PDL BioPharma, Inc. (NASDAQ:PDLI)
31st Annual JP Morgan Healthcare Conference Call
January 10, 2013 12:30 pm ET
John P. McLaughlin – President and Chief Executive Officer
Good morning, and welcome to the 31st Annual JPMorgan Healthcare Conference. Today with us we have PDL BioPharma and speaking on behalf of PDL is CEO, John McLaughlin. John?
John P. McLaughlin
John, thanks very much. Good morning, welcome to the PDL presentation. This morning I will be making some forward-looking statements for additional information about the risks and assumptions behind those forward-looking statements. Please see our most recent filings with the Securities and Exchange Commission.
We think that PDL represents a unique and attractive investment opportunity in the spectrum of biotech and healthcare companies generally and the broader group of public companies overall. And some of the reasons are depicted on this slide. As you can see, we are less than 10 folks. We don't do any research, development or manufacturing. Our focus is optimizing shareholder return.
We’re quite profitable. You can see our revenues for 2011 were $360 some odd million with expenses of just under $20 million. Many years ago, beginning in 2009, we started paying initially special dividends, which was unique in biotech land. We’ve now moved to quarterly regular dividends. You can see we paid $0.15 per quarter four times last year for an aggregate of $0.60. We will announce the 2013 dividend policy. And atypical of many companies, we announced the policy a year in advance. You know what the record dates are and what the payment dates are, we don’t do it on a per quarter basis.
We've been accumulating cash, you see we’re about at a $160 million, we’re down a little bit. The nice thing about our cash position, it replenishes each quarter. We have been building cash for acquisition of other revenue generating assets I’ll talk about that for a second. For many institutional investors it’s that last line that they find most attractive and that is our substantial daily volume. We trade about 2.8 million shares. We are largely an institutional shareholder base. Let me be clear, that’s not retail and what they like about it is it allows easy entrance and if you made money, we hope you did exit from the stock and so we have had substantial shareholders holding as much as 12 million, 14 million shares where they have made a nice return and they have been able to exit the stock in a couple of weeks without moving the share price, and we think that’s a benefit for our shareholders and the individual institutions.
To turn to PDL for a second, today our revenues are primarily generated from the humanization of antibody technology. In simple terms, back in the 80s, scientists hypothesized that it might be possible to develop antibodies against targets that weren’t naturally occurring and they developed these antibodies in non-human systems typically mice. The issue in developing an antibody in a non-human system is often times when it’s injected particularly chronically in a human system either sometimes recognized as foreign and rejected before it can accomplish its therapeutic goals.
The beauty of the PDL technology was it allows you to take the important regions from those murine, typically mouse-derived antibodies and graft them on to a human framework preserving the specificity and binding. So specificity means it only binds to what you wanted to bind to which is important in a targeted therapy like antibodies and binding is just that, how tightly in fact binds to those. You can see that it’s been widely adopted by some of the leaders, we’ll talk about that in a second but last year the aggregated annual sales incorporating the technology were over $20 billion.
The patents that it encompassed this technology we refer as the Queen et al Patents. Among our three missions, one is to manage that portfolio to optimize returns. More recently what we started to look at is the acquisition of alternative revenue generating assets and I’ll talk about why for a second but what it means is our patents will expire at some point. We have a dividend – a sensitive shareholder base and they have said, can you find other revenue generating assets that would allow you to continue to pay what today is about an 8% return on our share price.
As you can see the criteria are, our primary focus is at a good deal, does it improve the return for our shareholders? We typically focus on commercial stage assets. There is a perception that we have a lower risk profile than perhaps an R&D based company. We intend to maintain that profile. We are agnostic as the therapeutic area. We’ve invested in both drugs and medical devices and will show you some examples in a few minutes.
We’re fortunate to have a strong management team with substantial experience, because we're only 10 people, there's not a lot of room for on-the-job training. So these are all experienced seasoned executives. We’re also fortunate to have a very strong Board of Directors, Jody Lindell serves on our healthcare company Boards as well as others; Paul Sandman used to be General Counsel at Boston Scientific, obviously a major medical device. We do have some legal issues, he helps us there.
Barry Selick is currently CEO of Threshold and a scientist by training. And for many years I was an Executive at Genentech and have co-founded both Biotech and Medtech companies and sold them. Barry Selick is our lead director. And Fred Frank is previously a BOARD member and now a special advisor to the Board, he attends all the Board meetings given the fact that we’re a financial play, obviously we value his advice highly.
To give you a quick overview of the products that currently generate revenues, sorry, it's a little like an eye chart, but the good news is there are a lot of them and there are a lot of Bs in terms of what their sales look like. We will update this as soon as we know what the 2012 sales are, but suffice it to say these are the blockbusters in biotech you will understand antibody of the space. Predominantly skewed towards cancer but you do see others in there as well, the most recent being Perjeta and I’ll give you a little bit more color on some of each of these right now.
One of the questions we’re most commonly asked is, okay, you are being paid on the Queen royalties, how long are you going to be paid? The patents expire typically in December, the middle of December of 2014. But the answer of how long we're going to get paid is a little more complicated than that. In part it stems from the fact that we’re royalty play, so we get paid a quarter on arrears so that gets you to the first quarter of 2015.
The more important component of the answer is actually depicted in the two bar charts on this slide. When they making the antibody, they describe the process as a campaign and there is a reason for that. It takes a long time. And as you can see here, if you look just at the bulk line of the top and forget about freezing at the back end and the bottom line fill and finish you are about seven months to make an antibody.
Typically these manufacturers keep as much as 24 to 30 months, but let's assume that they [skinny] [ph] down for accounting reasons, not to pay PDL more money whatever, they [skinny] [ph] down to 12 months while that would get you the first quarter of 2016. So we think in fact we will get paid beyond the patent expiration just based on the inventories that these manufacturers hold. And certainly some of the experiences of stock outs with Genzyme's and these are life saving therapies, I would say that folks have become more careful not less careful about maintaining adequate inventories.
To give you a little bit of granularity in terms of the payments on the Genentech and Roche and Novartis products, you can see here Tysabri and Actemra they are flat low single-digit numbers, for Avastin, Herceptin, Lucentis, Xolair and now Perjeta to be clear, they are a little more complex and you could see it’s a bifurcated scheme here. In the U.S. it’s tiered, so if the product is either made or sold in U.S. and that's disjunctive either of those conditions is subject to tiered royalties on the aggregate sales.
You can see, we started 3%, that's a great number, but these are blockbuster products. We actually get down to that 1% level at some point in the second quarter, because they are such big sellers. And you can see there that the blended rates on the products that are made or sold in the United States in 2011 was about 1.4%, which gives you an idea of just how quickly we get down there.
In contrast for product that’s made and sold ex-U.S. you can see that we are paid a flat royalty rate of 3% and that’s important to us for the following reason. We have seen some movement of manufacturing ex-U.S. They have expanded a plant in Pennsburg to make Herceptin, they have expanded a plant in Basel to make Avastin, and the blue lines that are depicted here for Avastin and Herceptin represent sales.
The gold lines represent ex-U.S. manufacturing that’s sold in those territories where they overlap, that’s the 3% territory. Hence what we are quite interesting to see is whether or not in fact we’ve got a trend here going with respect to Avastin where we saw in the fourth quarter in fact 40% of that 57% was ex-U.S. made putting us into 3% territory and that’s actually quite significant for us financially. It’s something we will be paying attention to and we consistently report this data each quarter so that our shareholders can look at it.
To provide some updates on the individual products, let me start with Avastin for a second, because the last quarter or so has been quite busy with respect to Avastin. In fact, what we have seen is some very nice expansion in the label for Avastin. As many of you may be aware, there was negative sales growth with respect to Avastin in 2011 as they lost portions of label related to treatment of non-HER2 metastatic breast cancer. So what you see here is some nice expansions that label for recurrent platinum-sensitive ovarian cancer in Europe each already approved for first-line ovarian in Europe.
We also saw a positive opinion from the CHMP with respect to the Avastin in second-line metastatic colorectal. It’s already approved for that. They showed some very nice survival data there. And perhaps most intriguing of all is glioblastoma; they have a second-line label there. They showed some very nice improvement there on PFS 36% improvement there recently. Obviously that’s not a huge patient population, but considerably bigger than the second-line label in glioblastoma.
Herceptin’s sort of have been the steady eddy of the portfolio. We continue to see growth, most of the growth right now was driven outside the United States, in Europe and rest of the world, but you can see 12% in the first three quarters of 2012. There were various trials that were conducted just to explore whether or not a six month regimen or in fact a 24 month regimen, the gold standard today is 12 months produce superior safety and efficacy results. And I think the view of most oncologists is that has been answered definitely based on the results presented at ESMO and the answer is no. 12 months is the gold standard, that’s where it stand, it’s not going shorter, it’s not going longer.
Lucentis is a product that we have seen some decline in sales due to very successful launch of Eylea the VEGF Trap out of Regeneron and their partner Bayer. The most recent results we have from Roche suggested in the U.S. they have seen a decline about 8% in the age-related macular degeneration market, but I think it’s sales are starting to stabilize in the U.S. They just recently picked up a label expansion for diabetic macular edema. So this is a swelling behind the eye associated with diabetics. This probably is – not probably it affects a substantial number of patients. It’s leading cause of blindness in working age people as opposed to age-related macular degeneration, which is for those typically over 65.
They did have a nice label expansion for this indication earlier in last year and Novartis’ sales have actually been a little stronger in Europe and in fact we’ve seen in the U.S. with respect to Roche. We haven’t seen the same kind of loss of market share ex-U.S. The interesting thing that we are looking at right now is to see whether or not some of the DME sales will replace some of the loss, they won’t replace all of them but some of the loss sales with respect to AMD in the U.S.
Actemra is an antibody focused on targeting IL-6. Most folks thought it was going to be some place between second and third line therapy in this market, it's obviously been dominated by methotrexate initially in TNFs. They’ve started to move up, initially they did what most people perceived to be some fairly bold strokes in terms of going to head-to-head as monotherapy against Humira. Currently, this is still IV, Humira’s subQs.
What Roche has been trying to do is demonstrate efficacy to greater – equal to or greater than Humira. They have been able to do that, they are now moving it towards a sub-q formulation. And in fact, we are seeing some nice growth here as they continue to try and get the sub-q formulation approved. And obviously that's one of the key successes with Humira is its convenience for the administration.
Perjeta has been probably the most interesting one in the portfolio of the most recent announcement, it's still within the biggest surprise is, most of the financial committee thought it would be priced some place around $2,000 to $3,000 per monthly course of treatment, in fact it came in at $5900 per course of treatment. You can see that its initial label is in first-line metastatic breast. Roche has reported they got about 31% new patients starts, since its launch in this June. This is as of October there are [about] [ph].
We are seeing nice trajectory there, one of the things we want to keep an eye on here is its use in the adjuvant setting, that's obviously that market is a multiple of the metastatic breast cancer market. To refresh your recollection, the Phase 2 data here was quite compelling. In that setting Herceptin plus chemotherapy is you typically see a PCR rate of some place 28%, 29%. In contrast when you introduce Perjeta into the combination the mix you typically see PCR rates they’ve reported highly statistically results kind of in 41%, 42%, 43%, that’s actually a pretty nice difference, 41%, 42%, 43% versus 28%, 29%.
Moving to some of the development stage products perhaps the one that we’re most excited about and certainly those of you have been at some of the recent cancer meetings are T-DM1. It's a conjugate of Herceptin and a chemotherapeutic. The hypothesis behind this drug was that you could enhance the cancer cell killing ability of an antibiotic by linking it to a chemotherapeutic and delivering more of the chemotherapeutic into the tumor side, there was also a hope that you might in fact reduce the adverse events. And in fact, what we’ve seen here is a nice step up in the efficacy and a reduction in the grade 3 through 5 adverse events.
In fact, they have no final for second line therapy for this. You can see the PDUFA date, it’s been given priority view, we expect to see (inaudible) February 26 of 2013 to refresh of a collection. This is the second time through for they are filing for second line, they filed about two years ago, hope they got to right this time. I certainly think it's a good time, they got priority view. Previously there was some debate as well as just going to be a 1Q or 2Q launch, I think most people now are thinking looks a lot better for a 1Q launch. And eventually they will file for first-line therapy you can see some point in 2014.
Let me jump down to Solanezumab map here, so this is an antibody the targets data amyloid that is being developed by Lily. There's a lot of information in this slide, but it just still down in a secondary analysis, the target patient population in this are patients with mild and moderate disease. In the secondary subgroup analysis they saw some benefit it in patients that had mild Alzheimer’s disease. There been another analysis you suggest in fact that you might see some differences in using other markers such as Cog14 et cetera. Just recently Lilly announced that they intend to initiate another Phase 3 that would commence some point in the third quarter of this year. Last time it took them about two, two and a half years to complete the enrollments and report back results on that. Why that’s of interest to us is you can see the very bottom of the slide is most of the things I’ve talked about today are limited by the duration of our patents.
We have a know-how royalty in Europe and what that means is we help design the antibody and therefore we get our royalty separate and apart from the patents. It begins at the time of commercialization runs for twelve and a half years and it’s a 2%. We don’t have any better information (inaudible) to whether it is going to work or not to our estimates out there suggesting even in the mile population if it were to work. It’s being important in that sense. It could be a several billion dollar product. So this is something we’re going to keep an eye on, because this doesn’t begin to run until in fact it is commercialized. They are probably even much value in the share price at this point, but this is something we’ll keep an eye on, but it’s probably a 2015 or later event.
I’m not going to spend a whole lot of time on our financials here. You can see where they are. Cash position, it’s dropped from 11 to 12. We did spend about $125 million of new deals. We will continue to spend money. Typically our second quarter is our strongest quarter in terms of replenishing our free cash, our cash positions, and I will talk about our free cash flow now.
Now, there is a little less data on this slide than it was a quarter or so ago where we did have a securitization. Now we paid it off. We do have technically three convertible notes due out their due in February and May of 2015. You can see it’s just under $400 million. One of them we’ve hedged is $6.74, the others at $5.90, they are not exercise yet through the first quarter. They may be in the second quarter. I think it’s probably our view based on conversation with some nibblers they are probably just let them sit out there, and push sort of the optionality of them. To refresh that collection these are net share of settles, so there was an article that appeared on one of the blogs that said, there is going to be tons of dilution et cetera, et cetera, and that shows it will mean we pay them off in cash mostly. And that's intentional, we pay dividends, we don't want a whole lot of shares out there unnecessarily. So we want these to be like a dead instrument.
We do have a dispute pending with Genentech. It stems from the facts we received from them in August of 2010 and the essence of the facts was we and Genentech are riding to you at the behest of Roche and Novartis, because we don't think we woe you royalties on your European sales. After some deliberations, we wrote back them and said we think that you have violated our 2003 Settlement Agreement which prohibits you from challenging or assisting anybody in challenging our patents. And in fact, we are currently in litigation with these folks.
There is a common misunderstanding here that this is a patent case, but it is about our SPCs. It’s a contract case which in state court and the contract is the Settlement Agreement. And so the question is whether or not in sending us that facts they violated their clause and says you can’t challenge our patents. So they actually haven’t attacked the underlying patents for the validity of the SPCs et cetera.
This has been pending for a little while, we been in, they have been various motions were they tried to get out of it, they have not been successful. They are been a whole series of motions where they have tried to stop to not to preclude us from getting this various documents they have not been successful. And we are still in discovery, the trial is scheduled for October of 2013, it is moved twice. The only thing I would suggest is given some of the bows that are ongoing between the parties in terms of discovery. I wouldn’t be running on October 2013 date down and it might slip again.
As I mentioned, John, you at the beginning of this presentation, our patents expire in December 2014. We are in the process of looking for additional revenue generating assets. One of the things we want to be cognizant, and we are coming up on a decision point here. We told all our shareholders now for some period of time that late 2013, more likely or early 2014, we’re going to decide which of those two folks in the Roche to pursue. So we were continuing to do deals, we are looking to do deals through this year, but at that point, we’re going to step back and say, okay, looking at the deals we have done and the revenues that we expect with those, do we think this is an ongoing entity or should we begin to wind it down?
Now to be clear, if we decide to wind it down, it’s not going to wind down in 2014. It will probably be 2016 or some places nearby the time; we finished collecting rest of our royalty checks and pay them out. But at some point, we’ll start giving you some guidance is at the left work or the right work. Probably what we will do is, we will get some outside group to help us assess as we do each year in our internal portfolio. We bring in typically LEK. so we have an objective assessment to what the portfolio is like.
We’ll probably do something similar in this circumstance, and maybe make some of that information available. So you can understand why we decided to go left and why we decided to go right. And to be clear, the decision we might make is, we’re going to keep going for two years or three more years or four more years to pay dividends. It’s going to depend upon whether or not we can improve the return for our shareholders, that’s how we make decisions. It’s a spreadsheet. That’s how we decide.
Think about at some point, probably late 2013 or likely early 2014, then you can see the number of deals we do this year and I will give you guidance to how we’re doing. To be clear, we did two to three deals for an aggregate of $125 million, there is some information here on each of them. We are proud of those deals. We think they are great deals. So don’t read anything negative into any of that. Three deals are not a track record, that's the only point we’re making. We want to see more deals before we’re to say this is a sustainable business model.
I'll talk about each of them for a second. This is not the order we did them, but AxoGen it’s a peripheral-nerve repair company. Typically these are patients that have undergone trauma or some neuromas. There is gap in the nerves, as you well know you can’t stretch the nerve to close those gaps, nerves die if you do that. Treatment today is your harvest nerve typically of the back at leg and use that to bridge the gap and the problem is do sensitivity in that portion of your leg, these are trauma patients, we don't necessarily want to subject to a second surgery if you can avoid it.
What this product is, these are graphs from cadavers, it’s put into a sudden matrix which allows it to grow and in fact you just snip it, size it, and so it in. You avoid the need and time sophisticated with the harvest so it is operating time and they are getting very nice results, you can see we gave them about $20 million in a right purchase. This is the deal which will run through 2020 although to be clear there are various puts for both parties are sooner than that.
Merus is probably that high-tech is approved, it sort of earlier in their commercial launch, Merus has probably be other end of the spectrum this is an overactive bladder drug from Novartis, they’ve acquired it, it's a very nice product, it's a nice position, it's a nice steady, and you can see we’ve blown them a total about the $55 million and they’re doing a nice execution there.
Third, is a diagnostic, so we aren’t just did in Medtech as well. So this is Wellstat Diagnostics. This is the team that was previously had IGEN using the same electrochemical luminescence technology, they sold IGEN to Roche for about $1.4 billion, $1.5 billion that team then moved on to BioVeris, they shrunk the size of the machine, they sold it to Roche again for about $600 million, this is the third version, they shrunk the machine again, it’s the same technology.
But what they have done now is gotten this machine down from a central processing unit down to something that’s a little bit smaller than that projector, it's actually about half the size of that projector. But what you kept our Central Lab, like results are better in 8 to 15 minutes, they have some proprietary assays, they will be paying us revenues, excluding royalties on their sales. And you can see the term is up through 2021. If you are interested in more details, please look at the slides which are on our web site you can see the information there.
To our in-depth, we think that PDL is an attractive investment opportunity you've seen historically strong revenue growth. There is a potential with some new products and new indications. We have been generating additional revenue through new deals, we do see there is no R&D burn or the risk associated with that and you can see for institutional investors, the high volume allows easy entrance and exits, and we have a demonstrated track record of returning money to shareholders.
Thank you very much for your attention.
[No Q&A session for this event]
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