Why Ligand Pharmaceuticals Shares Dipped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ligand Pharmaceuticals , a biotechnology acquisition and development company targeted at securing royalty revenue, fell as much as 15% after reporting its third-quarter results and providing a disappointing fourth-quarter forecast.

So what: For the third quarter, Ligand reported a 104% increase in revenue, to $13 million, primarily as a result of a near-quadrupling in materials sales due to the timing of customer purchases of Captisol. Net income jumped to $2 million from a loss of $0.2 million in the previous year, and Ligand delivered adjusted EPS of $0.12. Comparatively, Wall Street had expected just $10.8 million in revenue and a profit of $0.06 per share. Looking ahead, though, is where everything fell apart. Ligand is estimating fourth-quarter revenue of $11 million to $12 million on EPS of $0.15-$0.17, compared to the current consensus of $14.2 million in revenue and $0.21 in EPS.

Now what: Here we see the upside and the downside of royalty revenue companies in the biotech sector. The positive is that Ligand has extremely low operating costs because of its workforce of less than two dozen people. Focusing on acquisitions and development leads to a relative tight cost structure that allows only a small amount of revenue to equal big profits. Conversely, royalty revenue companies are completely at the mercy of other companies' sales and customer purchasing habits, which can lead to some wild swings come earnings season. Overall, I tend to like the royalty revenue model, but I'm a bit concerned that  at $1.1 billion in market value, even with royalty revenue from potential blockbuster Kyprolis, Ligand might be a bit frothy here.

Two biotech stocks transforming the health-care landscape
The best way to play the biotech space is to find companies that shun the status quo and, instead, discover revolutionary, groundbreaking technologies. In the Motley Fool's brand-new FREE report, "2 Game-Changing Biotechs Revolutionizing the Way We Treat Cancer," find out about a new technology that big pharma is endorsing through partnerships, and the two companies that are set to profit from this emerging drug class. Click here to get your copy today.

The article Why Ligand Pharmaceuticals Shares Dipped originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story