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Ligand Pharmaceuticals Inc (NASDAQ:LGND)Q4 2018 Earnings Conference CallFeb. 07, 2019, 4:30 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Operator
Welcome to the Ligand Fourth Quarter Earnings call. My name is Vincent and I'll be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream please take note of the options available in your event console. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I'll now turn the call over to your speaker today, Mr. Todd Pettingill. Sir, you may begin.
Todd Pettingill -- Investor Relations
Welcome to Ligand's fourth quarter of 2018 financial results and business update conference call. Speaking today for Ligand are John Higgins, CEO; Matt Foehr, COO; and Matt Korenberg, CFO.
As a reminder, today's call will contain forward-looking statements within the meaning of Federal Securities Laws. It may include but are not limited to statements regarding intent, belief or current expectations of the company and its management regarding its internal and partnered programs. These statements involve risks and uncertainties and actual events or results may differ materially from the projections described in today's press release and this conference call. Additional information concerning risk factors and other matters concerning Ligand can be found in Ligand's earnings press release and public periodic filings with the Securities and Exchange Commission, which are available at www.sec.gov.
The information in this conference call related to projections or other forward-looking statements represent the company's best judgment based on information available and reviewed by the company as of today, February 7, 2019 and do not necessarily represent the views of any other party. Ligand undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.
At this time, I'll turn the call over to John Higgins.
John Higgins -- Chief Executive Officer
Todd, thank you. Good afternoon and thanks for joining our call. Ligand finished the year strong and had an outstanding 2018. The company is better today financially and in terms of portfolio quality than a year ago and we have a bright outlook as we look forward to the next five to 10 years, and for 2018 -- for the year we posted over a quarter of a billion dollars of revenue at $251 million, that is more than a five-fold increase over 2013, just several years ago.
All three revenue sources Royalties, Captisol, Material sales and contract payments hit all time highs in 2018. I'll add as a bit of corporate history, at an Analyst Day five years ago in late 2013, we published the slide forecasting revenue of over $200 million in 2018. Well, that forecast for 2018 five years ago was accurate, now coming in well past that outlook. The business is highly efficient with gross margins over 97% for 2018 and high EBITDA or cash flow margins of about 80%. Cash flow in 2018 more than doubled over 2017 to nearly $200 million. The lead Royalty products Promacta and Kyprolis are doing very well in the market with each posting record Q4 quarterly sales and continued robust growth.
Captisol orders are balanced with a good mix of commercial and clinical orders and we've had a highly diverse mix of contract payments. Now, we manage our business with a lean cost structure and low share count. Our focus on value creation, features maximizing the cash flow and earnings per share. Our adjusted diluted EPS for 2018 exceeds $7, which is more than double last year.
Defining events for 2018 were major licensing agreements, M&A transactions and investment in pipeline programs. Now as we look forward to 2019 and beyond, we are pleased to report, we have a highly diversified and strengthening business both in terms of the number of programs and the quality of late-stage programs. We have 117 employees now including our Vernalis subsidiary with a heavy commitment to R&D with over 85 scientists. Ligand focuses on inventing new drugs or developing technologies to help facilitate drug discovery or making drugs possible. We strive to outlicense as early as possible after achieving proof-of-concept with the goal of securing back in economics of milestones and royalties on potential products.
Overall, the pharmaceutical industry is getting better at picking winners but most drugs still fail in development but not all of them. If we have quality inventions and good IP, we stand a good chance of finding a partner to advance those programs. Industry averages say drugs take about 12 years from discovery to launch, all the work to approval, a drug needs to go through is the same with Ligand business model. We simply choose to focus on the first couple of years of that 12 year cycle, and then have partners focused on the other years.
Now, our 2019 financial outlook calls for $224 million of revenue while that is a bit lower than 2018, a better way to compare years, if you look at 2018 without the sizable nearly $50 million one-time payment from WuXi for buying out China OmniAb milestones, backing that out 2018 revenues would be about $200 million and we are forecasting revenue growth of more than 10% in 2019.
Looking out to the mid-term timeframe over the next several years there are several major programs investors should focus on. Zulresso, Sage's drug for PPD. Sparsentan, retrophins drug for kidney disease. RVT-1502, medivance drug for diabetes. VK2809, Vikings drug for NASH, and our internal iohexol program. All five of these are promising programs with the potential to generate significant data and product launches over the next one to four years and contributing to Ligand's growth early in the next decade.
Looking beyond that into the middle of the next decade we believe OmniAb has the potential to deliver a very substantial annual royalty revenue. The factors we utilized to help us plot the trajectory of the strength of that business or the number of new partners we have signed up, the number of programs under research and the number of programs in the clinic. Biometrics OmniAb is outperforming our expectations. We see, well over 300 antibodies going into discovery research by our 40 plus OmniAb partners and today 12 OmniAb programs are in human trial which is more than we expected two years ago. This matters because there is important derisking with antibody programs as they enter the clinic, the probability of a Phase 1 antibody program making it to market is reported to be nearly double that our traditional chemical based drugs.
Overall, we see the possibility for generating between $500 million to $1 billion in annual royalties from our OmniAb business in 2013 given launch timing assumptions and market potential for antibody-based medicines. As we look at our partnered pipeline and outlook for the business one important element of our revenue is the substantial book of potential contract payments from all of our partners. We currently have over $3.5 billion of potential contract payments and this number is up from the $3 billion figure we reported last year. It also reflects the substantial amounts already paid to Ligand including the nearly $100 million we booked in 2018.
We are very realistic and acknowledging, we do not expect to book all of these payment as they are mostly tied to clinical and commercial success of this, but nonetheless, it is a substantial amount and a high value book of assets owned by Ligand. Now, before I turn the call over to Matt, I want to point out Ligand's recent series of smaller investments in companies and programs to secure attractive economics. We invested in Palvella Therapeutics and in Dianomi Therapeutics $10 million and $3 million, respectively. This is a deliberate part of our growth strategy that we are pursuing along with traditional M&A. We identify and then heavily diligence programs to secure royalties.
We intend to keep doing these sorts of deals deploying additional capital and in the process of locking in substantial royalty rates on many new products in development. The work is paying off as we are pleased with the quality of companies in terms, we are secured and see these investments potentially yielding new royalties in the early to mid 2020. And finally, we are now passed our first few months with the Vernalis acquisition and already its proving to be a great acquisition.
The revenue contribution is higher than we expected given the earlier than projected timing of milestone payments. We have strong engagement with current collaborators and a highly motivated team of researchers in England that joined Ligand. The Vernalis Design Platform or VDP is now our third major technology platform along with the OmniAb and Captisol platforms to license from. Our VDP technology enables us to serve customers with difficult and highly complex chemistry challenges. If we can overcome the issues and filed patents, then we can secure royalties from these programs.
And with that, I'll turn it over to Matt.
Matthew Foehr -- President and Chief Operating Officer
Thanks, John. As was mentioned in our press release today, our portfolio is the largest that it's ever been now at over 200 shots on goal. I think it's worth mentioning that a shot on goal at Ligand is a project that is being actively funded and progressed by a Ligand partner. In the current figure of over 200 shots is net of attrition and despite attrition, our portfolio has continued to grow over the years driven by acquisitions, our own licensing of our valuable platform technologies and by turning targeted internal R&D investments in the program specific licenses with higher back end economics, with a focus on royalties to reflect the derisking activities that we funded prior to a licensing deal.
Our technology platforms continue to drive growth of new programs and our recent acquisition of Vernalis has added to our portfolio in terms of number and diversity of programs and has brought us a new set of expertise and the platform to leverage for future shot on goal growth. This afternoon, I'll touch on a selection of recent partner program developments and then I'll provide some updates on our technology platforms in general, highlighting some recent progress and investments in the platforms as well as plans that we're excited about for the technology platforms in 2019.
I'll also review some updates on our focused internal R&D activities. Starting now with partnered programs, we've noted a couple of new approvals recently CASI Pharmaceuticals announced, it received approval to market Captisol enabled EVOMELA in China, they talk generally about their commercial plans and expectations for the drug in our -- remind investors that because of Ligand's investment in clinical stage R&D for the program years back, we earn a 20% royalty on global sales of EVOMELA. A few weeks back, we were also pleased to see the Daiichi Sankyo received marketing approval in Japan for esaxerenone for hypertension. This is an asset, now with the trade name Minnebro whose original discovery heritage is based on Ligand's nuclear receptor technology and we're pleased to see it now positioned to reach patients.
Partners are also progressing toward new potential approvals, have recently announced clinical data or have started or getting ready to start new clinical trials. Following a favorable FDA advisory committee review in November our partners at Sage Therapeutics have an FDA action date of March 19 for Zulresso, for postpartum depression or PPD. We've also seen positive Phase II and Phase III results from multiple partners in recent months, with Melinta announcing positive Phase III data for Baxdela for the treatment of adults with community-acquired bacterial pneumonia and positive Phase II datasets and expanded data from Viking Therapeutics for VK2809 and patients with non-alcoholic fatty liver disease or NAFLD and for VK5211 in patients who are recovering from hip fracture.
Vikings VK2809 data presented at the AASLD Liver Meeting is of particular note in our view and patients with NAFLD and with elevated LDL cholesterol, the Phase II study of VK2809 achieved its primary endpoint, demonstrating statistically significant reductions in LDLc in patients receiving VK2809. 57% to 60% median relative liver fat reduction was observed in VK2809 treated patients and a 77% to 91% of VK2809 treated patients experienced a greater than 30% reduction in liver fat content.
And importantly VK2809 was shown to be safe and well tolerated with no FAEs observed. Viking has said that VK2809 effect on liver fat at 12 weeks of treatment appears to exceed all other oral agents currently in development for NASH, supporting the view that VK2809 has a best-in-class profile. Viking also indicated that based on published data from multiple studies anticipate that the liver fat reductions would result in longer-term histological benefits.
In addition, the improvement in lipid parameters observed in the study may suggest potential benefits in cardiovascular health, which is obviously an important consideration in this patient population. We look forward, the Vikings continued progress on this and other programs. At ASH Amgen shared Phase 1 data of AMG 330 in relapsed-refractory acute myeloid leukemia. AMG 330 of a novel bispecific T-cell engager or bite immunotherapy that utilizes our Captisol technology in its formulation.
I also note recent new trial starts with our partners at Retrophin having initiated a Phase III trial for Sparsentan in a new indication for IgA nephropathy. In addition to the Phase III trial that's progressing in focal segmental glomerulosclerosis or FSGS. The protect study, which started dosing patients in late December is a global randomized multicenter double-blind, parallel arm active controlled Phase III clinical trial evaluating the safety and efficacy of Sparsentan for the treatment of IGA in the property.
According to Retrophin, approximately 280 patients with IgA nephropathy are expected to be randomized to receive either Sparsentan or an active control which is herbicide 10. IgA nephropathy is a rare kidney disorder that often leads to end stage renal disease and if approved Sparsentan could potentially be the first approved pharmacologic agent for FSGS and IgA nephropathy. Also Metavante is starting up a trial examining RVT-1502 which was formally known as LGD-6972 in patients with Type 1 diabetes.
RVT-1502 is a novel orally bio-available small molecule Glucagon Receptor Antagonist or GRA that's been successfully tested at Ligand in multiple Phase 1 and Phase 2 studies in patients with type two diabetes. As a bit of scientific background on type 1, type 1 diabetic patients do not produce their own insulin and require daily injections of insulin to manage hyperglycemia. Management of insulin dose and frequency can be very challenging leading to periodic episodes of hyper and hypoglycemia.
Furthermore, the effects of glucagon may not be appropriately balanced by exogenous insulin and contribute to elevated blood glucose. Glucagon Receptor Antagonism decreases the insulin requirements in animal models of type 1 diabetes, and may help to improve glycemic control in type 1 diabetic patients. Our team naturally presented data in type 1 diabetes at the ADA conference a few years back, and in addition to its use and work toward further trials in type 2 diabetes, we are very pleased to see Medivance work in type 1.
Our new partners at Palvella, plan to initiate a Phase II, III pivotal trial of PTX-022 addressing an orphan disease called pachyonychia congenita or PC in the coming months. PC is a rare chronically debilitating and life long monogenic disease in which mutations of genes responsible for keratin production lead to dysregulated keratinocyte proliferation increased skin fragility and impaired skin barrier function on the plantar aspects of the feet.
As a result, affected individuals experience difficulty with ambulation which frequently than necessitates the use of either ambulatory aids or alternative forms of mobility such as crawling on hands and knees. PTX-O22 leverages a proprietary formulation and delivery technology to enable distribution into the basal keratinocytes which harbor the mutant keratin genes and are the primary defects in PC.
Switching now to our technology platforms and starting with OmniAb. Our OmniAb antibody discovery platform continues to grow and rapidly drive the expansion of our portfolio of partnerships. There are now 12 distinct Phase 1 and Phase 2 studies under way or recently completed with OmniAb derived antibodies and we expect that number to grow with more partners preparing to start new clinical trials. The majority of these antibodies are for oncology indications and one is in the autoimmune area, since that time, we purchased the Omni-technology just over three years ago, the number of partners accessing OmniAb antibodies has nearly tripled.
Earlier today, we announced a new OmniAb deal with Sweden-based Genagon therapeutics and we expect to continue to add new OmniAb partners. Our scientific team up in Emeryville now has more active projects related to OmniChicken than ever before. We're also seeing interest from current partners as well as prospective new ones for additional and new campaigns for novel antibody targets in OmniChicken, innovation has and will continue to be a hallmark of the OmniAb platform.
Last year we launched a next generation OmniChicken or what we call the SD Bird, which features a full complement of natural human D or diversity gene segments. We also entered into a funded collaboration with Johnson & Johnson, for the development of a novel heavy chain-only OmniChicken, that program is progressing very well and we expect to meet certain success related milestones this year.
Additionally, our team is also well under way with the development of a common light chain OmniChicken which we plan to brand as OmniFlic and expect to launch to partners late this year. The OmniFlic common light chain chicken is somewhat akin to our OmniFlic or fixed light chain rodent technology which assist our partners as they look to develop bispecific antibodies or antibody fragments specifically for CAR-T applications. OmniFlic has been growing in popularity, as the industry's interest in bispecific antibodies increase.
Turning now to Vernalis, the addition of renounced Ligand has done very well and is now nearly complete, the team at the Cambridge U.K. site which will be the sole Vernalis site going forward fits in very well with our model of early stage partnering. Vernalis strength are in fragment and structure-based drug discovery where protein structuring, fragment screening and molecular modeling are closely integrated with medicinal chemistry and create an additional ligand platform upon which to enable rapid and efficient discovery of novel drugs.
The acquisition has added exciting new shots on goal existing collaborations with major pharma companies that we look to expand upon and additional assets that present potential outlicensing and corporate formation opportunities for Ligand. The Vernalis assets also have increased the diversity of our partner base and the underlying technologies of our portfolio. I'll also direct investor attention to a presentation at the upcoming AACR Meeting in Atlanta, where Servier (ph) will be presenting data on the Servier Vernalis collaboration and specifically the Phase 1 stage MCL inhibitor for cancer, that Servier has now partnered with Novartis. The molecule was previously known as S-64315 at Vernalis and Servier and now at Novartis is known as MIK665.
Importantly, we now also see the opportunity to marry our OmniAb antibody expertise with the small molecule prowess at Vernalis in the area of antibody-drug conjugates which is another growing area of interest within the pharmaceutical industry. And now, very briefly on Captisol, the Captisol technology continues to provide value to our partners and we continue to expand our active Captisol Drug Master Files in the U.S., Canada, Japan and China. Notably, last year, additional special population safety reports were added to the DMF safety databases for Captisol, including patient data on oral administration, additional renal related data and data sets specific to the pediatric populations.
Our Captisol partners continue to value our growing and global safety database. Our large and reproducible manufacturing scale of GMP material and our well-established history of highest reliability as a supply partner. In addition to shipping commercial and clinical material out of our contract manufacturing sites in both, Portugal and Ireland. Last year, we also established a new distribution capability in Ireland in 2018. This expanded distribution capacity, it helps us meet the current and future needs of multiple commercial and pre-commercial partners as they diversify or expand their manufacturing supply chain for their finished products that have been enabled by Captisol. I also note that we recently entered into new Captisol licenses with Merck KGAA and a start-up company called reVision Therapeutics.
And I'll wrap up my comments with some brief update on activities with our internal R&D pipeline, starting with Captisol-enabled iohexol our internal team has continued to make good progress on the Captisol-enabled iohexol or CE iohexol program. We built up our preclinical data sets significantly, which is designed to further illustrate the differentiating features of our product and we're now in final preparations for making our CTA submission to the health authorities in Canada where our first in human trial will be run this year. We've manufactured our clinical batches of CE iohexol and are expecting to initiate the clinical trial this quarter, and we aim to have Phase 1 bioavailability data on CE iohexol in Q3 of this year.
The trial will target enrollment of 24 healthy volunteers and we will be a single-center, randomized, double-blind two period crossover study to determine the relative bioavailability of CE iohexol and a reference product, which will be GE Healthcare's OMNIPAQUE. The trial will also assess safety and tolerability. We expect to present data from the program at relevant medical and scientific meetings throughout the year. We also now have five new internal antibody related programs, leveraging the capability of our deeply experienced OmniAb team. We initiated these programs in 2018 and have generated data and plans that we expect to be talking more about at meetings and with investors and potential partners through the year. The five programs are on targets where the biology is known and they generally center around the oncology and inflammation therapy areas.
And I'll now turn the call over to Matthew Korenberg to discuss the financials.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Thanks, Matt. 2018 was an exceptional year for Ligand. Significant growth in total revenues and in earnings contributed to a year in which we significantly exceeded our expectations for the business and for our financial guidance. We continued our track record of generating significant cash flow from operations. As I begin discussing the financials, I'll remind investors that the fourth quarter of 2018, is the last quarter in which our prior year royalty revenue comparable period has shifted by one quarter as a result of ASC 606, when discussing royalties. I mentioned the appropriate comparable prior year period as well as the actual reported number.
The tables in our earnings news release issued today contain only the 2017 period numbers as reported at the time. While our 10-K, we'll have more details on the comparability of the royalty numbers when we file in a couple of weeks. Total revenues for the quarter ended December 31, 2018 were 59.6 million and this is up from 50.5 million a year ago. Royalty revenue in Q4, 2018 was $40.2 million, which is a 25% increase compared with the royalty revenue of $32.2 million in the appropriate comparable period. The growth in royalty revenue largely reflected higher Promacta and Kyprolis royalties. Q4 2017 royalty revenue as reported was $28.3 million, but as I just mentioned, this is not the appropriate comparable number for the Q4, 2018 period.
Milestone and license revenues were $9.3 million in Q4 2018 versus $14.4 million in -- for the year-ago period, reflective of the fluctuations in timing of milestone and license fee achievement by our partners. Captisol material sales were $10.1 million compared to $7.7 million in Q4, 2017. This substantial Q4, 2018 number for Captisol contributed to a record year for the technology, and while this business generally has lumpy sales from quarter-to-quarter and should not be considered a trend, it should give investors confidence in the strength of the Captisol business. Regarding gross margin, our Q4 gross margin for Captisol sales was slightly lower as compared to the first nine months of the year as well as the prior year period.
Our mix of commercial and clinical material sales can shift from quarter to quarter and year-to-year resulting in changes in gross margin. Our material sales costs translated to an overall corporate gross margin of 95% for Q4, 2018. On the expense side, our R&D in Q4 was $8.8 million excluding stock comp and other non-cash charges, R&D was $6.3 million. For G&A, our Q4 total was $11.2 million excluding stock comp and other non-cash charges, there, G&A was $7.3 million. Taken together, total cash expenses for the quarter were $13.6 million, which is in line with our guidance of $13 million to $15 million. As we've gotten further into the Vernalis integration, we have a more detailed view on how this will roll into 2019 and I'll provide some more specifics in a few minutes, when discussing guidance.
Turning to GAAP net income. For Q4 2018, GAAP net income was a loss of $42.5 million or a loss of $2.02 per share, similar to Q2 and Q3 of 2018. In Q4, there was a significant non-cash item related to the performance of Viking share price. In this quarter, the loss associated with Viking shares is $74 million, while in Q2 and Q3 combined, we had a gain of approximately $102 million. Viking stock has been volatile as most biotech stocks often are, but Viking had a strong 2018, with good execution and good data events. Our view continues to be that Viking as a great company with a promising future.
As we mentioned in previous quarters due to the change in accounting for financial instruments prescribe by ASU 2016-01, beginning, January 1, 2018, we account for the value of our ownership in common stock such as Viking and Retrophin, by making the value of our -- by marking the value of our shares to current market prices, with the resulting unrealized gain or loss running through the P&L each quarter rather than at the time of selling the stock.
Prior to the new accounting standard, the changes in value would impact the balance sheet, but not the P&L these fluctuations in value whether positive or negative are not reflective of our core operating business as such, these gains or losses will be excluded from our adjusted earnings calculation. For the quarter, we reported adjusted net income of $39 million or $1.70 per diluted share, and this compares with adjusted net income of $29 million, $29.6 million or $1.31 per diluted share for the same period last year.
In Q4, we generated $33.3 million in operating cash flow, which is an increase from $31 million of operating cash flow generated in the year-ago period. For the full year 2018, total revenues were $251.5 million versus $141.1 million in 2017. Revenue growth translated to significant increases in cash flow as well. We generated $194.7 million in cash from operations in 2018, which is more than doubled at $93.6 million in 2017. Related to our GAAP net income for the full year 2018, as outlined in our earnings news release, GAAP net income for the year was $143.3 million. However, as mentioned this figure was impacted by a large non-cash gain of $50.2 million for the year, resulting principally from changes in the trading prices of Viking shares.
For 2018, we reported adjusted net income of $166.9 million or $7.15 per diluted share compared with adjusted net income of $72.5 million or $3.26 per diluted share for 2017. The outperformance on revenue and EPS, relative to our most recent guidance was primarily attributable to the exceptional Promacta fourth quarter as well as a few additional Captisol orders in the quarter and some benefits on cash R&D and G&A expenses. As a reminder, our adjusted EPS is reported on a fully tax basis, despite the fact that we pay less than 1% cash taxes as a result of the utilization of our NOLs and other tax asset. Based on our current projections, our cash tax rate will remain less than 1% through the end of 2020.
On the balance sheet, we finished the year with over $718 million of cash, cash equivalents and short-term investments, we continue to maintain our cash in highly liquid short-term investments, but in 2018, we realized over 200 basis points of interest income on our cash. Our cash balance reflects the significant share repurchases and convertible note repayments that occurred in Q4, 2018.
As investors likely saw we recently increased our share repurchase authorization to $350 million which is up from $200 million previously. As of today, we have acquired over 870,000 total shares and use over $120 million of our authorization. In the past three months, we've repurchased over 4% of our stock, knowing what we know about the business and given our outlook, we are pleased to make these repurchases as they directly increase, the per share cash flow and earnings for all investors going forward. We planned to continue to opportunistically evaluate share repurchase opportunities.
On the strategic front front, we could quote two transactions in the quarter that I wanted to touch on briefly. Our acquisition of Vernalis closed in October, I mean -- integration process is going well. The team in the U.K. is on board and servicing our clients. We'll continue to integrate the financial aspects of the business and as always, we'll look to control costs as we generate new shots on goal. Separately, we closed our $10 million investment in Palvella's Phase II-III trial for PTX-022 as Matt Foehr discussed earlier. We hope this along with our recently disclosed $3 million Dianomi investment are the first of many such investments as we continue to use all of the tools at our disposal to create new shots on goal.
Turning now to financial guidance. As detailed in today's press release, we're raising our 2019 guidance in introducing more detailed Full-Year Financial Information. First on revenue, we expect continued solid royalty revenue growth for 2019. For the year, we expect about $154 million of royalty revenue. For material sales we expect another solid year with approximately $27 million of Captisol sales, a couple of the late December orders in 2018 contributed to the outperformance we saw last year, but we still continue to see strong order demand in 2019.
And lastly, from milestones and license fees, we expect at least 43 million of milestones and license fees for the year. As I've detailed in previous years. This milestone and license revenue will come from a variety of sources and spends more than 80 possible events. On the expense side for R&D, we expect $36 million to $38 million of total R&D expenses for the year, excluding stock comp and other non-cash charges, as we expect R&D expense will be 25$million to $27 million.
For G&A, we expect the total expenses to be $37 million to $39 million and excluding non-cash charges and stock comp, we expect G&A to be approximately $23 million to $25 million. Together, we expect these cash operating expenses for 2019 to total $48 million to $52 million. These revenue and cost components all translate to full year 2019 revenues of approximately $224 million and adjusted earnings per diluted share of approximately $6.05. With respect to quarterly pacing or breakdown, we expect royalty revenue to increase each quarter with Q1 being the lowest royalty quarter for the year.
As of now, our Q1 royalty revenue estimate is approximately $25 million beyond that, the pacing of milestones and material sales is always uncertain. That said, we generally expect a relatively even split across the year for Captisol material sales and we expect milestones to be more heavily weighted to the first half of the year with several large approval and related other milestones, approval-related and other milestones lining up in the first quarter as we see it now. Finally, just a reminder that our adjusted EPS guidance exclude stock-based compensation expense, non-cash debt related costs, changes in contingent liabilities transaction related amortization in one-time costs. Unrelated changes in value -- unrealized changes in value to our holdings in Viking and other common stock, mark-to-market adjustments for amounts owed to licensers, changes in contingent liabilities related to our CBRs and excess converted shares covered by the bond hedge and certain other onetime non-recurring items.
With that, I'll turn the call back over to the operator and open up for questions.
Questions and Answers:
Operator
(Operator Instructions). We have your first question comes from the line of Joe Pantginis from H.C. Wainwright. Your line is now open.
Joe Pantginis -- H.C. Wainwright -- Analyst
Hi guys, good afternoon and congratulations on a great year. Couple of questions on some of your transactions and also your internal development that Matt mentioned. First on Dianomi, I was just wondering if you could add a little more color, it seems like you've added a -- another technology platform that has the opportunity to provide multiple shots on goal. Just wondering if you could provide any color there?
Matthew Foehr -- President and Chief Operating Officer
Yeah. Joe. This is Matt Foehr. Just to give you a little bit more background on the technology itself, it's called the MCM technology or the Mineral-coated microparticle technology and essentially what it does it mimics the ability of -- it's mimicking the ability of what human bones and teeth can store and protect biologics and it's leveraging that to improve delivery either sustain delivery or stability. So it's a new technology, as you said, it gives us an opportunity for more shots on goal. The technology came out of Bill Murphy's lab, who is a well known biomedical engineer at University of Wisconsin and our team obviously spent a lot of time evaluating the technology. We really like it and think it does give an opportunity for more shots on goal.
John Higgins -- Chief Executive Officer
Yeah and Joe, I'll just add the -- perhaps the difference here versus Captisol, we did not acquire the company. It was an investment into the company. So, they will operate and perform their work. What we've done with the structured transaction is secure royalty economics on their first five products. So they may market them, themselves. They may license those, but it's not our business, so to speak to control and license those out, but it's certainly a very exciting platform again heavily diligence and in some ways comparable to some of the other technologies that we own in-house here at Ligand.
Joe Pantginis -- H.C. Wainwright -- Analyst
No, that's helpful. Thank you. And then with regard to your internal programs. Appreciate the added color as well. So it looks like you're certainly leveraging the OmniAb platform for yourselves and with regard to these five antibodies that you're talking about in the oncology and inflammatory spaces, how far do you think you would take them and what I mean by that is, do you think they'll fit into the very long-term successful model that you've had with regard to -- even your earlier comment on today's call. John, where you said, outlicense as early as possible or maybe see some sort of balance that you saw with our RVT-1502 or 6972, where you held on it -- held onto it, just a little bit longer to garner better economics.
Matthew Foehr -- President and Chief Operating Officer
Yeah. Joe. This is Matt Foehr. That -- as we look at these five program one I'll say our team since we initiated to kick these off last year. The team has made great progress on them, they are all targets with known biology. Right, so the biology is known, but there are in areas where we see potential licensing need. And so for us the key is targeted investment answering a couple of key questions that then increase the economics. So in the case of antibodies like these, it's obviously defining the antibody sequence, it's getting some of the biology in the animal models and preclinical models and even during some of the Pre-IND type of work that can really drive better downstream economics for an antibody program.
Joe Pantginis -- H.C. Wainwright -- Analyst
Got it. Thanks a lot guys.
John Higgins -- Chief Executive Officer
Joe, thank you.
Operator
Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is now open.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
Good afternoon and congratulations on all the progress.
John Higgins -- Chief Executive Officer
Matt, thank you.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
First one upon Minnebro. I'm wondering if you could provide some details, whether it's, what the royalty rate there is maybe market size, any details along those lines. And then, if I remember correctly, your event was part of that licensing agreement maybe an update on where they're at in their regulatory processes.
Matthew Foehr -- President and Chief Operating Officer
Yeah, that I could obviously speak to the Minnebro history, a little bit. Right, so this is a drug that was discovered leveraging Ligand's original nuclear receptor technology for a time it was in a spin out company. This is now going back to 1999, 2000 timeframe within a spin out company called accept or that was then acquired by Exelixis who then partnered it with Daiichi Sankyo and we've seen that with a number of assets over the years, right. They change hands as a larger player comes in, which is the case here with Daiichi Sankyo. This was in the mineralocorticoid receptor field and now it's obviously approved in Japan, Daiichi ran the Phase III trials. We pass along that data, a year and a half or so ago when they completed those successful trials and hypertension.
Hypertension is obviously a large market and we're hearing Daiichi they haven't given specific guidance around commercial outlook for things like that, so we direct you to them, for more details there.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
Okay, great. And then regarding your event, is there any update on how they're progressing with U.S. and I guess Rest of World.
Matthew Foehr -- President and Chief Operating Officer
No, we'd have to direct you to other parties on that.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
All right. Fair enough. And then I guess a follow-up question on the Dianomi, given that that's how -- essentially a fourth platform. Is there an opportunity downstream versus that's having some success where you would bring that in-house, you would essentially acquired the rest of the business or do you anticipate kind of letting it run its course with the five and moving onto other opportunities?
John Higgins -- Chief Executive Officer
Well, it's a fair question. I think clearly the idea, both beyond technology is right in the strike zone of what we want to do and frankly what we're good at, but out of full respect for Dianomi they are independent company. Obviously, there are financed with the Ligand money, but they are fundraising outside of Ligand. They've got very good science and leadership. One of the founders was a Senior Portfolio Manager in Invesco, a very credible and highly respected investors. So this is a stand-alone company, there is no plan to acquire them and that really was not the objective here, but certainly over time there's interest are -- or we see other technologies to built and we will pursue those opportunities.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
Okay, understood all alright. Thank you. And then maybe one last one from me, is there any reason why a kind of looking through the year, whether it's timing or what not -- where your margins, your gross margins in particular would change or is that, should we kind of use the 2019 run rate is kind of a good starting point.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
So that 2019 margins will be reflective of the mix of Commercial Clinical and which partners et cetera are on the material side, but no reason why margins would be overall different than 2019 versus '18. I think we have seen a slight shift toward the commercial side, which is -- as we've said all along, lower margin in the clinical side and so that might be a reason for the material sales margins to tick down a bit, but I think they will still end up right in the same neighborhood.
Matt Hewitt -- Craig-Hallum Capital -- Analyst
Okay, great. Thank you very much.
John Higgins -- Chief Executive Officer
Thank you, Matt.
Operator
Your next question comes from the line of Larry Solow from CJS Securities. Your line is now open.
Larry Solow -- CJS Securities -- Analyst
Great, thank you. Good afternoon, guys. Just on Promacta obviously driving a significant amount of your current royalties, a lot of varying opinions out there from analysts and the like, just the exact or potential patent expiration. I know you mentioned the Orange Book patents where at least one that goes into 2020. Can you maybe just give us a couple more minutes on that. Just a little more color and what -- are there earlier significant patent expirations that could maybe provide a window for generic competition to come onto the market earlier.
John Higgins -- Chief Executive Officer
Yeah, Larry. Good question. And obviously we monitor closely, we've got a very talented sophisticated patent team in-house here at Ligand, and obviously talked at Novartis and monitor their public disclosures, as well as work that they're doing internally. The big picture is, its a fantastic asset, it's growing very nicely, and we think we're going to have years, seven years or more patent protection. When you study Novartis's 10-K, our Q disclosures, I think they have a very long list of IP, it's layers upon layers and frankly, there are some, some presumption that have competition matter come off in the early 2020, '23 type timeframe, but that is at the end of the patent life.
We absolutely do not see it that way. I don't believe Novartis sees it that way. There are very strong salt patents that go through 2025 and 2026 and then again a series of other patents though '27 and '28. So our view is that sitting here in Q1 of 2019, we have seven years or more of patent life and it's some that we're excited about in terms of seeing the continued growth and the robust market protection. I'll see if Matt Foehr wants to add any other color there.
Matthew Foehr -- President and Chief Operating Officer
Yeah, no, I think you covered it well and, as you said John Novartis is pretty fulsome in their disclosures in their 20-F, and their 10-Ks on the list of patents in the different market.
Larry Solow -- CJS Securities -- Analyst
Okay. Great, I appreciate that color. And with -- it sounds like a good runway of least patent protection. How about just the runway for you in terms of growth. Obviously, the product is done amazingly well. There are a couple of new competitors in the market. Could you maybe just share with us from a global level that they have been getting, quantify numbers or the potential of it sort of how much, you guys have tonnage or to penetrate on its second-line of indication, and where there potentially room for growth there.
John Higgins -- Chief Executive Officer
Yeah, so in 2018, it is some way the road map, we raised guidance a few times. We obviously had over performance on licensing deal revenue but Novartis, frankly two quarters or three quarters blew it out of the water. Their numbers -- we're being good expectations, frankly we exceeded our internal forecasting, fantastic performance, what's important 2018, while the year that we saw, these other entrance. Now, 12 year, 12 months of market experience these other entrants frankly are small, they're marketed by small companies, they are getting a lot of traction, they maybe good medicines not commenting on that, but in the face of new market entrants Novartis is posting some fantastic numbers. It is a best-in-class medicine, there's no doubt about that. And in this fourth quarter is a real nice reinforcement of how well that product is doing. The analysts expectations, we monitor Street outlook and for the last three years analysts outlook has grown considerably, It was peak sales within our kind of $1 billion to $1.2 billion range jJust a few years ago. And now when you look at the 13 analysts that cover Promacta these are Novartis analysts, not Ligand, the companies -- the analysts who cover Novartis -- the peak outlook is as high as to the $2.2 billion.
So I think that yes, it's an evolving market, there's a belief that the platelet category overall is expanding the entire pool of potential eligible patients to be treated is larger than people expected at a larger dollar category and Novartis is dominating the market share. So, it's a good product, we're proud of it and that is our kind of report what we observe in terms of what is available publicly.
Larry Solow -- CJS Securities -- Analyst
Okay, great. I appreciate that. Just a couple of more, a global question, in your press release you reaffirmed sort of your business model, which is obviously backend loaded royalty base, along with that with your partners, you do milestone payments that come in. Could you just maybe I know the total number is over $3.5 billion, but just remind investors, what you guys think is a comfortable number for not just this year, but on average over the next, I think you said 10 years and. And just also I think a part of that or even a material part of that is sort of not necessarily milestones, but more license fees and subscription-based fees on for OMT, so which is also growing. So I think there's been some misguided analysis out there that you know -- how to value the company based on milestones, which I think gets a little bit lost in the real and over the company really is worth.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Yeah, thanks, Larry, this is Matt Korenberg. As I said frequently on these calls, when we talk about our milestones, we talk about the number as being over a certain amount and we we bake into some, some level of conservatism into that number. But we -- as John says all the time and as we say in our slides, most things fail. So when we talk about the total, that the total possible of everything worked. And when we model it internally, what we do is take industry averages for success rate of trials moving from start to finish in approval and depending on where our drugs are we line up those milestones stage of drug. And then apply all that math.
And what I've said in the past is that we see over the next 15 years or so realizing on average about $40 million to $60 million a year -- $40 million to $60 million a year. So in total over 15 years, that's something like $600 million to $900 million over that period. And obviously that's so much less much lower number than the $3.5 billion total that we've got recognized or contracted for.
Larry Solow -- CJS Securities -- Analyst
Got it.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
You mentioned the breakdown of those, they're certainly a subset of that $40 million to $60 million that we expect every year that is regular recurring license fees, annual license fees that our partners pay us, service fees and other license fees that our partners pay us for use of our technology or otherwise. So there is a certain recurring nature to that -- a portion of that as well.
John Higgins -- Chief Executive Officer
And one other thing just to add and we invite investors to go back and look at the last five or six years. But the amount of partnerships under license has grown and we have of course a later stage portfolio, which often are the later stage events are often tied to large potential milestones. But as a point of fact, if you look at the revenue trend, five, six years ago the annual contract revenue annually was about $5 million to $10 million and we saw that level for a few years.
Well, I tell you, we had a prolific increase of licenses and again programs we're advancing, for a couple of years we then saw revenue gap up to about $20 million to $30 million and we saw that level for a couple of years. And now once again here we are more deals, more licensing later stage, we were looking at $30 million to $40 million, while we are at that level and with what we see this year $90 million, almost $94 million you back that out, we're at $45 million.
So once again, we do believe that we are at a new higher quantum of annual revenue and while it's hard to forecast, these are events out of our control. They're tied to clinical timing, et cetera. The reality is the model is working. We have the highest volume of license contract payments in the history of the company, the most assets under development and programs are advancing. And this is a substantial and what we witnessed the last five years meaningfully growing element of our revenue stream.
Larry Solow -- CJS Securities -- Analyst
Right. And on the license and milestone number guidance you provided for '19, I think when you had initially provided guidance you had said there was an additional amount that where timing was really challenging to gauge, but you could get a portion of that. Could you remind us, I think there was a certain amount of dollar amount touch that.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Yeah, thanks, Larry. When we initially gave guidance, we quantify that as about $40 million of potential upside. Nothing has changed from that, you correctly noticed that we didn't mention that specific number in our -- in our guidance today or my speech today. But the reason really is, it's rather than sort of track that number specifically for investors quarter-to-quarter and have to update it, every time we're talking publicly, we wanted to give the rough level of potential upside at the beginning of the year and let folks just digest that. And over the course of the year, we'll just continue to update actual milestone guidance as we go.
Larry Solow -- CJS Securities -- Analyst
Right. And the updated guidance relative to that because just about six weeks ago, the reason for the increase was that mostly driven by higher expected royalties obviously Promacta maybe end of the year perhaps higher levels. maybe that's the biggest factor or anything else out there?
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Yeah, good question. It's mostly -- almost entirely Promacta outperforming what we expected in Q4 and then rolling that forward through the rest of the year. And offset just a little bit by some of the Captisol orders that ended up happening right at the end of 2018 instead of in early 2019. So offset a little bit of the upside of Promacta with that, but otherwise this is not Promacta.
Larry Solow -- CJS Securities -- Analyst
Okay, Matt, just a couple of, I think the effective tax rate in the quarter and what you expect in '19 and what sort of incorporate into guidance?
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Our guidance always assumes 22% to 24% tax rate, which is 21% federal. And then one 1% to 3% state depending on where our sales come from each year, et cetera. So that's what's baked in.
Larry Solow -- CJS Securities -- Analyst
And the net effective in the quarter -- in this quarter, past quarter was the same number was it looked like it was little lower than that?
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Yeah, it's -- I think it was a little lower, but it's always shift around by one-time items that either have differing tax impact and then the actual rate at which we get, we forecast. So it's one-off things that move in and out of our adjusted EPS, et cetera.
Larry Solow -- CJS Securities -- Analyst
Great. Okay, great thanks guys, I appreciate it.
Operator
Your next question comes from the line of Drew Jones from Stephens Incorporated. Your line is now open.
Nathan -- Stephens Inc. -- Analyst
Hey guys, this is actually Nathan (ph) filling in for Drew. Thanks for taking the questions.
John Higgins -- Chief Executive Officer
Mason, thanks for calling in.
Nathan -- Stephens Inc. -- Analyst
So looking at OmniAb. what's the OmniAb representation in the milestone opportunity, that $3.5 billion opportunity that you guys talk about. And how much of the $43 million guide for 2019 is from OmniAb projects?
John Higgins -- Chief Executive Officer
Yeah, good question. Last year at Analyst Day we gave a breakdown of the 2017 and 2018 milestones by category. We didn't specifically break out mile OmniAb, but we gave a sense of the annual license fees, which is mostly OmniAb and some of the trial starts which we said were a lot tied to OmniAb. As you probably saw in our press release, we announced date of our Analyst Day in today's press release, we intend to give a lot more detail on the breakdown of milestones at Analyst Day. But generally speaking, beyond the Ab numbers have been about $10 million to $20 million a year, so they're a subset of the $43 million.
Nathan -- Stephens Inc. -- Analyst
Got it, thanks. And in stepping back for a minute. What percentage of your partners would you say are virtual biotech and how do you think that compares to the percentage of the total market, that's made up of virtual biotechs.
John Higgins -- Chief Executive Officer
Yeah. So, yeah, out of 200 shots on goal, there is a very small subset of folks that are -- what I call start-up companies and that are actually counted as shots on goal. That's an important nuance. Just because we announced a new deal with someone that maybe a start-up company, it doesn't necessarily mean it ends up in our shots on goal count right away, and so across our partner list. We have a handful of start-up biotech type companies but across the shots on goal, its lesser percentage.
Nathan -- Stephens Inc. -- Analyst
Got it.
John Higgins -- Chief Executive Officer
Yeah, and what's fascinating. I mean just, and -- when we go back and look at the last 10 years in deal making often there are investors, student investors or scientists that, that have an instinct to go after something, to go after some opportunity. They come to Ligand because what they want to do, Ligand has, either we got actually a molecule or a drug or we've got technology that can enable their dream. Okay, so start start-ups happen frankly you look at technology, the tech sector, biotech et cetera.
Three examples, Retrophin, Sage and Viking each one of these had an investor or a scientists who had an idea for a product and they came to Ligand and they -- they took a license. These are all virtual start-ups and we were there literally at the beginning with the principles when they sensibly had nothing else except a license for Ligand.
Now you look at Viking, today over $600 million market cap, all right. How about Retrophin over $1 billion market cap, and Sage about a $3.5 billion market cap, $4 billion or $5 billion. It's incredible, the evolution of this industry and it's not brick-and-mortar. It's not size, 20 years ago. The industry was -- your market cap was based on how many PhDs you have and I'll tell you, I was the former banker in early '90, the joke was well for every PhD is about $1 million in market cap.
What if you know these companies raised to sign a PhD, 200 PhDs, well, so that's about a $200 million market cap. Well, I'm just saying because today, the industry has evolved, and there is much more virtual opportunity, a chance to create a biotech out of ideas and then contract for services. Contract for discovery, contract for clinical trial management and it is really a profound way how this industry has evolved, and a very efficient way for Ligand to participate with these inventors.
With the start-up companies to lock in meaningful economics and to do it in a very efficient, low-cost way for Ligand. So we are clearly witnessing capital in company information, but on the back end, there's a lot of good taste preference for how these virtual company see starts-up, are successfully moving to very substantial companies just several years later.
Nathan -- Stephens Inc. -- Analyst
Got it, got it. That makes sense. All right. That's it from me guys, thanks. Appreciate it.
John Higgins -- Chief Executive Officer
Thank you. I really appreciate you all call again and asking those questions.
Operator
Your next question comes from the line of Scott Henry from ROTH Capital. Your line is now open. Scott Henry, your line is now open.
John Higgins -- Chief Executive Officer
All right. So let's move on. Operator, please.
Operator
Your next question comes from the line of Dana Flanders from Goldman Sachs. Your line is now open.
Dana Flanders -- Goldman Sachs -- Analyst
Hi, thank you for taking my questions. My first one just on milestones. Can you just remind us kind of the methodology to get down to that risk-adjusted number. Are you taking just the average probability of success based on phase or are there specific assets and milestones we're using either a higher probability or lower probability of success.
John Higgins -- Chief Executive Officer
Yeah. Thanks, Dana. Largely across the portfolio. We just take the average industry standard probably success based on stage of development. We do occasionally vary from that, but it only to be more conservative and not, not to be more aggressive. We would never assume that we had, higher probability of success than industry average, but in certain sectors -- in the past -- some of the higher risk, later stage trials we think with lower probabilities but speaking it's about the average.
Dana Flanders -- Goldman Sachs -- Analyst
Okay. And maybe a similar question on just how you kind of set your shots on goal target or is there a minimum threshold for a company to be considered a viable partner whether it's level of funding or moving on asset through clinical trials. It sounds like you may be leaving assets out, that should be considered a shot on goal, but just trying to figure out kind of the level of subjectivity there and how you kind of walk that line.
Matthew Foehr -- President and Chief Operating Officer
Yes Dana, this is Matt Foehr, I mean obviously we -- as I said -- we only count something as a shot on goal. If it's being actively funded and progress by a partner. Right, and I'll use a kind of a recent example that I think is probably useful. We did a licensing deal with a company called Filos (ph), a couple of years ago. A multipart licensing deal and while we announced the deal and they were progressing, working our plans and looking to raise funds, they actually just completed a reverse merger very recently raised $18 million. We are using -- because it's kind of a present time example. We actually didn't count Filos in our shot on goal count until very recently, once they've gotten funding and they are progressing the programs forward.
So that I think gives you a little insight, kind of how we think about it, we've seen a lot of growth in our shots on goal, lately a lot of that's been driven by OmniAb and some of that is because of the way our licenses are structured, obviously we enter into a discovery license partners generally pay an annual fee to utilize the technology on an annual basis, that if they're using in discovery we would generally count that as a discovery shot. Now they may be testing 20, 30, 40 targets, we don't count all those as shots on goal, but we will count in OmniAb shot downstream once they've define the antibody and are progressing actively preclinically toward an IND and that's been leading to a lot of growth in our shot on goal count.
Matthew Korenberg -- Executive Vice President, Finance and Chief Financial Officer
Yeah. And the -- I think the number, obviously, it's increased every year we report out when there is some event to talk about what the count is, but you're good to ask what do we count, we don't count everything, frankly, we think we're conservative. We got to make sure it's funded that it's in progress, but we also are very disciplined, very detailed in studying what's dead -- what's killed, what doesn't deserve to be on the list any longer and we -- we have substantial attrition and we're always backing those out.
Okay, so not to be -- to say the number, we literally, right. We try to be conservative and in terms of reporting the number, but it's not only what is qualified, the qualification to count was in, but also the discipline to exclude or delete what no longer should be counted.
Dana Flanders -- Goldman Sachs -- Analyst
Okay. And maybe a, just a housekeeping question. Can you just talk to the increase in accounts receivables recently what's been driving that. Is that been capsule related.
John Higgins -- Chief Executive Officer
Yeah, no, not really. Well, partially related to the capital orders in the last weeks of the quarter, but it's actually, mostly driven by the royalties, because now we book real time. The royalties -- we always have a -- whatever the royalty numbers are for the quarter. We have a receivable related to -- nearly entirely all of the royalties each quarter. So as we have increasing royalties, our receivables are going to increase every year. Back when we booked real on a one quarter lag. We had almost no receivables because our royalties were booked and paid in the same quarter.
Dana Flanders -- Goldman Sachs -- Analyst
Okay, thank you for taking my questions.
John Higgins -- Chief Executive Officer
Sure, thank you.
Operator
The next question comes from the line of Scott Henry from ROTH Capital, your line is now open.
Scott Henry -- ROTH Capital -- Analyst
Thank you, gentlemen and congratulations on a great year. Sorry, I had some technical difficulties just a couple of moments ago. Just a couple of questions, first EVOMELA in China, could you give us any idea of how we should think about the magnitude of revenues you could, could generate in that area?
Matthew Foehr -- President and Chief Operating Officer
Yeah, thanks Scott. So as I mentioned in the remarks, even though I got approved in China at the end of last year. CASI Pharmaceuticals is going to market it, we expect they'll launch fairly soon, based on their communications, that's directly to them for kind of their specific market commentary for the drug, but we do get a 20% royalty on -- even thou
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Read More First Published on Feb 13, 2019 11:31 am