Send me real-time posts from this site at my email
Motley Fool

Here's Why Ligand Pharmaceuticals Plummeted 16% Today

What happened

Shares of Ligand Pharmaceuticals (NASDAQ: LGND) closed down 16% to $110.05 on Wednesday, having been down as much as 25%, after Citron Research released a report arguing that the drug developer is only worth $35 per share.

Citron notoriously shorts stocks prior to writing negative reports, so investors should take that into account while evaluating the value of the research.

Image source: Getty Images.

So what

Ligand Pharmaceuticals' business model is to collect royalties and milestone payments from compounds and intellectual property that it licenses to drug developers.

Most of Citron's report focuses on Ligand's potential milestone payments, noting that Viking Therapeutics accounts for 50% of the potential milestone payments, while Vernalis accounts for another 12%.

The thing is -- and every drug company investor should know this -- looking at milestone payments is a terrible way to value a drug development deal. For competitive reasons, most companies don't disclose the triggers for milestones -- is it start of phase 2? Positive phase 3? FDA approval? Sales of $200 million annually? $1 billion? -- and they also don't disclose how much of the total is allocated to each milestone, although sometimes companies will break out "development" milestones from "commercial" milestones, so at least investors can figure out the relative individual timing of the two blocks.

Investors shouldn't be focused on potential milestone payments to Ligand because there's no way to accurately determine when they'll come in and how large they'll be.

Now what

What investors should be focused on are royalties that Ligand will get on its licensed drugs. There's still some uncertainty, as royalties are often tiered, but the minimum levels are generally known. Many of the drugs Ligand has partnered on are in phase 2 or earlier development, so the potential royalties on sales are years away, but they'll also come in year after year, while milestone payments are one-time payments (although each deal typically has multiple milestone payments).

Whether the current and potential royalties justify Ligand's $2.3 billion market cap is up for debate, depending on how likely you think it is that the drugs will be approved and their potential peak sales, but given the unknowns with milestone payments, investors shouldn't be penciling them into their valuation models, and therefore Citron's argument that a large chunk comes from two companies shouldn't concern investors too much.

10 stocks we like better than Ligand Pharmaceuticals
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Ligand Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue