PDL BioPharma's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: PDL BioPharma, (PDLI)

PDL BioPharma, Inc. (NASDAQ:PDLI)

Q4 2012 Earnings Conference Call

March 1, 2013 16:30 ET

Executives

Jennifer Williams - Investor Relations

John McLaughlin - President and Chief Executive Officer

Analysts

Jason Kantor - Credit Suisse

Adnan Butt - RBC Capital Markets

Phil Nadeau - Cowen & Company

Operator

Good day, ladies and gentlemen and welcome to the PDL BioPharma’s Fourth Quarter 2012 Earnings Conference Call. Today’s call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Ms. Jennifer Williams. Ma’am, you may begin.

Jennifer Williams - Investor Relations

Thank you all for joining us today. I’d like to first point out that there is a slide presentation associated with today’s earnings call and you’ll see that in the Investor Relations section of the PDL website which you’ll find at pdl.com.

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 on our website at pdl.com.

The forward-looking statements made during this conference call should be considered accurate only as of the date of this call, 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’ll now turn the call over to John McLaughlin, President and CEO of PDL BioPharma as well as Acting CFO.

John McLaughlin - President and Chief Executive Officer

Thanks, Jennifer, and good afternoon everyone. In this call, I’ll provide a summary of recent events, and we’ll then follow up with review of our quarterly financial results. As you will see on slide 3, our initiative to bring in additional income generating assets remains a top priority for 2013 as we believe that the right transactions will increase value for our shareholders. We made solid progress in 2012 on this front having closed three significant transactions. We need to do more of these deals. And as a reminder, for the types of details we are evaluating our transactions which involve buying royalties on drugs or medical devices or loans secured by assets and product revenues or our hybrid royalty loan structures.

We are given this with the structure of the therapeutic area. Our three significant transactions in 2012 demonstrate this fact as they each involved a unique transaction structure and a different therapeutic area. Indeed, we completed transactions back by a small molecule drug, a biologic and a device. What we are focused on is the quality of the income generating assets, the likelihood of being repaid, and the return on investment for the benefit of our shareholders. We look forward to providing you with an additional update on our progress during 2013.

In recent weeks, there have been significant updates on some of our royalty bearing products that I’d like to share with you. Just last week, Genentech announced that T-DM1 now called Kadcyla was approved by the FDA for second line treatment of HER2-positive metastatic breast cancer and first line treatment for those patients who relapse within six months following adjuvant therapy.

Roche has submitted a marketing authorization application to the European Medicines Agency for the same indication. Kadcyla has been priced at $9,800 per month, which is significantly higher than many analysts estimated. We expect to receive royalties on sales of Kadcyla beginning in the first quarter, which we received in the second quarter in accordance with the Genentech license agreements with us. In October, Genentech and Roche announced that the European Commission approved Avastin in combination with standard chemotherapy as a treatment for women with first recurrence of platinum-sensitive ovarian cancer. In November, the European Medicines Agency adopted on positive opinion regarding the use of Avastin in second line metastatic colorectal cancer.

Also in November, additional details were announced regarding Phase 3 patients with newly-diagnosed glioblastoma, who were treated with Avastin plus for radiation and chemotherapy and showed an increase in progression-free survival of 36% when compared to patients on radiation and chemotherapy alone. Additionally, last month, Genentech announced Phase 3 results from another license drug called Obinutuzumab. This humanized antibody which targets CD20 alike the chimeric antibody Rituxan demonstrated a significant improvement in progression-free survival in people with chronic lymphocytic leukemia or CLF. Data from this trial will be submitted to European regulatory authorities and to the FDA for potential approval.

Now, on to our financial results on the next slide. Total revenues for the fourth quarter of 2011 were $86 million compared to $72.8 million in the fourth quarter of 2011. Total revenues for the full year ended December 31, 2012 were $374.5 million compared with $362 million for the same period in 2011. Royalty revenues increased 7% over full year 2012. Royalty revenues for the fourth quarter of 2012 are based on third quarter product sales by PDL’s licensees. The fourth quarter revenue growth was driven primarily by increased royalties on sales of Herceptin and Avastin when compared to the fourth quarter 2011. Royalty revenue for Lucentis for the fourth quarter and 2012 are net of payments made under our February 2011 settlement agreement with Novartis.

Turning to expenses, our operating expenses in 2012 were $25.5 million compared with $18.3 million in 2011. For the fourth quarter of 2012, general and administrative expenses were $7.7 million compared with $4.8 million for the same period of 2011. Net income in 2012 was $211.7 million or $1.45 per diluted share as compared with net income of $199.4 million in 2011 or $1.15 per diluted share.

Net income in the fourth quarter of 2012 was $49.4 million or $0.34 per diluted share as compared with net income of $38.9 million or $0.24 per diluted share for the same period of 2011. Net cash provided by operating activities in 2012 was $210.2 million compared with $169.8 million in 2011. At December 31, 2012, PDL had cash, cash equivalents and investments of $148.7 million compared with $227.9 million at December 31, 2011. The reduction in cash relates primarily to the company’s income generating asset transactions, repayment of the company’s non-recourse notes, and dividend payments.

In accordance with our regular quarterly dividend policy, we paid the final of four dividends of $0.15 per share on December 14, 2012 to all stockholders of record as of December 7, 2012 for a total of $21 million. We were pleased to announce last month that our Board of Directors has declared a regular quarterly dividend again for 2013 which will total $0.60 per share for the year. This marks the fifth consecutive year that PDL has paid either a regular dividend or special dividend and a third consecutive year that we will pay a regular dividend.

Continuing our policy of providing quarterly revenue guidance in the third month of the quarter, we will be providing the first quarter revenue guidance in early March. On the administrative side, we have an active executive search ongoing for new CFO. We have had significant interest in the position from many high-quality candidates and are now in the process of narrowing the field down to the final handful. We hope to have a new CFO on board by the second quarter of this year. In the interim, we are well staffed with a strong finance team of internal employees and external consultants.

At this time, operator, we are ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of (Kim Lee) with Janney Capital. Your line is open.

Unidentified Analyst

Good afternoon. Just a couple of quick questions for you. First, looking at the SG&A expenses for fourth quarter, there was quite a jump up from the prior quarters. So, going forward for Q1 of this year and beyond, should we use that Q4 number as a good base to start from?

John McLaughlin

So, yes, Kim and how are you doing? So, that your point we just see SG&A jump up in the fourth quarter that’s really driven by two things. One is increased legal expenses as we approach a trial date in the litigation with Genentech in Nevada state court that’s set for October of 2013. So, we will see continuing run rate increase and there will probably be some add to the fourth quarter if that trial date gets closer. A little bit of that is also expenses associated with our acquisition of income generating assets, but the big driver was really our increased legal expenses and they will probably step up some more towards the middle of 2013 as we get closer to trial date?

Unidentified Analyst

Great. And thanks for that clarity. Also speaking of closing on that trail date, any new updates, I mean, I guess the October date is still you are still on for that and no other news on that front?

John McLaughlin

Yeah, that’s correct. We are in the midst of discovery and depositions. We are anticipating that’s going to close at some point perhaps later in the summer or early fall. There will be probably some motions what are called summary judgment by both parties to try and simplify the case. And then the trial date as you alluded to is October of 2013.

Unidentified Analyst

Great. And one final question, I’ll jump back in the queue. Can you give us any updates on this business development front internally, how many do you anticipate or want to license this year and how is that process going so far? Thanks.

John McLaughlin

Sure. So, we deployed about $125 million in capital last year. And our goal this year is to exceed that rather focused on the number of deals where our goal is to exceed that. We are seeing a lot of very interesting transactions. We are pretty selective. So, the top of the funnel was pretty wide, but as you work your way down it gets pretty narrow. But because we are focused on quality assets as I know you’ve heard me say before, we are very cognizant of the fact that unlike, for example, a royalty fund, we have the obligation to return money to shareholders in different ways such as dividends. So, we are pretty picky buyers, but having said that, we are seeing some very attractive transactions.

Unidentified Analyst

Great. Thanks for the update.

John McLaughlin

Sure, thank you.

Operator

Our next question comes from the line of Jason Kantor with Credit Suisse. Your line is open.

John McLaughlin

Hi, Jason.

Jason Kantor - Credit Suisse

Hi, thanks for taking the questions. How much money do you think you need to deploy relative to the $125 million that you did last year in order to achieve some sort of sustainability of the business beyond 2014, what are some of your targets as it relates to that?

John McLaughlin

So, certainly we would like to, as I suggested, deploy more than that. Part of it, Jason, though and it’s a very good question, part of it also in terms of what do we think the returns look like. So, as we have suggested and I know you have heard it too, some place towards the end of ‘13 and ‘14, we are going to step back and say okay, how much capital did we deploy, what are the returns look like on those deals, what’s the duration of those deals. And are we seeing enough deal flow that we think it’s consistent. So, I mean, to be honest, we could do transactions with lots of transactions to deploy lots of capital, if we were willing to take fairly low returns. That’s not good for our shareholders. We shouldn’t be thinking about that. We are not going to. So, it’s – to the point of your question its how much more, we’d like to do more than a $125 million frankly as much as we could reasonably do. And second is also what are the returns looking like in those transactions, are we comfortable that, they are rich enough that when we model investing in income producing assets versus simply returning money to investors earlier you are going to do better in the former scenario than the latter.

Jason Kantor - Credit Suisse

Okay. And also could you just with regard to potential future special dividends, are you basically likely to hang on to your cash for now until you make the decision about what to do with the company at the end of 2013 or you are going to have a big increase in cash flow with the debt that’s been paid down?

John McLaughlin

You are exactly correct. With the payment of the non-recourse notes, we will see a step up in free cash flow. As you know, typically the revenues we see in the first quarter because they come from fourth quarter sales maturing in the Genentech deal, they are not typically – it’s actually one of our lower quarters and not the lowest quarter. But to your point, the royalties we receive in the second quarter based on first quarter sales that’s typically our highest quarter. We will see an increase in free cash flow.

To the earlier part of your question though at this point, we declared a regular dividend. We think we have visibility on sufficient number of deals that we are probably not likely to do any special dividends, we do think about that. Our shareholders do not pay us to be a bank. We have a very prudent and reasonable investment policy. But obviously, we don’t make a lot of money nor does frankly any corporate treasury group these days given the returns on notes. And so we are cognizant of the fact that if we don’t have visibility on some real concrete transactions, we shouldn’t be accumulating excess amounts of cash. And probably in that context, if we didn’t have visibility and the cash pile was getting bigger. We might think about doing something like a special dividend there, but that’s something we kind of keep an eye on. So, I can’t answer your question to say, yes, we are going to do it or no, we are never going to do it, its something we keep an eye on.

Jason Kantor - Credit Suisse

One last question on Solanezumab, now that that’s the time you got kind of pushed out a bit, it’s a little bit – the timing is little bit awkward with respect to the decisions that you have to make about what to do with the company later this year or early next year, how are you thinking about that asset at the moment?

John McLaughlin

No, so it’s a great question. So, if I can, let me break your question down into two parts. So, in the event we decided well let’s wind this place up for good and valid reasons, which we could talk about separate conversation, but in fact it would probably take us into late ’15 or early ’16 to do that just given that we have to pay out convertible notes. We do think we would continue to be paid royalties on inventory of product that was made prior to patent expiration, but sold thereafter. And fortuitously, we are hoping, maybe that’s the best word to use that we would see results from early Phase 3 trial on Solanezumab in and around that time.

They publicly said that they expect commence no later than the third quarter of 2013 hopefully given the fact they run two very large Phase 3 trials in moderate and mild Alzheimer patients, they know what the good centers are, they can get up and running more quickly. They are focused on mild patients and while that’s the subset of what they enrolled before, it’s still a fairly large percentage of the overall patient population, so hopefully they can complete that quickly. They haven’t given any guidance on that, but let’s hope they can get it done faster. Last time it probably took them just under three years. So, we are talking probably late ’15 or early ’16 when we would see those results.

To the value of the option itself, I will characterize Solanezumab as an option for right now. I guess how we think about that it is, it’s probably not terribly valuable at this point. I think most folks attribute a reasonably low probability of success to the outcome of the trial. It’s hard to know what the usage would be or pricing should be in the absence of clinical data. So, if you were to go out and try and sell it, I doubt we would get a very attractive price for it. And in the wind up scenario we might try and get a price for it, just to go out in the market and test it. But I can expect it’s going to be a reasonably no long number. And in fact if we would expect to see some results from the Phase 3 in and around that timetable, I will get and I would want to make a final judgment at this point and so we’ve actually shopped and seen what it would bear in the market. Probably guess it’s going to be more attractive for our shareholders given the fact that it’s a 12.5 year royalty at 2% and there are some estimates that suggest even in the mild patient population, it could be a sizable product to just find out what the results are and then figure out what it’s worth.

Jason Kantor - Credit Suisse

Thank you.

John McLaughlin

Long answer, sorry.

Operator

Our next question comes from the line of Adnan Butt with RBC Capital Markets. Your line is open.

Adnan Butt - RBC Capital Markets

Hi, John, you mentioned Obinutuzumab, are you – do you have an handle on any other late stage assets or indications that could receive approval prior to the expiration of the Queen et al. patent?

John McLaughlin

Yes, so there – I mean there is a couple of interesting ones out there and I will just touch on a couple one – a couple of them. So, Obinutuzumab I think it’s interesting certainly I think a lot of people were optimistic going head to head against standard chemotherapy and CLL. They were optimistic that you would see some nice results there in terms of improved PFS which of course we saw. I think probably what’s intrigued all of us is that it’s a two stage trial and that the DSMB, the data safety monitoring group conducted a futility analysis on the head-to-head comparison in that the inpatient population against Rituxan and said keep going. And of course as we all know that the futility analysis doesn’t mean it’s going to work, but that’s probably the more intriguing of it there are two set of results. To the point of your question if we were to show an improvement in PFS and or an improved safety profile that would probably change the adoption curve for it as a replacement therapy for Rituxan. And given the fact that of course the Rituxan has been on the market for a while, the patent expiration is coming up. You can see where Genentech and Roche would have motivation to switch patients from Rituxan or begin switch them over to Obinutuzumab, which probably will come up with a better name than that generic name for.

Interestingly, sort of just to pick them not necessarily in commercial importance, I was aware there was nice data there on chronic idiopathic urticaria where it’s always has been a nice steady any sort of product. Novartis is the ex-US partner of Genentech on that and Genentech-Roche announced some very nice results and descriptively described its severity score. Chronic idiopathic urticaria is known to layman as hives and you saw some dramatic results on SubQ administration every 12 week period when administered with antihistamines. Again they are probably only going to pick up the very severe portion of that patient population given the pricing in SubQ administration, but a nice add to the market.

Probably others that are intriguing on moving from second line to first line in glioblastoma and Avastin, that’s pretty interesting data, not a huge patient population but obviously a multiple bigger than the current second line. I think the others that are intriguing are on the data sets with respect to re-treatment in metastatic colorectal, where you see patients that have been on Avastin with metastatic, they progress and you continue to treat and you see some nice improvements there. And that’s just a couple off the top of my head I do things SubQ Herceptin will help a little bit, but that clearly that’s a pretty mature product at this point.

I think the other thing that’s interesting to notice during this call with the financial community, Novartis was pretty bullish on their ability to maintain Lucentis and actually continue to grow that market even in the face of Eylea launches and of course they have not been suggested the same kind pressures particularly in the ANDA market that Lucentis has seen in the US. So, that’s something we will be watching for as well. Probably the last one is just the most recent one to mention. I discussed the therapy T-DM1. There has been fair amount of enthusiasm in the medical community for that, because it is in ADC and you did see both an improvement in efficacy and safety and the price was as noted higher than many predicted in some cases almost twice as high.

Adnan Butt - RBC Capital Markets

And the final question from me is on the lawsuit versus Roche, how definitive is the date can it be changed and have you thought about the potential outcomes in under any scenario could PDLI or anything back to Roche?

John McLaughlin

Great question, so to start at the top the date is October of 2013, it’s already moved twice and one thing about court dates is, if they move they never come in, they always go out. So we are still in document discovery depositions, so while it is the court approved date. Yes, I mean there is some risk it might go out just because there are disputes between the parties are on documents and depositions to be added etcetera. So, it is the date but having said that, there are disputes and sometime these things do get moved.

The second part of your question is sort of what’s the US profile for PDL in the context of this litigation and just to step back for second, it is a contract dispute, not a patent dispute. And so the issue is whether or not when Genentech sent a fax in August of 2010 at the behest of Roche and Novartis questioning whether or not in fact royalties were owed on ex-US and specifically European product sales, whether that constituted a challenge within the meaning of the 2003 settlement agreement and whether the settlements agreement covered this sort of challenge.

That’s the issue in dispute, if we – our legal risk or our exposure in this is really our attorney fees, their exposure in this is if in fact they were found – if the agreement is found to have covered the circumstance and this is a challenge within the meaning of that agreement then they have exposure to various levels of damages and some of them are quite sizeable. We’ve actually provided a copy of that in one of our Qs, but they include monetary damages and changes in royalties retroactive and prospective increase on royalty rates where products made or sold in the United States from the current levels which were tiered, last year ran about 1.4%, 1.5% up to 3% and 3.25%, it’s a contract cases.

Adnan Butt - RBC Capital Markets

John I don’t know if you’ll answer this but I’ll ask have they approached the company for a settlement yet and the company hasn’t accepted?

John McLaughlin

Adnan sorry, if there were such conversations they would be wrapped up so tight in confidentiality agreements I’d look like an inmate and insane asylum in a straitjacket.

Adnan Butt - RBC Capital Markets

Thanks. Thank you for taking the question.

John McLaughlin

Sure, thank you.

Operator

Our next question comes from the line of Phil Nadeau with Cowen & Company. Your line is open.

Phil Nadeau - Cowen & Company

Good afternoon. Thanks for taking my questions. First, John wanted to follow-up on a comment you made just earlier, and that’s on the wind down of the royalties through or after the Queen patents expire, can you give us some sense proportionately how much you would expect to receive over those years after the Queen patents expire? So, if the patents were in force, you would get 100% obviously, but as the inventory gets run down there is some fall off. Can you give us quantitatively like what proportion of inventory in 2015 you would expect to have been manufactured before the patents expire in 2016? What proportion of that inventory would have been manufactured before the Queen patents expire?

John McLaughlin

Do I wish I could, do I wish I would do I wish I knew to answer that question. The issue is yes, we wish we knew that. And I think what we are comfortable saying is that clearly they will have built up some inventory prior to expiration of the patents in the SPCs, the last of which expire in December. But how much of that inventory and where it is in the manufacturing site? Well, it’s a little hard to know. I mean, what we have suggested is that typically they keep fairly sizable inventories on hand. It takes about seven months between both in fill and finish to produce, fabricate an antibody. And that we think that they will probably keep about 12 months or so on hand and that’s we say well, we are going to get paid for patent expiration and even if they skinny it down, we’ll probably get paid for a couple of quarters thereafter. We really wish we could give the kind of – we wish we have the kind of granularity in terms of where we form those manufacturing cycles and exactly how much they have left. We just don’t have that information. I mean to be clear at that point, we do have audit rights and that’s one of the things we will monitor very carefully to make sure we are paid for all of those things, but we don’t have a good ability to project it or predict it on a prospective basis.

Phil Nadeau - Cowen & Company

Okay, great. That’s fair enough. And then second on the decision point in late 2013 or ‘14 and the structure of the company after that there is two obvious solutions, one is you wind things down and return money to shareholders, and then the second is that you kind of continue to invest in positive cash flows to generate positive ROIC. Are there any other scenarios that I am maybe not considering like some hybrid scenario or a smaller version of what you are already doing? Are those really the two paths you can take or is there anything else that we should be considering?

John McLaughlin

No, I think you’ve identified them. Probably the only additional comment I’d make is you could see a situation where we say look, we are doing pretty good. We got a bunch of deals. We think we are good for the next three years. So, it might not be. We are going to be handing out gold watches in all retiring and put a cornerstone in the side of the building that we are here forever, but it could be something where we say look, we are comfortable about this for the next X period of years and we visit again at that point, because I do think it is something we need to kind of keep an eye on an ongoing basis to say. Can we do a good enough job for the shareholders in terms of finding deals or should we be given the money back. And that’s – so the only maybe amendment I’d make is it could be a possibility where it says we talk to you again in three years about the same question.

Phil Nadeau - Cowen & Company

Okay. And what about public versus private, is there some way that you could continue, but as a private entity instead of a publicly traded company?

John McLaughlin

That’s a real good question. We are looking at that to see if there are some ways we can be more tax efficient and some of those are private structures, don’t have a great answer yet that says okay, here is a way to do that. But it is something we are looking at is I mean obviously one of the reasons we relocated to California excuse from California to Nevada was to be more tax efficient. So, it’s something we’re looking at, we are thinking about it and it’s a very good question we are spending some time on it.

Phil Nadeau - Cowen & Company

Okay, great. Thank you for taking my question.

John McLaughlin

Thank you.

Operator

We have a follow-up question from the Jason Kantor with Credit Suisse. Your line is open.

Jason Kantor - Credit Suisse

Hi, thanks, I just wanted to make sure I understand on Herceptin and T-DM1. In Europe, your royalty is based on the SPC which is specific for Herceptin, that does not apply to T-DM1 or does it because it’s the same core antibody?

John McLaughlin

It does supply yes that’s our view.

Jason Kantor - Credit Suisse

Is that a shared view, just has Roche given you indication that’s in fact the way they see it as well?

John McLaughlin

We have no indication they see it separately.

Jason Kantor - Credit Suisse

Okay, but isn’t that, isn’t it a named product and as a different product with a different name and a different chemical structure, it doesn’t matter that it’s derived from the same antibody, I guess, I am just trying to under the logic, it is a product specific expansion, right?

John McLaughlin

Right. And of course that is the antibody component of the drug conjugate. So, it is our view and we have obviously discussed this extensively that it is covered.

Jason Kantor - Credit Suisse

Got it. Okay, thank you.

John McLaughlin

Sure.

Operator

I am not showing any further questions. At this time, I’d like to turn the call back over to John McLaughlin for closing remarks.

John McLaughlin - President and Chief Executive Officer

Thank you all for joining us on this call on a late Friday afternoon. We greatly appreciate it. We look forward to seeing many of you at upcoming conferences, including the Cowen Conference next week. Thanks again for participating and have a good weekend.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!