Ligand Pharmaceuticals IncLGND113,88 $
Today we have a speculative idea: take shares of biotech Ligand Pharmaceuticals (NASDAQ: LGND), to cash in on some changes in his business.
Growth potential and validity: 22,5% behind 16 Months; 49% behind 3 of the year; 78% behind 8 years. In all cases, the separation of one of the company's divisions into a separate issuer is taken into account.
Why stocks can go up: because the company is changing before our eyes.
How do we act: we take shares now by 113,89 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
Ligand is a contractor, working in drug development. The company's report goes into great detail about the medical characteristics of its products and services.. The business is divided into the following segments.
Royalties — 17,57%. This is Ligand's share of sales of goods, produced by its partners, who pay a company to use its patents. On the site you can see, how much does she get from sales of each type of product.
This is what the entire company's revenue from drug royalties looks like:
- "Kiprolis" - 9,92%.
- Evomela - 3,64%.
- Other — 4,01%.
Sale of Captisol — 59,26%. Sale of cyclodextrin, manufactured by Hovione. This substance, used to develop new drugs. Captisol itself for Ligand is made by a third-party manufacturer.
Contracts — 23,17%. Ligand outsources drug development process from its partners.
The three segments are closely related: Ligand sells Kaptizol and develops drugs for the same customers, from which he takes money for the use of his intellectual property. Ligand works with pharmaceutical companies like Merck and Gilead.
The company does not provide data on the regional distribution of sales.
Arguments in favor of the company
Fell down. Since February 2021, the company's shares have fallen from 203 to 113,89 $. In view of certain circumstances, we can, if not hope for a rapid rebound, then expect other benefits.
Clear with demand. Pharmaceutical companies are literally forced to run as fast as they can, just to stay put: their drug patents have an expiration date and when does it expire, their competitors get the right to produce analogues. They will do it cheap and dump.
Reverse engineering itself can cost much less than full-fledged R&D from scratch, but in the case of drugs, this is not particularly necessary: basic data already exists in patent and regulatory documents.
Before the expiration of the patent, the right holder-manufacturer of the drug can take the manufacturer of the analogue to court and win, if in the country, where do they sue, his patent is recognized. But when the patent stops working, revenue and profit from the sale of this product are declining.
This is why pharmaceutical companies spend a lot of money on R&D., to have as many patents on hand as possible. And R&D is always a guessing game, drug trials are divided into phases, and together they can stretch up to 7 years, and the project can be wrapped up by regulators even at the very last phase.
In sum, this stimulates pharmaceutical companies to spend heavily on the development of new drugs.. And this will spur demand for Ligand solutions in this area.. It is this segment of the company that I see as the most promising.
So far reliable. In the US, the company's patent for Captisol is valid until 2033, on "Cyprolis" - to 2029. This makes her business more or less secure for the next three years at least..
Acceptable bookkeeping. The company has 479.754 million debts. Of this amount, only 41.665 million need to be repaid during the year. She has a lot of money at her disposal.: 341,108 million on accounts plus 85.453 million debts of counterparties. So the company will be able to survive the coming era of rising borrowing costs, even though the specifics of her business will interfere with this.
Can buy. The company is worth acceptable both in absolute, as well as in relative terms: P / S — 6,75, P / E — 33,49, capitalization 1.88 billion. In combination with all the above points, this factor can attract a buyer to it.. The company also has a fairly high margin of business, that her buyer will also take into account.
Branch. The company is going to launch a biotech platform on the exchange in the second half of the year. It is linked to OmniAb antibody research through a merger with SPAC Avista Public Acquisition Corp. II (AHPA). Ligand shareholders will receive 75% new venture shares. Think, that its shares can grow more vigorously than the shares of a single Ligand.
OmniAb itself is a relatively small part of Ligand's business - about $50 million a year., about 18% from its revenue, — while the value of the OmniAb enterprise will be approximately 884 million.
All in all, deal looks very good for Ligand shareholders. Yes, and a separate OmniAb can also be bought, to our benefit.
What can get in the way
Concentration. Three unnamed large clients of the company give it the majority of revenue: 41, 14 and around 10%. Changing the relationship with one of them can have a very bad impact on the company's reporting.
Quo vadis? The company's patents won't expire soon, but they will. And she faces the same problems, like conventional pharmaceutical companies: the need to invest in R&D with no guarantee of success.
You also need to take into account, that sales of Captisol by the company will depend on surges in demand for this product. During a pandemic, demand, certainly, rose due to wild growth in demand for vaccine development. But he might fall soon, when the “thaw” begins and the coronavirus will temporarily win.
Then a new disease will appear, this is simply inevitable - but during the period of "shift change" between pandemics, Ligand's revenue will fall. Actually, This explains the decline in the value of the company's shares.: investors don't understand, what to expect from this business.
OmniAb, which makes up the majority of Ligand's contract R&D segment, much more interesting than the whole company as a whole. However, I am ready to show unusual optimism and assume, that Ligand's management is preparing for the transformation of the entire company as a whole and the spin-off of OmniAb on favorable terms is a step towards this.
Captisol. The main revenue of Ligand comes from the product, the production of which the company does not control at all. Produces "Kaptisol" Hovione at its facilities in Ireland and Portugal - and any of its troubles will quickly affect Ligand. This must be kept in mind.
What's the bottom line?
We take shares now by 113,89 $. And then there are the following options:
- Expect stock to rise 140 $. Think, we will reach this level in the next 16 Months.
- Expect stock to rise 170 $. Better get ready to wait here 3 of the year.
- We are waiting for the return of shares to the level 203 $. Here it is worth focusing on the time 8 years.
In all options, we take into account the spin-off of OmniAb into a separate company - we will have to receive these shares, as shareholders of Ligand, in proportion, which will be known later. That is, Ligand shares may fall, while OmniAb shares rise or fall too. We had a similar story with Synnex.
