Life After Loeb: Ligand Pharmaceuticals Prospers In Stripped-Down Mode

ligand 1On his first day as chief executive of Ligand Pharmaceuticals in January 2007, John Higgins was shown into a conference room in the biotech firm’s 135,000-square-foot San Diego headquarters. Inside was a table so mammoth, Higgins recalls, “you could practically land a corporate jet on it.”

The new CEO immediately instructed the head of facilities to find a carpenter and cut it up into smaller tables. Higgins wasn’t some scientist-turned-empire builder trying to make Ligand into the next Amgen or Genentech. He was a hit man, brought in amid a raid by activist Daniel Loeb of Third Point LLC to stem the losses at the once-promising biotech firm and turn whatever was left into quick cash.

Within a year the 365-employee company was down to 66, on its way to 18 employees, which is what Ligand has today. The huge San Diego headquarters is gone, along with an expensive sales force and all of Ligand’s commercial products. Over the next two years Higgins oversaw a wave of sales that produced $518 million in cash.
Loeb pocketed his share of a $250 million special dividend in April 2007, sold most of his 7 million shares at a profit and by 2011 was out, having roughly doubled his $50 million investment. “Higgins deserves credit for transforming Ligand,” Loeb says. But Higgins stayed on, reshaping the company into his vision of what a biotech company should be. “No matter how smart you are, no matter how much diligence you do, no matter how many Nobel Prize-winning scientists you put on your advisory staff, there’s no certainty your decision making about a drug will be right,” says Higgins, 45.

He’s rebuilt the company along lines that would make a Texas wildcatter proud: spreading bets and relying on other people’s money to find winners. Instead of bankrolling his own R&D, Higgins employs five senior scientists and uses low-cost contract labs in India and China to investigate promising new compounds. Meanwhile, Ligand has more than 120 projects in various stages of development at bigger pharmaceutical companies under contracts that will give Ligand a stream of license revenue if they succeed.

In all, Ligand’s partners will spend $1.1 billion this year developing its drugs, Higgins says. He calls them shots on goal, and if the historical stats for biotechnology developments hold, he figures at least 20 of the drugs Ligand has licensed out will make it to market, boosting Ligand’s $30 million in royalty revenue last year by hundreds of millions of dollars. GlaxoSmithKline brought Ligand’s blood-platelet-restoring pill Promacta to market, for example, and the drug, since sold to Novartis, could become a big seller. At an average royalty of 5% to 10% and patent protection through 2027, Higgins says, Promacta could be “a very rich annuity” if sales grow past $1 billion a year as hoped.

Ligand also has Captisol, a sugar compound that allows chemically unstable pharmaceuticals to be administered. Higgins bought Captisol’s Kansas inventor for $30 million in cash in 2011 and stripped it of most of its employees and costs. He has since negotiated some 60 licenses, including one with Amgen to use it in Kyprolis, a multiple myeloma treatment that analysts think could generate sales of $1 billion to $2 billion a year. Captisol royalties this year should hit $30 million, Higgins says, an amount equal to the original purchase price.

Higgins came to Ligand from Connetics Corp., a Genentech spinout he joined after stops at Dillon, Read & Co. and drugmaker BioCryst. He was CFO the day in 2000 when Connetics lost 80% of its market value after a late-stage trial for its scleroderma drug failed. An Omaha native who majored in economics and took the bare minimum of science courses in college, Higgins told his more scholarly colleagues to forget about doubling down on another expensive drug trial. “If it doesn’t work, and it’s our only thing,” he told them, “there’s not going to be much more to talk about.”

Instead he cut costs, engineered a series of small deals and pulled Connetics back from the brink. Within four years Higgins was also running corporate development, and the stock had soared from $4 to $27. He’d also secured a fan in Jason Aryeh, a fellow Colgate grad who runs JALAA Equities, a life-sciences hedge fund that had invested heavily in Connetics and cashed out at a profit after it recovered. “When I sold, I knew John was a superstar,” said Aryeh.

Aryeh became interested in Ligand around the same time as Loeb. A spinout from the prestigious Salk Institute, Ligand had potentially valuable assets but was floundering under then chief David Robinson. “The [cash] burn was off the charts,” Aryeh recalls (Robinson declined to comment). Loeb assembled a 9.5% position in the stock in 2005 and then let fly with one of his famously abusive letters, saying directors should have dumped Robinson long ago “accompanied by a well worn boot planted in the backside.”
Aryeh bought a 2% to 2.5% stake in Ligand and joined the board of directors in late 2006, helping to engineer the coup that brought in Higgins as chief executive. Higgins dusted off his Connetics playbook, slashing costs and looking for acquisitions to boost Ligand’s royalty stream.

It was a good time to shop. He bought Neurogen, a Branford, Conn. biotech with a couple of promising drugs in development; Pharmacopeia, a Princeton, N.J. company that screens compounds for their promise as pharmaceuticals; and Captisol’s inventor, CyDex. Neurogen, Pharmacopeia and a third company he bought then, Metabasis, had a combined market value of $1.1 billion at their peaks. “They were probably undersold at the high but way oversold at the low,” says Higgins.

Biotech stocks have tripled since 2011, so Higgins’ shopping spree has slowed. “We are on a prolific binge of licensing now,” he says, using the royalties from existing contracts to boost cash flow and fund a tightly controlled portfolio of early-stage drugs that could produce the next round of deals. Ligand’s revenue has more than doubled since 2010 to $65 million last year, including $30 million in royalties. The company swung to profitability in 2013 and bought back $68 million in stock last year–more than five times what it spent on R&D.

No question Higgins has wrung the romance of biotech right out of Ligand. But there’s also no question he’s made it Loeb-proof. There’s nothing left for a takeover artist to cut. “No other biotech has this story,” Higgins says. “No other biotech with success could show a flat expense line.”

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