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PDL BioPharma, Inc. (NASDAQ:PDLI)

Q2 2009 Earnings Call Transcript

July 30, 2009 4:30 pm ET

Executives

Danielle Bertrand – IR, WeissComm Partners

John McLaughlin – President and CEO

Cris Larson – VP and CFO

Analysts

Charles Duncan – JMP Securities

Alex [ph] – BMO Capital Markets

Joel Sendek – Lazard Capital Markets

Terry Kline – JP Morgan

Sean Haas – CFI Partners

Operator

Good afternoon and welcome to PDL BioPharma’s second quarter 2009 conference call. Today’s call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Danielle Bertrand. Please go ahead.

Danielle Bertrand

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 on our website at pdl.com.

The forward looking statements made in this presentation should be considered accurate only as of the date of the 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 if 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.

John McLaughlin

Thanks, Danielle; and good afternoon, everyone. With me today is Cris Larson, our Vice President and Chief Financial Officer.

When we spoke with you last quarter, we laid out the new focus of the company, generating revenues from royalties on a diversified portfolio of approved and successful products. Our strategy is designed to optimize our assets to benefit stockholders without the diversion, expense, and considerable risk of research and development.

We remain focused on our three-pronged business approach, which includes managing our Queen et al. patents state that covers our antibody humanization technology, managing our licensing agreements with the biopharmaceutical companies that use our technology and have licensed our patents, and using our assets and the associated royalty revenues to maximize financial return for our stockholders.

I am happy to report that we are now delivering on what we promised and have begun to pay dividends to our stockholders. In the second quarter, we also bought back $55 million of our convertible debt and we will continue to explore ways in which to reduce our outstanding convertible debt for the benefit of our stockholders.

We remain focused on evaluating alternatives for monetizing royalties, so that we can bring forward royalty cash flows and we will keep you updated regarding these efforts.

In addition, we are continuing to see the promise of our technology fulfilled through significant increases in sales of a number of products in our licensing portfolio, including many of the best-selling drugs in the world.

Sales of Tysabri, which is marketed by Elan and Biogen Idec for multiple sclerosis, increased by 30% in the second quarter of 2009. Avastin and Herceptin, both marketed by Genentech and Roche for a variety of cancers recorded global sales increases of 29% and 10% in the first half of 2009 respectively.

In another important development, during its conference call reporting on results for the first half of 2009, Roche disclosed last week two important decisions that could positively affect our royalty stream in the future. They indicated there will be a partial closure of their mammalian cell manufacturing facility in Vacaville, California by the end of 2009; and the E. coli-based manufacturing, now occurring at Genentech's South San Francisco plant, would transition to their Singapore facility in the 2011-2012 timeframe. These plants previously made Avastin, Herceptin, and Lucentis.

As you may recall, we receive a tiered royalty rate on annual sales of products manufactured in the United States and used or sold anywhere in the world. The tiered royalty rate starts at 3% for net sales of up to $1.5 billion, dropping to 1% for net sales exceeding $4 billion. For products that are manufactured and sold outside the United States, we receive a flat rate of 3%. Thus, these manufacturing changes have the potential to improve the mix of applicable royalty rates paid by Roche.

I will now turn the call over to Cris Larson, our CFO, to provide more detail about our financial results for the second quarter of 2009, and to update our 2009 guidance.

Cris Larson

Thank you, John. As I discuss the financial results from the second quarter of 2009, please keep in mind the comparison of 2009 versus 2008 results represent only the new PDL, the PDL without our former commercial or biotech operations.

For the second quarter of 2009, total revenues from continuing operations were $125.9 million, an 18% increase from $106.5 million for the same period in 2008.

Royalty revenues are based on first-quarter 2009 product sales by our licensees and include $18.9 million for Synagis, which is marketed by MedImmune. Also included in second-quarter results is the second and final installment of $12.5 million from Alexion, as agreed to in our December 2008 settlement arrangement with them.

I should also point out that in comparison to the second quarter of 2008, royalty revenues for foreign-sourced sales in the second quarter of 2009 were negatively impacted by changes in foreign currency rates. This is important, because approximately half of the underlying product sales on which we receive royalties are in currencies other than in US dollars.

Moving on, total general and administrative expenses from continuing operations for the second quarter of 2009 were $5.6 million, as compared with $10.9 million for the second quarter of 2008. The decrease was primarily driven by the reduced cost structure of our Nevada operation, where we currently have fewer than 10 employees. Significant expense items for the second quarter of 2009 are legal fees of $2.7 million, professional fees and insurance of $1 million, compensation and benefits of $800,000, and non-cash stock compensation cost of $200,000.

Net income for the second quarter of 2009 was $77.2 million or $0.47 per diluted share; as compared with the $3.9 million or $0.24 per diluted share for the same period last year.

Net cash provided by operating activities was $103.4 million for the first half of 2009, as compared with $7.5 million for the same period in 2008. At June 30, 2009, PDL had cash, cash equivalents, and short-term investments of $192.7 million, as compared with $147.5 million at December 31, 2008.

Turning to dividend payments, we paid our first 2009 dividend of approximately $60 million on April 1, 2009. The second dividend payment of $0.50 per share will be made on October 1, 2009 to stockholders of record as of December 17, 2009.

As a result of the April 1 dividend payment, we announced adjustments to the conversion rates on the company's convertible notes. The conversion ratios will be further adjusted in this September in connection with the October dividend payment.

I would now like to spend a moment reviewing our financial guidance for 2009. Our revenue guidance is unchanged and we continue to anticipate revenue in 2009 to be in the range of $310 million to $325 million. This amount excludes the MedImmune royalties. We expect revenue growth to continue to be driven by increased product sales of Avastin, Herceptin, Lucentis, and Tysabri.

We expect general and administrative expenses for 2009 to be in a range of $20 million to $22 million, a significant decrease from $51.5 million in 2008, but an increase from our original projection of $12 million to $15 million. The increase is a result of increased legal and patent defense costs due to ongoing litigation and interference proceedings; increased other professional fees as we conclude certain activities associated with our former commercial and biotech operations; and finally, a one-time $900,000 depreciation charge for our old general ledger system.

Approximately 50% of projected 2009 expense is due to legal fees and patent defense, as well as other professional fees.

We are projecting net income after taxes to be in the range of $200 million to $215 million, up from our previous projection of $185 million to $200 million. The new projection includes royalties from MedImmune for the first and second quarters of 2009, partially offset by the increase in general and administrative expenses.

Cash generated in 2009 is expected to be in the range of $285 million to $300 million, an increase from our original projection of $260 million to $280 million.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Charles Duncan from JMP Securities. Please proceed.

Charles Duncan – JMP Securities

Hi, guys. Nice job in the quarter.

John, I had a quick question with regard to – perhaps the royalties on some of the products that are in development. Can you identify some products that are in development that you may get royalties on, and I had heard that one of the Alzheimer's drugs that you have in development, the payments to you don't only depend on the Queen patent. Can you give us some additional insights on that?

John McLaughlin

Sure. And you are correct. So the focus on two of the products that are in development, there is a bunch, but to focus on two, there are antibodies for the treatment of Alzheimer's disease, both of them are in Phase III. One is under license to Wyatt – now it is Wyatt J&J. You may have seen last week the two companies announced the formation of a joint venture. J&J invested about – a little over $1 billion at a premium to land stock – actually Wyatt stock to get – something more than 50% of the joint venture, which includes the Alzheimer anti-body and I think our vaccine plus they also committed to about an initial $500 million in clinical development for the product.

The second one, which you see is actually the one that I think that your – the second part of your question refers to is an antibody being developed by Lilly, and to the point in your question, for some of the antibodies, PDL provided not only a patent license, but also provided humanization services that as they helped – they assisted in the humanization of the antibody, providing know-how. And in the instance of that license, there are payments that stem from the patent license granted. At the time of expiration of the patent license, there is a step down royalty for payment for use of the know-how, which continues for a couple of years thereafter.

Charles Duncan – JMP Securities

Is that step down on the order of – say, does it go to a tenth of the original payment, or is it some larger fraction thereof?

John McLaughlin

Yes, I can't get into the details of that particular license. But as a rule of thumb, when you see these kinds of licenses and these structures are reasonably common. Typically, you see a step down on the range of kind of a third a quarter, someplace in there, but I'm not commenting on that specific license.

Charles Duncan – JMP Securities

So it is still pretty meaningful though?

John McLaughlin

Again, given – these products are in Phase III, we have to see what the data looks like, but certainly there are many folks who believe that if they were to hit the product profile, they have blockbuster potential.

Charles Duncan – JMP Securities

And then how long does that part of the license run? Through the life of the product?

John McLaughlin

Again, I can't comment on the term of it, it runs a couple of years thereafter. I apologize, some of these terms are confidential and the licensees might not be terribly happy with us if we disclosed them.

Charles Duncan – JMP Securities

But clearly it is beyond the Queen patent?

John McLaughlin

Yes.

Charles Duncan – JMP Securities

Okay. Thanks for the added color.

John McLaughlin

Thank you.

Operator

Your next question comes from Jason Zhang from BMO Capital Markets. Please proceed.

Alex – BMO Capital Markets

Good afternoon, folks. It is actually Alex [ph] for Jason; and congratulations on the quarter.

One quick housekeeping question. Could you – in the past you have broken up royalties and your revenues into royalties and licensing and other. Wondering if you could again provide us as to let us know which part of the – what portion of the total revenues were licensing and other payments.

Cris Larson

Total revenues of $125.9 million included $113.4 million of royalties and license and other of $12.5 million.

Alex – BMO Capital Markets

So the licensing and other were just the Alexion payments?

Cris Larson

Yes.

Alex – BMO Capital Markets

Okay. Thank you very much.

Operator

Your next question comes from Joel Sendek from Lazard Capital Markets. Please proceed.

Joel Sendek – Lazard Capital Markets

Hi, thanks. I have a question about your tax rate; it is higher than I had thought it would be. I am wondering if it is going to go down in the future or if this is the – a good run rate for the tax rate.

Cris Larson

Our tax rate is the federal statutory rate of 35%, always impacted by a few little things, both differences et cetera, but I think perhaps what you are referring to is the actual cash that we will pay, our taxes that we will pay in cash in 2009, so that 35% amount of tax will be substantially offset by both an operating loss carry forward that we have, as well as tax credits that we have. And so the way we report it for book is somewhat different than what we will actually pay.

Joel Sendek – Lazard Capital Markets

Okay, great. And then – what are the – how much do you have left as far as the carry forwards right now and the credits?

Cris Larson

We have over $200 million, but we are only able to use $173 million in the current period.

Joel Sendek – Lazard Capital Markets

Okay.

Cris Larson

There is a limitation based on – part of the NOL was acquired through the acquisition of another company.

Joel Sendek – Lazard Capital Markets

Right, okay. And then just a small thing with regard to the EPS on a diluted basis. When I do my calculation, I get to a slightly different number than $0.47. Is that because of converts or why does that – I get $0.46.

Cris Larson

We view benefit from the – there is – if when you include the converts in the diluted earnings per share, then you back out the interest expense, perhaps that is why.

Joel Sendek – Lazard Capital Markets

Okay. Okay, thank you.

John McLaughlin

Joel, thanks.

Operator

Your next question comes from Geoff Meacham from JP Morgan. Please proceed.

Terry Kline – JP Morgan

Hey, guys. This is Terry Kline here for Geoff today. Thanks for taking the question.

When you think about – it looks like you guys bought back some of the converts this quarter, and I am just trying to get an idea of what your thoughts are around that versus increasing the dividend going forward.

Cris Larson

Well, as you are aware, of course, those are obligations that are outstanding, but we do weigh the alternatives of dividend payment versus convert buybacks versus conversions and as those opportunities present themselves, and assess them relative to the benefit to our shareholders.

Terry Kline – JP Morgan

So do you think that – do you continue to see opportunities to buyback the converts before the expiry of the market?

Cris Larson

Well, during the second quarter, our stock prices trended up significantly, so that has changed – as a result of the change in the conversion ratio as well as the change in the stock price, it is changing somewhat the way in which we look at both of the nodes at this time.

Terry Kline – JP Morgan

Okay, thanks.

Operator

(Operator instructions) Your next question comes from Sean Haas from CFI Partners. Please proceed.

Sean Haas – CFI Partners

Is there any update on progress or thoughts about monetizing pieces of the portfolio? Thanks.

John McLaughlin

Sure, Sean. So, we are in the process of the escrow, looking at a couple of different alternatives. As you are well aware, the financial markets will envision the stock markets but the financial markets have been improving since the beginning of 2009. Frankly, things are going a little bit slower than we would like, but having said that, we are pleased with the progress that we are making and it is hopefully a process we can come to a conclusion at some point in the not-too-distant future. And we will decide based on the alternatives as we perfected [ph] them, whether they make sense for our shareholders or not.

Sean Haas – CFI Partners

Okay. And then a housekeeping item. Before the impact of foreign exchange, what was the growth rate?

Cris Larson

It is difficult to assess that specifically because we receive all of our royalties in US dollars, so I can only sort of project based on underlying sales and relative earnings to us, but we don’t have that kind of detailed information from our licensees.

Sean Haas – CFI Partners

Okay. All right, thanks.

Operator

There are no further questions. I would now like to turn the presentation over to John McLaughlin for closing remarks. Please proceed.

John McLaughlin

Thank you all very much for participating in the call today, and we look forward to seeing you in the future at various conferences. Have a good day.

Operator

Thank you for your participation in today’s conference.

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