Will Ligand Pharmaceuticals (LGND) Miss on Earnings in Q4?

Ligand Pharmaceuticals Incorporated LGND is scheduled to report fourth-quarter 2014 results before the opening bell on Feb 9, 2015.

Ligand Pharma beat estimates in two of the past three quarters. The average earnings surprise over the past four quarters stands at 26.89%. Let's see how things are shaping up for this announcement.

Factors Influencing Fourth-Quarter and 2014 Results

In the fourth quarter of 2014, the company expects total revenue in the range of $22.5 million – $24.5 million and earnings in the range of $0.57 – $0.62 per share. For 2014, total revenue is estimated in the range of $64 million – $66 million and earnings in the range of $1.50 – $1.55 per share.

The quarterly revenue pattern at Ligand Pharma over the past couple of years shows that the fourth quarter remains particularly strong due to the tiered royalties contracts and ordering patterns of Captisol for commercial use. Revenues at Ligand Pharma are mainly dependent on royalties and licensing fees apart from Captisol material sales.

The company said on its third-quarter 2014 call that demand for Captisol increased from new customers as well as several supply contracts supporting large late-stage studies. In order to meet the demand, Ligand Pharma is increasing production levels at its contract manufacturing locations in Ireland and Portugal and is planning to scale up manufacturing at the manufacturing site in China.

In the fourth quarter of 2014, Ligand Pharma expects Captisol orders to comprise roughly half of its fourth-quarter revenues (approximately $12 million). Moreover, this quarter is expected to record the highest Captisol material sales so far.

We note that Ligand's partner Spectrum Pharmaceuticals SPPI filed for the approval of Captisol-enabled Melphalan HCl injection for using as a high-dose conditioning treatment prior to hematopoietic progenitor (stem) cell transplantation in patients suffering from multiple myeloma. Upon approval, this product is expected to make a healthy contribution to Ligand Pharma's top line. Hence, investors might keep an eye on updates regarding the candidate's approval status.

Although the past few years show that operating expenses tend to remain flat year over year, recent research and development activities may push up costs in this quarter.

What Our Model Indicates

Our proven model does not conclusively show that Ligand Pharma is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat earnings. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -4.17%. This is because the Most Accurate estimate currently stands at 46 cents, while the Zacks Consensus Estimate is 48 cents.

Zacks Rank #3 (Hold): Although Ligand Pharma's Zacks Rank #3 increases the predictive power of ESP, we need to have a positive ESP to be confident of an earnings beat. However, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Actavis plc ACT has an earnings ESP of +4.38% and carries a Zacks Rank #2. The company is scheduled to release its fourth-quarter 2014 results on Feb 18.

ARIAD Pharmaceuticals, Inc. ARIA has an Earnings ESP of +33.33% and carries a Zacks Rank #3. The company is scheduled to release fourth-quarter 2014 results on Feb 19.