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Executives

Danielle Bertrand – IR, WeissComm Partners

John McLaughlin – President and CEO

Cris Larson – VP and CFO

Analysts

Phil Nadeau – Cowen and Company

Charles Duncan – JMP Securities

Christian Gordy – JP Morgan

Jason Zhang – BMO Capital Markets

Peter Schoenfeld – PSAM LLP

PDL BioPharma, Inc. (PDLI) Q1 2010 Earnings Call Transcript April 29, 2010 4:30 PM ET

Operator

Good afternoon, and welcome to PDL BioPharma's first quarter 2010 earnings conference call. Today's call is being recorded. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) For opening remarks and introductions, I would now like to turn the call over to Ms. Danielle Bertrand. Please proceed.

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 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. In the first quarter of 2010, we continued to optimize stockholder value by maximizing returns from our Queen et al. patent estate. Our first quarter revenue from sales of Avastin, Herceptin, Lucentis Tysabri and Actemra grew by more than 35% over the first quarter of 2009.

We anticipate strong royalty revenue growth from these approved and licensed products throughout the year as well as additional growth through the approval of new indications for these existing products and the FDA's approval of Actemra for the treatment of rheumatoid arthritis in the United States earlier this year.

On April 1, we paid a special dividend of $0.50 per share and we will pay a second special dividend in the same amount on October 1. We are also continuing our rigorous management of the Queen et al. patent portfolio and are seeking to negotiate new licenses for late-stage development products using our technology.

We are in the process of completing an audit of each of our licensees to assure that all moneys due to PDL are being paid. This program will also give us further insight into sales and manufacturing practices of our licensees so as to better manage the receipt of royalties as our patents reach their termination.

Finally, we continue to manage the patent portfolio to assure that our intellectual property is being respected. While disputes or litigation are never a desired outcome, we continue to vigorously defend our IP when the financial interests warrant such actions on behalf of our shareholders.

On our year-end financial results call in March, we discussed an additional alternative being explored to increase return for our shareholders, namely, – excuse me – purchasing royalty streams on commercial stage products. We are diligently evaluating royalty streams owned by universities and ventures and other pharmaceutical companies that are considering selling their royalty rights in order to raise money.

We continue to evaluate simultaneously the repurchase of our convertible notes and/or a share repurchase program. Chris will talk more about this in a minute. As mentioned earlier, we are also seeking new licensees through our existing patents. As you can see, we are evaluating diverse opportunities to improve performance and growth in 2010 and we will continue to report our progress to you.

I will now turn the call over to Cris Larson, our CFO, to discuss our first-quarter financial results.

Cris Larson

Thank you, John. Total revenue in the first quarter of 2010 was $62.1 million compared with $62.6 million for the same period of 2009. Of note, first-quarter 2010 revenue does not include royalties on sales of Synagis due to our ongoing legal dispute with MedImmune. Excluding first-quarter 2009 MedImmune royalties, first-quarter 2010 revenue grew by more than 35% over the first quarter of 2009.

The growth was primarily driven by increased fourth quarter 2009 sales by our licensees of Avastin, Herceptin, Lucentis and Tysabri. Total general and administrative expenses for the first quarter of 2010 were $9.4 million compared with 47 – $4.7 million for the same period of 2009.

The increase was primarily driven by increased legal expense, which increased from $1.6 million in 2009 to $6.4 million in 2010. Other significant expense items in the first quarter of 2010 were compensation and benefits of $1 million and professional service fees of $1.1 million.

Non-operating expense, consisting primarily of interest expense, increased from $3.2 million in the first quarter of 2009 to $12.4 million in the first quarter of 2010. The increase resulted from the issuance of a $300 million securitization debt in the first – third – excuse me – the fourth quarter of 2009. First-quarter 2010 interest expense on these notes was $9.5 million, of which $1.9 million was attributable to amortization of debt issuance costs.

Net income for the first quarter of 2010 was $26 million or $0.15 per diluted share, compared with net income of $37.5 million or $0.23 per diluted share for the same period in 2009. Impacting earnings per share was an increase in fully-diluted shares, which increased from 172.6 million shares in the first quarter of 2009 to 184.3 million shares in the first quarter of 2010. This increase occurred despite a $72 million repurchase of convertible notes in 2009.

Because we are required to change the conversion ratios on the convertible notes when we pay dividends, more shares must be issued, which dilutes net income. For example, as a result of the $0.50 dividend that we paid on April 1, 2010, the conversion price to the convertible notes due in August 2023 declined $0.43 per share to $5.64 per share and the conversion price for the convertible notes due February 2012 declined $0.59 per share to $7.79 per share.

At March 31, 2009, the conversion prices were $8.08 per share and $11.22 per share for the same two notes, respectively. We recently commenced a program to repurchase a portion of our convertible notes due in 2023. Since March 31, 2010, we have repurchased $77 million of these notes.

This repurchase represents a reduction in our fully-diluted shares outstanding of approximately 14 million shares. Net cash provided by operating activities for the first quarter of 2010 was $26.9 million compared with $27.7 million for the first quarter of 2009. As of March 31, 2010, we had cash and cash equivalents of $319.7 million compared with $303.2 million at December 31 of 2009.

Turning to our 2010 dividend policy, we previously announced that we will pay two special dividends to stockholders in 2010, each of which will be $0.50 per share. We paid the first special dividend, totaling $59.8 million on April 1, 2010 to all stockholders of record on March 15, 2010. The second special dividend will be paid on October 1 of this year to all stockholders of record on September 15 of this year. I should also mention that PDL does not have a regular dividend policy.

Following our policy of providing revenue guidance for each quarter in the third month of that quarter, we will be providing revenue guidance for the second quarter of 2010 at the beginning of June. I will now turn the call back to John.

John McLaughlin

Thanks, Cris. With that, we will turn the call over to the operator and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Phil Nadeau with Cowen and Company. Please proceed.

Phil Nadeau – Cowen and Company

Good afternoon. Thanks for taking my question. My first question is on the Synagis revenue. In the past, even though Synagis wasn't in your guidance, it did seem like you were recognizing revenue from AstraZeneca. Has that changed in the last quarter? Did you not actually get any revenue from AstraZeneca? Is that why you are at $62 million?

John McLaughlin

That is correct, Phil. So in December of 2009, we terminated the license with MedImmune/AstraZeneca and the basis for that was there were issues in terms of payment and also compliance with some of the audit provisions. And as a result, we expanded the litigation, filed counterclaims, declaring them in breach, canceling the license, seeking damages for patent infringement, breach of contract, et cetera. So they are no longer paying us money in 2010.

Phil Nadeau – Cowen and Company

Okay. And should you win that lawsuit, are you now eligible to receive treble damages or is there a question of willful infringement here?

John McLaughlin

As part of our counterclaims, because the license is no longer in place and they are selling product without the benefit of a license, we are seeking treble damages from the court for patent infringement.

Phil Nadeau – Cowen and Company

Okay. And then just one housekeeping item, to make sure I heard all the numbers correct, for Cris. Cris, it sounds like following the dividend on April 1 and your repurchase of convertible shares, is my math correct that you currently have about $180 million in cash on a pro forma basis?

Cris Larson

That's correct.

Phil Nadeau – Cowen and Company

Okay, good. Thanks for taking my questions.

John McLaughlin

Thanks, Phil.

Operator

Our next question comes from the line of Charles Duncan with JMP Securities. Please proceed

Charles Duncan – JMP Securities

Hi, guys. Thanks for taking questions. I had a question on Synagis. Could you give us some sense on the process and the timeline and when we could see this come to resolution?

John McLaughlin

Sure, Charles. So we are still in discovery. That will go on for a period of time. The court has set a new trial date for January of 2011 and there will probably be a couple week trial in and around that trial date. It is probably kind of a two-week trial, something like that in and around that time.

Charles Duncan – JMP Securities

And then are you seeking some sort of a declaratory judgment or could this stretch out for a couple of years? What are you thinking, John?

John McLaughlin

I think what they've actually sought is, just to step back for a second, Charles – so this is actually MedImmune/AstraZeneca is seeking declaratory judgments on the patents, whether or not they infringe or the patents are valid as well as other questions, such as whether or not they are entitled to a lower royalty rate because of their – a clause in their agreement that gives them most favored licensee status. As I mentioned earlier with respect to Phil's question, we subsequently declared them in breach for various reasons. It is likely that this will be a dispositive trial that they'll get to all the issues. There is – the scope of the litigation has clearly broadened some but it is likely they will reach all the issues. Whether there is appeal for that or not Charles, don't know. There certainly could be – so it could go on for a little while after that, yes.

Charles Duncan – JMP Securities

Okay. And what are you spending? What do you anticipate the cost to be on kind of an annual basis and could you perhaps provide some color on the increase in the legal expense in the last year?

John McLaughlin

So the increase in legal expense in the last year is directly related to the expansion of the case, in terms of some of the counterclaims that we filed declaring them in breach, seeking additional damages, et cetera. As for what the number looks like, let me turn it back to Cris and there may be some other things as well that results, that are causing that increase in numbers, let her identify those for you.

Cris Larson

Sure. In adjacent to the MedImmune litigation, as you may recall, last year we had two interference proceedings declared against us by the U.S. Patent and Trade and those have also contributed to an increase. The first one was declared in February of last year and the last one in November of last year.

Charles Duncan – JMP Securities

Okay. And then perhaps moving to the future, John, I was intrigued with some of your suggestions that you are talking with universities and then pharma companies about bringing in some of their royalty bearing or monetizing some of their royalties. What is your sense on the probability of you being able to do that? Don't you have some competitors in that field or is that something that you think you can do for perhaps a lower cost of capital than in the past?

John McLaughlin

Both your points are correct. I mean, clearly, there are others looking at these royalty streams besides us. We do think we have some competitive advantages; you alluded to one, cost of capital. The other thing I would point out is that some of the royalty streams, if in fact they go to monetization, they are really quite sizable and frankly, probably would require a consortium of royalty buyers to sort of participate in a monetization transaction.

So we think there is some possibilities. At this point, Charles, it is just a little too early to be able to handicap in terms of probabilities set. We have seen both the transactions; we are clearly in the mix. We are looking carefully. But at the same time, we are going to do a smart deal, a good deal for the shareholders. They have a nice return embedded in their share. So we are looking for something where we can improve that return.

Charles Duncan – JMP Securities

So you don't have any certain goals or your comp's not tied to getting anything done this year?

John McLaughlin

What we've got to do is to increase the return for our shareholders as best we can. So, for example, one of the things is we saw some opportunities to buy up some of the convertible notes, where we thought that could enhance shareholder return. And Cris went out and bought some of the convertible notes. So frankly, we will do whatever we can to sort of see what we could do to improve return to the shareholders.

Charles Duncan – JMP Securities

Okay. That makes sense and thanks for the added color. Good luck on the Synagis pattern [ph].

John McLaughlin

Thank you, Charles.

Operator

Our next question comes from the line of Geoffrey Meacham with JP Morgan.

Christian Gordy – JP Morgan

This is Christian Gordy on behalf of Geoff Meacham. I was wanting to ask going forward, what type or kind of royalty assets would you be interested to acquire in the future?

John McLaughlin

It is a good question. So what we – we are focusing on predominately, we really want to focus on approved products. We have a bias toward biologicals and we would like to see products that are well-positioned in their class. If they are not first in the class that they have highly defined competitive advantages over others in the marketplace in the same therapeutic category.

John McLaughlin

Thank you.

Christian Gordy – JP Morgan

Okay, got it. Thanks a lot.

Operator

(Operator Instructions) Our next question comes from the line of Jason Zhang with BMO Capital Markets. Please proceed.

Jason Zhang – BMO Capital Markets

Yes. Hi. Can you hear me, Cris?

Cris Larson

Yeah, Jason. Thank you.

Jason Zhang – BMO Capital Markets

Just a housekeeping question. Can you break out the Genentech materials that are made and sold ex-U.S. versus those in the U.S.? Just to get a sense of what type of royalty you are getting during this quarter.

Cris Larson

You want the percentages? Is that what you're asking? I'm sorry, it wasn't quite clear. So for example, in 2010 in the first quarter, 81% of the sales were U.S. manufactured products, and 19% of the sales were ex-U.S. manufactured products, as compared to last year in the first quarter, 93% were manufactured in the United States and only 7% were manufactured outside the United States. So that contributed to the increase in the royalties that we received on Xolair, Herceptin and for the first time, we saw ex-US manufactured Avastin.

Jason Zhang – BMO Capital Markets

Okay. Okay, good. Thanks.

John McLaughlin

Thanks, Jason.

Operator

Our next question comes from the line of Peter Schoenfeld with PSAM LLP.

Peter Schoenfeld – PSAM LLP

Hi, John. How are you?

John McLaughlin

Good, Peter. How are you?

Peter Schoenfeld – PSAM LLP

Great. Just wanted to go through the sort of shift that we are seeing in your strategy with respect to looking at royalties. It looked as if the company was heading down a different path up to this point in time, predominantly looking at potential sale of the company or what looked like a wind down. Could you give us a little bit more clarity as to what you view your hurdle rates to be, what sort of rate of return requirements you have and what sort of timeframe are you looking at? Are you looking at royalty streams that sort of coincide with what would be the end of the royalty streams at PDL right now?

John McLaughlin

So a number of people have asked us about hurdle rates, things like that and what we've said is – and the only guidance we are prepared to offer is that we would look at something that would increase return for our shareholders beyond where we think their return is today. So it would have to be additive in improvements. Certainly, most of the royalty terms that we are seeing so far, frankly, are roughly coterminous with the duration of the Queen patents, that is not to say we won't look at others, but I would say most of the ones we are seeing at this point are roughly coterminous with the duration of payment on the Queen patents.

Peter Schoenfeld – PSAM LLP

Okay. And I guess, primary in your list of preferences prior to recently was accelerating the issuance of the cash flow as much as you could and also pursuing a sale of the company. Are those – can you still rate that as your priority at this point?

John McLaughlin

Absolutely, Peter. So we've said that we continue – we have a list of options. We listed some of them today in terms of share repurchases, convert repurchases, conversations with potential acquirers. We are pursuing all those simultaneously. For example, we saw an opportunity to pick up some of the converts in the last month or so. We thought that was advantageous to do on behalf of our shareholders, and we did it. So it is – again, it is a menu, whichever one allows us to sort of benefit our shareholders.

Peter Schoenfeld – PSAM LLP

Thank you.

Operator

This concludes the Q&A portion of the call. I would now like to turn the call back over to John McLaughlin for closing remarks.

John McLaughlin

Thank you all for joining us on the call this afternoon, and we look forward to seeing many of you at upcoming conferences. Have a good evening, all. Thanks.

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Source: PDL BioPharma, Inc. Q1 2010 Earnings Call Transcript
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