PDL BioPharma, Inc. (NASDAQ:PDLI)
Lazard Capital Markets Healthcare Conference
November 13, 2012 04:30 PM ET
John McLaughlin - President and CEO
Okay we will go ahead and get started. I am Christine Stewart [ph] from Lazard Capital Markets. And I want to welcome both John McLaughlin and Bruce Tomlinson and they are going to give us an update on PDL BioPharma. Thank you.
Christine thanks very much. Welcome to the PDL presentation. This afternoon I will be making some forward looking statements. For additional information about the risks and uncertainties associated with those forward looking statements, please see our most recent filings with the Securities and Exchange Commission. We think there are a number of attributes that distinguish PDL among the universal biotech companies and public companies generally, and some of those points are captured on the slide.
You can see we have less than 10 employees. We don’t do any research, development, commercialization or manufacturing. We really focus on managing our assets to the benefit of our shareholders. We are also quite profitable. You can see from the revenues, 362 million in 2011 compared to expenses of about 18.3 million. We used some of that cash flow to pay dividends. Unlike many dividend payers, we establish the dividend policy in advance for the year; we pay quarterly, so you know at the beginning of the calendar year exactly what the record date is and what the payment dates are. We moved to a regular dividend as opposed to a special dividend recognizing that that implied a consistency and that was our intended message.
Our cash position is about a $160 million. We have done three deals since the beginning of the year, depleted that, we spent about $115 million. The nice thing about being - about earning royalties is that cash position replenishes itself on a quarterly basis. Perhaps most importantly for our institutional investors, you can see our daily volume is about 2.5 million shares. We have had multiple investors come in with significant share hold positions in the millions of shares, and they have been able to enter and after they’ve made a profit, exit the stock without moving the share price.
PDL’s underlying technology involves the humanization of antibodies. So in the early 80s scientists hypothesized that it might be possible to develop antibodies in non-human systems against targets which antibodies typically don’t develop. We all develop antibodies for example when you are exposed to a bacteria and the thought here was that perhaps you could develop them against markers unique to cancer cells.
Most of these experiments were done in mice because they were simple biological system to develop such constructs. The difficulty is when you take a mouse or murine-derived antibody and clinically inject it into a human immune system it is sometimes recognized as a foreign substance and rejected before it can accomplish its therapeutic goals. The importance of the PDL technology is it allows you to take those binding regions denoted here in red and transfer them to a human framework such that they maintain the binding and specificity of an antibody. And those are the two key elements of an antibody that it only targets the regions - antigens that you're hoping to target. And then when it targets them it binds tightly. And the beauty of the technology that was developed by PDL is that it allows you to do it on a routine and reliable basis maintaining both the specificity and the binding of the murine derived antibodies.
Currently it's incorporated into products selling a little over $17 billion. As I mentioned at the outset, you could see our three part mission statement. We focus on managing the Queen et al. patents and the underlying license agreements, looking for ways to optimize return for shareholders, so that could be buying back shares, buying back our converts, in some cases doing special dividends. But our primary focus for the next couple of years is really obtaining new revenue generating assets and I'll talk more about this in a few minutes.
What we're focused in on is, can we extend the duration of our dividend paying capabilities? We've heard from our shareholders, they like the dividend, they like the yield, it’s reasonably high. At today's share price it's about 7.7 % which makes us one of the higher paying dividend companies of all publically traded companies. Our focus is for assets that are backed by commercial staged products, it says preferentially that's a fairly strong preference to do development stage products or a late stage development product. That's going to be the rare exception for us, not the rule.
We're indifferent as to whether it's a device or a drug, and we’re also indifferent as to the therapeutic field, what we're interested in is, does it have a differentiated profile. It could be first in class, could be second in class but we want it to be a differentiated profile. For products [that are in] [ph] marketing battles, that’s not going to where we're going to be focusing.
We're fortunate to have a very strong management team with substantial experience in healthcare as well as a strong Board of Directors. Jody Lindell has a background in healthcare companies, as well as an auditor; Paul Sandman was formerly general counsel of Boston Scientific. Barry Selick is now CEO of Threshold and is actually an inventor. And as for myself, I'm a lawyer by training with a regulatory and commercial background and I was Executive Vice President at Genentech for a number of years. I cofounded and sold both biotech and medtech companies.
To focus for a second on our current revenue generating assets, you can see here that these are predominantly Genentech/Roche products because they are the leaders in antibodies, and these are blockbuster of products, they are some of the biggest selling in biotech. And the purpose here is not to suggest, [not to stuck an eye] [ph] chart but we obviously suggest that it is a basket of products in multiple indications which affords us some nice risk sharing.
One of the questions we are most commonly asked is, how long are you folks going to be able to pay royalties based on your current patents, the Queen at al. patents and the simple part of the answer is that the last of the patents expire in December of 2014. In thinking about that answer, there is two additional considerations, so the first of which is where royalty play when that means we get to paid a quarter on a arrears, so that gets you to the first quarter of 2015. But the more important component of the answer is really depicted here on the two bar charts.
When they talk about manufacturing an antibody, they call them campaigns and there's a reason for that. It takes a long time. So unlike a small molecule which might be synthesized in a week, two weeks or three weeks, in fact from start to finish, between both manufacturing on a top and formulation filling and finish at the bottom, it’s a minimum of about seven weeks and that assumes everything lines up sequentially, your plants is available et cetera.
And as a result, most of the antibody manufacturers keep an inventory of around 24 to three months on hand. Last thing you want is a stock out. Obviously that's bad for shareholders, but more importantly some of these are life-saving therapies, patients die without these drugs.
Because Genentech and Roche constitute such a big portion of our royalties, we give you a little more granularity as to the royalty schemes that are applicable to them and as you cans see it’s a bifurcated scheme. For those products that touch the United States that is they are either made here or sold here, you can see a tiered royalty system which starts at 3% and as the aggregate sales increase drops to 1%.
Because these are such blockbuster products, in fact we get down to that 1% tiering some place in the second quarter. As you look a little further down, you can see the blended royalty rate on the products that we either made or sold in the United States in 2011 was 1.4%.
In contrast for products that are both made and sold, so that's conjunctive, both conditions, outside United States, we get a flat 3% royalty. Why that has become increasingly important with time is depicted on this slide. And what we've seen is an effort by Roche particularly since they took over Genentech to move manufacturing ex-US, they expanded a plant in Penzberg, Germany where they are making Herceptin and they bought two plants in Singapore, one capable of making Herceptin and Avastin, the other capable of making Lucentis.
And what we are showing you here in the mustard colored lines are ex-US sales as a percent and in the blue, what we are showing you are ex-US made products. To the extent that those two lines overlap, that’s 3% territory for us. Now we've seen, you could see some bouncing around here quarter-to-quarter, but compare ‘11-‘12; we are seeing a move particularly with respect to Herceptin to more off US - a more off-shore manufacturing and sales.
Avastin is a little harder to predict what’s going on there. What we think is they are probably burning off some US made inventory. As you are well aware, they lost part of their label last year with respect to metastatic breast cancer. That was a big piece of their label. They probably have more inventories than they need and are burning some of it off, and we suspect that’s why we haven't seen a comparable shift to ex-US manufacturing for Avastin.
To give you a quick update on some of the currently - royalty generating products, let’s start with Avastin for a second. There has been a fair amount going on with respect to Avastin this year. At the end of last year, they got a label for the treatment of ovarian cancer first line in combination with chemotherapy in the European Union. Just recently, about two weeks ago they announced it. In fact they now have a second line label for a platinum-resistant ovarian cancer.
In the middle of the year they reported results in metastatic colorectal cancer. So it’s only approved for that, these are patients who relapse and the question was whether or not an additional course of treatment would improve patient outcomes that as you can see from the data reported, you see an improvement in PFS as well as overall survival.
Here at the bottom of the slide, you can see the third set of data they’ve generated this year and this is with respect to glioblastoma. As you know Avastin is approved for second line treatment of glioblastoma. This was first line in combination with radiation. And as you can see they reported as statistically significant improvement in PFS. We don’t know what the numbers are and we are told that we will see the overall survival data early next year.
Moving down to Herceptin, this has been a steady growth for quarters, growth reported to the financial community in mid-October, that in fact they were seeing 12% growth in the first three quarters in a constant currency. One of the important development is with Esmo, there were a series of data sets presented and they were exploring whether or not treatment for a shorter period of time, six months or treated with treatment with a longer period of time, two years would provide a greater benefit for patients in the current standard of one year; and the answer is neither shorter nor longer, showed a significant benefit and I think most clinicians at this point agree that one year is and will continue to be the standard of treatment.
Lucentis is then a controversial story this year because of the competition from Ilea. As many of you are well aware, Baird and Regeneron launched Ilea, it has a dosing advantage after the initial loading doses that it's required bimonthly as opposed to Lucentis which is required monthly.
In fact in the United States, they have been ceding market share in the aids related macular degeneration market, AMD market from Lucentis to Ilea, Roche has opined in their call it the financial community, they think that perhaps it's starting to stabilize. I don't know that we're quite as confident of that.
I think some good news for Lucentis is, they did get an approval in the United States following on their approval in Europe for diabetic macular edema, this is the leading cause of blindness among working age adults. And in fact this will probably offset some of the loss but not all of it in the AMD markets.
Turning to Actemra, when this was first launched, it's an antibody to IL-6, most people thought of the third line therapy, in fact Roche has done a very nice job in managing in connection with their partners (inaudible) and Genentech and moving up towards a second line therapy.
As you can see what they've done is initially a head to head trial against (inaudible) which is the market leader in this field because of its efficacy and convenience of dosing. It's sub-q most of these other therapies are IV, and two it’s a surprise that many what they saw was in fact a statistically superior result disease activity scores, just recently they reported some additional data in this for a longer period of time, which reinforces these results. Subsequent to that trial what they did was some work to show that in fact the IV formulation of Actemra was equivalent in efficacy to the subcutaneous formulation and clearly their goal is to get a label where for subcutaneous formulation with efficacy comparable to or greater than (inaudible).
One other interesting note, in mid-October they did get an expansion on the label to cover patients that have an adequate response on all (inaudible) that's a nice addition to their label, they’ve seen continuous growth, midyear they show a growth of about 39% through the year. As of third quarter it's about 34% and it's been a steady grower in the portfolio.
(Inaudible) we think is a very exciting product and to some degree it's finally getting some of the recognition it deserves. Roche has been talking about this as a billion dollar potential seller and you could see here some of the data. What's important to note here is when you use Pertuzumab with Herceptin and (inaudible) you are seeing a PFS of six months. To give you a benchmark, in 1999, the PFS improvement of Herceptin which got everybody excited in the oncology field was six months so this is on top of receiptin. You get an additional six months, you can see some of the other data there.
The other thing I'll call to your attention is when before this was launched, most of the financial community was estimating the price to be some place between $2000 and $3000. You can see that it’s just under $6000. We’d say that for us this is an exciting product because in probably one of these sales, we get paid twice, we get paid once on Herceptin, we get paid second time on (inaudible) so we love getting paid twice on the same transaction.
You could see in it is in the mid October call with the financial community, despite the fact that it’s only been launched about a little over three months, in fact it's got 31% share of new patients starts for first line metastatic breast, that’s very impressive and we expect it will continue to take our share in that market.
Moving on to some of the license products which are not yet approved, TDM 1 there has been a fair amount of excitement about this product, you can read some of the data there, I mean it’s a very impressive both from a safety perspective and from an efficacy perspective. Probably the most important things we learnt just recently, were about a week ago, it in fact when it hit to refuse to file it was accepted for filing even more importantly, we now know that it’s got priority review in the (inaudible). Within the financial community there was a fair amount of speculation whether or not it could be a first quarter or a second quarter of 2013 approval, now looks short of that towards the first quarter of 2013. They have been recently quite on the filing in with the EMA in Europe and we've learnt that in fact that they have filed and it was accepted for review.
We do have a little bit more information from an October release date and what we can see is in second line compared to (inaudible) there is a low which you see as a reduction in depth of about 32%, this is a product that they do anticipate they are in Phase III on first line therapies and hope to file in 2014.
Ocrelizumab and pertuzumab I'll talk about in combination. These are both humanized versions of antibody to CD-20. Currently there is a chimeric antibody to CD-20 which is sold for under the trade brand name RITUXAN and really its approved for two sets of indications, autoimmunification conditions and hematologic cancers and what Genentech and Roche have done is they spilt ocrelizumab and pertuzumab between those two indications you can see ocrelizumab focusing on the autoimmunification such as multiple sclerosis, of pertuzumab which I'll talk about in a second for CLO and later NHL. MS data, we are not anticipating seeing really until 2015. CLO data we are anticipating seeing next year and therefore casting that they will be able to file on it in 2013 as well. They predicted annual revenue in excess of $1 billion.
Moving down to bapineuzumab and solanezumab, the user antibodies are targeting data amyloid and their product profile is to slow the course of Alzheimer’s disease. Prior to the unblinding of some of the data in the late summer, most commentators gave a higher chance of success, not that high by the way, but a higher of chance of success as least to bapineuzumab and it turned out in fact in fact despite a robust clinical development plan. There really wasn’t any efficacy seen with respect to that and J&J and Pfizer have terminated efforts to develop the antibody.
With respect to solanezumab it did not hit its core primary end points of functionally incognitive improvement. However they did have a pre-specified secondary group focusing on mild patients with Alzheimer’s disease and they did see a reduction in cognitive decline; and subsequently Lily has disclosed that the reduction was about 31%.
They’ve also made a subsequent disclosure on one of the functional measures they in fact, there was a non-statistical significant difference. They are talking about whether or not, they are talking with the regulatory authorities as whether or not they are going to file on this data. There is a lot of discussion right now and controversies to whether they can file or can't they file. We don’t have any particular insights on that but I would expect we’d be hearing something from them in the not too distant future given the fact that this is probably a priority conversation with the FDA.
Why this is important for PDL is, we have a knowhow royalty on this. So we know how royalty is independent of a patent royalty. So even after our patents expire, we are entitled to receive a 2% royalty from the time of first sale through 12.5 years. So if in fact they can get an approval either on the current data set or they have to do another Phase III which is probably then will have common deal out there, if that were successful, they get approval. We could have a 12.5 year royalty at 2%, some analysts have estimated even in the mild patient population with reasonable pricing this could be a several billion dollar product.
The purpose of this slide is to simply focus on some filings between Genentech, and Roche to be cleared enough all of these are going to be successful. What we are trying to suggest to you however is that there are a number of them and certainly many of them will be successful and represent additional revenue opportunities for PDL.
Let me turn briefly to our financials, they're publicly available here, there's not a lot to focus on. Probably the only thing I call to your attention is our current cash position is down from our end of the year position and that's namely a result of the investments we have made in revenue generating assets.
We do have some data on the books. I'll start at the bottom of the slide and work up. We had a secured non-recourse note which in fact took about 40% of our revenues to pay off. We extinguished that note in the third quarter and the result is that our free cash flow will jump significantly, some in the first quarter of next year but more significantly in the second quarter of next year which is typically our highest quarter.
We do have some other convertible notes, they are due in 2015. We’ll evaluate what we want to do with those notes, when we make a decision as to whether or not we want to continue the company to operate or in fact wind it up.
Many of you may be familiar, we do have some an ongoing piece of litigation with Genentech and it stems from a fax we received from Genentech in August of 2010. And the gist of the fax was that we Genentech are writing to you PDL on behest of Novartis and Roche, our European licensees and we don't think we owe you royalties on product sales that occur in the European Union, because we don't think we infringe your supplementary patent certificates. These are the European equivalents of a patent extension what we call a patent extension in the United States.
We replied to them that we thought it was without merit and in fact we actually brought an action in Nevada state court. There was some confusion about this. This isn't a patent action, no it's not about the European patent certificate, it's actually a contract action, so the question is did the transmission of the fax constitute a breach of the settlement agreement which precludes Genentech from challenging or assisting others in challenging our patent. There's been a fair number of motions by the parties to try, particularly in Genentech and Roche to try and get themselves out of this suit, to try and extinguish the suit and both Genentech and Roche are parties to litigation, they were unsuccessful in extricating themselves from it and the court upholds four of the five basis for our litigation, it is proceeding you can read the rest of it in terms of the claims there.
The one thing I would call to your attention is we previously disclosed we had a trial date in mid-October of 2013. At the current pace of discovery and depositions, we believe that date will probably move. Unfortunately with these things, they typically don't come in, this one is probably not coming in either, it’s probably going to be a later date than that in October of 2013 date and we will advise you as to the date when it’s known to us.
Some point in 2013 or 2014, we will make a decision for the company as to which of these two paths we are going to travel down. As I mentioned, at the end of 2014, our patents expire, we expect to get paid through 2015, in some cases in to early 2016, so we’ll have revenues at that point. But the question for us is can we identify enough revenue generating assets that it makes sense to continue the company?
Probably 80%, almost 90% of our shareholders are dividend sensitive, that's why they are in the stock, they have asked us try and find such additional assets. And we are embarked on that, and I'll talk about a couple of deals we've done in a second. But that’s really the key question for us. If we can't, then what we can do of our shareholders is wind the company up and get the money back to them as quickly as possible, so it doesn’t improve the duration of their return but it does improve their return on investment by getting the funds back to them as quickly as we can.
Here is a couple of deals that we've announced over the last four or five months. They are different deals and they are exactly the kind of deals we'll do. Some are loan transactions; one is a loan transaction, Merus for example, exemplary of that, AxoGen is a royalty transaction. Wellstat is in fact a combination of the two, it’s got elements of a loan and elements of a royalty deal. Merus is a stable product for over active bladder which comes from Novartis, so in some cases we'll think about (inaudible) products where it’s a stable product like AxoGen, it’s a really strong management team, it’s a product for, it’s a highly differentiate product for a high unmet medical need. They need money to expand the commercialization efforts and we were very impressed with both their data and their commercialization skills and we think that’s a good investment. Wellstat is unique, it’s a diagnostic, this comes from a company founded by Sam Wohlstadter, not a name perhaps known to many but let me just help educate you for a second.
So in addition to being a co-founder for Amgen, in fact he has done - co-founded two previous diagnostic companies, one IGEN which he sold to Roche for 1.4 billion and then more recently BioVeris which he sold for 600 million. This is the third generation of that technology. What they have basically done is taken the central professing diagnostic kits and shrunk it down to something about the size of a small printer and what's unique about it is, it works for a multiple test, it’s a lot less expensive than a central testing lab, but most importantly you get results in about eight to 15 minutes, with sensitivity equal to or greater than a central processing lab.
To sum up, we think that PDL is an attractive investment opportunity. There is a history of strong revenue growth. We have shown you some of the additional indications which may generate potential revenue streams for us. We've done through revenue generating deals. We have a constantly refreshing cash flow which allows to do additional deals. We don’t have any R&D burn. We don’t have any real R&D exposure that's intentional.
As I mentioned at the outset, we have significant daily volume which affords easy entrance and exits from the stock. And we have a proven record of returning money to shareholders in the form of dividends. Thank you very much.
[No Q&A session for this event]
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