Lemelson Capital Makes Short Case Against Ligand Pharma (LGND)

June 16, 2014 2:59 PM EDT
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Ligand Pharma (NASDAQ: LGND) is dipping lower following a new report from Lemelson Capital, which makes a short case for the stock. The following is from the 02+ page report:

A significant portion of Ligand’s business model is based on the goal of partnering with other pharmaceutical companies to commercialize and market its assets, and therefore a significant part of its revenue is based largely on payments made to the Company by partners for royalties, milestones and license fees.

Despite an entirely opaque future, the dwindling of critical revenue streams that will continue to stress the Company as a “going concern”, Ligand trades at an excessively high PE ratio of 115, a factor of 4.8x that of financially superior competitors (and 6x that of the S & P 500). Moreover, Lemelson Capital believes the Company has consistently used persuasive definitions to suppress important evidence regarding pressures to the Company’s revenue streams and its super-concentration in both its sole supplier and also its customer base.

Ligand’s press releases and communications with investors paint an exceedingly optimistic picture of the Company’s future growth. Yet the firm’s SEC filings reveal a business whose key revenue streams are either are in decline, or are likely to diminish entirely. By way of example, collaborative R & D revenues (a substantial part of Ligand’s overall sales and business model), have already declined 79 percent in just the last four years, further concentrating the Company’s business into just two precariously remaining fragile revenue streams.

Above all, the Company faces it biggest existential threat in what is likely to be a momentous impairment of its largest royalty generating asset, Promacta®, a GlaxoSmithKline therapy that as recently as Q4 2013 accounted for as much as 72 percent of all royalties received by the Company.

Getting past the Company’s Jargon, Ligand’s business is radically simple. The result of 27 years of operating activity at Ligand is a deficit of $669 million. In the last ten years alone, shareholders have been diluted by 72 percent. The future of the Company is sold as full of promise, but in reality there is no evidence to support significant gains in revenue or profitability that would even vaguely approximate a justification for the Company’s current share price of $66.75 as of June 13, 2014. Further, after losing revenue from collaborative R & D efforts, the Company has gone from three revenue sources to essentially two, and now appears likely to decline even further to just one revenue source, resulting in a dangerously undiversified revenue structure.

In light of the extraordinary risks associated with Ligand as a going concern, the imminent threat to Promacta® royalties and based on superior firms’ far lower valuations, Lemelson Capital believes that Ligand’s fair value is roughly between $0 per share, or 100 percent below the current stock price.

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