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PDL BioPharma, Inc. (NASDAQ:PDLI)

Q4 2013 Earnings Conference Call

March 03, 2014 04:30 PM ET

Executives

Jennifer Williams - IR

John McLaughlin - President and CEO

Peter Garcia - CFO

Analyst

Adnan Butt - RBC Capital

Operator

Good afternoon ladies and gentlemen and thank you for standing by. And welcome to the PDL BioPharma’s Fourth Quarter and Year-End 2013 Earnings Conference Call. Today’s call is being recorded.

For opening remarks and introductions, I'd now like to turn the call over to Jennifer Williams. Ma’am, the floor is yours.

Jennifer Williams

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 of 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.

John McLaughlin

Thank you, Jennifer, and good afternoon, everyone. With me today is Pete Garcia, our Chief Financial Officer, who will provide an overview of our note transactions and financial results after I run through a summary of recent events.

As you'll see on slide three, we were pleased to announce last month that our Board of Directors made the strategic decision for PDL to continue operations. We have previously announced that we’d make a decision on whether to continue operations or wind up the company in late 2013 or early 2014, given the expiration of our Queen et al. patents, the last of which expires at the end of this year. Due to the successes we’ve had to-date in acquiring multiple income generating assets, the decision was made to continue our strategy of pursuing additional assets in order to extend our ability to pay dividends to our shareholders. We have deployed approximately $550 million to-date and believe that the returns from these and additional future investments will allow us to continue to return tangible value to our shareholders.

Along those lines as you can see on slide four, we’ve announced that we will pay quarterly dividends again this year for our sixth consecutive year. Returning value to our shareholders in this way is a top priority for us. Since this management team assumed stewardship of PDL in 2009 it has paid $5.47 per share in dividends. We are proud to be the highest dividend yielding company among biotech and pharmaceutical companies. We will again pay a $0.15 quarterly dividend this year. The $0.15 dividends will be paid on March 12th, June 12th, September 12th, and December 12th of 2014, to all stockholders who own shares of PDL on March 5th, June 5th, September 5th, and December 5th, of 2014.

Please turn to slide five. We’re pleased to announce last month that we’ve reached an agreement with Roche and Genentech to resolve all outstanding legal disputes between us. We believe that our shareholders have benefit from this settlement given that the new royalty rate reflect an increase over historical rates and there is now certainty around the period for which we will continue to receive royalties. More specifically under the terms of the agreement effective retroactively to August 15, 2013, Genentech will pay a fixed royalty of 2.125% on worldwide sales of Avastin, Herceptin, Lucentis, Xolair, Kadcyla and Perjeta, as compared to the previous tiered royalty rate in the U.S and the fixed royalty rate on all ex-U.S based manufactured and sold products. Genentech will pay these royalties on all worldwide sales of Avastin, Herceptin, Xolair, Perjeta and Kadcyla occurring on or before December 31, 2015. This new royalty rate of 2.125% compares favorably to the blended royalty rate of 1.9% in 2013.

With respect to Lucentis, Genentech will owe no royalties on U.S. sales occurring after June 30, 2013, and will pay a royalty of 2.125% on all ex-U.S. sales occurring on or before December 28, 2014. Pursuant to a separate agreement, Roche Glycart agreed that Gazyva is a licensed product. The royalty term and royalty rate for Gazyva remain unchanged from the existing license agreement pertaining thereto. The settlement agreement precludes Genentech and Roche from challenging the validity of PDL's Queen et al patents, including its SPCs in Europe, from contesting their obligation to pay royalties, from contesting patent coverage for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva and from assisting any third party in challenging PDL's Queen in all patents and SPCs. The agreement further outlines the conduct of any audits initiated by PDL of the books and records of Genentech in an effort to ensure a full and fair audit procedure.

Moving on now to a deal that we announced a couple of weeks ago which added to our portfolio of income generating assets. As you can see on slide six, we announced a credit agreement with Paradigm Spine, which is a company developing and marketing products for the treatment of spinal conditions and diseases. We provided Paradigm with $50 million at the close of the transaction and they will receive up to an additional $25 million from us paid in two tranches upon the achievement of specified milestones. The $75 million will be used by Paradigm to refinance its existing credit facility and to expand its domestic commercial operations related to the Company’s landmark coflex Interlaminar stabilization device which is on the market in more than 50 countries for patients with spinal stenosis.

The Paradigm Spine transaction represents our first deal of 2014. If you will turn to slide 7 though, you will see that we’ve now completed 10 deals to bring in high quality income generating assets. We are actively re-evaluating others with a goal of acquiring assets that will provide the return on investment required to continue to support the payment of dividends. Along these lines we are pleased to announce that we bolstered our team through the addition of another highly experienced and sophisticated investor by the name of Stephen Hoffman. Dr. Hoffman joined us earlier this month as a senior advisor of the company. With his 25 years of experience in Biotech Pharma which have included leadership positions and biotech investing, we will greatly benefit from his knowledge and network of industry contacts.

At this point I would like to turn the call over to Pete to discuss additional progress on the financial side as well as our financial results.

Peter Garcia

Thank you, John. Before we launch into the financial results, I would like to review with you on slide #8, one of the two financing transactions that we completed in February. The first was an exchange for approximately $132 million, a principal outstanding of our existing 2.875% convertible notes due on February 2015 in return for 20.3 million shares and $34.2 million in cash. The effect of this exchange is to reduce the principal outstanding from approximately $180 million to about $48 million.

There were several reasons for exchanging these notes, but an important one is that the conversion rates in these notes adjust each time we pay a dividend; in other words they become potentially more dilutive to our shareholders with each quarterly dividend payments. Because continuing to pay dividends is important to our shareholders and because we want to avoid or mitigate dilutions to our shareholders whenever possible, we retired a significant amount of these notes. On slide number 9, you can see the $300 million offering of convertible notes that we were able to complete last month.

On February 12, 2014 we issued $300 million aggregate principal amount of 4% convertible senior notes due on February 1, 2018 which included $39.13 million aggregate principal amount issued pursuant to the exercise of the underwriters overallotments options to purchase additional notes. The convertible notes our net shares settled, which means that as the conversion occurs the principal amount is due in cash and to the extent that the conversion value exceeds the principal amount the difference is paid in shares of our common stock.

In connection with the offering we entered into a privately negotiated convertible note hedge transaction with hedge counterparties and privately negotiated warrant transactions with the same hedge counterparties. With the note hedged the conversion price of the 2018 notes is approximately $10.36 per share of common stock. The conversion rate was subject to increase under certain circumstances, will not be increased as a result of regular quarterly cash dividend paid by us that do not exceed $0.15 per share.

The net proceeds of the offerings are approximately $290.3 million which will be reflected in our Q1 2014 cash balance. This number includes underwriters discount, legal fees and accounting expenses and in addition the net cost of the note hedge was $19.5 million. All in all we were very pleased with the outcome of the financing and the quality of the investors.

Now onto the financial results for the fourth quarter and full-year 2013. Please turn to slide number 10. Total revenues in 2013 were $442.9 million compared with $374.5 million in 2012 which demonstrated an 18% increase. For the fourth quarter of 2013 total revenues were $110.1 million compared to $86 million in the fourth quarter of 2012. Royalty revenues for the fourth quarter of 2013 are based on third quarter 2013 product sales by PDL's licensees to the Queen et al. patents and on Depomed's Glumetza royalties related to October and November 2013 U.S. sales.

The fourth quarter marks the first period for which we recognized royalties from our recent transactions with Depomed. We recognized $11.2 million in revenue related to the Depomed royalties in the fourth quarter of 2013 for royalties from U.S. sales of Glumetza which will typically be recognized one month in arrears. While early, these initial royalties have exceeded our expectations. Additional royalties from the Depomed transaction such as Canadian and Korean Glumetza royalties and Janumet royalties will be recognized one quarter in arrears, and the first quarter of 2014 will be the first reported quarter for these royalties.

Full-year royalty revenue growth is driven by increased sales of Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla, Tysabri, and Actemra by PDL's licensees, along with the addition of the royalty payments from PDL's purchase of Depomed's diabetes-related royalties. As you may be aware prior to the settlement agreement, the net sales of Avastin, Herceptin, Lucentis, Xolair, Perjeta and Kadcyla were subject to a tiered royalty rate except in the case when the product is ex-U.S. manufactured and sold, in which case it was subject to a flat 3% royalty rate. Under the terms of a settlement agreement that John discussed, Genentech will now pay a fixed royalty rate of 2.125% on worldwide sales of all licensed products as compared to the previous tiered royalty rate in the U.S and the fixed rate on ex-U.S based manufactured and sold and licensed products. The retroactive change in the royalty rate from August 15, 2013 to December 31, 2013, will be recognized as royalty revenue by PDL in the first quarter of 2014.

Turning to expenses, our operating expenses in 2013 were $35.4 million, compared with $25.5 million in 2012. The increase in expenses during 2013 was a result of a $5.6 million in cost of royalty revenue for the non-cash amortization of the Depomed intangible asset, an increase in the professional services due to increased income generating assets we acquired and increased legal expenses related to the Genentech litigation, arbitration and subsequent settlement. Legal expenses in 2013 related to the Genentech litigation and arbitration were approximately $11.6 million.

For the fourth quarter of 2013, operating expenses were $13.7 million compared with $7.7 million for the same period in 2012. The increase in expenses for the quarter ended December 31, 2013, was primarily a result of $5.6 million in Depomed intangible asset amortization. Net income in 2013 was $264.5 million or $1.66 per diluted share, as compared with net income in 2012 of $211.7 million or $1.45 per diluted share.

Net income for the fourth quarter of 2013 was $61.1 million or $0.39 per diluted share as compared with net income of $49.4 million for the same period of 2012 or $0.34 per diluted share. The increase in net income in the fourth quarter is primarily due to a 27% increase in royalty revenues, which included a $11.2 million in royalties from Depomed on U.S. Glumetza sale. Without these new additional revenues, the increase in royalty revenues for Q4 related to the Queen et al patents was 15% over the same period last year.

At December 31, 2013, we had cash, cash equivalents and investments of $99.5 million compared with $148.7 million at December 31, 2012. The decrease in cash was primarily attributable to the purchase of the Depomed royalties for $240.5 million, cash advanced on notes receivable of $148.7 million and payment of dividends of $84 million, offset in part by net cash provided by operating activities of $270.9 million and the repayment of note receivable of $58.1 million. This includes our review of the financials and our prepared remarks.

So, Operator we are now ready to open the lineup for questions.

Question-and-Answer Session

Operator

Sure. (Operator Instructions) All right and it looks like our first question in the queue will come from the line of Adnan Butt with RBC Capital. Please go ahead. Your line is open.

Adnan Butt - RBC Capital

Hi, good afternoon. One question for John, first. John, for the Genentech, Roche litigation, why settle? It seems like the company was in a good position or was there a risk theoretically at least to losing the case as well or the case going on and on and on. So, why settle?

And then one for Pete, can you -- when do you think the company might be able to get some expense guidance going forward? I think you mentioned the litigation related expenses. So, it’s kind of deducting that from the current operating expenses, is that the run rate going forward?

John McLaughlin

Adnan, thanks very much. So, I will jump in first and let Pete go to the expenses guidance. So, with respect to why settle, it’s simply a function of certainty versus uncertainty. Litigation is inherently uncertain with their scripts, there is -- no matter how good you feel about your case, it is always, there is always a risk in litigation. We view ourselves as a financial entity in many respects to the extent we could provide certainty for our shareholders in terms of what are the funds that we're going to receive and for how long we will receive those funds. We determine based on the terms we able to negotiate that it was a good deal for our shareholders and executed the transaction.

Let me turn it over to Pete to talk about expenses.

Peter Garcia

Sure, hi Adnan. In terms of the 2013 numbers, so we identified the 11.6 in legal fees, so effectively on our going forward run rate you could deduct those for 2014 operating expenses G&A expenses I should say, so the run rate would be about $4.5 million to $5 million per quarter. Just want to note that doesn’t include the non-cash amortization of the Depomed assets, so that would be in the cost of revenue royalty line and we’ll give further guidance on that when we give guidance on our revenue going forward.

Adnan Butt - RBC Capital

I am sorry if I missed it, just a follow up. Is there any non-cash amortization in the current quarter?

John McLaughlin

In the Q4, yes it was $5.6 million.

Operator

Thank you. And presenters, currently at this time I’m showing no additional phone questions. I’d like to turn the program back over to John McLaughlin for any closing remarks.

John McLaughlin

Thank you for joining us on the call this afternoon. It’s been a very productive past few months for PDL and we look forward to updating you on our continued progress in the months ahead. We will be presenting at the Cowen & Company Healthcare Conference on Wednesday this week and hope to see some of you there. Have a good day all.

Operator

Thank you presenters and thank you ladies and gentlemen. Again this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may logoff at this time.

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