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PDL BioPharma, Inc. (NASDAQ:PDLI)

Q4 2009 Earnings Call Transcript

March 2, 2010 4:30 pm ET

Executives

Danielle Bertrand – IR, WeissComm Partners

John McLaughlin – President and CEO

Cris Larson – VP and CFO

Analysts

Joel Sendek – Lazard Capital Markets

Phil Nadeau – Cowen & Company

Thomas Tan [ph] – Capital [ph]

Operator

Good afternoon and welcome to the PDL Biopharma fourth quarter and year-end 2009 earnings 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 proceed, ma'am.

Danielle Bertrand

Thank you, all 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 investor 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 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'll 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.

In 2009, we focused on using our assets and the associated royalty revenues to maximize financial return to our stockholders. Over the course of last year, we paid three special dividends totaling $2.67 per share. This includes our most-recent cash dividend of $1.67 per share paid in December of 2009, using a portion of the proceeds from the $300 million securitization transaction completed in November of last year. This monetization enabled to pull some of our future income forward in time and distribute a substantial portion of the net proceeds from the securitization note to our shareholders. As you may recall, a portion of our future Genentech royalties are being used to pay off the principal and the interest of the note, we anticipate that the note will be repaid in December 2012.

I would also like to take a minute to discuss the more rigorous management of the Queen et al patent portfolio, which we began in 2009. We're seeking to negotiate new licenses for late-stage development products using our technology. At the end of last year, we successfully executed a new license with Eli Lilly for teplizumab, an exciting product being investigated in pivotal trials for recent onset type 1 diabetes. We also commenced an audit of each of our licensees to ensure that all monies due to PDL are being paid. This program will give us further insight into the sales and the manufacturing prices – practices of our licensees so as to better manage the receipt of royalties as our patents reach their termination.

Finally, we managed the patent portfolio to assure that our intellectual properties are being respected. While disputes or litigation are never a desired outcome, we have started to vigorously defend IP with the financial interest warranting such actions on behalf of our shareholders, such as in the MedImmune litigation.

Moving into 2010 our priority remains the same, to maximize shareholder value. We will continue to maximize returns from our core Queen et al patent estate and we have already announced that we will pay two special dividends in 2010. One question that's commonly asked of us is how long PDL will receive royalties. Today, we receive royalties from licenses to the Queen et al patents. Those patents generally expire in mid-2013 through the end of 2014. We receive royalties one quarter in arrears. In other words, royalties that are paid to us in first quarter of 2010 are for sales that occurred in the fourth quarter of 2009.

It is also important to note that we are paid royalties on amyloid products made or sold prior to patent expiry. If a product is made while the Queen et al patents are extends, say in November of 2014, then held in inventory for 18 months prior to being sold, we would get paid on those sales in 2016. Thus, with the exception of step-down know-how royalties in very few of our agreements, we believe that the royalty stream will end in 2015 or 2016.

As such we have been exploring whether we can enhance shareholder return by purchasing new royalty streams on commercial-stage products from universities, adventures and other pharmaceutical companies interested in selling their royalty rights in an effort to raise money to support current operations. We look forward to reporting our progress on this effort to you in the future.

I'll now turn the call over to Cris Larson to discuss our fourth-quarter and full-year financial results as well as the first quarter revenue guidance.

Cris Larson

Thank you, John. Total revenues from continuing operations in 2009 were $318.2 million, an 8% increase from $294.2 million in 2008. For the fourth quarter of 2009 total revenues were $58.3 million as compared with $68.7 million for the same period of 2008. Included in 2008 fourth-quarter revenues was the first of two $12.5 million settlement installments from the Alexion Pharmaceuticals. The second installment was received and recognized in the second quarter of 2009.

When compared with the fourth quarter of 2008, underlying product sales of Avastin, Lucentis and Tysabri increased by more than 20% each. Royalties from sales of Herceptin decreased 8% despite an 8% increase in underlying Herceptin sales. This was due to a change in the sales mix of ex-US-based manufactured and sold Herceptin, for which PDL receives a flat 3% royalty rate and the US-based manufactured or sold Herceptin, for which the fourth quarter effective rate received from Genentech was 1%. Changes in foreign currency conversion rates did not have a significant impact in the fourth quarter of 2009 when compared to the same period in 2008.

Total general and administrative expenses from continuing operations in 2009 were $21.1 million as compared with $51.5 million in 2008. For the fourth quarter of 2009, general and administrative expenses were $5.5 million compared with $15.9 million for the same period of 2008. The decrease was primarily driven by the company's reduced cost structure.

Significant expense items in 2009 were legal fees of $10.9 million, compensation and benefits expense of $3.4 million, professional service fees of $2.4 million and non-cash compensation and depreciation costs of $1.8 million. Net income in 2009 was $189.7 million, or $1.07 per diluted share compared with net income of $68.4 million in 2008, or $0.47 per diluted share.

Net income for the fourth quarter of 2009 was $28.6 million or $0.17 per diluted share compared with net income of $68.4 million in 2008, or $0.47 per diluted share. Net income for the fourth quarter of 2009 was $28.6 million, or $0.17 per diluted share, compared with net income of $40.6 million, or $0.26 per diluted share for the same period in 2008. Net cash provided by operating activities was $187 million in 2009 compared with $80.1 million in 2008. Also, in 2009, while we recognized $90.6 million in income tax expense, the actual cash outlay for taxes was $29.3 million, because we were able to use $173.7 million in federal net operating loss carry forwards and $16.4 million in federal income tax credits.

While PDL has $46.5 million in federal NOL carry forwards remaining at the end of 2009, we are limited to using only $1.8 million per year in determining taxes to be paid for each year going forward. Also, at the end of 2009, we had $22.6 million in federal income tax credits, of which we anticipate $19.8 million will be used in 2010. As of December 31, 2009 PDL had cash, cash equivalents, short-term investments of $303.2 million as compared with $147.5 million at December 31, 2008.

I'd like to now spend a minute discussing our 2010 dividend policy. As we have announced, we will pay two special dividends to stockholders in 2010, each of which will be $0.50 per share. The first special dividend will be paid on April 1, 2010 to all stockholders who own shares of PDL on March 15, 2010. The second special dividend will be paid on October 1, 2010 to all stockholders who own shares of PDL on September 15th. I should also mention that PDL does not have a regular dividend policy.

Turning to guidance, as we did in 2009 we will continue to provide revenue guidance on a quarterly basis in 2010. Guidance for each quarter will be given at the beginning of the third month of that quarter. Our revenue guidance for the first quarter of 2010 is $62 million as compared with actual results of $62.6 million for the same period in 2009. Included in first-quarter 2009 results was $17.1 million from MedImmune for sales of Synagis.

Our first-quarter 2010 guidance does not include royalties for Synagis due to ongoing legal disputes with MedImmune. Excluding MedImmune, anticipated first-quarter 2010 revenue grew by more than 35% over the first quarter of 2009. The growth is primarily driven by increased fourth-quarter 2009 sales of Avastin, Herceptin, Lucentis, Tysabri and Actemra, for which we have received royalties in the first quarter of 2010.

Reported sales of Avastin and Herceptin increased 18% and 11% respectively when compared to the same period in the prior year. Also contributing to increased Avastin and Herceptin royalties are product sales that are ex-US manufactured and sold for which we receive a flat 3% royalty, as compared to the tiered royalty that we receive from Genentech for product sales that are either manufactured or sold in the United States. As a percent of total, Herceptin sales ex-US manufactured and sold Herceptin increased to 43% from 16% in the prior year. Ex-US manufactured and sold Avastin sales represented 5% of total Avastin sales. This is the first quarter in which we have received royalties on sales of ex-US manufactured and sold Avastin.

Reported sales of Lucentis increased 64% when compared to the same period in the prior year. Ex-US sales of Lucentis, which is now approved in more than 80 countries worldwide, increased 88% when compared to the same period in 2009. This represents 57% of total global sales.

Reported sales of Tysabri increased 32%, when compared to the same period in the prior year. Ex-US sales of Tysabri increased 45%, when compared to the same period in the prior year and represented 53% of total global sales. Elan recently reported a 30% increase in the worldwide Tysabri patient population at the end of 2009 as compared with 2008.

I'll turn the call back to John.

John McLaughlin

Cris, thanks very much. That concludes our prepared remarks. Operator, can we open up the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joel Sendek with Lazard Capital Markets. Please proceed, sir.

Joel Sendek – Lazard Capital Markets

Hi. Thanks. I appreciate the detail on the percentage of Herceptin. It's going to have the higher royalty. I'm wondering if there are any other drugs, like Xolair or Lucentis, for example, that you might get the – that are made and sold ex-US that you might get a higher royalty on this year?

Cris Larson

Xolair has – pretty much both in 2009 and first quarter 2010 is about – the ex-US sales represent ex-US manufactured, as well, so we won't see the –

Joel Sendek – Lazard Capital Markets

Okay.

Cris Larson

See any uptick in Xolair, but we were very pleased to see what the Avastin ex-US.

John McLaughlin

Joel, Avastin could be a possibility. As you probably have seen, there are two manufacturing plants that they're trying to qualify in Singapore. One of them is an E. coli plant capable of manufacturing antibody fracs, which, of course, is what Lucentis is and apparently there's – Roche has given some guidance that they would make some Lucentis there. What we don't know is what the status of qualifying that plant and when it would begin to produce commercial product for ex-US sales?

Joel Sendek – Lazard Capital Markets

And back on Herceptin and Avastin, I think you gave the numbers for 2009, whether it could be – could we assume the same numbers for 2010?

Cris Larson

What I was representing were the fourth-quarter 2009 sales versus fourth quarter 2008, for which we received our royalties in the first quarter of 2009 and first quarter 2010.

Joel Sendek – Lazard Capital Markets

Okay. So there's no – sorry, I'm in an airport. There's no predictive value to that for 2010?

Cris Larson

So it was 16% for Herceptin in the first quarter of 2009 and 43% in the first quarter of 2010. Does that answer the question?

Joel Sendek – Lazard Capital Markets

Yes. Okay. All right. Well, I'm just trying to model it out for the future, that's all. But that's fine. I can just use the guidance you gave for royalty revenue. Thanks.

Cris Larson

Sure.

John McLaughlin

Thanks, Joel.

Operator

Your next question comes from the line of Phil Nadeau with Cowen & Company. Please proceed.

Phil Nadeau – Cowen & Company

Good afternoon. Thanks for taking my questions. John, my first one's for you and it's on your announcement that you're now looking to purchase royalty streams. It seems like when PDL was kind of separated from Facet that the purview of the company was to distribute most of the cash that's received from the current royalties to investors. So I'm just curious, kind of what led to this change where – may be looking to go out and buy other assets. What was that? What was the thought process there?

John McLaughlin

Sure. It's a good question. So I think it was really a function of our exercise. Last year we went through a process of trying to monetize the assets and we realized some of the discounts that the parties were seeking. Also as we went around and talked to various individuals particularly people who manage endowments for universities. We realized that there was a fair amount of interests on the parts of the universities to monetize some of those royalty streams. To be clear, we would only do this if in fact, we could increase shareholder return. We would also continue to pay dividends in coming years, much as we pay dividends now.

The one question that we have been unable to answer is – we addressed it at the beginning – is okay, but your royalties run out at some point right, 2015, 2016. And the question is if there's opportunity here to secure those future royalty streams on commercial stage products, predominantly biologicals at attractive rates, continue to pay dividends, increase the return for our shareholders and pay dividends longer. That's a pretty good deal for everybody.

Phil Nadeau – Cowen & Company

And do you have a sense or – I'm sure you have a sense. But could you give us a sense of what type of IRR you'd be looking for in a transaction in order to, as you say increase shareholder returns?

John McLaughlin

Not at this point. We're – as you can tell, given the fact that we're just talking about this. We're in the early stages of the game and as we get a little further down then I hope we can probably give you some more guidance but it's too early at this point.

Phil Nadeau – Cowen & Company

Okay. Then Cris, one clarifying question for you, just to make sure I have this straight. The 43% of Herceptin that was made and sold outside the US and the 5% of Avastin that was made and sold outside of the US, those are both figures referring to the Q4 sales of those products, not the Q3, is that correct?

Cris Larson

Correct. The Q4 sales reported in our first quarter royalty reports from Genentech.

Phil Nadeau – Cowen & Company

Okay. Great. Thanks for answering my questions.

Operator

(Operator Instructions) Your next question comes from the line of Thomas Tan with Capital [ph]. Please proceed, sir.

Thomas Tan – Capital

Thanks for taking my question. I have a question about dividend policy. You mentioned in your early comments that you don't – I mean in your press release that you don't pay a regular dividend. But now you say that you plan to pay dividends in the next years to come. So my question is, how do you set the dividends and what do you expect for 2011?

John McLaughlin

So it's a good question. So to be clear, what we said is we do intend to pay dividends. If we were to establish a regular dividend policy it would be a fixed amount of dividends each year, either an amount or a specified formula and we're try – we're not doing that, which is the answer to your question. So that's why for example, we haven't given guidance to what the 2011 dividends would be because we are trying to understand what the revenue streams will look like. There may be some new licenses we have.

There's a significant number of applications for approvals, some of them are second indications. There may be some new products coming for approval and it's just a little too hard for to us predict at this point what that would be with precision. So what we've done is and what we'll probably continue to do for a while is to declare special dividends. At the beginning of each year, we'll tell give you some guidance to say here's what the current year is going to look like. That we intend to pay dividends in future years, but we won't specify the amount.

Thomas Tan – Capital

And do you look mostly at cash flow or revenue? What you look the most?

John McLaughlin

Yeah. So it's as you suggest, its revenue and cash flow. We're a reasonably small operation as you can tell from, Cris, report on the numbers. Our expense line's not a big number. Obviously, we'd like to make it smaller but it's not a big number. It's more the revenue line and it's what can we do with that. We do have some converts outstanding. Periodically we've been buying back some of the converts. We've talked about perhaps we might buy some royalty streams if they were at attractive rates. But all of that said, in 2010 we're going to pay 1 buck in dividends in two increments of $0.50.

Thomas Tan – Capital

Thank you very much and congrats to the great quarter.

John McLaughlin

Thank you.

Operator

With no far – that concludes the Q&A portion of this call. I would now like to turn the call over to Mr. John McLaughlin for closing remarks. You may proceed, sir.

John McLaughlin

Thank you all for joining us on this call this afternoon. We look forward to seeing you – many of you at upcoming conferences, including the account conference next week and have a good evening all. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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