Ligand: A portfolio of biotech products

by David Sterman, editor $100,000 Portfolio

How do you gain potentially big upside in biotech without suffering significant downside in this speculative sector?

I think I've found the perfect vehicle. It's a company with ties to a range of promising drugs and only needs to see a few hits to give its shares a solid boost. I'm talking about Ligand Pharmaceuticals (LGND), which has been around for more than 20 years.

Ligand had been losing money because its portfolio of drugs had yet to mature, but now it's finally profitable -- and potentially hugely profitable within a few years.

After a major revamp about five years ago, the company is just now hitting its stride. It actually delivered positive EBITDA in the fourth quarter -- for the first time in a number of years. And now that Ligand is in the black, it's highly unlikely to slip back into the red.

Credit for this company's coming turnaround goes to CEO John Higgins, who took the reins in January 2007.

Since then, he has deployed the company's cash into four key deals, which have provided a pipeline of drugs, and more important, some key biotechnology platforms that can boost the efficacy and safety of many other companies' drugs.

Through its investment in various small biotech firms, Ligand now has exposure to 60 different drugs that are either in clinical trials or are already on the market.

Specifically, roughly 10% of its drug pipeline has already received Food and Drug Administration approval, another 10% is in Phase III testing, another 25% is in Phase II testing, with the remainder either in Phase I or pre-clinical testing.

Captisol is a chemical solution that makes drugs more stable and can lead to more precise dosing. More than 20 drugs currently in development are being tested with Captisol.

This platform is being licensed by major pharmaceutical firms to improve the performance of existing drugs. Partners include Baxter, Merck and Bristol-Myers Squibb.

GlaxoSmithKline currently sells Promacta., which stimulates platelet formation and targets patients with bleeding disorders.

Glaxo is also testing Promacta to gauge its efficacy in patients with hepatitis C. If Promacta proves to be efficient in the treatment of the disease, then it could potentially become a blockbuster drug.

Ligand's partner Onyx Pharmaceuticals is testing a drug called carfilzomib, which is a Captisol-based protease inhibitor that has appeared quite effective in the treatment of multiple myelomas (blood cancers).

Phase II testing is underway, and carfilzomib could be on the market a year from now. The company and the analysts who follow Ligand say this drug also has the potential to be a blockbuster.

On the downside, the shares have traded as low as $9 when the market was in full sell-off mode last summer. If the market hits another deep rough patch in 2012, then that's a floor that you need to think about.

Insiders tend to step in and support the stock with open market purchases in the $11 range. Now that Ligand is profitable, shares may never touch those lows again.

On the upside, the drug platforms noted above are just beginning to hit their stride. As a result, 2012 should see a steady stream of announcements from Ligand and its partners regarding clinical trial progress or new sales agreements.

As a very rough gauge, assume 2012 sales of $30 million, 2013 sales of $40 million and sales approaching $100 million by 2015. Notably, these sales carry very high margins, which is why analysts say Ligand could earn $3 to $4 a share by 2016.

If this scenario plays out, then shares could rise from a current $14 to $30 or $40 in the next few years. In my view, this stock should be viewed as a solid long-term growth portfolio holding.

Learn more about this financial newsletter at David Sterman's $100,000 Portfolio.