Drug Royalties Boost Ligand

06/12/2015 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This recommended biotech has spent a bunch of time and money on early-stage clinical research, explains growth stock expect Mike Cintolo, editor of Cabot Top Ten Trader.

Ligand Pharmaceuticals (LGND) has parlayed those efforts into partnerships with more than 70 companies for more than 120 drug programs.

The company's strategy is to shift the costs of further research and (eventually) commercialization to its partners and thus enjoy a high-margin stream of royalties.

The strategy is already paying off; seven drugs are currently on the market, with two of them (Promacta and Kyprolis) driving royalty revenues today ($10.3 million in the first quarter, up 31% from a year ago). But that's just the beginning.

Another likely big-seller—from Spectrum Pharmaceuticals (SPPI)—should hit the market late this year, and by 2020, management sees at least 20 royalty-generating drugs on the market.

Because expenses are so low, Ligand is showing huge profits (50% after-tax profit margins are the norm) and earnings estimates are very healthy (up 33% this year and 53% in 2016).

There's the usual trial-related risk with Ligand—if the FDA rejects a potential drug it would hit the stock—but this is a unique story that we think can go far.

By our measures, LGND is still within a big 16-month basing structure that began in February 2014 around $80.

Yes, the stock did hit new price highs a few weeks back, but the relative performance (RP) line didn't and the last few weeks could be the final pause before the RP line kicks into gear.

But what we like about the current chart is the set-up; LGND has resistance just above $90, but support in the low $80s, so buying a little here with a tight stop looks like a good risk-reward situation.

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