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Executives

David Carey – IR, Lazar Partners Ltd.

John McLaughlin – President and CEO

Cris Larson – VP and CFO

Analysts

Joel Sendek – Lazard Capital Markets

Jason Zhang – BMO Capital Markets

Phil Nadeau – Cowen

Sutanto Widjaja – Symphony Asset Management

David Madden – Narrow River Management

PDL BioPharma, Inc. (PDLI) Q4 2008 Earnings Call Transcript March 2, 2009 4:30 PM ET

Operator

Good afternoon and welcome to the PDL BioPharma fourth quarter and end of 2008 conference call. Today’s call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. David Carey. Please go ahead sir.

David Carey

Good afternoon and thank you for joining us today. Before we begin, let me remind you that the information we will cover today contains forward looking statements regarding our financial performance, and other matters, and our actual results may differ materially from those expressed or implied in the forward looking statements. Factors that may cause differences between current expectations and actual results are described in our filings with the Securities and Exchange Commission, copies of which may be obtained in the investors section of our website at pdl.com.

The forward looking statements made in this presentation should be considered accurate only as of the date of this presentation, and although we may elect to update forward looking statements from time to time in the future, we specifically disclaim any duty or obligation to do so even as new information becomes available or other events occur in the future. I will now turn the call over to John McLaughlin, President and CEO of PDL BioPharma. Please go ahead sir.

John McLaughlin

Thank you, David, and good afternoon everyone. With me today is Cris Larson, our Vice President and Chief Financial Officer. 2008 was a busy year for PDL. In March we sold our manufacturing and commercial assets, and in May we paid a dividend of $4.25 per share to our stockholders from the proceeds of those dispositions.

In December, we spun off our biotech operations at Facet Biotech, and distributed Facet shares to PDL shareholders. We also redomiciled PDL's offices from California to Nevada.

Today and hereafter, we will focus on the new PDL. Our mission is to manage our antibody humanization patterns known as the Queen et al patents, defending the litigation is required, and seek means to return the cash generated by licenses to those patents to our shareholders.

In the fourth quarter 2008, there were several important developments with respect to the new PDL. First, we settled the litigation with Alexion on favorable terms. They agreed to pay $25 million in return for our license for their product Solaris under the Queen et al patents. $12.5 million was paid at the beginning of 2009 and the second payment of $2.5 million is due at the end of the second quarter of 2009.

They also were granted the option for additional licenses under the Queen et al patents for future products at a royalty rate of 4%. Importantly, Alexion acknowledged the delivery of the Queen et al patents, and pledged not to challenge our patents or assist others in challenging our patents.

Second, Genentech exercised an option under our existing agreement with them for licenses to 4 additional antigens, and extended the period for exercising their options for two more antigens. For the exercise of these options and the extension of other options, Genentech paid us $1.8 million.

Third, we completed the hiring of the management team of PDL. I joined as senior adviser to PDL in November 2008 and became President and CEO in December. Cris Larson joined us as Vice President and Chief Financial Officer in mid-December. She has significant operational experience having worked with numerous companies as well as expertise in various financial constructs that we will consider to enhance the return to our shareholders.

In February 2009, Chris Stone joined us as Vice President, General Counsel, and Secretary. He brings a wealth of experience in managing intellectual property as well as litigation to protect IP. In addition, we have three other full-time employees to support our finance and administrative functions.

Last, we committed to provide increased transparency on the royalty rates applicable to some of our most important products. With the filing of our 10-K earlier today, you will see greater detail on key terms of important license agreements in that filing.

Now let us turn to 2009. Our main focus is to enhance shareholder return. To that end, we have been working with our financial advisers and our Board of Directors to determine the best means of maximizing value for our shareholders. Our board has approved the payment of a semi-annual dividend of $0.50. The first dividend will be paid on April 1 to stockholders of record as of March 16.

The second dividend of $0.50 will be paid on October 1, 2009. Second, we are exploring means of monetizing our royalties, so that we can bring future cash flow forward in time and pay it to our stockholders sooner. As you will recall, this effort was terminated in November 2008 due to the deteriorating conditions in the financial markets. We are ascertaining whether conditions warrant restarting those efforts, and we look forward to discussing our progress with you in future calls.

Now, I want to turn the call over to Cris Larson, our CFO, to discuss the financial results for the fourth quarter and 2008 fiscal year end, and then review our 2009 revenue guidance. Cris.

Cris Larson

Thank you, John. It is important to bear in mind that a lot of the information in the public domain about PDL for 2009 may still reflect the combined operations of PDL and Facet Biotech. Today all of the amounts that I will discuss, except for the per share data, represent only the new PDL, even those referring to 2007 and 2008 will reflect the new PDL. That is PDL without the commercial manufacturing or biotech operations, which are presented as discontinued operations in our financial statements.

Total revenues from continuing operations, for PDL only, in 2008 were $294 million, which represents a 31% increase compared to $225 million in 2007. Total revenues from continuing operations in the fourth quarter of 2008 were $68.7 million compared to $39.2 million in the same period of 2007. The increase in revenues in both the fourth-quarter and fiscal year 2008 were primarily driven by higher reported product sales of Avastin, Herceptin, and Lucentis, which are marketed by Genentech, and sales of Tysabri, which is marketed by Elan. Also, in 2008 a greater amount of Herceptin was both manufactured and sold outside of the United States for which the royalty rate is a higher fixed rate as compared to the tiered-rate fee structure that applies to U.S.-based manufacture or sales.

The increase was partially offset by a decrease in the effective average royalty rate earned on sales reported by Genentech for products sold and/or manufactured in the United States because of the tiered fee structure under PDL's license agreement with Genentech. This is an annual phenomenon in which lower rates, royalty rates, apply as certain sales thresholds are met. In other words, Genentech typically faces a lower royalty rate on sales which occurred towards the end of the year because sales thresholds have been met earlier in the year.

In addition, we recognized $12.5 million in license revenue from the definitive license and settlement agreements reached with Alexion in December 2008. The final $12.5 million payment is expected to be received in June 2009.

Total costs and expenses from continuing operations in 2008 were $51.5 million, an increase of $10.4 million from 2007. This increase was primarily due to the higher legal and consulting expenses because of the Facet spin-off and because of the royalty monetization efforts, which were terminated in November 2008.

Net income in 2008 was $68.4 million, or $0.47 per diluted share compared to a net loss of $21.1 million or $0.08 per diluted share in 2007. Net income for the fourth quarter of 2008 was $40.6 million or $0.26 per diluted share, compared to a net loss of $15.6 million in 2007 or $0.09 per diluted share. Per share data does include results of our discontinued commercial and biotech operations.

Net cash provided by operating activities was $80.1 million in 2008 compared to $67 million in 2007. At December 31, 2008, PDL had cash, cash equivalents, short-term investments and restricted cash of $147.5 million. This compares to $440.8 million at December 31, 2007. The reduction in our cash balance in 2008 was the result of the spin-off and capitalization of Facet Biotech in December.

I would like now to spend a moment reviewing our financial guidance for 2009. We anticipate revenue in 2009 to be in the range of $310 to $325 million, which represents an increase of approximately 10% as compared to 2008. We expect revenue growth to continue to be driven primarily by increases in product sales of Avastin, Herceptin and Tysabri.

Our revenue growth estimate includes royalties from seven humanized antibody products. Royalties from Synagis are not included in our guidance. While MedImmune continues to pay us royalties on sales of Synagis, including as recently as the first quarter of 2009, and we remain confident in our legal position that Synagis infringes our patents, and we are owed royalties on its sales, we have chosen to be conservative in regard to our financial guidance for 2009.

I would also like to take a moment to comment on Raptiva. As you may know, in October, the Food and Drug Administration added serious warning regarding Raptiva’s risk after the first patient that contacted PML died. In February 2009, a committee of the European Medicines Agency recommended that marketing authorization for Raptiva in the European Union be suspended. Also based on a recommendation by Health Canada, EMD Serono Canada announced that it is suspending Raptiva from the Canadian marketplace due to safety concerns.

I would also note that royalties on the sale of Raptiva in 2008 were $3.9 million or 1.3% of our total revenue. Here are some current assumptions that have been included in our guidance assessment.

First, we anticipate continued growth in aggregate net product sales from our existing royalty bearing products. Second, we expect the percentage of Herceptin product manufactured and sold outside of the US to increase in future periods as compared to recent historical levels based on announcements by Roche that its new Herceptin production facility in Penzberg, Germany, will commence commercial production in 2009.

Third, with the commencement of the ex-US manufacturing of Avastin product based on announcements by Roche that its new Avastin production facility in Basel, Switzerland, will begin commercial production in 2009, some of which the company expects will be sold outside the United States, and expected subsequent increases in the percentage of Avastin products manufactured and sold outside the United States due to the expected scale up of the production facilities.

And finally, potential marketing approval and launch of new royalty bearing products. As a result of the divestiture of both the commercial and biotech operations, we expect operating expenses to decline significantly in 2009 to a range of $12 to $15. A significant portion of these expenses relate to patent defense and litigation cost. Expenses will be higher if we commence the monetization effort in 2009.

Net income after taxes is projected to be in the range of $185 to $200 million or $1.10 to $1.19 per diluted share. Making use of our federal net operating loss carry forward and tax credits, as well as reducing our state tax expense with our move to Nevada, cash provided from operations is expected to be in the range of $260 to $280 million.

Now, I would like to turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first to Joel Sendek with Lazard Capital Markets.

Joel Sendek – Lazard Capital Markets

Thanks. A couple of questions, the first on the MedImmune litigation. As they have been paying royalties for over 10 years now, it seems to me overly conservative to not include that in the guidance. I'm wondering if you are indicating by not including it that they have a legitimate claim to not pay.

John McLaughlin

So Joel, this is John McLaughlin. And thanks for your question. So the answer is no. From our perspective, there's been no change in our legal assessment. We remain confident in our legal position, and it is simply a matter of being conservative in terms of our financial guidance, but it does not represent any change in our legal analysis et cetera.

Joel Sendek – Lazard Capital Markets

And how about the follow on Synagis – what they used to call Numax, what is your position there?

John McLaughlin

Similar. Again, these folks have signed a license agreement. They have been paying, as you observe, for over 10 years about $250 plus million. It is a little interesting when a licensee wakes up 10 years later and goes, gee, I don't think I infringe any more, I don't think your patents are any good any more.

Joel Sendek – Lazard Capital Markets

Right, okay. I have always thought that they have bit of a better argument on Numax then they do on Synagis, would you concur with that or do you think your IP is just as strong on both?

John McLaughlin

You only have to infringe a single claim to be to owe royalty, and we clearly have claims that cover both.

Joel Sendek – Lazard Capital Markets

And then quickly on the ex-US Avastin and if it is made and sold in Europe, what is, what percentage of sales could that represent for Avastin. You have any estimates that you could share with us?

John McLaughlin

We don't really have any estimates that we can break out at this point. We don't, as – if you look at our recently filed 10-K, you will see that they haven’t – they forecast that it be up and running in 2009. We don't have any information in terms of how much it is going to contribute to the overall production at this point. Obviously, we do get paid at a higher royalty on that, and there are additional disclosures in terms of what the specific royalties are that you can find in our 10-K.

Joel Sendek – Lazard Capital Markets

Great. Thanks a lot.

John McLaughlin

Sure, thank you.

Operator

And we will go next to Jason Zhang with BMO Capital Markets.

Jason Zhang – BMO Capital Markets

Hi, thanks for taking my questions. The first is on the dividend that you just announced. So you have two dividends $1 per share combined for 2009 and that, again based on the total shares is probably close to $160 million, $170 million a year, and probably slightly lower the cash you might get from continued operations in 2009. I mean, I guess the question is related to the plan for the future. You have cash right now; you are going to continue to bring in cash. But, on the other hand you have debt that needs to be paid, and I guess for a lot of investors, what is your plan if you are not able to monetize the royalty stream, meaning to sell the company for cash. What is the plan for the cash, are you going to increase dividend or are you really going to keep enough cash on hand, to make the sale of the company a little more attractive. I guess, we don't really have any visibility on that.

John McLaughlin

So, you got a couple of questions in there. Jason let me try and break down and if I miss one jump back in and I will try and cover it. So I think your first question is, how do we think about the cash, and basically what we do is we run IRRs, to see what is the best way to utilize the cash for the benefit of our shareholders. Clearly, we have established a dividend policy for 2009. In 2010, we will review that dividend policy. I think one of the things that were looking at in 2009 is we want to put a little cash aside, because we do have some converts the first of which do in 2010. So we have some notes out there for about $250 million. They are called the 2023 notes. There is actually a put in those notes for the full value in August of 2010. So, we have to be cognizant of that, second of which is only thing that we want to see is, is we are restarting the – we're going to look to see whether or not we can start the monetization efforts. We don't know whether we can or not. We are clearly getting some very significant interest in the quality of the assets, the royalty streams, people like the royalties, they like the underlying products. The question is whether or not we can do a monetization on attractive terms, and that is just something we are going to – it is going to take us a little while to figure out over the next couple of months. But that is what we are trying to run the ground right now. It is not that people don't like the assets. The question is, is it going to be on terms that are favorable for our shareholders. In the absence of such an outcome, obviously we have the ability to dividend back. We have started dividending back, and that is not to say in future years, we wouldn’t increase both the size and frequency of dividend depending upon how we are doing.

Jason Zhang – BMO Capital Markets

Okay, and then the question related to the MedImmune litigation. So for 2008 sales, they paid full royalty, right? You have received, you said recently at February you received another payment. So that – I assume that is for 2004, I am sorry, 2008 fourth-quarter sales. So, am I right assuming that they have paid for their 2008 obligation?

John McLaughlin

Yes.

Jason Zhang – BMO Capital Markets

Okay, and what – could you tell us what is the procedure going from here, and also the question related to that is if they somehow are able to win the case, do you think your other license agreement is also at jeopardy?

John McLaughlin

So, again Jason, you got a couple of questions here. Let me try and pass through them for a second. So with respect to the next steps in the litigation with MedImmune, I assume that is what you are referring to, basically what they have, they have alleged a couple of things. So they have alleged that the patent aren’t valid, and then secondarily that they don't infringe the patents and therefore no monies are, no future royalties are due under the license agreement between us.

There is a series of, I will call them, preliminary motions filed by each of the parties to determine whether this case proceeds in California or Delaware, whether or not in fact they have stated a legally sufficient complaint, things like that. Most of that will get hurt at some point, probably or beginning in April, and it will take a little while after that. It is a little hard to forecast how long this litigation is going to take. So, without necessarily describing his specific litigation, it is not uncommon for a patent litigation, as you probably are well aware to take some place between two years and three years, and we will have to just get a little further along in this one to see where it goes.

Your second question relates to sort of what would be the ramifications or possible outcomes, and Jason and sorry that is a little hard to speculate. As earlier Joel mentioned, there are actually two products in the litigation, one of which is Synagis – the other of which they used to call Numax third generation [ph] product, and so for example, if there is a finding of infringement or non-infringement then it may or may not have any effect on any of the other licenses. If they find one claim is not valid but all the others are valid. That may or may not have any effect on all the other licenses. So, I guess forgive me, but I am little low to speculate just given that there are so many possible outcomes at this point.

Operator

And we will take our next question from Phil Nadeau with Cowen.

Phil Nadeau – Cowen

Good afternoon, thanks for taking my questions. My question is also on the, I guess, on the MedImmune suit and its relation to Alexion. If I remember correctly, MedImmune at some point in their dispute with you mentioned that they believed Alexion is now getting a lower royalty rate, and I think they suggested that they also would like to get that same royalty rate. Two prong question, first do the royalty agreements that you have in place with the people currently paying royalties have any provisions in them where they need to be given similarly low royalty rates to any new agreements that are signed in the future. And I guess, first only that question with you.

John McLaughlin

So, with respect to other agreements the answer is no. I don't think so.

Phil Nadeau – Cowen

Okay, and does MedImmune itself have that agreement in its contract.

John McLaughlin

There is a clause in there, yes. It is a very complicated clause, but there is a clause in there, yes.

Phil Nadeau – Cowen

Okay, so just clear what you are saying, MedImmune is unique in that it has a clause that allows it to reference the royalty rates in other agreements.

John McLaughlin

I won't say it is unique, because I can't say that I ever read every single one of the other agreements, but I'd certainly don't think there is, at least in the major agreements I don't believe there is such a clause in other agreements.

Phil Nadeau – Cowen

Okay, and second part of the question is given that Alexion is essentially paying a 0% royalty, and have satisfied their obligations to you with a lump upfront payment, how do you argue against the fact that Alexion has a lower royalty rate?

John McLaughlin

Because this is a matter that is in litigation. I'm not prepared to go through all the legal rational as to sort of how we come there. What we have provided to you and it is correct is our belief that in fact they are not entitled to a lower royalty rate.

Phil Nadeau – Cowen

Okay, thank you.

Operator

(Operator instructions) We will take our next question from Sutanto Widjaja with Symphony Asset Management.

Sutanto Widjaja – Symphony Asset Management

Hi, thanks for taking my questions. The couple of questions, just so if you can compare apples-to-apples for all the analysts model out there for 2009, what is your revenue guidance for 2009, if you were to include the MedImmune royalties? And second question, I calculated you guided that your cash flow from operations is going to be 262 to 280 for ’09, and you will be paying roughly $168 million for the dividend payments. That suggests that you have roughly $90 million to $110 million of excess cash at the end of ’09 roughly. Would you actually consider taking advantage of the new administration stimulus bill tax deferment program to buy back the bonds at a discount?

John McLaughlin

Sutanto, you got a couple of questions in there. Let us try and work our way through them first, let us do the MedImmune one first if we could.

Sutanto Widjaja – Symphony Asset Management

Sure.

Cris Larson

Our forecast for MedImmune -- this is Cris Larson again -- is roughly $35 million to $45 million.

Sutanto Widjaja – Symphony Asset Management

So, we just add that back to the 310 to 325, so we can compare against the analyst model, okay.

John McLaughlin

Your second question relates to whether or not we will in fact buy back converts. We have not made a decision to buy back converts at this time. We have looked at it. We have done a couple of financial models, obviously it is something we will continue to look at though.

Sutanto Widjaja – Symphony Asset Management

Right, and one thing that has changed from last quarter was the fact that you have the new stimulus bill that actually offers companies a tax deferment program, if you would buy back the converts below par?

John McLaughlin

Understood, and we are aware of it. At this point, I don't know that I can give you a much longer answer.

Sutanto Widjaja – Symphony Asset Management

Sure. Thank you for taking my questions.

John McLaughlin

Sure.

Operator

We will go next to David Madden with Narrow River Management.

David Madden – Narrow River Management

Yes, thank you. I wanted to follow up more on the debt repayment question, and whether you intend if you're not going to buy back the bonds to create something like a sinking fund or other means of essentially storing up the capital that would be required to pay down not only the 2010 convert but also the 2012.

Cris Larson

The way in which we analyzed our cash forecast, our ability to pay dividends, was keeping in mind the amount of cash that we needed to pay down the debt. So, I guess in response to your question I would phrase it as yes, something of a sinking fund if you will, that we do keep to maintain, to be able to service our debt.

David Madden – Narrow River Management

Okay, and if you were going to run a financial model then of keeping the cash on the balance sheet versus buying back the converts, it seems hard to believe that you couldn't come out with some, if you are receiving probably 1% on your cash balances, and the yield to maturity on the bonds is in the 11% range, that doesn't seem like a difficult calculation.

Cris Larson

That is correct, and I would say that at this time we are exploring a number of different structures. Again, John had mentioned earlier the monetization effort and within a short period of time, I do believe that we will be more focused on one of those, whether it is the monetization or base case managing our cash, and reach some conclusions within the next several months as to what we want to do.

David Madden – Narrow River Management

Is there any possibility of redomiciling outside of the US as opposed to just Nevada? It seems to me that there are some attractive possibilities there, especially with the NOL that the company has.

John McLaughlin

Yes, this is John McLaughlin. So unfortunately at this point it is very hard to do in terms of. I understand the nature of your question, it is possible to do it earlier on but given this sort of a stage in the development of the company where we are with the intellectual property assets, it is very hard to do.

David Madden – Narrow River Management

Okay, thank you.

John McLaughlin

Sure.

Operator

At this time there are no further questions, Mr. McLaughlin, I will turn the call back over to you for any closing remarks.

John McLaughlin

Thanks everybody for joining us on the call today. We look forward to seeing many of you at the upcoming industrial conferences including the Cowen conference coming up in mid-March. Have a good day.

Operator

This will conclude today’s conference. We thank you for your participation and have a wonderful day.

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