verona's launch preparations are well underway. With the U.S. approval, Verona has hired 120 field personnel. As of late June, Verona reports these representatives had already scheduled approximately 1,800 health care provider appointments to occur during the first 3 months of launch.

In June, Verona also announced a monthly WAC price of $2,950 for Ohtuvayre. This represents a premium to other nebulized COPD treatments. Verona estimates that the vast majority of Ohtuvayre patients will receive coverage under their medical benefit.

Verona reports that there are an estimated 8.5 million people living with COPD in the U.S. today, half of whom remain persistently symptomatic despite treatment and will be the focus of Ohtuvayre's launch. Analysts expect Ohtuvayre to be a blockbuster product, and we look forward to update from Verona as the launch progresses during the third and fourth quarters.

Turning to Slide 16. Now let's turn to Merck's CAPVAXIVE, another recent pipeline win. CAPVAXIVE, previously known as V116, is a pneumococcal 21 valent conjugate vaccine that received FDA approval on June 17 for the prevention of invasive pneumococcal disease and pneumococcal pneumonia in adults.

The FDA's summary basis for regulatory action state and I quote: FDA granted priority review on December 15, 2023, with the justification that CAPVAXIVE meets the qualifying criteria as a drug that treats or prevent serious conditions, IPD and pneumonia, and provides a significant improvement in effectiveness over currently licensed pneumococcal conjugated vaccine.

CAPVAXIVE is specifically designed for adults that includes 8 streptococcus pneumonia serotype not covered by other currently approved pneumococcal vaccines on the market today. In their latest earnings call, Merck stated: Given its compelling clinical profile, we expect that CAPVAXIVE will achieve a majority market share in the adult setting.

The last thing I want to highlight is that on June 27, the CDC's Advisory Committee on Immunization Practices, also known as ACIP, recommended CAPVAXIVE for all adults aged 65 years and older who have not previously received a pneumococcal conjugate vaccine or whose vaccine history is unknown, and for adults 19 to 64 years old with certain underlying medical conditions among other situations. At its October meeting, ACIP may consider broadening this to all adults aged 50 to 64. Analysts believe this could potentially double the size of the CAPVAXIVE commercial opportunity.

With that, I will now turn the call over to Tavo for the financial update.

[Octavio Espinoza, executive]

Thanks, Karen. Let's move to Slide 17, please. First, I want to highlight that I will be discussing non-GAAP results which exclude certain items, including stock-based compensation, amortization of intangible assets, amortization and/or impairment of financial assets, unrealized gains or losses from short-term investments, our share of losses absorbed from accounting for our investment in Primrose Bio under the equity method, and expenses incurred to incubate the Pelthos' business, amongst others.

In addition, to further focus our investors on the core business results, we adjust for realized gains from the sale of Viking Therapeutics stock. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release available on our website. We believe that the adjusted measures can assist investors in analyzing and assessing our past and future core operating performance.

We reported another quarter of strong financial results with total Q2 '24 revenue growing by 58% to $41.5 million and core adjusted EPS growing 121% to $1.40 when compared to the second quarter of 2023.

Royalty revenue grew to $23.2 million or 11% over the prior year quarter with Travere's FILSPARI being a key driver. We ended the quarter with just under $230 million in cash and investments, and over $350 million in deployable capital when you include the $125 million available under the credit facility we have with Citibank.

Slide 18 frames up our financial results in more detail. Like I mentioned, we reported total second quarter revenue of $41.5 million, which is 58% above the $26.4 million we reported in the prior year quarter. The increase in total revenue is due primarily to the milestones we earned from the regulatory approvals of Travere's FILSPARI, Verona's Ohtuvayre and Merck's CAPVAXIVE.

Royalty revenue increased to $23.2 million from $20.9 million in the prior year quarter, with the growth driven by an increase in sales of Travere's FILSPARI, which reported sales of $27.1 million this quarter versus $3.5 million in the prior year quarter. As a reminder, we earn a 9% royalty on sales of FILSPARI.

Other major contributors to royalty revenue this quarter include Jazz's RYLAZE with reported Q2 sales of $107.8 million and Merck's VAXNEUVANCE with reported sales of $189 million. We believe these royalty assets, along with the recently approved products as well as QARZIBA will continue to drive royalty revenue growth in the future.

Captisol sales were $7.5 million in the second quarter of 2024 versus $5.2 million in the prior year quarter, with the increase due to timing of customer orders. Contract revenue this quarter was $10.9 million and is due primarily to the 3 product approvals this quarter, namely the $2.3 million milestone payment earned from the European approval of FILSPARI, the $5.8 million earned from the approval of Ohtuvayre and the $2 million earned from the approval of CAPVAXIVE.

Moving on to operating expenses. R&D expenses decreased from $6.9 million in the prior year quarter to $5.4 million in Q2 '24, with the decrease driven primarily by lower headcount-related expenses resulting from last year's Pelican business spinout.

G&A expenses increased from $11.3 million in the prior year quarter to $17.6 million in Q2 '24. The $6.3 million increase is driven primarily by the $4.7 million investment made to incubate the Pelthos business this quarter as well as investments made to build up our business development and investment team in Boston.

As we've mentioned on previous calls, we expect to incur incremental operating costs associated with incubating the Pelthos business. Our intent is to spinout and/or out-license the Pelthos business, and therefore, we are adjusting out these expenses for purposes of reporting adjusted non-GAAP earnings.

The $26.5 million recorded to financial royalty asset impairment is primarily attributable to the reduction in the carrying value of our investment in Takeda's soticlestat as a result of the Phase 3 results recently announced by Takeda that was previously discussed by Paul.

The $32 million recorded to other expense is primarily related to the noncash decrease in the carrying value of our Primrose Bio investment. Our equity ownership interest in Primrose Bio has decreased from 49.9% to 34.3% in connection with the recent financing round. The financing round was at a valuation below the value arrived at when we spun out the Pelican business in September of 2023, which resulted in a reduction in the carrying value of our investment.

GAAP net loss in the second quarter of 2024 was $51.9 million or $2.88 per share versus GAAP net income of $2.3 million or $0.13 per diluted share in the prior year quarter. The change in GAAP EPS is largely due to the reduction in carrying value of the soticlestat asset and the fair value adjustments in our investment in Primrose Bio.

Excluding the impact of these as well as the other non-GAAP adjustments described earlier, core adjusted net income in the second quarter of 2024 was $25.8 million or $1.40 per diluted share versus $11.7 million or $0.66 per diluted share in the prior year quarter.

Turning to the balance sheet. As of June 30, 2024, we had cash and short-term investments of $227 million, which includes $53 million of our holdings in Viking common stock. We expect that our current cash plus annual cash flow generation will be sufficient to fund the investment activity we anticipate over the foreseeable future. We did not sell any shares of Viking stock this quarter. However, we did enter into a caller option agreement to hedge against a Viking stock price fluctuation risk.

We recorded a $15.2 million unrealized gain associated with the collar option agreement in Q2 '24, and the value of that derivative asset is classified in other current assets. In addition, this quarter we expanded our credit facility with Citibank by $50 million and now have $125 million available to us under that credit facility.

Turning now to guidance under Slide 19. As mentioned earlier, we are reaffirming the updated 2024 financial guidance we gave on July 8 in conjunction with the Apeiron acquisition announcement. We expect 2024 royalty revenue will be in the range of $100 million to $105 million, sales of Captisol in the range of $25 million to $27 million, and contract revenue in the range of $15 million to $25 million. These revenue components result in total revenue guidance of $140 million to $157 million and adjusted earnings per diluted share of $5 to $5.50. Year-to-date, we've recorded total revenue of $73 million and core adjusted EPS of $2.61. We feel confident that we're on track to meet or exceed our updated 2024 financial guidance.

We also continue to feel confident about the longer term outlook we've shared, which spills out to 2028 and calls for royalty revenue growing at a compound annual growth rate of above 20% and adjusted core EPS growing even faster at a compound annual growth rate above 25%.

Finally, I'd like to direct listeners to our second quarter earnings press release issued earlier today, including a reconciliation of GAAP results to the adjusted financial results, which is available on our website.

I'll now turn the call over to Todd for closing comments.

[Todd Davis, executive]

Thank you, Tavo. I want to thank everyone for joining us today. We've made tremendous progress at Ligand in the first half of 2024. Ligand has a scalable business model and an efficient low-cost infrastructure to continue to grow our portfolio of royalty generating assets. We are steadily increasing our major commercial stage products and the pace of our investment activity continues to accelerate. We have set ambitious yet realistic targets for long-term growth and believe we are well positioned to create further value for our shareholders.

We will now open up the call for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Matt Hewitt of Craig-Hallum.

[Matthew Hewitt, analyst]

Well, congratulations on an active quarter. Maybe first up, starting with the Pelthos opportunity, an update on how those partnership discussions are going. And once that asset is kind of spun off, do you anticipate recovering these upfront costs that you've been putting into the business here since you acquired the asset?

[Todd Davis, executive]

Yes, we have several tangible discussions ongoing in parallel, ranging from straight financing options, which will be effectively a spinout, similar to what we did with Viking Therapeutics or what we witnessed this quarter with Primrose by our raising additional capital into that company, but also strategic licensing and potentially strategic merger opportunities. So those are ongoing. And as you know, we commit to incubating these things and spinning them out as an investment thesis. We believe this is the optimal way to commercialize this asset. And we will not rush it, but we're pretty confident that we'll have success in our efforts to spin this out. And I would say the process and the progress is going very well.

[Matthew Hewitt, analyst]

And then maybe one for me and one more and then I'll hop back in the queue. But regarding QARZIBA, how should we be thinking about the growth of that asset? We don't have -- I don't have a good sense for how fast those revenues are growing and what that would mean for your royalty stream.

[Paul Hadden, executive]

Yes. So great question. This is Paul. I'll take that head on. So for Recordati, this is a growth asset. I think if you go to their earnings, the most recent earnings announcement, their oncology franchise put up net revenue of EUR 117 million, which was growing at a rate of 22.7%. And they said that was mainly driven by QARZIBA with continued growth also of SYLVANT, another product that we don't have royalty on.

But to see the obvious, this is a growth asset. It's been on the market for 7 years, but it continue to penetrate new territories and regions. In fact, just last month, they secured an approval in South Korea. And we see this growing for the foreseeable future, which is why we were eager to bring it into the Ligand portfolio.

[Octavio Espinoza, executive]

And then I would just add, if you want to take a look at Slide 5, we do have that layered into our longer term outlook, if you want to get a sense for our view on that royalty stream.

[Operator]

Your next question comes from the line of Douglas Miehm of RBC Capital Markets.

[Douglas Miehm, analyst]

A couple of questions. First one, maybe if you could talk about H2 '24 and the outlook and maybe sizing the potential deals that you're contemplating. I believe you'd like to spend $200 million, maybe $250 million a year for these investments. And I'm just wondering if we're thinking about things in the range of 25 to 75 through to the end of 2024.

[Todd Davis, executive]

Yes, sure. I believe -- this is Todd speaking. But we have a pretty active pipeline now. When we are making new commitments to investments, we are trying to build a diversified portfolio, of course. And we have been operating at a pace and have built a team to be able to kind of functionally invest about $200 million per year. And that's what we're planning on. There can be some variation around that. And of course, the more recent investment was a fairly large one at $100 million, although it's cash generative immediately, which offsets that significantly.

But in general, we're typically looking at diversification by asset size. And we're typically not going to make more than a $30 million to $40 million commitment per asset. So we might get a couple more deals done this year would be a good base case, but there could be some variation depending on how the discussions go. But I think that's a good expectation.

[Douglas Miehm, analyst]

And then as you look at the new product Ohtuvayre and its potential launch, I guess, shortly, we know pricing now, they've already set up meetings, obviously going to be an exciting product for the company. I'm curious, that royalty, the $13.8 million or milestone, should come in in Q3, would that be fair?

[Octavio Espinoza, executive]

Yes. We've got that factored into our forecast contract, revenue forecast for the year. And the company, Verona, has said that they do plan to launch. And if it's not in Q3, probably likely in Q4.

[Douglas Miehm, analyst]

And then just let me wrap up with -- you have increased the line, although it doesn't look like you need to use it. But under what circumstances would you expect to draw on the line that is available to you? And I'll wrap it up there.

[Todd Davis, executive]

Yes. I think we are going to try to maintain kind of reasonable cash balances. If our pace of investment accelerates significantly, we may start to draw down some of that balance. But we'll generate -- Tavo could give you the estimates. But in the second half of the year, we should be close to $50 million of new cash flow generation, over $100 million next year. So I don't feel like it's imminent. And at our current pace, with the current pipeline, the activities that we're looking at, I would not expect that to be an imminent activity. We have plenty of runway from where we are right now.

[Octavio Espinoza, executive]

I can tell you, Doug, I'm not including any interest expense in our guidance for 2024. And the run rate on cash -- the cash operating run rate is above $100 million a year at this point.

[Operator]

Your next question comes from the line of Joe Pantginis of H.C. Wainwright and Company.

[Unknown Analyst]

This is [ Josh ] on for Joe. So as Captisol continues to provide an important revenue stream for you guys, I was wondering if you guys could describe the research versus the commercial mix and how your BD efforts are currently going, both inbound and outbound.

[Octavio Espinoza, executive]

Yes. No, the commercial versus research mix leans very heavily on the commercial side. I would say it's probably 85% commercial and 15% research use. But then in terms of the actual quantity of customers, I would say it's perhaps maybe the inverse. We have large customers that take in a significant amount of commercial product, but then a significantly larger amount of customers that take in lower volumes of Captisol for their research needs.

Was there a second portion of that question that I didn't address?

[Unknown Analyst]

Just about the BD effort, inbound and outbound.

[Todd Davis, executive]

Yes. So I would say that there's a steady pace of deal flow around the Captisol business. We are conducting a strategic review there and looking at different ways to accelerate that, expand the business, et cetera. So that's part of our -- we spent the first half of '23 really building out the investment team and the second half commencing the execution through till now. And there's a significant operational focus right now in terms of are we really using best practices in terms of new deal generation around our platform technologies in terms of monetizing existing assets that we have on our platforms. For example, the nitric oxide platform that we purchased, we're very focused on the ZELSUVMI launch. But there are a number of other high potential clinical assets that came out of that acquisition.

So I do think that we can do a better job on that, and that's a focus of us this year and right now, in fact, reviewing our management practices, are we optimizing there and asking ourselves what we can do better. So give us some time, but we hope to have, frankly, greater yield on those activities going forward.

[Operator]

Your next question comes from the line of Balaji Prasad with Barclays.

[Unknown Analyst]

This is [ Shaon ] for Balaji. The question is about CAPVAXIVE. And based on the chart on Slide 16, it seems like you guys are expecting a relatively rapid uptake from 2024 to 2026 with around $500 million annual sales in year 2026. So with that, could you give us a ballpark range on how much of this asset could drive your royalty revenue growth for the next 3 years? And would VAXNEUVANCE a good benchmark to consider?

[Octavio Espinoza, executive]

Yes, I guess I would want to first say that the chart there that you referenced is that those are analyst consensus numbers. And then if you want to get a sense for how we think that how that plays out on the top line royalty revenue stream going out to 2028, I would just refer you to Slide 5.

[Operator]

Your next question comes from the line of Larry Solow with CJS.

[Lawrence Solow, analyst]

I echo the congrats on an active and good quarter. I guess first question, just to clarify, so the guidance change, which you did a few weeks back, essentially $10 million of the royalties, that's from the Apeiron acquisition, and then there's timing -- I mean not timing. There's the milestone payments for the remainder. Essentially is that right?

[Octavio Espinoza, executive]

That's right. You got that right, Larry. Yes.

[Lawrence Solow, analyst]

And then I'm just curious just on sourcing. So it looks like you acquired this asset for basically about 5x royalty. And it sounds like it's not -- there's some -- it's growing and doesn't include the U.S., which could potentially accelerate growth. Just curious on how this asset came about sourcing of it and whatnot without divulging any secret sauce, but just curious if there's anything you could share.

[Todd Davis, executive]

Yes. There's a lot of effort that goes into our origination efforts, but I'll let Paul answer that since he actually originated that deal.

[Paul Hadden, executive]

Yes, it's a great question. I guess in short, it was a proprietary opportunity. There were some relationships involved that go back many years. And the reason why we were able to secure it is because we're able to acquire the shares for the selling shareholders. There were significant benefits to them from a tax perspective. And so it really made a lot of sense on both sides of the transaction. And obviously, our team's experience and diligence in underwriting these types of complex cross-border transactions came into play. So it just made a lot of sense. And there are some future earnouts that were referenced in the press release. And so really, we're happy to be the proud owners of Apeiron.

[Lawrence Solow, analyst]

If I could just switch gears and squeeze one more in. Just on the CAPVAXIVE, just another follow-up question on that. Again, not looking at the slide as an exact science, but it looks like based on what VAXNEUVANCE is today and my limited knowledge on this market, is this -- is the pneumococcal vaccine in the market in general, right -- I guess it's adult and has a pediatric side. Is the adult market today as big or even bigger than the pediatric? I guess is question A. And then B, is this ACIP recommendation a change from what historical or standard of care is today?

[Octavio Espinoza, executive]

Yes. I mean I can give you my perspective on VAXNEUVANCE, formerly known as V114. And so that program is trending towards blockbuster status with Merck's CAPVAXIVE. We're not quite sure how the dynamics will play out there with the existing product. Pfizer's PREVNAR, clearly the market leader, I think a $6 billion to $7 billion market there. And so analysts expect CAPVAXIVE to, as we show on the chart there, to eclipse the $1 billion mark as well. So we're excited about that royalty stream coming in the future, but it's still early.

[Operator]

[Operator Instructions]

[Todd Davis, executive]

If there are no more questions, I'll wrap up. Okay. Thank you, everyone, for joining today's call. We look forward to updating you on our company progress in the next quarterly call in November. Good day.