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PDL Biopharma, Inc. (NASDAQ:PDLI)

Q1 2011 Earnings Call

April 27, 2011 04:30 pm ET

Executives

Jennifer Williams - IR

John McLaughlin - President and CEO

Cris Larson - VP & CFO

Analysts

Mike Oakes - JPMorgan

Charles Duncan - JMP Securities

Adnan Butt - RBC Capital Markets

Phil Nadeau - Cowen & Company

Operator

Good afternoon and welcome to the PDL Biopharma’s first quarter 2011 earnings conference call. Today's call is being recorded. For opening remarks and introductions I will now turn the call over to Jennifer Williams.

Jennifer Williams

Hello 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 maybe obtained in the Investor 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 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 Jennifer and good afternoon everyone. Also with me today is Cris Larson, our Vice President and Chief Financial officer. I will begin with the business update and then turn the call over to Cris to discuss our financial results in detail. Over the course of the first quarter, we concluded a number of legal matters as we discussed on our year-end call at the end of February.

We reached settlements with three different parties, MedImmune, UCB Pharma and Novartis which along with the purchase of a bankrupt biotech company, BioTransplant resolved all challenges to the Queen et al. patents in the U.S. Patent and Trademark Office and the European Patent Office as well as our litigation with MedImmune.

Also in the first quarter, our board of directors declared regular quarterly dividend of $0.15 per quarter which we paid the first dividend on March 15 and the remaining dividends will be paid on June 15, September 15 and December 15.

At this time, we are actively pursuing a couple of royalty asset purchase opportunities, we are generally looking for approved biologics with strong patent protection that will increase the return to our stockholders. These assets typically come from universities or in ventures who are looking monetize the assets, biotech companies who need additional capital and pharmaceutical companies who have acquired these assets through M&A and who are looking to defray their acquisition costs.

We continue to believe this a viable strategy for the company to improve stockholder value overtime. We look forward to sharing our progress with you in the months ahead. At this time, I’d like to turn the call over to Cris Larson to discuss our first quarter financial results.

Cris Larson

Thank you, John. Total revenues for the first quarter of 2011 were $83.3 million compared with $62.1 million in the first quarter of 2010. Excluding, the one-time settlement payment from UCB Pharma, revenues increased 18% over the comparable quarter of 2010. The growth in revenues was primarily driven by increased sales by our licensees, Herceptin, Lucentis and Tysabri.

Also contributing to the growth was an increase in the amount of Avastin that is both made and sold outside of the United States. Under our license agreement with Genentech we received a flat royalty rate of 3% for sales of products that are both manufactured and sold outside of the United States. By comparison we received a tiered royalty rate from Genentech for products that is either made or sold in the United States and typically the tiered royalty rate paid to PDL is at its lowest level of 1% in the first quarter of each calendar year.

Turning to expenses, total expenses for the first quarter of 2011 were $5.8 million compared to $9.4 million for the first quarter of 2010. The decrease is primarily due to a decrease in legal fees resulting from the conclusion of the legal issues that John described earlier. In addition we saw a decline in professional services fees due to reduced costs associated with one time special project costs.

Net income for the first quarter of 2011 was $44.5 million or $0.25 per diluted share compared with net income of $26 million or $0.15 per diluted share for the first quarter of 2010. As you know in response to requests from our stockholders and with additional clarity regarding our future cash flows we declared a regular quarterly dividend of $0.15 per share that was approved by our Board of Directors at the end of February.

As John mentioned on March 15 we paid the first of four quarterly dividends to all stockholders of record on March 8 for a total of $21 million. As of March 8, 2011 in connection with the March dividend payment, the conversion ratios for our 2% convertible notes due in 2012 and our 2.875% convertible notes due in 2015 were both adjusted to 144.47 shares per $1000 principal amount or a conversion price of approximately $6.92 per share of common stock.

Net cash used in operating activities for the first quarter of 2011, was $13.2 million compared with $26.9 million provided by operating activities in the first quarter of 2010. As of March 31st 2011, PDL had cash, cash equivalents and investments of $193.5 million, as compared with $248.2 million at December 31, 2010.

Following our policy of providing quarterly revenue guidance in the third month of the quarter, we will be providing second quarter 2011 revenue guidance in early June.

I'll now turn the call back to John.

John McLaughlin

Thanks Chris. At this time, we are ready to open the call for questions, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of [Mike Oakes] with JPMorgan. Please proceed. Mr. Oakes, your line is open.

Mike Oakes - JPMorgan

Sorry about that. This is Mike, in for Jeff actually. Just curious about, I know operating expenses tick down quite a bit in 1Q versus 4Q, due to lower legal expenses. Just curious how we should think about that going forward. Is that a time a good run rate or just curious of your thoughts there?

Cris Larson

Yes. This declined significantly and I think we will actually see a little bit more improvement in the upcoming quarters in that from the costs associated with the settlements in January and February, also included the first quarter.

Mike Oakes - JPMorgan

Great. Thanks for taking the question.

Operator

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

Charles Duncan - JMP Securities

Congrats on a nice quarter and thanks for taking my question. My first question is John or Cris if you have any perspective on the Roche challenge. It seems like that’s just perhaps kind of dragging on and I’m wondering if you have any sense of timing when that could be reconciled and what would drive in? I believe also they have a new CFO and if you have a perspective on that I’d love to hear that?

John McLaughlin

With respect to the first part of your question, the old adage justice grant slowly appears to be here certainly, so you’re correct; it has been moving at a reasonably slow pace and fortunately we don’t anticipate it’s going to pick much up to us the motions before the court, but assuming that we can pass some of those preliminary motions, we’re not really expecting to see this go to a trial or towards the end of 2011 or into early of 2012 thereabout and I think that’s – which is one of the four plays within terms of what’s a reasonable estimate.

The second part of your question is – the reason posing your question is have dynamics changed with inside Roche, there are clearly are some new folks there. There clearly is some awareness on Roche’s part that you have some liability there and it’s a very interesting questions one we want to explore is there are some – as we said we go as like, our goal from thereafter just as to trying some, find some amicable way to settle this to the benefit of our shareholders and that’s our goal, we’ll continue to pursue it and see we’re going to have some of the changes in personnel and make that likely or not.

Charles Duncan - JMP Securities

If we could hop over to the royalty asset discussion that you mentioned in terms of your efforts for opportunity identification, do you have a goal in mind in terms of having one of those done this year or some number or is it really going to be driven by the availability of assets and would you will also consider small molecules with – given the criteria that you offered?

John McLaughlin

To answer your question, perhaps in reverse order, so with respect to small molecules, yes, particularly if there is some history in terms of marketing, absolutely and if we can get comfortable in terms of their patent positions.

You will know better than any, it’s a just a little harder in the small molecule arena to be able to figure out what to protect, what the real market exclusivity is. And I am distinguishing in that from patent exclusivity because you may have exclusivity, but you can have multiple analogs competing in the same therapeutic category.

John McLaughlin

With respect to the former, yes, obviously we would like to get a deal done. But perhaps unlike a fund for example that goes out and buys royalty assets; we have other ways to include the return for our shareholders.

So if we see something, we’ll likely can go off and acquire and just to the benefit of our shareholders if we don't, there are other things we can do with that money such as increase dividends, buyback shares etcetera which also improves the return for our shareholders.

So we do have some advantages over for example, a fix like private fund where they have to invest in a certain amount of time and they have to get the return back. There are other ways we can generate return.

So, yes we would like to get one done; we would like to get as many done as we can as well as make plenty for our shareholders to be clear and as fast as we can. But we do have other ways to generate returns for our shareholder if we can't find them on attractive terms.

Charles Duncan - JMP Securities

Do you have any in the queue that you think could be done within this calendar year?

John McLaughlin

We working as a couple, but at this point I wouldn’t to speculate as to when it can get done.

Charles Duncan - JMP Securities

Okay. And then if I can just back to my previous question, sorry for taking so much time but just clarifying, I am not sure if I had this right. Are you assuming that the Roche challenge goes to trial or are you assuming that it could be perhaps reconciled via some other mechanisms such as business plan.

John McLaughlin

I don’t know that we can comment on that at this point, Charles.

Operator

Our next question comes from the line of Jason Kantor with RBC Capital Markets. Please proceed.

Adnan Butt - RBC Capital Markets

It’s Adnan on Jason’s behalf. Just to follow up with the Roche, is there anything that would prevent a potential settlement between the two parties taking place potentially, does it have t go through a court venue and secondly did I hear correctly that the expense run rate for this quarter could be appropriate for the year. Would that change if anything in terms of the Roche, does it remain changed?

John McLaughlin

Sure, taking questions in order, so in all litigation like and this is true to that, there is always the potential for the parties to settle a litigation at any point in the process. So there is nothing unique about this one, that’s not to say we are going to settle, but we have set the outset, at the outset of this, we’d like to find an amicable to the benefit of our shareholders to resolve this. Your second question talks about our legal work expense runrate and I’ll turn that over to Cris to answer.

Cris Larson

Sure, as I described earlier, our expenses in the first quarter were significantly less then what we saw as a run rate last year. However they do include some of the expenses associated to the settlements that we just mentioned. So I’d actually expect a slight improvement for the balance of the year in our legal fees.

Adnan Butt - RBC Capital Markets

And Cris could that change if anything on the Roche’s end change.

Cris Larson

That would included our projections for what that matter may cost us.

John McLaughlin

So that would assume it actually goes to trial in answering your question.

Cris Larson

Yeah, I am sorry, it assumes it goes to trial and we just incur our costs throughout the year associated with getting ready for that process.

Adnan Butt - RBC Capital Markets

And if you can answer a question on potential and licensing or acquisition of royalty assets, have you looked at any, have you, I mean how competitive is the process, did you find it to be bidding type of an environment when you look at these assets.

John McLaughlin

It varies dramatically from asset to asset and it varies dramatically from seller to seller. It depends on who is selling it and whether they run a competitive process or not, I mean some are competitive, some aren't competitive, much beyond that I don't think, frankly we are into confidentiality, we can't disclose.

Operator

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

Phil Nadeau - Cowen & Company

My question is actually on the Roche Genentech royalty stream, it looks like the portion of sales that were ex-US made and sold peaked at 29% in the second quarter 2010 and it actually kind of gradually tick down since then to about 23% this quarter based on my first review of the figures, you guys distributed, it looks like most of that change or a good portion of that change is driven by what's going on with Avastin, could you give us some more information about what is Roche’s long term plans for ex-US manufacture and sale of Avastin and whether this tick down is going to be a consistent trend or whether this is going to reverse any time soon.

John McLaughlin

So you got a couple of questions embedded there and let me try and get to all of them and if I miss one please jump in. So if we don't have any specific insights as to what's going on in this particular quarter, or whether that represents a trend or not. We suspected in fact what they are probably doing is utilizing some inventory that was produced in the United States, that maybe getting towards an expiration of shelf life where they want to burn if they want to burn through it.

The second part is Roche is being quite clear as recently as their meeting with investors in February of 2011 where they talked about sort of in their annual report, what are they doing in terms of integrating their manufacturing opportunities and to answer your question specifically, what they have said is they do want to move Avastin manufacturing offshore, which seems to-date has been largely a product that’s produced in a facility in Basel, Switzerland. It's an older facility. But they reconfigured it. It became commercially operational in 2008 and you started seeing some significant production thereafter.

What we have not seen production from yet is a facility that they purchased in Singapore, which is quite a bit larger. We understand that it is now registered in the EU to supply the European Union core product and they hope to have registrations to produce for U.S. supply as well from that same facility. We have not seen any information that facility is producing commercial product that has been sold yet.

But what they have said is they do intend to move a substantial amount of their source, particularly for the ex-U.S. markets to that plant. And thus we are projecting that in fact, from an economic perspective, we will be seeing a higher royalty rate because as you are aware products that either made or sold in United States is a tiered royalty in 2010, the effective royalty rate on those tiers was about, I think, 1.5% [Chris] Ex U.S. for parts that’s both made and sold, both conditions. It's a 3%, so, we're expecting to see some more of that 3% royalty bearing products in years to come.

Phil Nadeau - Cowen & Company

Okay, great. That’s it.

John McLaughlin

That’s really all the answer.

Phil Nadeau - Cowen & Company

Yes, I know. That’s very helpful and just one follow-up question. I believe that Actemra isn’t subject to the royalty tiers, is that correct? Because that’s just Roche product not from a Genentech product.

John McLaughlin

You are correct because it comes through Chugai. It is not subject to the tier system we just talk about. You are correct.

Phil Nadeau - Cowen & Company

Okay, great. Thanks for taking my questions.

Operator

Ladies and gentlemen, this concludes the Q&A portion of the call. I would now like to turn things back over to Mr. John McLaughlin for closing remarks.

John McLaughlin

Thanks to all of you for joining us on the call today. We look forward to seeing many of you at the upcoming conferences. We will be presenting at the JMP Securities Research Conference on May 10th at 2PM San Francisco and at the Bank of America Merrill Lynch Healthcare Conference on May 11 at 1PM in Las Vegas. Thanks again for participating and have a good day.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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