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Ligand Coverage Initiation
July 20, 2005
Ligand has four products that have already been FDA approved: Avinza, Panretin gel, ONTAK, and Targretin capsules and gel. ONTAK was approved in 2002 for the treatment of chronic pain, Panretin gel received approval in 1999 for Kaposi’s sarcoma, while ONTAK, Targretin capsules and Targretin gel have been approved for the treatment of Cutaneous T cell lymphoma (CTCL), a subtype of non-Hodgkin’s lymphoma.
DRUG PIPELINE
Ligand has numerous ongoing label-expanding studies for ONTAK and Targretin. The company also has several new molecular entities in clinical development with Oporia and Bazedoxifene furthest in development.
ONTAK is a fusion protein consisting of Interleukin-2 (IL-2) fused to a fragment of the diphtheria toxin. ONTAK is designed to deliver the toxic diphtheria fragment to IL-2 expressing cells. The IL-2 receptor is expressed on T cells and is involved in the activation, proliferation and survival of these cells. IL-2 is also expressed in low numbers on B cells. Studies have shown that the binding of ONTAK to IL-2 expressing cells causes the disruption of protein synthesis in these cells and consequently cell death.
ONTAK received FDA approval for Cutaneous T cell lymphoma (CTCL) in 1999 in patients whose CTCL express the CD25 subunit of IL-2. CTCL is a type of Non-Hodgkin’s lymphoma (NHL) and accounts for 5% of all NHL. CTCL is an indolent (slow growing) disease and unlike other types of NHL, it mainly affects the skin. In CTCL, a type of T cell, called T-helper cells, proliferate uncontrollably and migrate to the skin to cause rash-like lesions. Approval for ONTAK for CTCL was based on data from a pivotal phase III study that showed that ONTAK treatment resulted in a 30% response rate in these patients who had progressed on other therapies. Most of these patients had an average of 5 prior therapies. Based on these results, the FDA approved ONTAK for CTCL as a 2nd or subsequent line therapy.
ONTAK for other NHL subtypes
ONTAK is currently in phase II studies for NHL. Non-Hodgkin’s lymphoma (NHL) is a collection of different types of lymphomas (cancers that arrive in lymphoid tissue). There are 20 different subtypes of NHL, for which CTCL is one that occurs 5% of the time. The incidence of NHL has increased substantially in the last 20 years and now represents the 5th most common malignancy in the U.S. Recently approved therapies for NHL target the B-cell subtypes of NHL. ONTAK is currently being evaluated in both B-cell and T-cell NHL.
The most recent data on ONTAK for the treatment of NHL were presented at the American Society of Hematology (ASH) in December 2004. In this small phase II study, which evaluated ONTAK in patients with refractory or relapsed NHL, ONTAK induced a response in 53% of patients with an additional 29% of patients demonstrating disease stabilization. Furthermore, response to ONTAK was seen not only in patients with CD25 expression, but in those not expressing that subunit of the IL-2 receptor. These results are highly encouraging given the heavily pretreated nature of these patients.
ONTAK is also currently being evaluated in combination with Rituxan (Rituximab; Biogen Idec) in refractory NHL. Rituxan is a monoclonal antibody that inhibits B cells and thus the combination of B and T cell inhibition may provide a more potent control of NHL.
ONTAK for chronic lymphocytic leukemia (CLL)
ONTAK is also in phase II studies for CLL, a blood malignancy characterized by the over-proliferation of functionally incompetent lymphocytes (T and B cells). According to the National cancer institute, CLL will affect 9,730 new patients in 2005 with the majority of cases being B cell CLL.
Several small studies that evaluated ONTAK in CLL indicated that ONTAK is efficacious in patients with CLL who are refractory to multiple treatments. ONTAK was able to reduce the number of CLL cells in the blood of some patients. Due to the heavily pretreated nature of these patients and the fact that they are unresponsive to available therapies, the results thus far in this refractory CLL population are encouraging.
Larger studies are needed to verify ONTAK’s effectiveness in both NHL and CLL. However, the results thus far have been encouraging and suggest that the drug will have utility as a second and third line agent for both indications, which will help expand the drug’s potential.
Targretin (Bexarotene) comes in two formulations: capsules and gel. Both formulations have been approved for CTCL. Label-expanding studies are ongoing with the gel formulation being evaluated for psoriasis while the capsules are being evaluated for the treatment of solid tumors. Tagretin is a synthetic retinoid that selectively activates Retinoid X Receptors (RXR). Retinoid receptors are nuclear receptors that play a key role in the regulation of cell growth, differentiation and proliferation. Thus their inhibition may provide benefit for the treatment of cancer.
Tagretin capsules received FDA approval for the treatment of advanced refractory CTCL in late 1999 while Targretin gel received approval in mid 2000. The gels can be directly applied to CTCL lesions on the skin to reduce the lesions while the capsules provide a systemic administration of the drug to combat the CTCL cells.
Targretin gel for psoriasis
Targretin gel is currently being evaluated in phase II studies for psoriasis, another disease that is characterized by skin lesions. While there is little information on the effectiveness of Targretin gel for psoriasis thus far, the rationale for the use of Targretin for this disease is scientifically sound. Psoriasis is an autoimmune disease that afflicts approximately 4.5 million people in the U.S. alone. It is an incurable disease that is typically treated by immunosuppressive drugs, steroids or vitamin A. Some of these drugs are topical treatments that are applied directly to the lesions. Targretin is similar to vitamin A and given its gel formulation we speculate, pending positive trial data, that it can be beneficial for patients with psoriasis. The large number of patients afflicted by this disease makes this indication an exciting expansion opportunity to the Targretin franchise.
Tagretin capsules for non-small cell lung cancer (NSCLC)
Tagretin capsules have undergone two large pivotal phase III studies for front-line NSCLC called SPIRIT I and SPIRIT II. Both studies evaluated Tagretin in combination with chemotherapy in front-line NSCLC. SPIRIT I evaluated Targretin in combination with cisplatin and vinorelbine, while SPIRIT II evaluated Targretin in combination with carboplatin and paclitaxel.
Full details of both studies were recently presented at the American Society of Clinical Oncology (ASCO). Collectively the results demonstrated that the addition of Targretin to standard chemotherapy actually reduced the progression-free survival and overall survival in NSCLC patients. While a positive trend in promoting survival was observed in earlier phase II studies, this was contradicted by the results of these phase III studies. These studies not only demonstrated that Targretin did little to benefit NSCLC patients, but in fact may be detrimental to these patients.
In a retrospective subset analysis of the patients in both SPIRIT I and II, it was found that a correlation between patients who had significant increases in triglyceride levels due to Targretin administration had better outcome on Targretin. These hypertriglyceremic (high triglyceride) patients had improved survival in response to Targretin compared to those who did not show an increase in triglyceride levels. While it could be argued that hypertriglyceride levels could serve as a marker for Targretin-responsiveness, it must be noted that in these patients who had hypertriglyceride levels, the dose of Targretin was reduced significantly in the trial. Given the retrospective nature of this subset analysis and the dose reduction, the data from this subset analysis is difficult to interpret. An additional trial that evaluates concurrent hypertriglyceremia and overall survival to Targretin treatment is required before the real meaning of this subset analysis can be determined. However, given the reduced progression-free survival and overall survival in the overall patient population when Targretin is added to standard chemotherapy, we feel the drug is unlikely to receive FDA approval. The investigators indicated that they would like to further evaluate the relationship between hypertriglyceremia and survival and the company has indicated that they would like to evaluate Targretin in the second and third line setting. However, based on data from SPIRIT I and II, we believe that Targretin has little, if any, chance of attaining FDA approval.
Targretin in other solid tumors
Targretin is being evaluated in early phase II studies in other solid tumors including breast cancer, renal cell cancer, prostate cancer and colorectal cancer. While Targretin has demonstrated benefit in the blood cancer CTCL, its track record in solid tumors, namely NSCLC, leads us to believe that it is unlikely to be of benefit in these other solid malignancies. Out of these indications, trial data is only available for renal cell cancer (RCC). While the phase I/II study in RCC look promising, it must be remembered that phase II studies of Targretin in NSCLC also looked promising. Thus, we would require positive phase III trial data before we believe that the drug would be of benefit in these settings.
Oporia is a joint development between Ligand and Pfizer. It is a second-generation non-steroidal selective estrogen receptor modulator (SERM). SERMs were developed to circumvent some of the toxicity associated with estrogen therapy, namely the risk of breast cancer and uterine cancer. SERMs exhibit both estrogen agonist (stimulates estrogen receptor) activity and antagonist (inhibits) activity depending on the tissue involved. The ideal SERM would provide pro-estrogen effects on the bone and heart with neutral or anti-estrogen effects on breast and uterine tissue.
Oporia has been evaluated for the treatment of postmenopausal osteoporosis and vaginal atrophy. An NDA was filed for Oporia for the treatment of postmenopausal osteoporosis in August 2004 and a supplemental NDA was submitted in December 2004 for vaginal atrophy.
Oporia for osteoporosis
Currently, the only SERM that has been approved by the FDA for osteoporosis is Evista (Raloxifene). Oporia is a second-generation Evista with pro-estrogen activities in the bone and cardiovascular system while acting as an anti-estrogen in the breast and uterine tissue, thus circumventing breast and uterine cancer risks.
While two phase III trials have been carried out in postmenopausal osteoporosis, only data from the phase II study is available. At the annual meeting of the American Society of Bone and Mineral Research (ASMBR) in October 2004, data from this phase II study in 410 women, which compared Oporia to Evista and placebo, showed that Oporia was effective in improving bone mineral density (BMD). Both Evista and Oporia improved BMD while patients on the placebo control lost bone density over the 2 year period. Oporia was shown to improve total hip BMD comparable to that with Evista, while it improved lumbar spine BMD more than Evista. Side effects appeared to be similar to Evista. From this phase II data, it would appear that Oporia is superior to Evista at improving bone density; however, Oporia’s effect on bone fractures is not yet clear.
Pfizer submitted an NDA for the treatment of postmenopausal osteoporosis in August 2004 based on results from the two phase III studies. These phase III studies have enrolled over 10,000 women to evaluate the effect of Oporia on bone loss prevention and fractures. Despite announcing at the 2004 Annual JP Morgan Healthcare Conference that the phase III data would be released in 2004 once the NDA was filed, we have yet to see this phase III data. Moreover, the expected PDUFA (FDA decision) date for Oporia was on June 19, 2005. Both Pfizer and Ligand have not provided an update on this decision leading us to believe that Oporia either received an outright rejection or an “approvable letter” from the FDA. Since the phase III data have not been made public, we speculate that either toxicity was a concern (perhaps the extraskeletal effects of Oporia are higher than that reported in the phase II study) or the FDA required bone fracture data, not just bone mineral density data, for approval. We are currently awaiting information from the companies.
Oporia for vaginal atrophy
At the annual meeting of the North American Menopause Society (NAMS), data was presented on Oporia for the treatment of vaginal atrophy, a common complaint in women with menopause. Vaginal atrophy is caused by estrogen deficiency and is characterized by a thinned endometrium and increased vaginal pH levels which predisposes the vagina and uterus to infections and mechanical weakness.
In a study presented at NAMS in October 2004, Oporia was shown to reduce the number of parabasal cells while increasing the number of superficial cells compared to placebo. Oporia also significantly decreased the vaginal pH compared to control. Furthermore, the women given Oporia reported improvements in symptoms associated with vaginal atrophy. This study represents the first study of a SERM demonstrating a benefit in patients with postmenopausal vaginal atrophy. Based on these results, a supplemental NDA was submitted in December 2004 for vaginal atrophy and the PDUFA is expected in October 2005. However, given the lack of information on the PDUFA for osteoporosis, we feel that there may be toxicity issues related to Oporia that may also affect its likelihood of approval for vaginal atrophy.
Like Oporia, Bazedoxifene is a second generation SERM. There are currently two formulations of Bazedoxifene in clinical development: the drug alone and the drug in combination with estrogen (Premarin; Wyeth). Bazedoxifene alone is being evaluated for the prevention of osteoporosis while the Bazedoxifene/Premarin combination is being evaluated for the treatment of menopause-related symptoms.
Bazedoxifene for osteoporosis
In vitro studies and animal studies have shown that Bazedoxifene increases bone mineral density and bone strength without stimulating breast or uterine tissue. In a small clinical trial evaluating the effects of Bazedoxifene on endometrial (uterine) tissue, it was shown that Bazedoxifene did not induce endometrial thickness and in fact, antagonized endometrial tissue, thus suggesting that the drug does not pose a risk for uterine cancer. This study is pertinent given that many SERMs have failed in clinical development due to uterine safety issues.
Bazedoxifene is currently in an ongoing phase III study in women with osteopenia (low bone mineral density) who are at risk of a fracture but have not yet had fractures. The study is comparing Bazedoxifene to Evista and placebo. The study recently completed enrollment and we now wait for data to be released from this study (which will occur after the predetermined number of fractures have occurred). Given the drug’s preclinical toxicity profile, particularly on uterine tissue, we believe that Bazedoxifene may pose less of a toxicity concern than with other SERMs, including Oporia, and may become a strong competitor to Evista for the osteoporosis market.
Bazedoxifene/Premarin for menopause
Premarin is a conjugated estrogen that has been approved for the treatment of menopausal symptoms. The combination of Bazedoxifene and Premarin could potentially provide patients with the beneficial effects of estrogen with the anti-estrogenic activity of Bazedoxifene that may reduce the breast and uterine cancer risks associated with Premarin. Phase III studies are ongoing and regulatory filing is expected in 2007 pending positive data.
Given the known risk of breast and uterine cancer associated with estrogen therapy, the addition of Bazedoxifene, with its antagonistic activity on uterine tissue, may help make hormone replacement therapy safer. Thus, we believe that this drug combination could become an important new drug regimen for the treatment of menopause and may expand the market once cancer risks are alleviated.
Drugs in early clinical development
Ligand has numerous drugs in early clinical development, many of which are in phase I or have just entered phase II development. Therefore, it is still too early to determine how effective these drugs are and how they will perform in their respective markets.
Of the drugs in early development, the majority are peroxisome proliferator-activated receptor (PPAR) modulators developed in collaboration with big pharmaceutical companies. The most clinically advanced of these is Naveglitazar, which is being developed in collaboration with Eli Lilly.
Naveglitazar
Naveglitazar is a PPAR alpha gamma dual agonist. PPARs are nuclear hormone receptors of which there are three subtypes. PPAR alpha is involved in lipid control while PPAR gamma is involved in blood glucose control. Several dual PPAR alpha/gamma agonists are in clinical development including Pargluva (Muraglitazar; Bristol Myers Squibb) and Galida (Tesaglitazar; AstraZeneca) which are in NDA and phase III development, respectively. Thus, Naveglitazar has the disadvantage of being behind in the race to market. Moreover, there are concerns regarding the toxicity of dual PPAR agonists with many of these being discontinued in development. In June 2004, the FDA required all PPAR dual agonists to undergo two year rodent carcinogenic studies to address these toxicity issues. This rodent study was initiated in 2004 for Naveglitazar and will further delay the drug’s development by an estimated 18-24 months.
PARTNERSHIPS
Ontak
In November 2004, Ligand restructured its agreement with Lilly with respect to the royalties payable to Lilly on sales of ONTAK in the United States. In January and April 2005, Ligand exercised two options which provided for one-time payments of $20 million and $13 million respectively, to Lilly in exchange for the elimination of ONTAK royalty obligations due in 2005 and 2006, and a reduced, reverse-tiered royalty scale on ONTAK sales in the U.S. thereafter. Because both options were exercised, beginning in 2007 and throughout the remaining ONTAK patent life (2014), Ligand will pay no royalties to Lilly on U.S. sales up to $38 million. Thereafter, Ligand will pay royalties to Lilly at a rate of 20% on net U.S. sales between $38 million and $50 million, at a rate of 15% on net U.S. sales between $50 million and $72 million, and at a rate of 10% on net U.S. sales in excess of $72 million. Sales outside the U.S. are excluded from this agreement and will continue at the previous non-tiered contract royalty rate of 20%.
Targretin
In October 1997, Ligand and Eli Lilly entered into a strategic alliance under which Lilly received rights to Targretin capsules. In February 1999, Ligand recaptured all rights to Targretin capsules as Lilly decided not to proceed with its development.
Oporia
In 1991, Ligand Pharmaceuticals entered into a research and development collaboration with Pfizer to develop therapies for osteoporosis. Under the terms of the agreement, Ligand is entitled to receive an additional milestone upon the first FDA approval of Oporia and, if marketed, net royalty payments equal to 3% of net sales of Oporia worldwide for any indication.
Bazedoxifene and Bazedoxifene/Premarin
In September 1994, Ligand entered into a research and development collaboration with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products (AHP), which granted Wyeth exclusive worldwide rights to discover and develop drugs that interact with estrogen receptors (ERs) or progesterone receptors (PRs) for use in hormone replacement therapy (HRT), anti-cancer therapy, gynecological diseases, and central nervous system disorders associated with menopause and fertility control. In May 1996, Wyeth-Ayerst exercised its option to expand its collaboration in women's health to include the area of treatment or prevention of osteoporosis through ER agonists.
Naveglitazar
The Lilly-Ligand collaboration involving PPAR modulators began in 1997. Under the terms of the collaboration, Ligand receives research funding from Lilly. Lilly is responsible for the development and registration of any products resulting from the collaboration, and pays Ligand milestone payments as products move through the development process. Lilly has exclusive worldwide marketing rights to products resulting from the research, and will pay Ligand royalties on sales of products that make it to market.
REVENUE POTENTIAL
Ligand’s four marketed products most likely provided enough revenue in 2004 for the company to turn a profit. Unfortunately for Ligand, its potential largest revenue generating drugs are primarily owned by big pharmaceutical companies that will pay Ligand only a fraction of sales. However, should these products gain approval, they will continue to add to Ligand’s already established profitability. Of the drugs in clinical development, Targretin is being evaluated in the largest markets and thus, have the potential to contribute the most to Ligand’s revenues. However, the failure of Targretin in front-line NSCLC makes us skeptical that Targretin will ever become a large franchise for Ligand.
Avinza for Pain Indications
While we do not expect Avinza to achieve a large amount of penetration into the pain market, we do expect Avinza to continue to grow and provide a healthy revenue stream to Ligand. We expect 5 and 10-year Avinza revenues of $364.0 million and $250.0 million.
ONTAK for CTCL
CTCL represents only 5% of NHL cases, however, CTCL patients tend to live for a relatively long time. Ligand estimates that there are approximately 16,000 patients in the U.S. and another 13,000 in Europe. Given ONTAK’s high price of $75,000 year, the drug does provide a decent amount of revenue to Ligand. We project 5 and 10-year revenues from ONTAK in CTCL of $31.6 million and $35.5 million.
ONTAK for CLL and NHL
CLL and NHL offer larger patient populations than CTCL, however, both programs are still very early in development. We project 5 and 10-year U.S. revenues for ONTAK in CLL of $16.4 million and $80.3 million and in NHL as $81.3 million and $391.8 million.
Targretin Capsules
Our low likelihood of approval for Targretin capsules reflects our skepticism for the product to ever expand outside of CTCL. However, should Ligand be able to gain approval for NSCLC, breast cancer, renal cell cancer, prostate cancer and colorectal cancer, we project 5 and 10-year U.S. revenues from Targretin caps at $155.6 million and $461.2 million.
Targretin Gel
Going forward, we expect Targretin gel to contribute only a small portion of revenue to Ligand. As such, we have not created revenue models for the gel. We have added approximately $7.5 million a year to Ligand’s other revenue for valuation purposes.
Oporia for Osteoporosis
We are awaiting an update by Pfizer in regards to the current status of Oporia. Currently, we have modeled Oporia for an FDA approvable letter than can easily be addressed by Pfizer and for the product to be approved in the beginning of 2006. We do not expect Oporia to do as well as Bazedoxifene in the osteoporosis market and to achieve 5 and 10-year worldwide revenues of $832.7 million and $1.31 billion, of which only 3% is payable to Ligand.
Oporia for Vaginal Atrophy
According to the American Association of Clinical Endocrinologists, there are approximately 35 million postmenopausal women in the U.S. An estimated 10 to 40 percent of postmenopausal women have symptoms of vaginal atrophy. We project Oporia to obtain similar penetration into the market as in osteoporosis and for 5 and 10-year worldwide revenues to be $201.6 million and $235.8 million, of which 3% is payable to Ligand.
Bazedoxifene for Osteoporosis
We expect Bazedoxifene to do better than Oporia in the osteoporosis market and to achieve 5 and 10-year worldwide revenues of $762.4 million and $2.39 billion. It is inconsequential as to which SERM (Oporia or Bazedoxifene) will perform in the osteoporosis market, as Ligand will only receive 3% of revenues from either one.
Bazedoxifene/Premarin for Menopause
It is unclear exactly how well the combination therapy will do in penetrating into the established estrogen-therapy (ET) market. However, given the known risks of breast and uterine cancer associated with estrogen therapy, the addition of Bazedoxifene may help make hormone replacement therapy safer and thus, may help expand the market. We believe that this drug combination could become an important new drug regimen for the treatment of menopause. We project 5 and 10-year worldwide revenue of $676.4 million and $2.37 billion, of which Ligand will earn 3%.
Naveglitazar for Type II Diabetes
We do not expect Naveglitazar to do as well in the market as the two other PPAR drugs: Galida and Pargluva. Despite this, diabetes represents a large enough market to be meaningful to Ligand, even with just 12% of revenue coming its way. We project 5 and 10-year worldwide revenue of $210.2 million and $1.24 billion.
VALUATION
Using our standard 25x EV/EBITDA multiple and 16% discount rate, we find Ligand to be UNDERVALUED at its current level. In total, we value Ligand’s 5 and 10-year pipeline at $15.53/share and $14.33/share. However, if we were to use a discount rate of 30%, we find Ligand to be FAIRLY VALUED with a 5 and 10-year pipeline valuation of $8.78/share and $4.59/share, which may be more appropriate given the financial risk involved in historical results.
If Ligand is unable to gain approval for any of its products in the pipeline, its 5 and 10-year valuation would still be $12.40/share and $7.79/share. Ligand will only receive a small portion of the potential SERM product revenue. Assuming that Bazedoxifene and Oporia both receive FDA approval, Ligand’s 5 and 10-year valuation becomes $16.16/share and $15.37/share. When Naveglitazar is added, its 5 and 10-year valuation becomes $16.63/share and $17.12/share.
Upcoming Catalysts and Valuation
The most obvious near-term valuation driver may come in the form of the company filing its 10k and remaining listed on the NASDAQ. This may relieve some of the investment risk from the company and allow it to be valued more on its pipeline.
Other significant catalysts for Ligand in the near future are the FDA approval (or rejection) of Oporia for both osteoporosis and vaginal atrophy. The PDUFA for vaginal atrophy is due in October 2005. Another important near-term catalyst is the expected FDA filing for Bazedoxifene in mid-2006 for the treatment of osteoporosis.
As mentioned above, the PDUFA for osteoporosis has already passed without comments from either Ligand or Pfizer. We expect Pfizer to give an update on its upcoming July 20th conference call. In the event that an approvable letter was issued and FDA concerns can be addressed easily, a future approval in both the osteoporosis and vaginal atrophy settings would add approximately $0.20/share to Ligand’s valuation.
Ligand Convertible Debt
On November 22nd, 2002 Ligand issued $155.25 million of junior subordinated convertible notes that pay interest at 6% and are due on November 16th, 2007. The notes also have an embedded call option on or after November 22nd, 2005 at 102.4% of par and on or after November 16th, 2006 at 101.2% of par. The notes are convertible into the company's common stock at a price of $6.17/share, or an initial conversion premium of 22%. The money was to be used to restructure their AVINZA relationship with Elan, as well as to purchase U.S. government securities in order to pledge the notes as security for the first 2 years.