Ligand’s First Results With XOMA Show Royalty Growth Beyond the Acquisition

Ligand’s first quarterly results following its purchase of XOMA Royalty, a fellow investor in drug royalties, show growth from both the acquired assets and its existing portfolio. Third-quarter royalties rose 51% year over year to $70.3 million. On the earnings call, management reported 25% growth in legacy royalties, with XOMA contributing approximately $12 million following the 14 July closing.

The 29 October results support a stronger assessment of Ligand’s income-generating portfolio. They also reveal the cost of building it: substantial acquisition payments, higher debt and a larger investment team. Management raised annual adjusted earnings guidance while maintaining its revenue outlook, leaving the final quarter dependent on customer orders and contract payments as well as royalties.

How medicine sales become Ligand’s income

Ligand Pharmaceuticals buys and creates rights to future medicine sales, providing capital or technology to drug developers in exchange for royalties and milestone payments. Its partners generally conduct clinical development, obtain approvals, manufacture products and sell them. Ligand, listed on Nasdaq under LGND, receives an economic interest without maintaining the full operating infrastructure of a pharmaceutical manufacturer.

Filspari illustrates the connection. The medicine treats rare kidney diseases, and Ligand’s portfolio disclosure lists a 9% royalty interest. Management estimated third-quarter Filspari royalties at $16.8 million, up 85% from a year earlier, making it the largest individual royalty contributor. The estimate remained subject to adjustment because the commercial partner had not reported its quarterly sales when Ligand prepared the results.

XOMA added seven commercial products and a broad development-stage portfolio, taking Ligand’s total economic interests above 200 assets. The July closing announcement identified interests linked to medicines including Vabysmo, Ojemda and Miplyffa. Commercial products supply current income; development-stage rights offer potential future payments but remain exposed to clinical failure, regulatory decisions and commercial uptake.

A smaller business supplies Captisol, a formulation ingredient that helps drugs dissolve and remain stable. Ligand earns material sales and licensing-related income from that technology. Customer ordering patterns can make those sales less even from quarter to quarter than the underlying demand for medicines using it.

Last year’s Pelthos transaction obscures the comparison

Reported total revenues and income fell 32% to $78.7 million, despite the royalty increase. The difference largely reflects $53.1 million recognised a year earlier when Ligand separated its former drug-commercialisation business, Pelthos. That amount comprised a $24.5 million Zelsuvmi licence payment and a $28.6 million gain on selling the business.

Removing both items from the prior-year comparison leaves growth of approximately 26%, as shown below. This comparison still includes the acquired XOMA contribution.

Royalties supplied 89% of the latest quarter’s total. Their growth more than offset lower Captisol sales and other contract income, increasing the importance of the royalty portfolio to group earnings. Management attributed the Captisol decline to order timing, while contract payments can vary with licensing activity and the achievement of milestones.

Royalty accounting and acquisition costs shape earnings

The royalty total combines two accounting categories. Some royalties are recognised from partner product sales under licensing arrangements. Other purchased payment rights are treated as financial royalty assets, with income calculated using an investment yield applied to their carrying value, based on expected future receipts.

Ligand’s accounting policy explains that these financial assets are increased by recognised income and reduced by cash receipts. Consequently, income in a particular quarter can differ from cash collected. Rights with insufficiently predictable receipts are treated on a non-accrual basis.

Income from financial royalty assets increased to $22.9 million from $6.4 million, representing roughly one-third of the latest royalty total. Their balance-sheet carrying value reached $800.1 million at September. As this category grows, the accuracy of long-term sales forecasts and subsequent cash collections becomes more consequential to reported earnings and asset recoverability.

Acquisition-related costs also affected profitability. Ligand reported a GAAP net loss of $28.5 million, compared with net income of $117.3 million a year earlier. Its non-GAAP reconciliation excludes, among other items, $29.0 million of share-based compensation, $23.9 million of transaction and integration costs, investment revaluations and amortisation. Adjusted net income was $57.5 million, down from $63.8 million.

The adjusted comparison still includes last year’s $24.5 million licence payment, although it excludes the Pelthos sale gain. Adjusted EPS fell 14% to $2.67 from $3.09, with a larger adjusted diluted share denominator also contributing: approximately 21.6 million shares versus 20.6 million.

There is a clear operating benefit to integrating XOMA. In the earnings-call discussion, management said it expects the acquired business’s annual cash operating-cost contribution to be just under $5 million, compared with a standalone run rate above $25 million. Adding royalty assets without retaining all the acquired overhead improves their earnings contribution. Group personnel costs are nevertheless increasing as Ligand expands its investment and portfolio-management capabilities.

The acquisition committed more cash than shareholder payments alone

The financing consequences extend beyond the announced equity price. Ligand’s September acquisition filing identifies approximately $897 million of gross cash payments, including repayment of XOMA’s Blue Owl loan and settlement of employee awards.

XOMA separately used approximately $70.3 million of its own unrestricted cash to redeem preferred shares, settle accrued dividends and cancel warrants, reducing the cash entering the combined business. Former XOMA shareholders also received contingent rights to a portion of 75% of net proceeds from specified litigation.

Ligand had prepared its financing before closing. Its June convertible-note issue raised $700 million of principal and approximately $679 million after fees. Around $81.7 million funded hedging arrangements and approximately $60 million funded share repurchases, leaving roughly $537 million for acquisitions and other corporate uses, alongside existing liquidity.

At September, cash, equivalents and short-term investments stood at $447.4 million, compared with $733.5 million at December 2025. Outstanding convertible principal totalled $1.16 billion: $460 million carrying a 0.75% coupon due in 2030 and $700 million with a zero coupon due in 2031. Low coupons limit current cash interest, while the principal remains a future repayment obligation.

The acquisition has therefore expanded Ligand’s earning assets and its financing commitments together. Higher royalty income strengthens the resources available for repayment and reinvestment, but the return on those assets must compensate for the capital committed and the risks retained.

Higher earnings guidance still needs a stronger revenue finish

Ligand raised its 2026 adjusted EPS range to $9.50–$9.75, from $9.00–$9.50 in August. Management attributed the increase to results through September and greater visibility into costs, share count and taxes. Annual revenue guidance was maintained.

Reaching the annual revenue midpoint would require approximately $95.8 million in Q4, about 22% above Q3. Management expects a full quarter of XOMA ownership and higher royalty tiers under some agreements to support the finish. Captisol orders and contract payments must also increase from Q3 levels to reach their respective annual ranges, making their timing material even with continued royalty growth.

The results support a stronger assessment of Ligand’s royalty-earning capacity, with legacy growth showing that the improvement extends beyond XOMA. The 8 December investor-day outlook should clarify the expected cash receipts and additional investment behind the enlarged portfolio. Higher receipts without a proportionate increase in annual capital deployment would strengthen its capacity to repay debt and reinvest. Weaker partner sales or a greater funding requirement would reduce that flexibility, even if accounting royalty income continued to grow.