PDL BioPharma, Inc. (NASDAQ:PDLI)
Jeffries 2013 Global Healthcare Conference Call
November 21, 2013 5:40 AM ET
John McLaughlin – President and CEO
Good morning and welcome to the Jeffries 2013 Global London Healthcare conference. It is my pleasure to introduce John McLaughlin, President and CEO and Peter Garcia, Chief Financial Officer of PDL BioPharma. 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 of assumptions behind those, please see our most fillings with the Securities and Exchange Commission.
There are a number of features that we think distinguishes PDL among healthcare companies, public or private and public companies overall. Some of them are captured on this slide. As you can see, while we're a healthcare company, we're somewhat a unique beast in the constellation of healthcare companies.
We have less than 10 employees. We don't do any research and development, manufacture and commercialization ourselves. You could see our revenues are 375 million for last year with expense of about 25 million. We're quite profitable. Of the last quarter, we reported 14% increase in our earnings year-over-year and we've seen low, double digit increases in revenues for the last several quarters.
Early in -- when this management team took over in 2009, we established a policy of paying dividends. Several years ago, we moved to quarterly dividends. And you can see the regular quarterly dividend for 2013 is 15 cents per share per quarter. That's been a policy for the last couple of years. Atypical of dividend payers, we announced the dividend a year in advance, typically in January and we tell you what it will be for the year, what the record date is and the payment dates.
You can see, we've built up a substantial CASK position, that as of the end of third quarter, in fact our current cash position is quite to be less than that based on some transactions that we consummated subsequent to the close. I'll talk a little bit more about those in a second.
From the perspective of institutional investors, and we are about 95% held institutionally, it's perhaps the last line, it's as important as any. You can see that the average daily volume is about 1.7 million shares per day. In fact, that number's a little dated. Our volume is actually a little bit higher than that for the last several days. But what it does afford is easy entrance and hopefully, if you've made money, exit from the stock important to institutional investors.
To talk a little bit about our mission, it's pretty simple. We focus on optimizing return for shareholders. Currently, our primary focus has been the Queen et al. Patents and they're the primary source of that $375 million in revenues that you saw for 2012. More recently, we spent a fair amount of our time acquiring other income generating assets.
And as you can see there, we are agnostic as to therapeutic category. Our focus is a differentiated product profile. It can be biotech, pharma, it could be medtech and in fact, we'll show you some deals in the dollar value that roughly split between the two. We have flexibility in terms of how to structure the deals. We'll show you some examples. Some are debt, some are royalty and some are hybrid between the two.
We're fortunate to have a very strong management team as well as a strong board of directors. You can see the board of directors there. Jody Lindell has a significant background in accounting as well as on Cooper Companies, a healthcare provider. Paul Sandman comes from Boston Scientific and Harold Selick is a scientist by training. He spends time as a venture capitalist and he's currently CEO of Threshold. So it's a nice combination of experiences.
I call to your attention, the bottom part of the slide, our senior advisors. So Fred Frank is an experienced banker and Dr. Evan Bedil and Dr. Glenn Reicin help us in terms of identifying potential investments. Both of them are former analysts from Morgan Stanley with biotech and medical device backgrounds respectively.
There's a lot of information on the slide. And I'm not going to through all of it in detail. These are the current income generating assets for us. You can see that they're humanized antibodies, that is the core of PDL's Queen et al. Patents. They are predominantly from Genentech and Roche, no surprise there given the fact that they staked out in early and a sizeable footprint in antibody therapeutics. And they range from a vast intercepting incentives, et cetera.
I call to your attention to sort of the more interesting ones at the bottom. Interesting because they're recently approved, Perjeta a little over a year ago. Kadcyla more recently and in fact the slide is actually wrong. As of yesterday, it was approved here in the EU. And then more recently, Gazyva. So we do not get royalty on Rituxan because of the chimeric antibody as you may be familiar with.
In fact, Genentech bifurcated its efforts to develop subsequent follow on humanized antibodies to Rituxan focusing, as you see with Gazyva on hematologic cancers and another antibody for the autoimmune. In the Rituxan franchise, the majority of the resources are driven by the hematologic cancers, and you could see there, the approval for Gazyva for chronic lymphocytic leukemia.
One of the questions that were commonly asked by our shareholders is, okay, you've got a strong revenue source here. How long do you anticipate you'll be paid given the fact that you're patents, the last of which expire in December of 2014, and the guidance we typically offer is -- these folks carry a fair amount of inventory product that has made the four patent expiration that sold thereafter, what we paid for. And that typically their inventory exceeds in around 20 months, 24 months thereabouts.
But even if they were to skinny down the inventory, down to about 12 months, recognizing it takes about seven to eight months to make an antibody through bulk and fill and finish. Even if they were to skinny their inventories down to about 12 months, we would expect to get paid through 2015 and into the first quarter of 2016 based upon the fact that we had our paid arrears as, one quarter an arrears as a royalty player.
But the more important question that many of our shareholders have asked is, we love the dividends, we love the yield, currently a little less than 7%. There are things you can do to continue that based on the current patent portfolio and their answer is no.
And so about two years ago, we had a conversation with our shareholders and said, we would -- the only way we can extend our ability to pay dividends is in fact to buy other income generating assets. And have been talked with 43 of them, large and small, biotech and generalist. They gave us the go-ahead to do that about two years ago. And we embarked on that effort.
There's a bunch of information here on the next couple of slides. They basically violate every rule of our PowerPoint presentation in terms of way too much details, but people have been asking for details and they are available if you would care to peruse them in greater depth on our website. And I'm not going to go through all of these deals in great detail. I'll call out a couple of them that I think are interesting.
So one of the things that we're finding is that medtech does not have the same access to capital markets as for example, biotech has enjoyed in particularly in the past year, 2013. So you'll see stories like, Direct Flow Medical, this is a catheter company where they deliver implantable heart valves to replace those that have been clogged with stenosis.
What we like about these folks are the fact that they're approved in Europe. They're currently generating assets and it's a repositionable replacement valve. So what that means is, unlike some of the other delivery systems, you put the catheter in, you deliver the valve, you put it in place and it better in place right the first time. These folks can actually adjust it for these patients.
A primary concern is regurgitation. Another way to think about it is leakage around the valve. The better placed it is, the tighter the fit, less regurgitation. Regurgitation clearly correlates with bad, mortality and morbidity outcomes. And if you look at the clinical data, these folks have been able to generate compared to some of the other available systems and those under development, you'll see they have a very nice efficacy and safety profile.
And this is a debt structure for those these folks. Moving down, Durata represents a nice story in terms of a therapeutic. They have a novel antibiotic, dalbavancin for those of you who have been following the company. You know they've generate some very positive data. They are not approved yet, but in fact, they have an expedited review process under a new system set up in the U.S. FDA comparable to something that they use for very impressive oncology drugs. And in fact, they're in this system right now. They filed, you can see again, it's a debt structure trounce depending upon how they proceed, the time of their approval. And that's a reasonably common feature in the deals that we've done.
Third is that Depomed. So this is a fairly sizeable royalty transaction that we conducted with them. These are -- it's a nice story here. They have a technology which is not core to them. They're focused on pain products. The technology as they've applied it has been predominantly in the field of type II diabetes and specifically with respect to an agent called metformin.
So with respect to directly flow in Durata, we're talking about cutting edge brand new technologies. Metformin has been around for a while for those of you who know it. It's basically an agent which sensitizes, excuse me, type II diabetes patients to their natural insulin production. It's over [ph] and available and via the Depomed technology. You can get the formulation down to once a day. And compliance is particularly important with respect to type II diabetes patients.
As part of this portfolio, we also bought rights to combination pills. So often times, unfortunately, these patients progress where they're taking another orally available agent which happens to be once a day. They're called BPP4 inhibitors. The leader in that class is Merck's Januvia.
And often, what they do is they take metformin which is an insulin sensitizer, BPP4 which could be simply described as enabling the body to perhaps produce a little bit more insulin by breaking down some of the agents that inhibit insulin production. And again, these are patients that are before or pre-requirements where they have to take insulin therapy directly. The advantage of those are, they're both once a day. They're reasonably in expensive. And we think given the fact that obesity, which correlates with type II diabetes is increasing. This will be main stays of therapy for some period of time.
The remainder of the products we bought in the portfolio involve combinations of these. So not we were taking two pills, but in fact, what they're doing is meld into a single therapy. An example of that would be Janumet, where they've taken their BPP4 inhibitor, they've taken a long-acting metformin and got approval for it as a combo pill. We've also bought rights for future royalties on combinations including some of the SGLTs' more recent advances in type II diabetes with a different mechanism of action for clearing excess sucrose from these patients.
There's some other deals here, I'm not going to spend too much time on them. They're predominantly debt structures here with Lensar or Avinger. Avinger is actually an example of a hybrid where we -- it's predominantly debt structure, but we've also taken a royalty interest as well. Wellstat Diagnostics and Avinger, both represent serial entrepreneurs. In the case of Avinger, that's Dr. John Simpson who has developed and commercialized through six catheter companies they sold previously for an aggregate of about $2 billion.
In the case of the Wellstats', these are folks that have developed diagnostic units, increasingly shrinking in size and increasingly improving in sensitivity and time for readout. This is their third generation and they've sold the previous two version in companies for a total of about $1.6 billion. And that we aligned a way toward success with respect to this one.
Some other deals, when we closed off with respect to Merus recently. It's one of the early deals we did on an overactive bladder and they just recently paid out and we're very happy with that transaction.
If I may, let me spend a few seconds here talking about some of the current revenue generating products. There's a bunch of information here. With respect to Avastin, perhaps the most important here is their intent to file for label expansion in colorectal cancer. You can see at the back in the growth stage in 2012, we weren't seeing a whole lot of growth there. They're now seeing growth predominantly driven by EU and rest of world sales 13%. And we look forward to some future label expanses particularly with respect to colorectal cancer.
Perhaps one of the oldest products in the portfolio in terms of revenue generating assets is Herceptin, one of the biggest -- one of the biggest, earliest to be approved in terms of therapeutic antibody. As you can see there, sales are continuing to grow. Now, it's more mid-single digits. This is largely fueled by the indications for gastric cancer.
To refresh your recollection, it was initially approved and most of the sales come from treatment of HER2 overexpressors in breast cancer. Interesting enough, as part of their lifecycle management, they've now moved to a subcutaneous formulation. And you can see there, it reduces the time from an infusion which currently runs at about 30 to 90 minutes, more typically by the way at 90 minute into the timeframe down to about 2 to 5 minutes.
Lucentis has probably been the most complicated in story, facing significant competition from Regeneron and Bayer's Eylea, particularly with respect to the age related macular degeneration market. And in that market, for a substantial period of time, Eylea had a dosing advantage.
So to refresh your recollection, these are injections into the eye. For the first couple of months, it's true for both products. You get a monthly injection. Thereafter, Eylea had an advantage in that their injection regiment was every other month, whereas Lucentis at time, it was every month. And obviously, patients and clinicians were preferring to only have to inject as few times in the eye as they could.
They have been able to generate growth in other markets. And those are retinal vein occlusion in diabetic macular edema. Diabetic macular edema is actually quite a substantial market. And that's what it counts for some of the growth that you're seeing in the United States. While in the past previous couple of quarters, it's been flat.
Novartis in fact has not faced substantial competition from Eylea yet in Europe. They're just starting to see it. And they've embarked upon a series of long-term contracts to try and lock in their market. But it has resulted in a slight decline in the last quarter for their sales.
Xolair is again also a fairly old product in the portfolio. Targets anti IgE, so that's a key component, a mediator of allergic responses. As you can see there, the initiation indications were severe allergic reactions, asthma et cetera. More recently, they've generate some very nice data in chronic idiopathic urticaria, also known as hives. So again, these are severe patients who don't respond to Benadryl and other sorts of antihistamines. But it's a nice addition potentially to the label, as they file for approval.
Tysabri's been a steady eddy in the portfolio. As you can see, sales have been reasonably flat. That's been true for the last couple of quarters. It's quite an effective agent for those who have relapsing, remitting multiple sclerosis and related conditions. The issue with it has always been one of safety, it's quite potent. And what you're seeing now is basically a steady state.
They have developed a screen to determine which patients might be susceptible to a rare but lethal brain infection, sometimes associated with long-term treatment with Tysabri. And what you're seeing here is a steady state of new patients coming in versus old patients who have been on it for therapy, who might be at risk coming off. And that's probably a pretty good forecast for the next couple of quarters with respect to that product.
With respect to Actemra, this is an anti IL6 antibody. Most people thought it would be third line therapy rheumatoid arthritis. It's moved up to second line therapy and in fact in some instances between the United States, we've seen it moving towards second line therapy. The sales aren't big, but you can see the growth rate, 33%. They've been seeing that kind of double digit growth in that area.
Now for several quarters, they have seen some label expansion into some smaller markets. But it's really rheumatoid arthritis to the extent that they can in fact get a subcutaneous label which was what they're moving to. And have shown a comparable efficacy to Humira, the leader in this because of its subcutaneous form of administration. That will continue to accelerate their growth.
Perjeta is an addition to the HER2 franchise in very simple terms, Herceptin blocks growth of cells, particularly cancer cells, aggressive growth in women with -- that are overexpressors, that in breast cancer Perjeta interferes with the dimerization, the activation of other receptors in that family specifically, one, three and four and is used in combination with Herceptin. You're seeing some very nice efficacy there for patients who have progressed on Herceptin treatment and you can see there, the recent approvals.
Perhaps one of the most interesting in the portfolio and perhaps the future of antibodies is represented by Kadcyla, an antibody drug conjugate. So the hypothesis behind these kinds of therapies are, rather than dosing patients for example, with Herceptin in the chemotherapeutic, separately could you link the chemotherapeutic to the antibody and by doing so release the chemotherapeutic only at -- to a predominantly at the site of the tumor reducing the systemic exposure of the chemotherapeutic.
And the hypothesis of such a mechanism might increase the cancer cell killing ability by localizing delivery of the chemotherapeutic and potentially even reduce the side effect profile by reducing the systemic exposure.
Happily admit both those product profiles, where you see a nice step up in efficacy as well as a reduction in the more serious side effects and you can see they continue to expand the label, this is the one that I mentioned, was just approved yesterday in the European Union, having received a positive opinion from the Committee on Medicinal Products a little over six weeks ago.
Gazyva is the most recent U.S approval to the portfolio, as I mentioned earlier this is a follow on humanized antibody to Rituxan focused on hematologic cancers. The first approval is in chronic lymphocytic leukemia.
You can see that they did two stages of trials there in Phase 3. The first was a head-to-head in such patients against chlorambucil. It was quite positive data there and I think that was expected by most of the clinical community.
Perhaps more interesting is the data that they reported a little while ago and just released the result about a week and a half ago at ASH. And that's when they did a head-to-head against Rituxan and you can see there at the very bottom of the slide a nice improving in PFS jumping from 10.9 to 23 months. For those of you who are familiar with cancer, that's obviously how often times, improvements are measured in three months, four months to see that kind of jump on top of Rituxan is actually quite impressive.
Early on I talked about our portfolio of products and said that among the revenue generating ones that the key date with respect to when we would see payments is the end of the patents in December 2014. There is one exception to that. This is not an approved product, it's an antibody being developed by Eli Lilly for the treatment of mild patients with Alzheimer's disease when, what it does is it binds to beta amyloid.
As you're all well aware of, the current hypothesis is, is that the accumulation of beta amyloid on the brain forms plaques which when they accumulate, secrete toxins resulting in neuronal death which eventually manifests itself into Alzheimer's disease.
Initially, about a year or so ago, they did a huge -- several huge Phase 3 trials international in mild and moderate patients with Alzheimer's disease and in fact it did not meet the composite endpoints of functional and competitive improvements in those patients.
In a pre-specified secondary group focusing only on mild patients, they did see some improvement in the mild patients only. They have recaps to Phase 3, they have initiated it and focused solely on the mild patients and if you -- among clinicians focused in Alzheimer's disease, the current hypothesis is that in fact we need to treat these patients earlier. So bear in mind what these therapies do is they bind beta amyloid trying to prevent further disease, they don't, in fact, actually try and -- or capable of restoring function.
Recently, the NIH has screened a series of therapeutics, where in fact they would -- conducting a trial in patients who have buildup of beta amyloid plaque but they are not clinically symptomatic at this point. When they screened on a large number of agent 16, Solanezumab is the one they decided to take forward in that trial. The Lilly trial is anticipated to read out data at some point in mid-2016.
I'm not going to spend a lot of time in our financials. As I said at the outset, you can see we're quite profitable. We did have a fairly sizeable cash position. We are -- it does -- we do get paid royalties on a quarterly basis, typically in the second month of each quarter. So that would be towards the end of this month, so it replenishes our cash position. It is down from what you see there because of some of the deals where we spent funds on it. But the nice thing about it is it replenishes quarterly.
We have assumed some debt. We have two convertible notes there, you can see them, they're both in the money. At this point, they're due in 2015. It's reasonably inexpensive money and we're looking at those in whether or not we should take some actions with respect to one or either of those. More recently, we did take on some debts short-term one year. Pete negotiated at very attractive rates and there's a nice arbitrage there between the money we're borrowing versus where we think we can put it to work in transactions.
There's a lot of information on this slide. We have had done -- and some of you who have been following the story of dispute with Genentech and Roche since August of 2010. At that point Genentech sent us a fax which in essence said, "We Genentech are writing to you at the behest of Roche and Novartis because they don't think they owe you royalties on sales in Europe."
Now in fact, since we received that fax well over three years ago, they have continued to pay all of those payments due on U.S. and in European sales. Shortly, thereafter we received that fax we replied to them that there was a 2003 settlement agreement between Genentech and Roche. So the settlement agreement's a contract which stem from a previous dispute we had with them and it was our view that in fact that settlement agreement precluded them from challenging our patent or assisting anybody in challenging our patents as if that fax constituted a challenge. Eventually, we round up in Nevada State Court and to be clear, the issue in Nevada State Court is a contractual one which is, does that fax constitute a challenge?
There's some additional information here. We also have done an audit on them with the assistance of KPMG and we have to dispute with them as to whether or not they have underpaid. About two -- well a little over two weeks ago, we -- as part of our earnings call, made a public disclosure that in fact we are in settlement conversations with those, anticipating that someone might look up some of the times for juries and achievement for trials and see that in fact some of the proceedings had been suspended or delayed. And the reason for that is we are in conversations, to be clear. We can't predict the outcome of those, we can't disclose the substance of the conversations. If they're fruitful, that's great, if they're not, we're prepared to continue litigating to protect our shareholders' interests.
Two years ago, when we went out -- reached out to our shareholders and said, if you want us to be able to continue to pay dividends, we have to start investing other income generating assets. We set a time frame of two years for that and we said, at the end of that time, we would make a decision as to whether or not we were going to go down the left fork or the right fork depicted on this slide. This is the slide. For those of you've seen our presentations, it's not new. It's been there for a while. And one would involve wrapping up the company probably in 2016 thereabouts and simply shutting it down and pushing out cash as quickly as we could to the shareholders.
The other which is dependent upon our ability to find a sizeable number of deals, deals with good returns and quality assets and quality management teams would dictate whether or not that would support our ability to continue to pay dividends. We said we'd make this decision at the end of '13, early '14, we were on track and you'll hear from us in the not too distant a future on that.
To summarize, we think PDL represents a unique story in the sense that we don't do research or development. We try to focus on commercial stage assets. It's our view of, you want to buy research and development in the biotech company you can go buy them directly. You don't need us to do that. What we try to focus on are a strip of commercial stage or near commercial stage assets where we think they have a distinctive product profiles that would support our ability to continue to pay payments -- to pay dividends, excuse me.
You can see that we've seen a nice growth in the portfolio, overall. It is a basket of products. We've got some nice new products, some label expansions which we hope will continue to support that growth in years beyond. We don't spend anything in R&D, appealing for institutional investors, we have substantial gale of liquidity in terms of our share turnover, and perhaps most importantly we have a demonstrated record of returning funds to shareholders.
Thank you very much for your attention. I think there's a few minutes left and I'm happy to take questions if there are any. I did that good job? There's no questions? Thank you all very much.
[No Q&A session for this event]
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