SCHEDULE: Ligand Boosts Pelthos Stake with $9M Convertible Note

Ligand Pharmaceuticals has increased its beneficial ownership in Pelthos Therapeutics to 49.9% through a new $9.0 million senior secured convertible note financing.

Summary

• Ligand Pharmaceuticals Incorporated acquired a $9.0 million Senior Secured Convertible Note from Pelthos Therapeutics Inc. on November 6, 2025.
• This financing increases Ligand's beneficial ownership in Pelthos to 49.9% of the common stock, totaling 5,189,177.10 shares, including common stock, Series A Preferred Stock, and shares underlying the new Convertible Note.
• The Convertible Note matures in 24 months, bears an 8.5% annual interest rate, and is convertible into common stock at an initial price of $34.442 per share, subject to potential reduction to $29.73.
• As part of the deal, Ligand receives a 2.5% royalty on net sales of Xepi™ and a pro rata share of Pelthos's royalty and milestone payments from Sato Pharmaceutical Co., Ltd. for ZELSUVMITM.
• The Convertible Notes are secured by a lien on Xepi revenue and Sato payments.
• Pelthos will seek shareholder approval for the conversion price reduction and will file a resale registration statement for investors' shares.
• Ligand's lock-up agreement was amended, immediately releasing 25% of its subject shares from restrictions until December 31, 2025.

Sentiment

Score: 7

Explanation: The filing indicates a significant strategic investment by Ligand in Pelthos, providing Pelthos with crucial capital while expanding Ligand's portfolio of royalty-generating assets and equity stake. The terms appear structured to benefit both parties, with Pelthos securing funding and Ligand gaining substantial economic interest and potential upside, albeit with a cap on direct control. The secured nature of the note and the royalty streams are positive for Ligand, while the cost of capital and potential dilution are considerations for Pelthos.

Positives

• Pelthos secured $9.0 million in financing, strengthening its capital position for ongoing operations and development.
• The Convertible Note is senior secured, providing a level of protection for Ligand's investment.
• Ligand gains additional revenue streams through a 2.5% royalty on net sales of Xepi™ and a pro rata share of ZELSUVMITM royalties/milestones.
• The potential reduction of the conversion price to $29.73 could be beneficial for Ligand, increasing its potential common stock ownership upon conversion.
• 25% of Ligand's previously locked-up shares were immediately released, providing Ligand with more liquidity options.

Negatives

• Pelthos incurs new debt with an 8.5% annual interest rate, adding to its financial obligations.
• Pelthos is granting significant future revenue streams (Xepi royalties, Sato payments) as consideration and collateral, which could impact its long-term profitability and cash flow.
• The potential for the conversion price to drop to $29.73 could lead to significant dilution for existing Pelthos shareholders if Ligand converts.
• The requirement for shareholder approval for the conversion price reduction introduces a potential hurdle for the full realization of the note's terms.
• Ligand's voting rights are capped at 49.9%, limiting its direct control despite a substantial economic interest.

Risks

• Shareholder approval for the conversion price reduction is not guaranteed, which could affect the final conversion terms of the Convertible Note.
• The Issuer's ability to make cash payments on the Convertible Notes could be constrained by Permitted Senior Indebtedness, potentially leading to an automatic conversion price adjustment based on VWAP at maturity, which could be unfavorable.
• The value of the collateral (Xepi revenue, Sato payments) is dependent on the commercial success and market performance of these pharmaceutical products.
• Dilution risk for existing shareholders if the Convertible Notes are converted into common stock, especially at a potentially lower conversion price.
• The lock-up period for Ligand's remaining shares extends until December 31, 2025, limiting its ability to sell those shares before that date.

Future Outlook

Pelthos Therapeutics is committed to seeking shareholder approval for the conversion price reduction and will file a resale registration statement for investors' common stock within 60 days of the Convertible Note Financing closing, aiming for SEC effectiveness within 90 days. The Convertible Notes mature in 24 months.

Industry Context

This transaction reflects a common strategy in the biotechnology and pharmaceutical sectors where larger, established companies like Ligand Pharmaceuticals provide financing to smaller, developing companies like Pelthos Therapeutics in exchange for equity, debt, and/or royalty streams on promising assets (Xepi, ZELSUVMI). Such deals provide crucial capital for drug development and commercialization while offering investors exposure to potential future product success. Ligand's business model often involves acquiring royalty streams and assets, making this a typical move for them.

Comparison to Industry Standards

• The 8.5% interest rate on a secured convertible note is within a reasonable range for a development-stage biotech company, reflecting both the security and the inherent risk.
• Royalty stacking (multiple royalty streams on the same product) is common in biotech financing, but the 5% royalty on Xepi (2.5% for Ligand) and the sharing of ZELSUVMITM royalties/milestones represent a significant portion of future product revenue being pledged. This could be considered a high cost of capital for Pelthos, though it secures necessary funding.
• The 49.9% beneficial ownership cap is a common mechanism to avoid triggering certain regulatory requirements or change of control provisions, allowing Ligand significant influence without outright control.
• The lock-up agreement and subsequent partial release are standard practices following business combinations or significant investments, balancing investor liquidity with market stability.

Corporate Governance

Related Party Transactions

• The entire transaction involving Ligand Pharmaceuticals Incorporated and Pelthos Therapeutics Inc. can be considered a related party transaction given Ligand's existing significant beneficial ownership and its role as a major investor.

Stakeholder Impact

• Shareholders (Pelthos): Potential for significant dilution if the Convertible Notes are converted, especially at a lower price. However, the financing provides crucial capital for company operations. Voting power of existing shareholders is diluted by Ligand's 49.9% cap.
• Shareholders (Ligand): Increased exposure to Pelthos's potential upside through equity and royalty streams. The investment is secured, reducing risk.
• Creditors (Pelthos): The new Convertible Notes rank senior to most existing and future indebtedness, potentially subordinating other creditors.
• Employees (Pelthos): Securing financing can provide stability and resources for ongoing operations and development.
• Customers/Partners (Pelthos): Continued development and commercialization of products like Xepi and ZELSUVMI are supported by the financing.

Next Steps

• Pelthos Therapeutics will seek shareholder approval for the potential reduction of the Convertible Note conversion price.
• Pelthos Therapeutics will prepare and file a resale registration statement with the SEC on or prior to January 5, 2026.
• Pelthos Therapeutics will use reasonable best efforts to cause the registration statement to be declared effective by the SEC by the earlier of February 4, 2026, or 2 business days after SEC notification of no review.
• The Convertible Notes will mature on November 6, 2027.

Key Dates

Recommendation

This filing details a significant financing event and an increase in a major investor's stake, which is generally positive for a biotech company needing capital. However, the terms involve substantial future revenue pledges and potential dilution. For Pelthos, while the capital is crucial, the cost in terms of future royalties and potential dilution is notable. For Ligand, it's a strategic expansion of its royalty portfolio and equity stake. Given the complexity of the terms, the need for shareholder approval, and the long-term nature of the royalty streams, a 'hold' recommendation is appropriate. Investors should monitor the shareholder vote on the conversion price, the progress of the registration statement, and the commercial performance of Xepi and ZELSUVMI. The 49.9% ownership cap also means Ligand doesn't have outright control, which could be a factor in future strategic decisions.

Keywords

Pelthos Therapeutics, Ligand Pharmaceuticals, Convertible Note, SEC Filing, Schedule 13D/A, Biotechnology, Pharmaceuticals, Equity Investment, Debt Financing, Xepi, ZELSUVMI, Royalty Agreement, Shareholder Ownership, Corporate Governance