John McLaughlin – Chief Executive Officer
Mike Ulz – JP Morgan Securities Inc.
PDL BioPharma, Inc. (PDLI) 30th Annual JP Morgan Healthcare Conference Transcript January 12, 2012 12:30 PM ET
Good morning, everyone. And welcome to day four of the JP Morgan Healthcare Conference. I’m Mike Ulz from Geoff Meacham’s biotech team here JP Morgan. It’s my pleasure to introduce John McLaughlin, CEO of PDL BioPharma. John?
Mike, thank you very much. Good morning. Welcome to the PDL presentation. This morning I will be making some forward-looking statements for additional information behind those statements, please see our most recent filings with the Securities and Exchange Commission.
We think that PDL is a very attractive investment opportunity, unique in the healthcare space and certainly, rare among all public companies. Some of the reasons for that are captured on this slide. As you can see we are a very profitable company. We have substantial revenues. We have less than 10 employees. We don’t do any research or development activities.
Since 2009 we’ve been paying dividends, in 2011 our dividend policy was $0.60 per share per year on the stock that trades some place between the high fives and low sixes, so that’s a very nice return. We have a substantial cash position we built up. We are looking to buy some additional royalty assets. I’ll talk more about that in a minute. And perhaps, most important for institutional investors is that last line you can see we have a substantial volume, some days it upward as much as 5 million shares and with that allows is easy entrance and if you so desire exit from the stock, hopefully you had made money that point.
To talk a little bit about the company for a second, PDL actually pioneered the humanization of monoclonal antibodies and the assets that reside in PDL today are really those patents and license agreements. This is the technology has been widely adopted in biotech and pharma surgical stream as you will see in a minute. It utilized by some of the leading players in the industries.
Simply put what we are doing here? What humanization of antibodies involve is, in the 1980’s scientist hypostasized that they could develop antibodies in non-human systems, predominantly mice and they can use those to find specific sites on the cell and target them, for example to fight cancer. And taking those nearing drive antibodies and injecting into human systems, they were sometimes recognized as foreign and rejected before they could accomplished their therapeutic goal.
What our technology does is allow you to identify those binding sites on a mouse which are most important to it’s therapeutic activities and transfer them to a human framework. And the key here is to maintain the specificiting and binding policy that is binding only what you want and binding it tightly, and that’s what our technology allows. You can see that it is being incorporated in products with aggregate annual sales, sorry, over $17 billion worth.
Our focus is really on managing those patents and license agreements, and more recently looking at new royalty generating assets, because we are a dividend paying company, our shareholders have come to us and said, like the dividends, we understand at some point you may have to stop paying them as your patents expire, can you find other royalty generating assets and that’s something we are looking at.
Our sweet spot here our commercial stage products with the value range some place between $75 and $150 million. We have our mild preference for biologics over small molecules, but we look at both and we are agnostic as two therapeutic area. And our goal really looking at these assets are can we get attractive assets, quality assets on attractive financial term, such that we can optimize the return for our shareholders.
We are fortunate to have a strong management team, as well as diverse Board of Directors with financial expertise, accounting, audit expertise, legal expertise, scientific expertise, as well as management expertise.
To give you a quick overview of the products which currently contribute most of the revenue, you can -- the names are familiar to you, undoubtedly you can see what the 2010 worldwide sales look like and you can see a substantial number of the indications for these products and I’ll talk a little bit about each of them with some recent developments.
One of the questions that were most commonly asked is, okay, you’re paid based on your patents, how long are you going to be paid? And our patents expire typically in December of 2014, but the answer for how long we are going to get paid is actually a little more complex than that.
First we’re royalty play, which means we get paid one quarter in a year, so that get you the first quarter of 2015. The rest of the answer is captured on the two bar charts on this slide. When they talk about the manufacturing of antibody, the term that they use is campaign and the reason for that is it takes a long time.
And as you see the top bar to picks the typical bulk manufacturing cycle in the bottom fill and finish. If you just track out the storage reports there or we’re just building inventory, take something on the order of six or seven months to fabricate an antibody. Because of the suspension disparity between the cost of goods and the selling price, most manufacturers keep 24 to 30 months worth of inventory on hand, but let’s assume that they change that practice in the future for reasons of economy whatever and simply kept 12 months on hand recognizing it six to seven months to make it that will get us pay through the first quarter of 2016.
Because we are a financial entities, much as anything else we provide a lot more transparency on some of our the details of our arrangements, about 70% of our revenues or more come from the Genentech related product and you can see here, it’s really a bifurcated scheme with respect to how we’re paid royalties for product that is made or sold in the United States, so that’s disjunctive one condition or the other, it’s a tiered royalty which starts at 3% and drops to 1%, because these are such blockbuster products, however, we get down to that 1% pretty quickly and in fact, did you see the fourth bullet point down there, the blended royalty rate on the Genentech products that were made or sold in United States was 1.5%.
In contrast to that product that is made and sold ex-U.S. that very last line in the chart that is it meets both conditions conjunctive we get paid a 3% royalty rate. Why that’s important is depicted on the following slide.
What we are seeing is an effort by Roche to gradually move some of the manufacturing these products outside the United States. They have had plants to make Avastin in Basel, a smaller plant and Herceptin in Penzburg, Germany. Recently they acquired two new plants in Singapore, one the CHO plant which you can make full length antibodies such as Avastin, which is apparently their primary -- would become the primary ex-U.S. source and the second of which is an e. coli plant where you can make proteins, as well as antibody fragments and example the antibody fragment would be Lucentis.
We understand that both of these plants they intend to use as primary supplies for Europe and as backup supplies in U.S. They have been approved for U.S. supply. We have not seen any indication from them yet that they are approved for European supply, which is their primary purpose.
At such time those bars start, the green bar start matching the blue bars where they overlap that’s a 3% royalty rate for us. So without any change in sales simply by virtue of the change inside of manufacturer, in fact our royalty rates will increase on these products in the future.
This is just a simple bar chart showing you, we’ve seen a very nice growth in these products. Again, they are well known to all of you and we hope that growth continues though we have seen some flattening of it due to austerity measures predominantly in Europe.
To talk about some of the products individually for a second, there has been a fair amount of controversy about Avastin in 2011 and finally, culminated in removal of the indication from their label for the treatment of metastatic breast -- negative breast cancer, in fact most of the sales in this -- for this indication we saw disappear in 2011. We don’t think there is much more decline to be associated with that.
In contrast EMEA did now the label but continues to be approve there for use where paclitaxel and if you look at some of the data that Genentech has generated, in fact that’s where you see the most efficacy when used in context of paclitaxel.
Roche has also been using some lifecycle management tricks with respect to Herceptin. One of things they done is they move to a subcutaneous formulation which is basically ready to use. You don’t have to get down to the pharmacy, get a prepared, et cetera and is also more quickly administered, you can see about 5 minutes, compared to 30 minutes, and we think this will be a nice addition to their inventory in terms of product portfolios.
There has been a fair amount of focus on Lucentis in 2011 and we think that’s going to get carry through into 2012. You can see here Novartis and Genentech have been very busy expanding the label and in fact, they have now label expansion for vision impairment associated with diabetic macular edema in Europe, we are anticipating we’ll see a similar label expansion in United States, as well as for macular edema secondary to retinal vein occlusion both of those are very nice market diabetic macular edema. I would notice the leading cause of blindness among working-age individuals in developed countries.
More recently we’ve seen the approval from Regeneron and their partner Bayer’s EYLEA for the treatment of Age-related Macular Degeneration. There was some surprise with respect to the approved dosing schedule, a lot of their clinical work had been done a by monthly dosing schedule, in fact what they got was a monthly dosing schedule for the first three months and then by monthly thereafter.
When you compare that to how Lucentis is used real world based on the data. Genentech is really in terms of the average number of doses Lucentis received by a patient the first year. You see that there are some differences but they are not very substantial. In fact, with Lucentis most of the retina vitreo surgeons in fact do treat monthly with Lucentis for the label for the first couple of months, but thereafter it goes period as needed. There is a price difference between Lucentis and EYLEA it’s about a 100 bucks, Lucentis is just under 2,000 bucks and you can see that EYLEA is just under 1,900 bucks.
One of the overhangs on EYLEA was some patent litigation between Regeneron and Genentech and that was recently settled. So we do think there probably will be some erosion of Lucentis market share in 2012 and forward. And in fact, Regeneron has given some guidance to that effect but we also think that the differences between the two are not as great as originally anticipated and not as favorable for EYLEA as originally hypostasized.
Tysabri is an interesting drug, without question it is the most potent and efficacious treatment for relapsing-remitting multiple sclerosis. At various times it’s been hunted by safety concerns. In fact, at one point it was actually pulled off the market then return to the market, largely due to the demand of the patients.
A little over a year ago Biogen Idec introduced an assay which allows you to screen patients, particularly those patients that are most acceptable developing PML, a rare but fatal -- often fatal brain infection. And the ability to screen patients and identify patients which are at risk, which typically begins about 24 months after therapy has given a great deal of comfort to the treating physicians and what you are seeing is a substantial increase in new patients starts.
So to be clear there are patients that are coming off, because the screen says, you are at risk, but when you look at the net patient adds, in fact, for last couple of quarter we’ve seen very nice increases for Tysabri, which have been reflected in their sales.
If I may, let me turn for a second to some of the products that are under license or to may be under license and I’ll identify which are which, where we think they could offer some near-term that is over the next couple of years increase in revenues, which will be reflected in our royalty income.
Many of you’re familiar with the Herceptin conjugate also known as T-DM1 and hypostasis behind this product was typically patients who have HER2+ breast cancer receive simultaneously treatment to the chemotherapeutic and Herceptin, and you have all the toxicities associated with systemic exposure of chemotherapeutic.
The hypostasis was if you combine Herceptin and Taxotere relying on the targeting of the antibody to deliver more of the chemotherapeutic, Taxotere in this case to the side of the tumor, you could not only increase it’s tumor cell killing ability but potentially also improve it’s side effect profile.
What we’ve seen is a very nice step up in terms of its efficacy. You see some of the data there. I would call to your attention the indented bullet point though, this was a much more dramatic improvement in the safety profile than I think most hypostasize as you well know great through higher the most serious of the side effects as they scale, typically requiring hospitalization and you see those cut just about in half. This is an important product. We do expect file for second line approval in 2012 and first line approval in 2014.
There are two products that Genentech and Roche are taking forward as line extensions of the Rituxan franchise for Non-Hodgkin's Lymphoma and multiple sclerosis, as well as some other blood born cancers. One is our Ocrelizumab and the other is Afutuzumab and you can see they spilt between them our Ocrelizumab going forward for MS, Afutuzumab for CLO and eventually for Non-Hodgkin's Lymphoma.
Genentech and Roche recently reported extension data. They have seen very nice results in terms of reduction the number of active brain lesions and relapses at 24 weeks and that benefit has been maintained through 96 weeks. This is not a license product.
The one that beginning to generate some attention is Pertuzumab, this is a drug they’ve been studying in HER2+ breast cancer patients and using it in combination with Herceptin. We’ve seen some very nice data here where you see a complete response for it, that’s quite a bit higher than you see either with Herceptin and Taxotere or T-DM1.
And in fact, they filed for approval in December of 2011 in both the U.S. and Europe for first line treatment in HER2+ metastatic breast cancer patients and we are waiting to see what kind of our approval status we’ll have whether we’ll get expedite approval or not, probably some that keep an eye on is the refuse the file date which comes about 60 days after their initial filing for application in the U.S.
Afutuzumab, I’m not going to spend a lot of time, as I mentioned, it sort of the other line extension for Rituxan. It’s a humanized anti-CD20 whereas Rituxan is a chimeric.
True that they will be a substantial amount of focus on the financial community this year are Bapineuzumab and the one right below its Solanezumab. These are both licensed product, their β -- antibodies to β-amyloid, both of them are in substantial international Phase 3’s, two Phase 3’s each, all four of those Phase 3’s are expected to report in the second half of 2012.
Early on with respect Bapineuzumab there was some concern because some of the higher doses where they saw swelling of the brain and in fact they turns out when you lower the dose the vasogenic edema does disappeared overtime and it is reversible there is no cognize of deficit expected.
What’s a little bit interesting, Bapineuzumab is covered by our patents with respect to Solanezumab because PDL assisted in the construct of the antibody. We also have a knowhow royalty. So this is a slightly lower royalty but unlike the patent it begins to run at the time of first approval and as you can see it runs from 12 and half years after first approval. So it could be important for our portfolio.
With respect to both Bapineuzumab and Solanezumab there is a fair amount of skepticism as to whether or not in fact these are working, their various estimates is the probability of success floating around there, but most of them are low.
Similar the estimate if they do work, suggest that these are multi-billion dollar products and there is some hope given that the current treatments for these patients afford such little benefit, the bar to improve is quite low and hopefully, we’ll some benefit from both of these agents.
Daclizumab is a product which is now jointly owned between Abbott and Biogen Idec for multiple sclerosis. They reported some very nice data from one of their Phase 2/3’s in patients and we anticipate seeing report of this data from the second trial in early 2013.
This chart, this stat chart we’re trying to simply show you some of the filings to be clear, not all of these are going to be successful but there are substantial number of them in U.S. and Europe anticipate and these are just from the Genentech and Roche products over the next couple years from which could derive financial benefit.
If I may, let me turn for a second to the financials. I’m not going to spend a lot of time here, you can see we’ve seen nice growth on our revenues, where we’ve also seen is a nice decline in our expenses, I would anticipate you’ll continue to see some decline in our expenses.
On the far right, you’ll see that we’ve been accumulating cash of $225 million. We are doing that for the purpose of looking for royalty generating assets and we want to be able to use our free cash flow to pay those.
We have been very busy. We have a series of debts and we’ve been very busy in late 2010 and 2011 engineering them. You could see the top most note; it’s a $155 million. It’s a 3.75 -- we actually made some changes to that one.
The most important which is, it’s a net share of settle provision, so what that means is, at the time the principle is due we paid in cash instead of stock most of the people are in are presenting at this conference over the last couple of years, they haven’t emerged, they probably want to pay at shares. We don’t. We pay dividend and we are more dilution sensitive than others. So we don’t want the shares outstanding.
A little further down you see we have an $11 million convertible note and $169 million convertible note, actually what those were were a $180 million convertible note we didn’t exchange for them. And the old portion is that $11 million. It wouldn’t be surprise that most of those people eventually trade into the one that’s a $169 million.
The difference between them is that all terms are identical except in fact the $169 million note is also net share settle. By switching them out of that the form note into the later note we’ve excluded about 26 million shares in potential dilution from our EPS and which also effects how we think about paying dividends.
At the very bottom of the page you’ll see we have a unitization note. We did in 2009. The face value was $300 million. We are down to about $115 million. We’ve been paying it off steadily. It pays off in relation to the Genentech revenues.
We took the proceeds of this note. We did a special dividend of a $1.69 in 2009. We are anticipating these notes probably going to paid down given our revenue projections for the 2012, some point in the third quarter of this year and at that point our free cash will jump significantly as all of those royalties return to us.
In 2011 we resolved a number of legal disputes both U.S. and ex-U.S. challenges to our patents. They were appealed in those jurisdictions. We do have one dispute remaining and it’s a dispute with Genentech and Roche. And this is something we hope at some point we’d express since the very beginning. We’d like to have see amicable settlement, they’ve been a good partner and they pay us a lot of money.
The genesis of the dispute stems from a fax, Genentech sent us at the request of Roche and Novartis in August of 2010, and what that basically said was, we are not surely owe you royalties on your European patents, our European product sales covered by what I call what our SPCs this is the European nomenclature for a patent extension.
We were puzzled by that because we have 2003 settlement agreement with Genentech, which says you won’t challenge, you won’t help anybody else challenge our patents and in fact, we wrote back to them and said, we think we’re in violation of the agreements.
Subsequent to that we have filed a contract action, so this is not a patent action. It’s a contract action, because the settlement agreement is a contract. So we filed an action in State Court in Nevada saying we think that the fax constitute a breach of the settlement agreement.
There are number of penalties in the settlement agreement, probably the most consequential from a financial perspective is that if we are successful in this suit, the royalty rate increases for product that is made and/or sold in United States. You saw in earlier slide that I showed you given the tiering of the royalties the 2010 blended royalty rate was about 1.5%.
The penalty specified in the agreement is the royalty rate increases retroactively and prospectively the 3.75%. On a historical basis if you just run the math on the sales they are on our website you can figure out yourself, but it is somewhere over $1 billion and obviously that keeps going.
In November of 2010 Genentech and Roche filed various motions to try and get out of the lawsuit. Roche filed motion basically saying we are Swiss company. We are not Nevada enough. You don’t really have jurisdiction over us. And Genentech filed the series of motions challenging the validity of the suit which is they releases on the basis, no harm, no file, we just did a fax, we didn’t really mean it, things like that.
In fact the judge through all those out and sort of said, sorry, Roche, you are in Nevada enough to run clinical trials in on four of the five accounts that we brought against Genentech and Roche, judge said, nice try, you are in the case. We anticipate this is going to go forward, it properly doesn’t go trial until some point in the middle of 2013 the parties are currently in discovery.
To conclude, there are really two futures for PDL as depicted here. On the left hand side in response to request from our shareholders, we are out looking to buy royalty assets. We’ve been accumulating cash. We have a fair amount of it, as I mentioned, our sweet spot here is $75 to $150 million. We are therapeutically agnostic but they do -- we do want them to be commercial stage products.
Many of our investors have come to us and said, look, if I want to go buy the research of the Acme company, I don’t need you guys to do that, what I like about PDL is, I have a strip of commercial stage products, which are lower risk and you are the only vehicle that affords me the opportunity to make that investment. We’ve heard that. We are going to honor it.
On the other side if we cannot in fact find either quality assets or assets that we think are high quality with an attractive rates, we will wind the place up. We have a substantial amount of cash, free cash flow and some point around 2016 timeframe, we’ll something wind it up and make sizable disbursements to the shareholders either in the form of share buybacks and/or increase dividends part of that time.
To conclude, we don’t run R&D, we don’t run manufacturing, all we think about everyday is how can we optimize returns, should we be buying back shares because this is dip, should we be buying back converts, because they are little cheaper, should we be pushing out converts and modifying because we can reduce the dilution and we are open to pretty much anything, which increases the return for our investors. To be clear, our substantial portion of our time is focus on that last bullet point though assessing commercial stage royalty generating assets.
To conclude, we think that PDL is a very attractive investment opportunity because of the dividend policy. We’ve seen historically very strong revenue growth in the approved products. There are numerous additional indications in those products.
I have also shown you some of the products that are in development where we think they could be approved in the future. We don’t believe they are built into the share price. We are reasonably efficient in terms of our small staff of less than 10 people with no R&D burn and we are not going to change that.
The other point I’d make is for institutional investors, we offer easy entrance and exit from the stock with the volume that runs, been averaging right now about 2 million shares a day have been up as high as 3 million shares a day. You’ve seen our dividend policy for 2011. We anticipate announcing a regular quarterly dividend policy for 2012 shortly. We have a Board of Directors meeting in a couple of weeks and we’ll typically announce it some point shortly thereafter.
Thank you very much for your attention. If you have any question, I look forward to seeing you at the breakout session. Good morning.