Jennifer Williams - Investor Relations
John McLaughlin - President and CEO
Cris Larson - VP and CFO
Charles Duncan - JMP Securities
Jason Zhang - BMO Capital
Phil Nadeau - Cowen & Company
Kim Lee - Global Hunter Securities
PDL BioPharma, Inc. (PDLI) Q2 2010 Earnings Call July 28, 2010 4:30 AM ET
Welcome to Second Quarter 2010 PDL Biopharma Incorporated Earnings Conference Call. My name is Kendall and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions)
I would now like to turn the presentation over to your host for today, Ms. Jennifer Williams, Investor Relations. Please proceed.
Good afternoon and 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.
Also with me today is Cris Larson, our Vice President and Chief Financial Officer, who will discuss our financial results in a few minutes. The second quarter of 2010 has been productive for PDL as we continue to focus on identifying and executing an opportunities to improve returns for our stockholders.
During the quarter we achieved an increase in royalty revenue year-over-year, we reduced dilution and strengthened our capital structure by repurchasing a portion of our convertible notes. We realized a gain on our foreign currency hedging contracts and we continue to evaluate new asset purchase opportunities to build shareholder value today and to the future.
Beginning with our license products, we were pleased to see the filing of Roche and Genentech biologics license application with the USFDA for Herceptin conjugate for T-DM1. T-DM1 is a novel antibody drug conjugate, which Roche terms and owned the antibody developed for the treatment of patients with advanced HER2-positive metastatic breast cancer.
According to Roche T-DM1 has a potential to peak sales of 2 billion to 5 billion Swiss francs and is expected to receive fast-track approval in the United States. As such, we anticipate T-DM1 maybe approved as early as the first half of 2011.
In addition to T-DM1 I would like to address some recent news related to Mylotarg and Avastin. As you know it finds with the prepared Company Wyeth voluntarily with through Mylotarg for the market in late June at the recommendation of the FDA. As it relates to PDL Mylotarg represents a small percentage of our overall revenue with royalties 303,000 in the second quarter of 2010. Given this we do not believe this development will have a substantial negative effect on our annual revenue for 2010 and beyond.
Similarly, based on follow-up Avastin breast cancer studies that failed to show our meaningful survival benefit. The FDA's Oncology Drug Advisory Committee recommended that first-line treatment with Avastin in combination with Paclitaxel for HER2-negative breast cancer removed from the US label for this drug. If the FDA accepts the recommendation from the Advisory Committee to remove the approval for first-line treatment of HER2-negative breast cancer we would no longer receive royalties for this indication.
Based on our internal model, we estimate in 2009 this indication represented less than 5% of total global Avastin sales. The Advisory Committee recommendation does not impact Avastin use in multiple cancers including advance colorectal, lung, kidney, and glioblastoma. Also last Thursday Genentech and Roche announced that they have filed with the USFDA for the approval Avastin for second-line treatment HER2-negative breast cancer.
It is important for me to note that we have provided selected financial information from our internal model for Avastin sales on a stand-alone basis due to the extraordinary circumstance presented by the FDA panel recommendation. We do not intend to make it a standard practice to provide guidance such as this in the future.
Turning back to our license products, during the American Society of Clinical Oncology Annual Meeting, it is also known as the ASCO Annual Meeting, in June, Genentech and Roche presented positive data from a Phase 3 clinical trial of Avastin for use in previously untreated advanced ovarian cancer which would be a new and potentially very large indication for the drug. Further recent data from a large multinational Phase 4 trial validates Avastin's use in treating non-small cell lung cancer.
In addition to these recent product developments, we saw a number of positive clinical presentations, specifically related to Avastin, Herceptin and T-DM1 at ASCO this year as well as recent positive data presented on late-stage licensed compounds for Alzheimer's disease for which PDL has two Phase 3 products under license, Bapineuzumab and Solanezumab. We anticipate clinical trial results for these two new drugs in mid 2012.
Turning to our financial accomplishments. In January of this year, we put in place quarterly Eurodollar hedging contracts to protect PDL against the fluctuations in Eurodollar exchange rates through the first quarter of 2012. During the second quarter, this resulted in revenue to PDL of $1.5 million and for contracts which matured on June 30, 2010; our revenue is $2.9 million which should be recognized in the third quarter of this year.
With the fluctuation in Eurodollar and PDL exposure to the international markets to our licensees, we believe this is a very effective way to protect PDL and our stockholders against some of the volatility in the European markets today and in the future with minimal downside risk to PDL.
One important note on our foreign currency hedges is that they qualify for hedge accounting thus avoiding volatility in our income statement.
Cris will detail the specifics of the 2023 convertible note repurchases that happened during the second quarter, but I would like to highlight the fact that we are working diligently to simply our capital structure. We continue to reduce strategies to reduce the dilution associated with our current debt, and at the same time, we want to maintain flexibility to acquire new assets or royalty streams as it relates to improving shareholder value of PDL.
In a reference to acquire new asset and diversify our business beyond the Queen et al. patents dates, we have evaluated more than a dozen transactions this year so far, we are looking primarily at biological agents with strong patent protection.
Our primary targets are commercial state products that are first-in-class or the gold standard for their treatment group. While we believe this strategy, we will build shareholder value for PDL today and to the future, finding the right transaction takes time. We will not proceed with the transaction unless it will enhance shareholder value.
Also we continue to seek new licensees for our current patent portfolio and look forward to keeping you price of our progress in the quarters to come.
At this time, I would like to turn the call over to Cris Larson, to discuss our second quarter financial results.
Total revenue in the second quarter of 2010 was $120.3 million as compared with $125.9 million for the same period of 2009. It is important to note that our second quarter 2010 revenue does not include royalties on sales of Synagis due to our ongoing legal dispute with MedImmune.
Also in the second quarter of 2009, we received the second of two $12.5 million settlement installments from Alexion. Excluding second quarter 2009, MedImmune royalties and the Alexion settlement, second quarter 2010 revenue grew by 27% over the second quarter of 2009.
The growth was primarily driven by increased first quarter 2010 sales by our licensees of Avastin, Herceptin, Lucentis and Tysabri. Also contributing to revenue growth with an increase in the amount of ex-US manufactured and sold Herceptin and Avastin for which we received a flat 3% royalty rate.
We have included a table in our press release showing the percentage of ex-US sales of Genentech products, which are manufactured in the United States, which are sold in the United States and in Europe.
As I mentioned, we have seen an increase in the amount of Herceptin and Avastin manufactured outside the United States as compared with 2009 and we anticipate that Roche will move more manufacturing outside the United States in the future specifically for Avastin and Lucentis.
Turning to expenses, total general and administrative expense for the second quarter of 2010 was $8.8 million as compared with $5.6 million for the same period of 2009. The increase was primarily driven by legal expense, which increased from $2.8 million in 2009 to $5.8 million in 2010. The increase is due to ongoing legal disputes with MedImmune and two interference proceedings with the US Patent and Trademark Office, which are also ongoing.
As John mentioned, one of our strategies to improve our capital structure is to reduce the dilution from our convertible notes. As such, during the second quarter of 2010, we have repurchased at market prices an aggregate $84 million of our convertible notes due in 2023 at an average premium of 19% for a charge of $16 million.
During the same period in 2009, we repurchased at market prices an aggregate $50 million of the convertible notes due in 2023 at a 2% discount and $5 million of the company's convertible notes due in 2012 at a 10.75% discount for an aggregate gain of $1.2 million.
The results of the convertible note repurchases are included in non-operating expense, which was $27.8 million for the second quarter of 2010, as compared to $1.9 million for the same period in 2009.
In addition to the convertible note repurchases also contributing to the increase in non-operating expense is interest expense of $11.6 million including $9 million associated with $300 million securitization notes issued in November 2009.
Net income for the second quarter of 2010 was $50.1 million, or $0.30 per diluted share, compared with net income of $77.2 million, or $0.47 per diluted share for the same period in 2009.
Adjusting net income for the convertible note transactions just discussed, non-GAAP net income for the three months ended June 30, 2010 totaled $64.9 million, or $0.38 per diluted share compared with non-GAAP net income of $76.5 million, or $0.46 per diluted share for the same period in 2009.
Taken together, the note repurchased transactions reduced shares used to compute net income per diluted share on an as-converted basis by a total of $21.5 million of shares. On an ongoing basis, we will continue to evaluate alternatives to increase return to our stockholders. This includes purchasing royalty generating assets, buying back our convertible notes or common stock, selling the company and paying dividends.
For the six-month ended June 30, 2010 total revenue was $182.4 million compared with $188.5 million for the same period of 2009. Again, the revenue for 2009 includes the Alexion settlement payment of $12.5 million and Synagis royalties of $36 million. Adjusting for these two items, total revenue increased $42.4 million, or 30%.
Total general and administrative expenses for the six months ended June 30, 2010 was $18.2 million compared to $10.3 million for the same period of 2009, or an increase of $7.9 million of which $7.8 million that attributable to increased legal expense.
Net income for the first six months of 2010 was approximately $76.1 million, or $0.44 per diluted share, compared to $114.7 million, or $0.69 per diluted share in 2010.
Adjusted for the convertible note transactions described earlier, non-GAAP net income for the six months ended June 30, 2010 totaled $90.9 million or $0.52 per diluted share compared with non-GAAP net income of about $113.9 million or $0.69 per diluted share for the same period of 2009.
Net cash provided by operating activities for the first half of 2010 was $123.6 million compared with $103.4 million for the first half of 2009. As of June 30, 2010, PDL had cash, cash equivalents and short-term investments of $223.7 million compared with $303.2 million at December 31, 2009.
The reduction in cash is primarily due to the repurchase of the convertible notes due in 2023, the $50 million principle repayment on the securitization note issued in November 2009 and the $60 million dividend payment on April 1st of this year. These payments are partially offset by cash provided by operating activities.
As we previously announced we will pay our second dividend of $0.50 per share on October 1st to all stockholders of record on September 15, 2010. 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 third quarter of 2010 in early September.
I will now turn the call back to John.
Thanks, Cris. Operator, this time we are ready to open the call for questions.
(Operator Instructions) Your first question comes from the line of Charles Duncan of JMP Securities.
Charles Duncan - JMP Securities
I had a couple of questions about, first of all T-DM1, have you actually been notified by them for taking the licensees at Roche, taken out license for T-DM1 yet?
Charles they have a license for Herceptin, which of course is a marketed product. As you know T-DM1 is Herceptin conjugate. The public copy of the license we'll show to you that it the original license covering Herceptin includes not only Herceptin but also conjugates their two, so it folds within that license. So they actually don't need to take any additional action with respect to PDL to how about a Queen patent license.
Charles Duncan - JMP Securities
Okay. Are the terms for that the same in that if they make more of it ex-US they have to pay you more royalty?
That exactly correct. It falls into that same tier royalty system where it's tiered in the US versus if a product is both made and sold ex-US, it's a flat 3% royalty.
Charles Duncan - JMP Securities
Okay, also with regard to the possible new royalty deals that you are looking at. First of all, do you have work-to-date for bringing anything in and secondly, do you have a goal with regard to the percentage or amount of dollars, percentage of your balance sheet that you might use in such a deal?
With respect to the former, we do not have a date. In fact, we specifically discussed with the board whether or not a date was appropriate and periodically during each quarter, we will look at what our various alternatives before us including is there a deal that we like or whatever to say, what benefit enhances shareholder return. We'll continue to follow that process.
With respect to your second question, we haven't given specific guidance on what a deal might look like or what the size of the deal would be but I can tell you is we have seen some small deals that frankly wouldn't really significantly beneficially impact our dividend strategy. Those are nice products but they wouldn't be sufficiently big putting in extra, for example, a nickel in our dividend policy I think it's probably other ways where we could enhance shareholder return beyond just a nickel dividend in our shareholder policy. So we would like something bigger than that.
We haven't been specifically nor do we intend to sort of how big the deal would be but something that's material. It could be co-terminates with the Queen patents. It could be longer than the Queen patents. The one situation we don't want to find ourselves in is the Queen patent is expiring we are sitting around trying to collect a few million dollars more in royalties. That wouldn't make sense to maintain a public company structure if you are only earning $2 million and paying out some fraction of that dividends. That wouldn't be a smart move on our part and we wouldn't do that.
Charles Duncan - JMP Securities
Okay, and then my final question is, perhaps for Cris or John regarding the SG&A, I think you mention there is about $5.8 million in legal fees in the second quarter. When would you anticipate that ending, I mean, the majority of that is Synagis or the majority of it is USPTO or are they linked and should we carry that through our quarterly model for the rest of this year, and how long thereafter?
Sure. It's primarily related to the MedImmune litigation. The court date for that is set in January of next year, so we will continue to see legal expenses up through that time unless something else occurs.
We certainly suggest carrying at that level through 2010 and into certainly in or around the first quarter of 2011.
Charles Duncan - JMP Securities
Okay, and then after that if everything is done maybe you have got 10% or is it 25%? And then can you give some color on the USPTO timelines and what that's about?
Cris, can you throw out any more color in terms of what the percentage basis that comprises?
Sure. On the legal expenses, I would say would be X the MedImmune litigation and without the interference proceedings will likely be about 10% to 20% of the current level. We anticipate that the interference proceedings will be resolved next year as well.
Your second question I think Charles was some of the color on the US patent interference. Specifically there's two patent interferences, and what we're anticipating as they are hearing probably some point in the first quarter of 2011. It looks like it's probably going to be some time in February.
Your next question comes from the line of Jason Zhang of BMO Capital.
Jason Zhang - BMO Capital
Just to clarify, Cris, the 27% sold and are manufacture and sold ex-US, is that out to the total Avastin revenue or is that 27% of the one sold ex-US?
Okay, so you're referring to our press release and that represents 27% of total sold. So it's manufactured and sold ex-US as compared to the 49% which is just ex-US sold.
Jason Zhang - BMO Capital
Okay, so that's actually pretty impressive because we already have almost half of the Avastin sold outside of the US that is also manufacture that means you to have a higher already. I guess my question is do you see pretty soon that you have almost 100% of the Avastin revenue sold outside of US to be manufactured outside of the US?
Sure, Jason. This is John. Let me jump in for a second. So here's what I think we can say confidently currently the product is being made and sold outside the United States is being produced at antibody plant in Basel, Switzerland, Roche we can figure that plant in 2006 that became operational in 2008. As you can see it's now making commercial production.
In 2009, Roche purchased a second antibody plant which they have said publicly they would used for the manufacture of Avastin bulk, and that's in Singapore. They have publicly said that they are doing qual lots, which is what you do, you do practice -- not practice runs, you do runs, three runs, production runs at a plant you filed that for registration with US and EMEA authorities to register plant in those jurisdictions. We understand you are in the process of doing those qual lots.
What we would anticipate is, is probably that plant will come online at some point in 2011 and began producing Avastin as well. What we don't know is how much US inventory they stockpiled and would have to burn down, assuming that you use some of it to continue to supply ex-US markets, but certainly between the two plants there is more than enough capacity there, frankly to supply all of the ex-US demand for the foreseeable future and probably some of the US demand as well.
Jason Zhang - BMO Capital
Okay. Then I have a follow-up on Charles question about the legal fees. I think that all the answers, I guess you have to engage them in order to, I know that, MedImmune is putting money in the escrow account. I guess you have to at least show your intend to collect them. That's why you have to have lawyers to go after them. But I guess my point is at what point do you make a decision whether in a continuing spending that much money is worthwhile? I mean, spending the money on the lawyers fee if it is $5 million a quarter, whatever you can collect may not be necessarily worthwhile and will you be able to come to a point like that?
I understand the nature of your question is, it's a very good question. I think a way to think about it, it might be as follows and Cris will jump in here, she has any amendments to my statements or corrections to my statements, more importantly. So think about last year we probably saw a little bit over $48 million in royalties from them. Now to be clear their sales have declined between 2009 and 2010 because of more restrictive guidelines regarding usage of the product promulgated by the American Academy of Pediatrics.
So, we don't know what the royalties would be this year, but let just take a guess and say it's probably $30 million, where about this year. So $30 million this year and again the patents run through 2014 we would actually anticipate getting paid a little beyond 2014, you start doing that math. Those are pretty good size numbers. So, obviously we do keep a track on it. We do think about it. I think the other thing to think about is, that we do have a trial date for the middle of January of 2011 this is probably trialed that would go on for two weeks, three weeks something like that some number weeks.
Depending on the outcome of that trial there might be appeals by either parties, but typically the appeals process is considerably less expensive on a go forward basis simply because all other discoveries have been done etcetera and it's a little bit cheaper going forward that's why in answer to Charles' earlier question we suggest to kind of keep the number through the first quarter of 2010, but they would drop off there after.
Cris anything you want to add or more importantly correct?
No, that sounded accurate.
Your next question comes from the line of Phil Nadeau of Cowen & Company.
Phil Nadeau - Cowen & Company
My question similar to one of those asked before on Avastin and that's on the other Roche products. Can you give us any details on what their production plans are for things like Herceptin outside the US?
Sure. So, if you look you can see that Herceptin they are around I guess 47% thereabouts and that's been steadily increasing over the last couple of quarters. They currently produce it at plants in Germany, in Pensberg, Germany and we have seen some nice upticks in terms of increased production there.
It looks like that will continue, but we can't tell you, they haven't bought any other plants. We can't tell you if there are any other facilities that they are going to be making at it. It looks like there might be enough capacity there that they could serve much of the ex-US market there, but they haven't given much guidance on that one.
The other parts that they have given some guidance on this with respect to Lucentis, which is course of antibody fragment. Unlike the other antibody is manufactured in E. coli plant system because it's a smaller arms truck.
They bought a second plant, I mentioned earlier they bought a plant in Singapore for Avastin. They bought a second E. coli plant also in Singapore and they have suggested that they would stop manufacturing the Lucentis, which is now 100% manufactured in South San Francisco and transfer that some point in the 2011, 2012 timeframe overseas.
What we know is it looks like the Avastin plant in Singapore they are doing qual lot now for registration with EMEA and FDA and it's our expectation that plant would be online some point in 2011 as well. There probably will be some US made inventory that they burn through. So, probably some point in the 2011 to 2012 timeframe, we see a fairly dramatic shift potentially as much as a 100% of the ex-US market served by that Singapore based plant.
Your next question comes from the line of Kim Lee with Global Hunter Securities.
Kim Lee - Global Hunter Securities
Just had a quick question on your thoughts on pricing pressures in Europe, do you think that will effect any of the manufacturing of the European products and effects your revenue at all going forward?
Good points. So you have got a couple on there. Let me get them, not quite in the order you asked them. So, with respect to the relocation of the manufacturing plants, there are other issues to drive that such as these are territories, where they got very good tax treatment. There are other things they can do in terms of transfer, prices, which would reduce their tax burdens, et cetera. So, probably all of those changes provides strong financial support for their previously announced plans to continue to implement those plans.
Your second question relates to, do we anticipate given some of the austerity measures, and I'm assuming that's what you are referring to, adopted, particularly by some of the European governments, where we expect to see some impact on sales and certainly a couple of the big pharmas have started to offer some guidance on that, but that they are anticipating seeing some impact on sales. That's something we are modeling right now. I apologize we are not in a position today, where we can give you an answer, but clearly with all of the austerity measures being adopted there will be some impact and perhaps, as we get better feedback from some of our licensees we may have a better sense of how to quantify that.
On the other hand, but perhaps in the good news column, in US we have the expansion of healthcare systems. We have got additional number of patients throw in the pool, additional 34 million to 35 million insured, particularly you have got some expansion and eventually closure of what's called the Part D doughnut hole or loophole, whatever you want to call it.
We are basically, particularly for expensive drugs like antibodies, there is reimbursement through Medicare up to a point of a couple of thousand dollars then there is a hole, where they don't reimburse anymore and then it would become catastrophic. It picks up. The newly adopted US healthcare reform begins to close that hole in 2011 and finally closes it in 2012.
Probably in the negative column though, there will be some increased levels rebate required moving from about 15% upwards to around 21% for some of the government purposes and obviously that would affect revenues. All of which a long way I think they are probably will be some impact it will probably be have somewhat negative impact, we are still trying to model the scope and extent.
You have no further question. This concludes the question-and-answer portion of today's call. I'd like to turn the call back over to John McLaughlin for closing remarks.
Thank you to all those on the call for joining us this afternoon, we look forward to seeing you many of you at the upcoming conferences in the next few months. We will be presenting at the BMO Capital Markets 10th Annual Focus on Healthcare Conference in New York on August 5th and the Global Hunter Securities Healthcare Conference at Newport Beach on August 17th. I hope you all have a good evening and again thanks for participating.
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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