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PDL BioPharma Inc. (NASDAQ:PDLI)

Q1 2014 Earnings Conference Call

May 12, 2014 04:30 PM ET

Executives

Jennifer Williams - IR

John McLaughlin - President and CEO

Peter Garcia - CFO

Analysts

Kim Lee - Janney Capital

Adnan Butt - RBC Capital Markets

Operator

Good afternoon and welcome to the PDL BioPharma’s First Quarter 2014 Earnings Conference Call. Today’s call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Jennifer Williams.

Jennifer Williams

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

As you'll see on slide 3, we were pleased to report continued progress in our efforts to build our portfolio of income generating assets. Early last month, we acquired $150 million of secured notes from Kaleo. For those of you who don’t know Kaleo, it’s a pharmaceutical company dedicated to putting a new generation of life-saving personal medical products in patients' hands. On April 3, 2014, the FDA approved EVZIO, the first and only naloxone auto injector intended to be available for emergency administration by family members or caregivers in cases of known or suspected opioid overdose.

The company’s first product approval Auvi-Q, or Allerject in Canada, was licensed to Sanofi U.S., which launched the project in early 2013. Auvi-Q is used to treat life-threatening allergic reactions such as anaphylaxis in people who are at risk for or have a history of these reactions. These notes are secured by 100% of royalties from Auvi-Q and 10% of net sales of EVZIO. The secured notes carry interest at 13% per annum, paid quarterly in arrears on principal outstanding. The final maturity of the secured notes is March 2029, although we expect the notes will be repaid in 2020. Kaleo may redeem the secured notes at any time subject to a redemption premium.

As you can see on slide 4, the Kaleo transaction represents the 10th transaction we have completed since embarking on our strategy to create a portfolio of high-quality, income-generating assets. We have deployed nearly $700 million in this program thus far and are continually evaluating assets which will provide the income necessary to support the ability to pay dividends to our shareholders.

Moving on to slide 5, you'll see that we announced the addition of a new Board member Mr. David Gryska. Dave brings more than 30 years of strategic biopharmaceutical and financial experience to PDL. His knowledge and extensive network strengthens our position as we continue to pursue additional income generating assets for our portfolio.

Please turn with me now to slide 6. We were pleased to announce last week that our antibody technology has received a prestigious nomination in Europe. Two of the inventors of PDL’s technology, Dr. Cary Queen and Dr. Barry Selick, were named by the European Patent Office as one of the three finalists for the European Inventor Award for 2014 in the non-European countries category. The award, which is Europe’s highest distinction for inventors is presented annually by the European Patent Office with the support of the Presidency of The Council of The European Union and by the European Commission to inventors who have made a significant contribution to innovation, economy, and society in Europe and draws from all technological fields of endeavor .

The breakthrough antibody technology was invented in the late 1980s while Dr. Queen and Dr. Selick worked together at PDL, which was then called Protein Design Labs. We now manage the portfolio of patents, the Queen et al., patents related to this technology. There are nine drugs on the market which utilize this technology, including Avastin and Herceptin, which altogether have sales of more than $15 billion per year. These drugs have dramatically improved the lives of many patients and their families worldwide. Thus we are heartened to see the EPO chose Dr. Queen and Dr. Selick for this prestigious and well deserved nomination. The award will be presented in Berlin on June 17.

At this point, I’ll turn the call over to Pete to discuss our financial results.

Peter Garcia

Thank you, John. Please turn with me to slide number 7. Total revenues for the first quarter of 2014 increased 52% to $139.7 million from $91.8 million in the first quarter of 2013. In the first quarter of 2014, royalty revenue growth over the first quarter of 2013 was driven by increased sales of Avastin, Herceptin, Xolair, Perjeta, Kadcyla, and Actemra by our licensees, the addition of $23.6 million in royalty revenue from our purchase of Depomed's diabetes-related royalties, a $5 million retroactive payment from Genentech, and an increase in royalties from the Genentech settlement as a result of a fixed royalty rate of 2.125% on worldwide sales of all licensed products in 2014 as compared to the previous lower blended rate based upon a tiered royalty rate in the U.S and the fixed rate on all ex-U.S based manufactured and sold licensed products.

Turning to our cost, our operating expenses in the first quarter of 2014 were $16.5 million, compared with $7.2 million in the first quarter of 2013. The increase in expenses in the first quarter was a result of the non-cash amortization expense of $11.9 million for the Depomed royalty and milestone purchase, offset in part by decreased legal expenses from the settlement of legal proceedings with Genentech.

Net non-operating expense has increased primarily by the non-cash, $6.1 million loss on the extinguishment of debt related to our recent partial extinguishment of the series 2012 notes and $2.5 million expense for the related inducement fee to extinguish the debt and the interest expense on the new February 2018 notes. The approximate $5.3 million increase in interest income to $9.1 million is the result of the increase in debt financings to late stage healthcare companies as part of our strategy to acquire income generating assets.

Net cash provided by operating activities in the first quarter of 2014 was $91.8 million compared with $52.9 million in the first quarter of 2013. At March 31, 2014, PDL had cash, cash equivalents, and investments of $337.6 million compared with $99.5 million at December 31, 2013. The increase in cash was primarily attributable to proceeds from the issuance of convertible notes, which we discussed in detail in our call in March. The cash balance as of March 31, 2014, does not reflect the recent cash outlay of the $150 million Kaleo investment.

Net income for the first quarter of 2014 was $72.9 million or $0.44 per diluted share as compared with net income for the first quarter of 2013 of $53.5 million or $0.36 per diluted share. The increase in net income in the first quarter is primarily due to the increase in royalty revenues.

In accordance with our regular quarterly dividend policy, we paid the first of four dividends on March 12 to all shareholders of record as of March 5, for a total of $24 million. This dividend was paid using earnings generated during this first quarter.

This concludes our review of the financials and our prepared remarks. Operator we are now ready to open the lines of questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will be coming from the line of Kim Lee from Janney Capital. Your line is open.

Kim Lee - Janney Capital

Sorry if I missed this, but how should we think about the cost of royalty revenues line going forward?

Peter Garcia

So as it currently exists, what we do is we amortize, it’s on our balance sheet as an intangible asset right now, and we’re amortizing that pro rata based upon the revenue that we’re receiving on the royalties, which right now are primarily Glumetza.

Kim Lee - Janney Capital

Okay. Great.

Peter Garcia

I was going to say if you took the revenue that we identified this quarter and the cost of revenues, and that kind of percentage might -- pro rata going forward that might be a good way to look at that.

Kim Lee - Janney Capital

Okay. Very helpful. Thanks. And then a last question from the business development spot, can you give us some ideas of what you continue to look for this year? Thanks.

John McLaughlin

Hi Kim this is John; so let’s see, we’ve already done in excess of about $200 million this year. One was a debt deal, and I think you’ll see some more deals from us. We’re seeing a nice flow of both royalty deals and debt deals, and I think we’re reasonably optimistic you’re going to see some additional announcements for us. At the beginning of the year, we sort of guided everybody or targeted everybody towards saying we hope to get at least $200 million done, and we’ve done more than that already, and I think we’ll continue to do more through the rest of the year. You’ll see some more announcements from us.

Operator

Thank you. Our next question will be coming from the line of Adnan Butt from RBC Capital Markets . Your line is open.

Unidentified Analyst

Hi, this is Jeff for Adnan. In terms of the capacity for deals, how much capacity do you have left?

John McLaughlin

So, we have a fair amount of capacity left. You heard Pete discuss what the cash balance looks like pre-Kaleo. Bear in mind that unlike other funds where it’s a fixed sum of money, ours replenishes each quarter, so we’ll have another series of royalty checks coming in, at least most coming through May -- by the end of May, some will come in early June of this year. We also did a transaction earlier in the year, you saw, to raise money to a convertible note at a reasonably low cost of capital. So, I don’t think at this point that’s a constraint for us so much. It’s trying to find quality assets to invest in, it is really the rate limiting step for us. I mean we’re seeing a lot of transactions. To be blunt, we're passing on a bunch, a whole lot, because we are trying to keep the bar high in terms of quality.

Unidentified Analyst

Thank you. And in terms of comparing the royalty deals versus debt deals, wouldn’t the royalty deals provide a higher upside than just the debt yield?

John McLaughlin

No it’s a very fair observation, so your compare and contrast I would say is as follows; certainly the royalty deals you have goes by higher potential upside, but you also some downside potential too, because you haven’t predicted what the sales curve is going to look like. The debt deals to your point, they are more capped in terms of upside but they are also more capped in terms of downside too, so there is a certain amount of predictability. And that’s why what you see is like a mix in the portfolio of goals where some are up and some do have some upside in terms of royalty deals, some are get deals, it’s a nice kind of structure, you see some also balance between net debt and drugs.

We think it’s important to have a balanced portfolio taking into those characteristics, some of which you just alluded to.

Operator

Thank you. (Operator Instructions). Our next question will be coming from the line of Adnan Butt from RBC Capital Markets.

Adnan Butt - RBC Capital Markets

Folks good afternoon. It's the actual Adnan this time. Can you hear me? So here’s the question. The terms of the recent deal, they seem to be fairly similar. Are you finding the same -- is that kind of the goal that you're setting for deals going forward as well?

John McLaughlin

No, to your point, certainly the market is dictating what some of the returns look like if that’s what you’re referring to Adnan, and that’s -- I think that’s fairly consistent with where the market is. I mean at the Kaleo assets, we really like those, I mean it’s two products, you’ve got Sanofi launching in the U.S., the epinephrine market we think is one where it's right for some innovation, it’s also a shifting market in it more and more states are requiring epinephrine injectors to be made available in schools. The noloxone market, this is the first product where it doesn’t have to be used by a physician, it can be used by a family member or another caregiver as well as emergency personnel for somebody who is overdosed on opioids or suspected of overdosing on opioids.

So, we really like that, but to your point that’s kind of what the return looks like on that. I think that some of the royalty deals as Jeff alluded to earlier. There’s potentially some more upside and downside on those, but potentially the returns are probably a little bit higher on those in some of the debt deals just because there is a little bit more upside, downside potential in those.

Adnan Butt - RBC Capital Markets

Okay, I guess the question I am asking is that your terms will reflect the amount of risk that you are taking on?

John McLaughlin

Yes, sorry.

Adnan Butt - RBC Capital Markets

Okay, John, how should the Street gauge the success of the undertaking? The history is still pretty recent, so what should we be looking forward to going forward?

John McLaughlin

So, I think Adnan, you are going to get -- you get reports from outside, you are starting to get them now and the performance of some of these assets as they start to bring in income, and it’s a very absolute unforgiving standard that as you measure the performance of any asset, is it performing as it was expected to or not, it's pretty straight forward there, Adnan. You will see the ones where you made investments, you will see what the returns look like, and people will be able to say okay, is that as good as we thought it was better or worse.

Adnan Butt - RBC Capital Markets

Okay. And here is another one, maybe it’s for Pete, when you give guidance, will that be including the new royalty income stream as well or is that the older products?

Peter Garcia

This is Pete, hi Adnan. We've given guidance based upon the Queen patent royalties in the past, but most recently in the last period, we did include the Glumetza and Depomed related royalties in that. Those are little bit harder to guesstimate, if you will, because first of all, it’s relatively new, and second of all we don’t have as much visibility into the revenue as we do with the Queen patents where at the end of this month -- well at the end of last month, we were getting a pretty good idea of what the potential would be. So, we have a month or two of Depomed royalties that we wouldn’t know, so we are trying to guesstimate that. And as you can see from the first quarter numbers, they were higher than we had even anticipated at 23.6 million.

Operator

Thank you. (Operator Instructions) And at this time I am not showing any further questions. I would now like to turn the call back over to John McLaughlin for any closing remarks.

John McLaughlin

Thank you all for joining us on the call this afternoon. We will be presenting at the Bank of America Conference later this week and at the Jefferies conference in early June and hope to see some of you there. Perhaps, we'll also see some of you at our Annual Stockholder Meeting which is scheduled for May 28 here in Incline Village. Have a good day all. Thank you, operator.

Operator

You are welcome. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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