Ligand Pharmaceuticals - Q3 2024

Transcript

Operator (participant)

Good morning. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Ligand third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session, and if you would like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, just press star, followed by the number one again. Thank you. With that, I would like to turn our call over to Melanie Herman, Senior Director of Financial Planning and Analysis. Melanie, you may begin.

Melanie Herman (Senior Director of Financial Planning and Analysis)

Good morning, everyone, and welcome to Ligand's Third Quarter earnings call. During the call today, we will review the financial results we released before today's market opens and offer commentary on our partner pipeline and business development activities, followed by a question-and-answer session. Our earnings release and a link to today's webcast can be found in the Investor Relations section of our website at ligand.com. With me on the call today are CEO Todd Davis, Senior Vice President of Investments and Head of Clinical Strategy, Dr. Karen Reeves, and Chief Financial Officer, Tavo Espinoza. This call is being recorded, and the audio portion will be archived in the Investor section of our website. On today's call, we will make forward-looking statements regarding our financial results and other matters related to the company's business.

Please refer to the safe harbor statement related to these forward-looking statements, which are subject to risks and uncertainties. We remind you that actual events or results may differ materially from those projected or discussed, and that all forward-looking statements are based upon current available information. Ligand assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Ligand filed with the Securities and Exchange Commission, or SEC, that can be found on Ligand's website at ligand.com or on the SEC's website at sec.gov. With that, I will turn the call over to Todd.

Todd Davis (CEO)

Thank you, Melanie, and welcome to everyone on the call. I'm delighted to report one of the best quarters of performance in Ligand's history. Slide three summarizes our strong business momentum in the third quarter. We grew total revenue by 58% over the prior year, and we increased guidance for the second time this year. We are well capitalized with access to over $300 million in capital to continue to execute on our strategy of acquiring high-value, royalty-generating assets. Our growing roster of major commercial programs gives us predictable and growing royalty revenue that is the foundation for our strong financial performance this quarter. Tavo will delve more into our financial performance later on the call. I'm extremely proud of our team and the many accomplishments we've achieved in the last 18 months.

We have invested almost $300 million since last fall and have added several programs to our pipeline, including Qarziba that came from our immediately accretive acquisition of Apeiron Biologics this summer and our transaction with Verona Pharma, increasing our royalty rate on that drug to nearly 3%. Additionally, our efforts to incubate Pelthos and Zelsuvmi for commercial launch continue in earnest, and we aim to select a partner that can launch Zelsuvmi in the first half of 2025. This drug addresses significant unmet need in molluscum contagiosum as the first at-home prescription product for this condition. On our second quarter earnings call, we talked about two important FDA approvals within our portfolio: Verona Pharma's Ohtuvayre and Merck's Capvaxive. We are pleased to report that both products were successfully launched during the third quarter.

Additionally, Merck announced in October that the CDC's Advisory Committee on Immunization Practices, or ACIP, has recommended Capvaxive for adult pneumococcal vaccination in adults 50 years of age and older. The ACIP's recommendation lowers the current age-based recommendation from 65, and as stated by Merck, has the potential to be a practice-changing milestone that may improve vaccination rates. Analysts estimate that both Ohtuvayre and Capvaxive have blockbuster sales potential, and we believe these products will be meaningful contributors to our royalty revenue over the next few years. Dr. Karen Reeves will provide more details on these and other programs later in the call. Another important milestone this quarter was the full FDA approval and label expansion of Travere Filspari.

This therapy has the potential to become foundational care in IgA nephropathy, a rare kidney disease that affects up to 150,000 people in the U.S. and is one of the most common glomerular diseases in Europe and Japan. We continue to see more widespread adoption of this groundbreaking therapy, as evidenced by the recent Swiss approval of Filspari, and look forward to the continued European launch in the coming months. We are also excited about Filspari's potential indication expansion into focal segmental glomerular sclerosis, or FSGS. FSGS is a rare kidney disease that has a high risk of progression to kidney failure. There are no FDA-approved therapies for FSGS. Dr. Karen Reeves attended the PARASOL scientific workshop meeting last month, which convened various stakeholder groups, including the FDA, to discuss endpoints for the FSGS clinical trials.

We are encouraged by the outcomes from this meeting and Travere's plan to re-engage with the FDA later this year about a potential path forward for Filspari and FSGS. All of these recent developments reinforce what we believe Filspari will be a significant driver of revenue for us over the next several years. Ligand has a 9% royalty on all indications of Filspari. Turning to slide four, I would like to remind our listeners about Ligand's strategic differentiation. We are a biopharmaceutical company that seeks to generate profitable, diversified, compounding growth. We target late-stage development assets and commercial assets with superior risk-reward profiles. Our highly qualified team brings decades of investing experience along with clinical, operational, and regulatory expertise, as well as strong origination networks throughout the industry. We continue to execute on our strategy of acquiring high-growth, low-OpEx assets, a plan we outlined nearly two years ago.

There is a sizable demand for royalty capital in the life science industry, which allows us to invest selectively as we offer a differentiated capital solution that traditional investors do not typically provide. Our capable team originates, diligences, and negotiates proprietary investments with customized investment structures and novel tactics to create investment opportunities. Our acquisition of Apeiron is a prime example of this. It is also important to emphasize that we do this while maintaining low operating expenses. Our structural approach to investing is a very small percentage of the total capital that is invested in life science companies today. Therefore, we believe our model is differentiated, scalable, and offers immense growth potential for years to come. Turning to slide five for our royalty revenue outlook, we have made substantial progress towards meeting or exceeding the longer-term growth goals we outlined at our analyst day in December of 2023.

Our investment origination seeks and identifies high-value clinical products that will offer significant positive clinical impact. Looking at the third quarter, we see the result of this focus, as we saw an increase in Wall Street consensus estimates on several of our partnered products, including Travere Filspari, which, as I mentioned earlier, has received full approval by the FDA and has been granted conditional approval by the European Commission and Swiss authorities. We also added several major new commercial products to our portfolio, including Qarziba, Capvaxive, and Ohtuvayre, which will positively impact our royalty revenues over the coming years. We will provide an updated long-term view that incorporates these recent events at our investor day on December 10th. As I have shared previously, we believe our long-term royalty revenue growth is on pace to exceed the 22% compounded annual growth rate we outlined last December.

The existing portfolio alone supports a royalty revenue CAGR of 18%, which is above our previous estimate of 16%. Further investments should add at least 4% to this, with potential upside on top of the current outlook. Our business development team is constantly searching for attractive new investments. In conclusion, we are all proud of what we've accomplished since we began restructuring and executing on this new strategy in the fourth quarter of 2022, and we are very optimistic about our future prospects. Ligand's pipeline remains robust. We are currently reviewing over 20 investment opportunities representing an excess of $800 million of investment potential. The operating leverage gained from our lean corporate cost structure is expected to result in adjusted EPS of greater than $10 per share in 2028. I'll now turn it over to Dr. Karen Reeves for a portfolio update. Karen?

Karen Reeves (SVP of Investments and Head of Clinical Strategy)

Thank you, Todd. Today, we'd like to highlight a few key commercial products in our portfolio. Turning to slide six, I would like to go into more detail on Travere Filspari, where we are entitled to a 9% royalty on global net product sales. In September this year, the FDA granted full approval for Travere Filspari, an endothelin and angiotensin II receptor antagonist, to slow kidney function decline in adults with primary immunoglobulin A nephropathy, IgAN, who are at risk for disease progression. This is the first and only non-immunosuppressive therapy approved for the treatment of IgAN, a rare kidney disease that leads to diminished kidney filtering, proteinuria, and progressive kidney function loss. The FDA's full approval for Filspari expands the indication to include, without qualifiers, patients with IgAN at risk for disease progression.

Moreover, with full approval, Filspari is now indicated to slow kidney function decline from the previously only reduced proteinuria. Importantly, the full approval label details the long-term durable benefit of Filspari on proteinuria and kidney function in the two-year PROTECT study, which compared Filspari with irbesartan and angiotensin II receptor blocker. Travere estimates that this broader label means that the addressable Filspari IgAN patient population could nearly double. We believe full approval will allow for more detailed physician communications regarding Filspari, and its sustained proteinuria reduction, as well as long-term kidney function preservation, should give physicians greater confidence to prescribe the drug. Filspari was also recently recommended as a foundational kidney-targeted therapy for IgAN in the draft Kidney Disease Improving Global Outcomes, KDIGO 2024 guidelines, which is a very important positive development that should drive further adoption of the drug.

Outside the US, the European Commission granted conditional marketing authorization for Filspari for IgAN in April. During the third quarter, Travere announced that their European commercial partner, CSL Vifor, launched Filspari in Germany and Austria, and that Switzerland achieved temporary marketing approval in October. Additionally, Travere reported that they have submitted a supplemental NDA requesting modification to the REMS liver monitoring requirement. We are also excited about initial data shared by Travere showing that Filspari induced further proteinuria reduction when used with SGLT2 inhibitors, supportive of the flexibility to be used in combination with other medicines. Turning to slide seven, Filspari is also being evaluated in a second important indication, focal segmental glomerular sclerosis, or FSGS. FSGS is a rare, complex kidney disorder and leading cause of kidney failure affecting children and adults. There are currently no FDA-approved pharmacologic treatments for FSGS.

Prompted by the urgency of no approved drugs and the need to develop FSGS treatments with alternative proteinuria-based endpoints, a group known as the PARASOL Initiative was formed as an international collaboration of NephCure and other global kidney foundations, patients, nephrologists, academia, scientists, and regulators, including the FDA. The PARASOL team reported at a scientific workshop with the FDA analyses of existing global databases from more than 1,600 children and adults with FSGS. A key finding was that the reduction of proteinuria over 24 months is associated with a reduction in the risk of kidney failure. The goal of PARASOL is to define quantitative relationships between biomarkers and long-term outcomes to support proteinuria endpoints as a basis for accelerated and traditional approvals.

On their recent earnings call, Travere stated that they have scheduled a Type C meeting with the FDA to discuss a regulatory pathway for Filspari and FSGS and that they are preparing a supplemental NDA. There are estimated to be more than 40,000 FSGS patients in the United States and a similar number in Europe. Approximately half of these would be candidates for Filspari. Approval of Filspari for FSGS would represent the first FDA-approved treatment and important milestone for the long-waiting FSGS community. Turning to slide eight, I would like to talk about Merck's Capvaxive vaccine. As Todd noted earlier, Merck launched Capvaxive during the third quarter of 2024. Capvaxive is a 21-valent pneumococcal conjugate vaccine for the prevention of invasive pneumococcal disease and pneumococcal pneumonia in the adult population that was approved by the FDA in June.

We are entitled to a low single-digit royalty on worldwide net sales of Capvaxive. Merck is in the early stages of the commercial launch. They mentioned on their third quarter earnings call that the Capvaxive launch is off to an encouraging start and that they expect to get a majority share of the market over time. The other recent and exciting development with Capvaxive is that in October, the CDC's ACIP voted to expand the age-based recommendations for Capvaxive to 50 years of age and older from the previous 65 and older. This will significantly expand the patient population for this vaccine and should accelerate the adoption of Capvaxive over time. Turning to slide nine, let's look at Verona's Ohtuvayre, which was granted FDA approval in June.

Ohtuvayre is a dual inhibitor of PDE3 and PDE4 enzymes that combines bronchodilator and nonsteroidal anti-inflammatory effects for the broad indication of maintenance of chronic obstructive pulmonary disease, COPD. Ohtuvayre is the first inhaled product with a novel mechanism of action for the maintenance treatment of COPD in more than 20 years, and we believe it has blockbuster commercial potential. We are entitled to a royalty rate of approximately 3% on worldwide sales of Ohtuvayre. From the perspective of product reimbursement, following the end of the third quarter, Verona received notification from the Centers for Medicare and Medicaid Services, CMS, that its permanent product-specific J-code for Ohtuvayre has been accepted and will be effective January 1st, 2025. There is also significant pipeline value in Ohtuvayre to be realized.

Verona's development partner in Greater China, Nuance Pharma, continues to make great progress and completed enrollment in its pivotal Phase 3 clinical trial evaluating Ohtuvayre for the maintenance treatment of COPD in China. Results from that trial are expected in 2025. At the recent CHEST annual meeting in late October, there were presentations and posters on analyses from Verona's successful Phase 3 enhanced studies with Ohtuvayre for the treatment of COPD. The analyses summarized the efficacy and safety of Ohtuvayre in subgroups of COPD patients, including data supporting improvements in lung function, symptoms, and quality of life, as well as reductions in the rate of exacerbations regardless of COPD severity, smoking status, and whether or not the patients had chronic bronchitis.

Furthermore, an analysis of Ohtuvayre's impact on reducing exacerbation rates and COPD-related healthcare resource utilization over 48 weeks showed Ohtuvayre decreased the exacerbation rate and healthcare utilization in patients with moderate to severe COPD. Therefore, Ohtuvayre may help decrease the burden of disease for patients and the healthcare system, an estimated cost of $24 billion annually. With that, I will now turn the call over to Tavo for the financial update.

Tavo Espinoza (CFO)

Thanks, Karen. First, I want to highlight that I will be discussing non-GAAP results, which exclude certain items, including stock-based compensation, amortization of intangible assets, amortization or impairment of financial assets or derivatives, and expenses incurred to incubate the Pelthos business, among others. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release, available on our website. We believe that the adjusted measures can assist investors in analyzing and assessing our past and future core operating performance. The third quarter of 2024 delivered exceptional financial results, with continued growth in royalty revenue and an increasingly positive outlook for the year. This strength allowed us to revise our guidance upward for the second time this year, underscoring our confidence in sustained momentum. Total revenues for the third quarter reached $51.8 million, representing a 58% increase over Q3 2023.

This growth was driven by a 33% increase in royalty revenue, which reached $31.7 million, up from $23.9 million in the same period last year. We reported adjusted earnings per share of $1.84, which is an 80% increase over Q3 2023, and we ended the quarter with a strong balance sheet with almost $350 million in available investable capital when you consider our cash-in investments and our credit facility. Turning to slide 11, key drivers in royalty revenue growth were the addition of Qarziba to our royalty revenue portfolio in July, coupled with strong performance from Amgen's Kyprolis, and Travere Filspari. While we are contractually limited from disclosing Qarziba sales, I can confirm that Q3 sales and the corresponding earned royalty were in line with our July guidance of approximately $1 an annualized EPS contribution.

Amgen reported $378 million in Kyprolis sales this quarter, marking an 8% increase year-over-year, largely attributed to robust volume growth outside the United States. We received a tiered royalty on Kyprolis sales from Amgen, ranging between 1.5% and 3%. Given Kyprolis' current annual sales level of approximately $1.5 billion, we achieved the maximum 3% royalty rate in the second half of the year. Travere reported $35.6 million in Filspari sales, including 505 new patient start forms, which represented strong sequential growth of 31%. Sell-side research analysts are projecting peak global Filspari sales in the range of $500-$700 million in IgA nephropathy alone, reinforcing our view that this product could be a significant driver of royalty revenue for us over the coming years.

Turning to the two recently approved programs that have expanded our major commercial portfolio, Verona reported a robust start to the U.S. launch of Ohtuvayre, achieving quarterly net sales of $5.6 million, with October sales alone exceeding the entire third quarter. Merck also highlighted a promising launch for Capvaxive during their third quarter earnings call. We earned a low single-digit royalty on both programs and expect them to contribute more meaningfully to our royalty revenue in 2025. Captisol sales came in at $6.3 million, down from $8.6 million in Q3 2023, primarily due to the timing of customer orders. Contract revenue for the quarter was $13.5 million, driven mainly by a milestone payment from Verona following the commercial launch of Ohtuvayre. Operating expenses increased this quarter, with G&A expenses at $24.5 million and R&D expenses at $5.7 million, compared to $14.7 and $5.5 million, respectively, in Q3 2023.

This increase in operating expenses was primarily due to an increase in personnel-related costs, as well as continued investments made to incubate the Pelthos business. This quarter's operating expenses also included a $7.8 million non-cash expense, stemming primarily from a fair value adjustment on several partner programs from Agenus that were returned to them in Q3. On our income statement, this adjustment is reflected as fair value adjustment to partner program derivatives. GAAP net loss in the third quarter of 2024 was $7.2 million, or $0.39 per diluted share, compared to a GAAP net loss of $10.3 million, or $0.59 per diluted share in Q3 2023.

This quarter's GAAP net loss was primarily impacted by several non-cash items, including a $7.4 million stock award modification expense related to the departure of our former president and COO, an $8 million fair value reduction of Agenus warrants, and the previously mentioned $7.8 million fair value adjustment on our partner program derivatives. Adjusted diluted EPS for the third quarter of 2024 was $1.84, up from $1.02 in Q3 2023. This increase reflects growth in royalty revenue and a $13.5 million milestone earned from the commercial launch of Ohtuvayre, partially offset by an increase in shares outstanding. Turning to the balance sheet, in July, we invested $100 million to acquire Apeiron Biologics. To partially offset this outlay, we accessed our ATM facility, issuing 334,000 shares of common stock at an average price of $105 per share, which contributed $35 million to our cash position.

As of September 30, 2024, our cash and short-term investments totaled $220 million, including $63 million in holdings of Viking Common Stock. Turning to slide 12 and turning to guidance, we are raising our 2024 total revenue forecast to a range of $100-$165 million, with adjusted earnings per share now expected to be between $5.50 and $5.70, a 38% increase over last year's adjusted EPS of $4.06. This upward revision reflects robust performance across our three primary revenue streams: royalty revenue, Captisol material sales, and contract revenue. For the full year 2024, we now expect total royalty revenue to be in the range of $105-$108 million, up from prior guidance of $100-$105 million, Captisol material sales between $27 and $29 million, previously $25 million-$27 million, and contract revenue to come in at $28 million, previously $15 million-$25 million.

Year to date, we've recorded total revenue of $124 million and core adjusted EPS of $4.46. We feel confident that we're on track to meet or exceed our updated 2024 financial guidance. We also continue to feel confident about the longer-term outlook we've shared, which goes out to 2028 and calls for royalty revenue growing at a compound annual growth rate above 20% and adjusted core EPS growing even faster at a compound annual growth rate above 25%. Finally, I'd like to direct listeners to our second quarter earnings press release issued earlier today, including a reconciliation of GAAP results to adjusted financial results, which is available on our website.

Before we open it up for questions, I'd like to remind everyone that we'll be hosting our annual Investor Day on December 10 in Boston, where we plan to provide you with an update to our financial guidance and long-term outlook. With that, I'd like to turn the call over to the operator to open it up for questions.

Operator (participant)

Ladies and gentlemen, once again, if you would like to ask a question today, you need to hit star followed by the number one on your touch-tone keypad. Our first question from today comes from the line of Matt Hewitt with Craig-Hallum.

Matt Hewitt (Senior Research Analyst)

Congratulations on a strong quarter, guys.

Todd Davis (CEO)

Go ahead.

Matt Hewitt (Senior Research Analyst)

Can you hear me okay?

Todd Davis (CEO)

Yeah, we can hear you.

Yeah, I'm there. Thank you.

Matt Hewitt (Senior Research Analyst)

Great. Maybe first question is, you still have a very strong balance sheet, and I'm just curious what the pipeline looks like. Do the election results this week have any impact on that, on how you think about the market from an investment standpoint? Any update, basically, on your thoughts regarding adding more shots on goal?

Todd Davis (CEO)

Yeah, I think the pipeline remains very robust. There's still very high demand for capital, regardless of the election results, one way or the other. And the pharmaceutical industry performance, in terms of revenue, is generally uncorrelated with market volatility, even around elections. That's kind of one of the beauties of having royalties in pharmaceutical products is it's non-correlated with capital markets volatility, typically. So the demand for capital continues on, Matt, and we continue to look at each asset that's presented to us in the form of a deal opportunity and analyze those the best we can. And we're constantly culling that pipeline to pursue what we think are the very best opportunities. And that activity is now pretty continuously at a very high level. And I think the business development machine is pretty well honed here at this point.

Matt Hewitt (Senior Research Analyst)

That's great. All right. Thank you very much. Congratulations.

Todd Davis (CEO)

Thank you.

Operator (participant)

Thank you for your questions. Our next question is from the line of Douglas Miehm with RBC Capital Markets. Your line is live.

Douglas Miehm (Healthcare Analyst)

Yeah, thank you. My first question just has to do, you know, delve a little deeper into those 25 potential investments that you are looking at. When you think about whether they're, well, the size, number one, is there a range that you can provide? What's the mix of, let's say, royalties versus structured deals versus new acquisitions at this point?

Todd Davis (CEO)

Okay. That's a great question, Doug. I think that about half of what we're looking at right now is what we call the project finance. That's often also called synthetic royalties. That's where you're providing capital to small and mid-cap companies that need capital to develop their assets. And in return for that, you're creating a royalty as a form of financing. Those deals are really creative. They're not made. They're not shopped. You proactively are identifying companies and products you're interested in, approaching them, and making those deals happen as an alternative form of capital that's available to them. On the M&A front, we continue to scour opportunities on that front as well. That's a little chunkier. We've got one of those we're looking at now amongst the many deals we're looking at.

On the passive royalty front, we are actively engaged in the academic inventor community, as well as the corporate community, looking at royalties that are currently held in the form of license agreements by those institutions. That's probably another third of our pipeline that we're looking at any given time. Oh, yeah, excuse me. The size, Doug, I didn't answer that. But right now, at our current size, to maintain kind of our diversity limits that we're trying to achieve, we're targeting 30-40 or so per product if it's on the development side. If something is significantly lower risk or commercial, for example, we will size up. We view diversification by product, not necessarily investment. So if we're doing a basket of products, those deals may be sized up too.

But at our current size, we think kind of $30 million-$40 million per asset is appropriate for us. And that's how we're structuring most of the deals in that range. As we grow over time, we will inevitably kind of size that up a little bit on a proportionate basis.

Douglas Miehm (Healthcare Analyst)

Great. Okay. And the follow-up question has to do with Filspari, which is going to be an important backbone of the company going forward. And I was just wondering if you'd be able to talk a little bit about how you see that in a competitive environment. I know you touched on.

Matt Hewitt (Senior Research Analyst)

Yeah, I'm calling for the Ligand Pharmaceuticals earnings call.

Matt, M-A-T-T, Hewitt, H-E-W-I-T-T.

Bear with me one second. Go ahead with your question. Sorry.

Douglas Miehm (Healthcare Analyst)

Yeah, I just wanted to expand a little bit on the competitive environment you see for Filspari. It seems to be quite attractive, but maybe you could provide a bit more context. Thank you.

Todd Davis (CEO)

Sure. Why don't I have Karen address this? I think an IgAN is a monotherapy in combination, and then, of course, an FSGS, where there's currently no other treatment.

Karen Reeves (SVP of Investments and Head of Clinical Strategy)

Yes. Thank you for the question. We believe that Filspari will be a foundational treatment for the treatment of IgAN. And the guidelines that are in the draft guidelines have recently come out, really talk about hitting two aspects of this disease. So it's going to be important that Filspari can be seen as a primary treatment and, in addition, along with other concomitant therapies. And recently, Travere actually showed some very good data, which I mentioned, regarding SGLT2 inhibitors, that they are doing a study of using both of them. And you can see that when you add Filspari, the reduction in proteinuria goes up, which is good news because the guidelines now are saying you should be lowering your proteinuria at the best mark would be less than 0.3 grams per day. So that is good news.

In addition, some initial data was shown using Filspari as the primary drug in patients who have no treatment, and that also is showing excellent results, so we're confident that Filspari is going to really only grow in what it's able to do in IgAN, and in addition, we just reported on the outcome from the PARASOL initiative in FSGS. This is a huge area of unmet need. There's never been an FDA-approved drug for this illness, and Travere is going to the FDA to discuss what is needed now to submit an sNDA for that drug, now that the PARASOL initiative has come up with proteinuria-related endpoint.

Douglas Miehm (Healthcare Analyst)

Thank you very much. That was helpful.

Operator (participant)

Thank you for your questions. Our next question comes from the line of Dr. Joseph Pantginis with Wainwright. Your line is live.

Joseph Pantginis (Managing Director of Equity Research)

Everybody, good morning. Thanks for taking the questions. First, a couple of logistical questions, if you don't mind. So Todd, when you look at, obviously, the number of opportunities that you're currently looking at, how do we view that with regard to your ability to look at even more? And it really correlates to my question of, is Ligand right-sized right now?

Todd Davis (CEO)

I think, yeah, if I understand your question, Joe, when you say right-sized, you mean in terms of access to capital relative to our current market cap, or how are you thinking about that?

Joseph Pantginis (Managing Director of Equity Research)

The employee base and the number of people delivering the number of skills.

Todd Davis (CEO)

Yeah.

Yeah. I think we've made a number of senior hires over the past year and a half as we put this strategy in place. We have, this year, kind of tweaked that with executives at the vice president level that come in with significant skill sets to back that up as well. And I think we're pretty set on the team. And that's kind of one of the things about this business model is that it offers very high operating leverage on the investment side. And we don't really need to add a lot to our team at this point, even if the size of the company grows dramatically over the next two to four years. So we're just under 40 employees now. I'd be surprised if we're over 50 employees three years from now. That's just the way this business model works. And we like it that way.

Joseph Pantginis (Managing Director of Equity Research)

No, it's very helpful. Thanks. And then just a quick logistical question before I ask my usual question is, what is the status? Don't think you'd really be doing it right now, but what's the status of your buyback program?

Todd Davis (CEO)

We just have that in place as a matter of general, I'd say, corporate hygiene. If there are any significant dislocations in the markets that have nothing to do with what we view as the inherent value of our business, we may take advantage of that. We have no immediate plans to use it right now.

Joseph Pantginis (Managing Director of Equity Research)

No, that's helpful. And then, as I alluded to, my usual question focuses on Captisol. It's typical volatility that you alluded to earlier with regard to the timing of payments and customer orders. So I guess the concept I want to look at is the mix here. Obviously, you have growing revenues from Captisol used products or Captisol formulated products. So I guess how should we view the mix right now and view it going forward with regard to, say, research requests versus, say, early clinical study requests?

Tavo Espinoza (CFO)

Yeah, it's Tavo here. Thanks for the question. It's a similar answer. Nothing has really changed here. It's the 80/20 rule. We get 80% of our revenue from 20% of our customer base, the commercial customers, and then a long tail of smaller research clinical use-only customers. And that tail, we're encouraged by the activity there. We expect that some of those smaller customers will be successful in their development and eventually become some of the join the roster of the larger commercial. But the business is doing well and, like implied with our FY guidance, it's exceeded our guidance for the year. So the business continues to perform.

Joseph Pantginis (Managing Director of Equity Research)

Great. Thank you very much.

Operator (participant)

Thank you for your questions. Our next question is from the line of Dr. Balaji Prasad with Barclays. Your line is live.

Good morning. This is Joel for Balaji. Thanks for taking our question, and just a follow-up question on Filspari. So, as Travere is preparing a supplemental NDA for FSGS, wondering if FSGS is already factored into the 18% CAGR that, like you highlighted earlier, or only like the current indication, IgAN is already factored in. Thank you.

Tavo Espinoza (CFO)

Yeah, no, this is Tavo. Good question. So when we came out with our long-term outlook at Investor Day last December 2023, we had significantly discounted very small contributions allocated to the pipeline from FSGS. We will update our view here coming up in December 10th.

Very helpful. Thank you.

Operator (participant)

Thank you for your question. Our next question comes from the line of Trevor Allred with Oppenheimer. Your line is live.

Trevor Allred (Analyst)

Hey, good morning. Can you guys talk about some of the recent changes with the Agenus royalty assets? Have you had any interactions with them, and do you have any current expectations for those royalties going forward?

Todd Davis (CEO)

Yeah, I think for the Agenus acquisition overall, I think that they did have some programs return. The BMS was a bit of a surprise to us. As you know, just for the general audience here, there were seven assets overall. The main asset underlying the deal is Agenus Bot/Bal. Our investment thesis around that is primarily driven by the Bot/Bal asset. And that particular asset, we reviewed the six-month data and an ongoing study that they have underway, which we viewed as very promising. And in the next few months, there should be 12-month data available, which is what we are really focused on. And if that is consistent with the six-month data, I think we're in good shape, and Agenus is in good shape in that regard.

So that's what's kind of driving our thinking around the Agenus deal, and we will wait for that data to unfold.

Trevor Allred (Analyst)

Okay. Thanks for that. And can you also talk about some of the things that give you confidence on a commercial launch for Pelthos and first step 25?

Todd Davis (CEO)

Yeah, we would be happy to. So Pelthos is the company we formed to commercialize Zelsuvmi. Zelsuvmi is the first approved take-home treatment for molluscum contagiosum. The only other treatments that have been available historically have been in-office procedures that are, I would just say, relatively inconvenient and can be painful. There's cryo, and then there's the use of cantharidin oil as well. Some companies have reformulated that and have a presentation of that, but cantharidin oil has been around for quite a while. So we're competing in a prescription market for take-home medications when that drug is launched. And there is very high demand for this product, we believe. We're, I think, conservatively estimating that this is $150 million-$200 million net sales potential in the U.S. market. We have global rights to the product. And so we're pretty optimistic about what can be achieved here.

And that's the lead asset around the platform that we purchased, if you recall. We're very focused on that because it is now FDA approved, and we are engaged with potential marketing partners to launch it. And so that is our number one priority around that. But I would just remind people, we're pretty enthusiastic about the platform overall. We have clinical data on four other assets that we will start to look for partners to further develop and then potentially commercialize if successful. And nitric oxide, in general, as a platform, has wide applicability and why it is not an antiviral or an antibiotic definitionally. It has those characteristics broadly and has promising clinical data and other products. So long term, we think we could end up with a few royalties around this platform.

Leading off with Zelsuvmi, we think that the numbers in that investment look very positive overall in the long term.

Operator (participant)

Thank you for your question. Ladies and gentlemen, once again, if you would like to ask a question today, remember it is star followed by the number one on your telephone keypad. Our next call is from the line of John Vandermosten with, I'm sorry, John Vandermosten with Zacks Small Cap Research. Your line is live.

John Vandermosten (Senior Analyst)

Great. Thank you and good morning, so we like to look at M&A to get a sense of where things are going. And I took a quick look at some of the over $1 billion transactions that have taken place, and they've been in neuro, cancer, and dermatology. Do you look at these at all to get a sense of kind of where the next trend will be in terms of good investments and where products may have a good end market?

Todd Davis (CEO)

We do, but our primary driver, because we're very product-focused, is high unmet clinical need. And so even on the commercial side, when we come across commercial products, we're looking at things like Qarziba and neuroblastoma. We don't specifically have a strategy around certain therapeutic areas, which the market can tend to group around. The market moves around. Various therapeutic areas can come in and out of favor. We're very just focused on the products and the high unmet clinical need and whether they're addressing something that's really important clinically to patients. And the reason we're focused on that is, one, I think that's important in general in terms of what we do with our daily lives, but that's your best defense also against payer pressure.

Ultimately, all of these products are going to have to sit down when and if the development is successful and have discussions with payers around reimbursement. The best-positioned companies are getting drugs approved that make big clinical differences in the lives of patients. That's why we're focused on that just as a matter of business strategy. That does drive us into different corners. Sometimes we'll make contrarian investments. I would say that right now, something like Zelsuvmi, which is a topically applied medication, may be viewed as contrarian because it's more of a specialty pharma product. It's topically applied. I think dermatology is a little out of favor right now. But the reality is there's very high unmet clinical need. These patients present primarily to pediatricians. They can't really do much for these patients other than refer them to pediatric dermatologists.

The waiting lists are very long to get in to see those types of physicians. And so we just think that this offers a really key solution in this clinical arena for patients and are confident in it. And so that's kind of how we think about our investing and our choices because in the long term, various therapeutic areas will come in and out of favor, even if they remain relatively underserved. That just happens as a matter of investing strategies. So that's how we view it if that's helpful.

John Vandermosten (Senior Analyst)

Okay. Yeah. Thanks, Todd. And a couple of questions on Captisol. I think that the company had indicated that there might be some life cycle management type of efforts that could take place. And then secondly, what is the competitive environment like for a solubility and stability agent out there? And do you guys control? I guess I'm just wondering how much of the market do you have a handle on there? And who are some of the others that might come up when somebody's looking for an agent like that?

Todd Davis (CEO)

Sure. Yeah. There remains very high demand for solubility-enhancing molecules or excipients that can enhance the solubility of the chemical entities that are active. Solubility and permeability are the two biggest drug delivery issues, stability being the third. And Captisol itself has probably the strongest position amongst the solubilizers. There are other ways to do that, obviously, with nanocrystals and things like that. So there are different technological approaches. So why does Captisol have 16 approved products historically? I don't know because I haven't done the historical analysis. That's probably the most prolific single drug delivery platform in history to have 16 approved products on one. Maybe there's a gelcap technology or something that's similar. But in terms of solubilization, that's pretty dominant. And the reason why it's dominant is because it works so well. It works broadly, and it's very easy to work with.

So our customers can basically get samples from us. Any chemist in the pharmaceutical industry can work with it very easily. If it works on their molecules, they come back to us and they take a license. So we make it easy to work with, and it solves a lot of the solubility problems that our customers face with the chemicals they're trying to formulate. So I hope that helps answer that question.

John Vandermosten (Senior Analyst)

Yeah, it does. Thank you.

Operator (participant)

Thank you for your question. And with that, ladies and gentlemen, that will conclude our Q&A session for today. And to wrap up, I'd like to turn the call back over to Todd.

Todd Davis (CEO)

Thank you. We are confident and optimistic. We believe we have the right strategy. We have the right team, and we are executing with discipline on the right market segment to deliver lasting, predictable, and compounding growth. Thank you all for attending the earnings call today.