I've been thinking about biotech stocks a great deal lately. The
sector seems to be trading much better in the early weeks of 2012,
a few spectacular gainers already in the bag
and likely more to come.
Yet investors are also well aware many biotech stocks simply
flame out as cash dwindles or as a drug fails to meet clinical
testing hurdles. So how do you gain potentially big upside without
suffering significant downside (which is
) in this speculative sector?
I think I've found the perfect vehicle.
It's a company with ties to a range of promising drugs and only
needs to see a few hits to give itsshares a solid boost. I'm
Ligand Pharmaceuticals (Nasdaq:
which has been around for more than 20 years. After a major revamp
about five years ago, the company is just now hitting its stride.
Just-released fourth-quarter results underscore a long-awaited
milestone. Ligand had been losing money because its portfolio of
drugs had yet to mature, but now it's finally profitable -- and
potentially hugely profitable within a few years.
Before I get into Ligand's slate of investments, let me show you
what this company has looked like by the numbers.
As you can see in the table above, Ligand's heavy investments to
acquire the rights to promising drugs have led to a string of
money-losing years.EBITDA is the more salient metric thanearnings
per share (
) , because it best highlights an ongoing cash burn. Not only did
Ligand sharply reduce theEBITDA drain in 2011, it actually
in the fourth quarter -- for the first time in a number of years.
And now that Ligand is in the black, it's highly unlikely to slip
back into the red.
Credit for this company's comingturnaround goes toCEO John Higgins,
who took the reins in January 2007. Since then, he has deployed the
company's cash into four key deals, which have provided a pipeline
of drugs, and more important, some key biotechnology platforms that
can boost the efficacy and safety of many other companies' drugs.
Reaping what they sow
Through its investment in various small biotech firms, Ligand now
has exposure to 60 different drugs that are either in clinical
trials or are already on themarket . Specifically, roughly 10% of
its drug pipeline has already received Food and Drug Administration
approval, another 10% is in Phase III testing, another 25% is in
Phase II testing, with the remainder either in Phase I or
Here's a quick summary of a few key programs that are already
• Captisol. Captisol is a chemical solution that makes drugs more
stable and can lead to more precise dosing. More than 20 drugs
currently in development are being tested with Captisol. This
platform is providing a boost to many of Ligand's drugs in
development, and is being licensed by major pharmaceutical firms to
improve the performance of existing drugs. Partners include
Bristol-Myers Squibb (NYSE:
Medicines Co. (Nasdaq:
currently sells this drug, which stimulates platelet formation and
targets patients with bleeding disorders. Glaxo is also testing
Promacta to gauge its efficacy in patients with hepatitis C.
According to the World Health Organization, about 170 million
people worldwide are infected with the hepatitis C virus, which can
result in cirrhosis of the liver and liver cancer. If Promacta
proves to be efficient in the treatment of the disease, then it
could potentially become a blockbuster drug.
Ligand earns a sliding 5% to 10% royalty scale, depending on
salesvolume . It is likely to make around $10 million in Promacta
royalties this year, but this figure could be 10 times higher by
the middle of the decade. UBS projects sales of Promacta to rise
150% to $123 million this year, and sees 2013 sales exceeding $200
million, on the way to $500 million in sales by 2015.
Ligand's sales are expected to remain stable or trend moderately
higher over the course of 2012 as these two drug platforms gain
greater traction. Management has formally issued guidance for 2012
sales of $30 million and positivecash flow , though this figure
appears to be conservative in light of recent quarterly sales run
Not only do the two platforms have significant growth opportunities
in the years ahead, but Ligand's pipeline of yet-to-be-approved
drugs also looks quite promising.
For example, Ligand's partner
Onyx Pharmaceuticals (Nasdaq:
is testing a drug called carfilzomib, which is a Captisol-based
protease inhibitor that has appeared quite effective in the
treatment of multiple myelomas (blood cancers). Phase II testing is
underway, and carfilzomib could be on themarket a year from now.
The company and the analysts who follow Ligand say this drug also
has the potential to be a blockbuster.
Behind carfilzomib stands a fairly deep drug pipeline, though it's
too early to place a value on it. The company is spending about $16
million in generaloverhead each year and another $10 million on
research and development (R&D) -- with partners spending much
more on their own R&D that couldyield royalties to Ligand.
So combined, we're talking about roughly $26 million in annual
expenses. Notably, Ligand's revenue stream has already surpassed
this amount and is likely to march much higher in 2013 and beyond.
That's why I think this former money-loser should be a money-maker
from here on out.
The Downside Protection -->
Shares have traded as low as $9 when the
was in full sell-off mode last summer. If the market hits another
deep rough patch in 2012, then that's a floor that you need to
think about. Insiders tend to step in and support the stock with
open market purchases in the $11 range. Now that Ligand is
may never touch those lows again.
Upside Triggers -->
The two drug platforms noted above are just beginning to hit their
stride. As a result, 2012 should see a steady stream of
announcements from Ligand and its partners regarding clinical trial
progress or new sales agreements. Analysts are still hard-pressed
to specifically gauge forward quarterly revenue streams, but the
projected income statements should get much more clarity over the
course of 2012.
As a very rough gauge, assume 2012 sales of $30 million, 2013 sales
of $40 million and sales approaching $100 million by 2015. Notably,
these sales carry very high margins, which is why analysts say
Ligand could earn $3 to $4 a share by 2016. If this scenario plays
out, then shares could rise from a current $14 to $30 or $40 in the
next few years.
Action to Take -->
I will be buying 700 shares of Ligand (or roughly
$10,000 worth) 48 hours after you read this.
I'm not expecting rapidappreciation for this stock. Indeed, it
carries a fairly lowbeta and wouldn't necessarily surge in value
just because the market takes off. More cyclical holdings in my
$100,000 portfolio, such as
, have much greaterleverage to expectations of a rebounding
U.S.economy . That said, Ligand's shares are more likely to hold
their own if the U.S. economic outlook becomes constrained.
Frankly, this isn't a stock to hold for the next six months, and
instead should be seen as a solid long-term growth portfolio
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, AA in one or more if its "real money" portfolios.