LIGAND PHARMACEUTICALS INC (LGND) stock intrinsic value fair value estimate & owner earnings analysis

Ligand Pharmaceuticals is a royalty company. It does not sell its own medicines. It owns slices of other companies' drug sales, collected through licences on its Captisol formulation technology and through royalty rights it has bought or funded. It also sells Captisol material to partners. In 2025 royalty receipts were $176.9 million, spread across a handful of products. The largest were Amgen's Kyprolis ($35.5M), Recordati's Qarziba ($33.7M), Travere's Filspari ($32.0M), Merck's Ohtuvayre ($14.8M), Jazz's Rylaze ($13.3M) and Merck's Capvaxive ($10.1M). In July 2026 Ligand closed its roughly $739 million cash purchase of XOMA Royalty, adding more than 120 further royalty assets led by Vabysmo and Ojemda. XOMA collected about $34 million of royalty receipts in 2025. What the owners actually earn. We measure owner earnings as operating cash flow, with working-capital timing swings removed, less stock compensation and the capital spending needed to stay in business. We do not use reported net income, which at Ligand is dominated by swings in the value of shareholdings it owns. In 2025, for example, reported net income was $124 million, but $91 million of that came from investment gains and $53 million from a one-time gain on the Pelthos transaction. On our measure, owner earnings since the 2022 spin-off of the antibody business have been: 2023 $3.08 a share, 2024 $1.95 and 2025 $0.75. The low 2025 figure reflects stock compensation of $47 million, which absorbed almost all of the year's operating cash. We treat that as a real cost. Years before 2023 describe a different company (Promacta royalties until 2019, the OmniAb antibody business until 2022) and are not used. The median of the royalty-company years is about $2 a share, or roughly $40 million. Why we start well above that. The first half of 2026 is two consecutive quarters of a different earning level. Operating cash flow was $72.7 million, against negative $9.6 million a year earlier. Royalties rose 32% in the second quarter, driven by Filspari (helped by its FSGS approval), Ohtuvayre and Capvaxive. Owner earnings for the half were about $51 million. About $13 million of that was interest earned on cash we count separately, and part of the Ohtuvayre gain came from pharmacy stocking that will not repeat. Adding XOMA's royalties, net of its own costs, the business before its lenders produces roughly $100 million a year today. Owner earnings fell 57% in 2025. Our first-year base case is far higher than that, not because we expect growth, but because the receipts from products already on the market have stepped up for two straight quarters and XOMA's portfolio is now owned. We credit no new deals. Ligand says it plans to invest $150 to $250 million a year in new royalties, but whether those buys earn their keep is unproven, so they are left out. Intangible amortisation (about $33 million a year) is added back because it is sunk cost. Royalties are wasting assets, though, so every case fades as patents expire. What it owes. After paying for XOMA, Ligand holds roughly $600 million of cash beyond operating needs, plus about $120 million of other investments. Against that it has $460 million of 0.75% convertible notes due October 2030, $700 million of zero-coupon convertible notes due 2031, and about $105 million of XOMA's Blue Owl royalty-backed loan. The notes cost far less than a normal long-term rate. On a like-for-like basis we count them at about $900 million rather than $1.16 billion, and total net debt comes to roughly $300 million. If the shares stay below the conversion prices (about $195 for 2030), the principal must be repaid in cash or refinanced. Base case: about $100 million a year of business cash flow, easing to about $86 million by year four. Kyprolis generics are publicly reported to be able to launch in the US in 2027, which cuts the largest single royalty (1.5% to 3% of sales) sharply. Filspari, Ohtuvayre, Capvaxive and Vabysmo hold their current level, and Teriparatide and Evomela keep declining. The cash flow holds in the mid-$80 millions to around 2032 and then fades to zero over about twelve years as the Captisol patents (2033) and partner patents lapse. Business value about $800 million, less about $300 million owed, leaves about $502 million, or $23 a share. Bear case: Kyprolis generics in 2027 plus the loss or sharp decline of one of the new growth products, the kind of reversal royalty holders have repeatedly suffered. Ligand itself booked $30.6 million of royalty-asset impairments in 2024. Cash flow falls from $80 million to the mid-$50 millions by 2028 and keeps sliding to about $32 million by 2035, then ends within six years. On that path cash flow cannot carry the 2031 notes, which would have to be refinanced at market rates or settled with heavy dilution. Business value about $410 million against about $480 million owed, so the company would owe roughly $65 million more than it is worth, about minus $3 a share. Bull case: Filspari, Ohtuvayre, Capvaxive and the XOMA assets keep ramping as their partners' recent launch trends suggest, and Kyprolis erosion is gradual. Cash flow rises to about $140 million and the portfolio lasts about eighteen years beyond 2035. Business value about $1.39 billion, less about $300 million owed, leaves about $1.09 billion, or $50 a share. Margin of safety price. We are only moderately sure of the earnings level. It rests on two strong quarters, one of them flattered by stocking, and on an acquisition that has not yet reported a quarter inside Ligand. The worst plausible outcome is the bear case or worse: a few products failing at once while $1.16 billion of notes come due in 2030 and 2031. The business has no hard assets to fall back on, only contracts whose value depends on other companies' sales. If we are wrong about the durability of the new launches and about how much XOMA truly adds, the shares are worth something between nothing and the low teens. Over the holding period, the business pays no dividend and keeps turning cash into new deals and stock awards. The margin-of-safety price is $10 a share. That price values the equity at about $218 million. The base case leaves about $500 million of equity value, so the base case implies the value could roughly double within four years, meeting the target with room for the base case to disappoint. And $10 is low enough that a partial recovery from a bear-type setback, rather than the full base case, still implies the target. Things we could not fully reconcile. The size of the second-quarter Ohtuvayre stocking benefit is not quantified in the filings. XOMA's exact debt and preferred stock balances at closing are taken from its last filing before the deal.