PDL BioPharma's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: PDL BioPharma, (PDLI)

PDL BioPharma, Inc. (NASDAQ:PDLI)

Q4 2011 Earnings Call

February 23, 2012 04:30 p.m. ET

Executives

Jennifer Williams – IR

John McLaughlin – President, CEO, Acting CFO

Caroline Krumel – VP, Finance

Analysts

Charles Duncan – JMP Securities

Brian Klein – Lazard Capital Markets

Jason Kantor – RBC Capital Markets

Phil Nadeau – Cowen & Company

Operator

Good afternoon and welcome to the PDL BioPharma’s Fourth Quarter and Year End 2011 Conference Call. Today’s call is being recorded. For opening remarks and introduction I would now like to turn the call over to Jennifer Williams.

Jennifer Williams

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 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. With me this afternoon is Caroline Krumel, our Vice President of Finance. I’ll begin with a brief business update and then turn to our financial results.

We continue to execute on our corporate objective of restructuring our capital to reduce the potential dilution associated with our convertible notes and to increase our financial flexibility. In January and February of 2012 we completed public and privately negotiated exchange transactions where we exchanged a $179 million worth of our 2.78 Convertible Notes due February 15, 2015 for a $179 million aggregate principal amount of new 2.78 Series 2012 Convertible Notes due February 15, 2015. We made this exchange into the new Notes because they are net share settle.

This means that the principal is paid in cash and any other sums due may be paid in shares. The effect of this exchange is a reduction of $27.8 million shares of potential dilution, a significant benefit to our stockholders. Additionally, as we manage our intellectual property portfolio we remain very active in evaluating opportunities to purchase new royalty assets to further improve return to our stockholders.

To reiterate what we said before, we are pursuing commercial stage assets in the range of $75 million to $150 million purchase price which generally represents the net present value of the future royalty stream.

Turning to our financial results, total revenues for the fourth quarter of 2011 were $72.8 million compared to $76.1 million in the fourth quarter of 2010, a 4% decrease. Total revenues for the full year ended December 31, 2011, were $362 million compared with $345 million for the same period in 2010. 2011 total revenue includes $400,000 milestone payment from Roche for a progress in clinical trial and a $10 million settlement payment from UCB resolving all disputes between our two companies.

Excluding the milestone and the one time payments, royalty revenue was $351.6 million for 2011 compared with $343.5 million for 2010, a 2% increase year-over-year. Royalty revenues for the fourth quarter of 2011 are based on third quarter product sales by PDL’s licensees. The fourth quarter 2000 revenue decline is primarily driven by reduced royalties from third quarter 2011 sales of Avastin and Herceptin which are marketed by Genentech and Roche, partially offset by increased royalties from the third quarter sales of Lucentis which is marketed by Genentech and Novartis, and Tysabri which is marketed by Elan and Biogen Idec. Royalty revenue for the fourth quarter in full year are net of payments made under our February 2011 settlement agreement with Novartis.

Turning to expenses, our operating expenses in 2011 were $18.3 million compared to a $133.9 million in 2010. Included in operating expenses in 2010 was $92.5 million legal settlement with MedImmune and $41.4 million general and administrative expenses. For the fourth quarter of 2011 G&A expenses were $4.8 million compared with $12.1 million for the same period of 2010.

Net income in 2011 was a $199.4 million or $1.15 per diluted share as compared with net income of $91.9 million in 2010 or $0.54 per diluted share. Net income for the fourth quarter of 2011 was $38.9 million or $0.24 per diluted share compared with the net loss of $24.5 million or $0.18 loss per diluted share for the same period in 2010.

Adjusting for effects of certain convertible note transactions throughout the year, non-GAAP net income for 2011 was $201.6 million or $1.17 per diluted share. Adjusting for legal settlement with MedImmune and the effects of certain convertible note transactions throughout 2010, non-GAAP net income was $168.4 million or $0.97 per diluted share in that year.

Non-GAAP net income for the fourth quarter of 2011 was $39.6 million or $0.24 per diluted share compared with non-GAAP net income of $35 million or $0.20 per diluted share for the fourth quarter of 2010.

Net cash provided by operating activities in 2011 was a $169.8 million compared with a $184.3 million for 2010. As of December 31, 2011, PDL had cash, cash equivalents and investments of $227.9 million compared with $248.2 million as of December 31, 2010.

In accordance with our regular quarterly dividend policy, we paid the final of four dividends on December 15 to all stockholders of record as of December 8 for a total of $21 million. In connection with the dividend payment, the conversion ratio for our outstanding February 2015 notes was adjusted to 155.39 fixed shares per $1000 principal amount for a conversion price of approximately $6.44 per share of common stock effective as of December 9, 2011.

For our May 2015 notes, the conversion ratio was adjusted to 135.9607 shares per $1000 principal amount, or approximately $7.36 per share, effective as of December 6, 2011.

The conversion ratio for the new series 2012 notes is a 155.396 shares of the company’s common stock for a $1000 principal amount which is equivalent to an initial conversion price of approximately $6.44 per share of common stock. This is the same conversion ratio applicable to the February 2015 notes.

We were pleased to announce last month our plans to pay regular quarterly dividends again in 2012, a $0.15 per share each payable on March 14, June 14, September 14, and December 14, the shares of record as of March 7, June 7, September 7, and December 7 respectively.

Continuing with our policy providing quarterly revenue guidance in the third month of the quarter, we will be providing first quarter revenue guidance in early March. On the administrative side, we have an active executive search ongoing for a new CFO. We ought to have a new CFO hired by the second quarter of this year. In the interim, we are well staffed with a strong finance team of internal employees and external consultants who continue to oversee our financials as well as our convertible notes and dividend disbursements.

Operator, at this time we are ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hi John. Thanks for taking my question and congratulations on a good quarter of progress especially with the Notes. You are wearing a lot of hats right now. I'm sure you are pretty busy. But I wanted to ask you about the new royalty asset betting process. This has been ongoing for a while so it seems like you have a pretty high bar. Can you provide a little bit more color on the kind of opportunity flow that you are seeing and let us know whether or not you think you are getting close to something?

John McLaughlin

Sure Charles. Your observation is exactly correct. We do have a high bar. We are focused on commercial stage products. We are looking for differentiated products. We are seeing a fair amount of deal flow, but we are being picky about that because unlike – for example a [indiscernible] royalties we can think of other ways to return capital to our shareholders and increase their return of the duration of their payments or dividends, but certainly their returns. We are looking at some of the royalties, we are looking at some that are debt structures, they seem promising. I think we are optimistic. But again, we have to actually get a deal done and show that we can do quality deals to you and to our stockholders, and that’s something we look forward to proving.

Charles Duncan – JMP Securities

You hired some independent folks I believe to help with those ideas. Does that contract have a certain life span, and if so, could you share that with us?

John McLaughlin

No, they are consultants. The consulting contract extend for – we can continue to roll the model for as long as it makes sense to roll them over. So, there is nothing to be read into the duration of those contracts. They are both Franklin Berger and Evan Bedil they are both very capable about this. Franklin is a well known analyst in U.S. patents, and Evan has actually purchased some of these when he was at a previous fund. So they are both very experienced, very capable, we are thrilled to have them. I think we are making good progress, but we got to pull that deal.

Charles Duncan – JMP Securities

Sure, I mean, I know, at least Franklin pretty well and very capable, but I guess what I'm really driving at I'm kind of wondering when – if you have a date in your mind that there is going to be a go-no-go decision or one that says, “Okay, well we should start to take a look at winding down,” I am just kind of wondering how we understand that.

John McLaughlin

Sure. Certainly some point around 2014 or thereabout we have to step back and say, okay, is this viable or not? Can we get enough deals done? We are running experiments, we’ve given ourselves the time, we put together a team. Can we get enough deals done that this is a viable entity that will provide increased returns for our shareholders, or is it not and we should simply be winding up the place and disbursing cash as quick as we can, at some point in the 2014 timeframe.

Charles Duncan – JMP Securities

Okay, that makes sense, and if I could ask just one more question related to Roche, I'm wondering if you have the perspective on the vector towards their manufacturing of certain products, ex-U.S. and how that's going and how you have been able to, call it, audit that activity? And then finally, if you have any commentary, I'm sure you will be conservative on this, with regards to the European royalty challenge that's ongoing.

John McLaughlin

Sure. So to take the questions in the order you asked them, we are doing some work to try and get better visibility on what’s going on with respect to Roche’s ex-U.S. manufacturing. We did see an announcement from them recently that they in fact expanded their existing plants in Germany to expand its capacity to make products including Herceptin. We are still awaiting some guidance from them on approval of the two plants in Singapore as commercial suppliers for the European market. We did not see anything from that. We are trying to get some better insight on it. So that's a work in progress for us.

With respect to the dispute with Roche as you’ve alluded to, we do have a litigation pending in State Court in Nevada. It’s in a discovery phase at this point. We are not anticipating this is going to go to trial until some point in the middle of 2013. The court has set a date of May of 2013 I believe. So it’s a little ways off and I don’t know that there is much more we can share at this point. It’s still in the reasonably early stages of the litigation, really the discovery phase eventually moving into depositions.

Charles Duncan – JMP Securities

Okay, thanks John for the extra help.

John McLaughlin

Thank you.

Operator

Our next question comes from Brian Klein, Lazard Capital Markets.

Brian Klein – Lazard Capital Markets

Thanks for taking my question. At first I was wondering if you could specifically comment on Herceptin and the percentage manufactured ex-US and sold ex-US, you saw a big decline in the third quarter. I was just wondering if you could comment on that, and then secondly if perhaps you could give us some guidance as to what you expect your litigation cost could be in 2012, thanks.

John McLaughlin

Sure. With respect to the first part of your question, as you have alluded to in fact what we did see was a modest increase in Herceptin sales but our royalties declined because of the shift in manufacturing site. The more it was made in the U.S. they made ex-U.S. and sold ex-U.S. and we don’t have a good explanation for what’s going on here. Again, as I alluded to in responding to Charles’ question, one of the things we are trying to get our arms around by having some conversations with Roche and others to try and understand what’s going on. Is this simply a question of leading down inventory or whatever. It does seem inconsistent with the fact that they spent a fairly sizeable sum to expand the Penzberg where they have been making Herceptin. They certainly have not changed their tune when you look at their corporate filings, but you go to the reports of the financial committee in early February about their intent to push manufacturing overseas. But there is something going on at least in the third quarter and we are trying to get our arms around it.

I think the second part of your question had to do with legal expenses for the year and we might see a modest uptick in our run rate on legal expenses there, just as it gets a little more intense, but again it’s going to be probably a fairly modest uptick, not a very sizeable number. Caroline, do you have a sense of what the number would be in terms of what we are thinking about for this year?

Caroline Krumel

Yes, we are budgeting about $9 million for the entire 2012 fiscal year.

Brian Klein – Lazard Capital Markets

Great, thanks a lot.

John McLaughlin

Thank you Brian.

Operator

Our next question comes from Jason Kantor with Royal Bank of Canada.

Jason Kantor – RBC Capital Markets

Thanks for taking the question. Charles asked a lot of my questions. But I was just wondering when you are looking out towards the coming years, especially if you are unable to do the kinds of deals in either size or number that you are contemplating, what is your calculus for trying to figure out how to return capital to shareholders in terms of how big special dividends might be, is there a minimum amount of cash you want to have on hand at the company above which you would distribute that cash or you have also in the past talked about share repurchases and debt repurchases. What is your preference there?

John McLaughlin

Sure. So, again Jason, it’s a little bit off. We have actually presented some alternative plans to the board, but what we do have to do is we would have to reserve some monies to pay off our convertible notes which are due in 2015. We probably need to reserve a certain amount of money just for unexpected expenses and ongoing operations. But by and large we would look to things like share repurchases, and pushing out cash payments whether those are in the form of increased regular dividends or special dividends or some combination of the two. I don’t think at this point we are prepared to say definitively, but obviously getting that money back to shareholders sooner once you’ve made that decision improves their return, we are cognizant of that. Nobody pays us to be a bank, we are cognizant to that, and we want to get the money back fast.

Jason Kantor – RBC Capital Markets

I mean let’s say you are still planning to move forward with the asset purchase plan, but we are six months from now and we still haven’t done it. Is there some special dividend associated with that, the cash flow over the next six months if you don’t put it to work where you would think to give it back over some shorter period of time?

John McLaughlin

It’s a good question. So I would want to comment over whether it’s 6 months or 12 months or whatever. But I think the point that’s implicit in your question is, we have been accumulating cash to buy royalty assets or other kinds of assets that improve return for our shareholder. Our shareholders don’t pay us to be a bank with an investment policy that is appropriately conservative and generates 20, 30, 40 basis points, and obviously we start looking at other things to do with that cash. It could be returning it to shareholders as a special dividend, it could be if we see some opportunities, weaknesses in the stock, buying back some shares. If we see some weaknesses in the prices they convert through trading, we are not looking at those sorts of things.

We would certainly look at those, I don’t know that we are prepared to specify what our timeframe is, but we are cognizant of our fiduciary obligations as sort of managers of other people’s money to be careful with it and not to let it sit around.

Jason Kantor – RBC Capital Markets

Thanks.

Operator

Our next question comes from Phil Nadeau with Cowen & Company.

Phil Nadeau – Cowen & Company

Thanks for taking my question. First on the Novartis royalty or the payment that you make to Novartis each quarter. In the past our model that payment seem to be about 50% of the royalty that you were owed. In this quarter, unless my math is wrong it seems to have declined somewhat and I was just wondering could you review with us how that royalty is calculated? What have you said publicly and can it float from quarter-to-quarter or is there just something wrong with my model?

John McLaughlin

I would never criticize your model, so let me start there. It does not float from – we have not disclosed what the percentage is, so let me say that. So we get X amount of dollars from them and we pay back to them a smaller sum than that. It is a percentage. It can change from year-to-year. It does not float quarter-to-quarter. And I'm sorry much beyond that I can't help you with your model.

Phil Nadeau – Cowen & Company

Okay, but it does change from year to year on what basis is a change there, is that schedule over time or is there some schedule.

John McLaughlin

It’s a fixed schedule.

Phil Nadeau – Cowen & Company

There is a fixed schedule, okay. And then, second, on your Lucentis royalty. To the extend that Lucentis sales are hurt by Ilia [ph] obviously your royalty on Lucentis will go down, obviously Roche has been compensated because we now have somewhat of a royalty or they have a royalty on Iria. But this suggests that maybe PDL gets hurt by the Iria competition not more than Roche, but at least you are not compensated for. Do you have any claim to that royalty that Genentech is getting from Regeneron or – because the queen patents were referenced in the settlement, do you have no claim on that whatsoever?

John McLaughlin

So that is correct, we do not have a claim on it. As you will know it’s a fusion protein not an antibody, so we have no entitlement to it. We have publicly said that we do anticipate that Lucentis royalties will either be flat or declining. Certainly you have seen it Regeneron almost doubled their guidance, we do anticipate that Lucentis will probably pick up an additional indication for macular edema associated with diabetes, but probably not in the second half of the year. It’s hard to see that that’s going to offset whatever declines might occur as a result of Ilia if in fact it’s strong in the first or second quarter as Regeneron seems to be suggesting.

Phil Nadeau – Cowen & Company

Okay, and then last question on Pertuzumab. You’ve highlighted it is in development stage, potential royalty bearing product, what communications have you had with Roche and Genentech on their requirement to pay royalties on that product, so I guess where does your understanding come from, and how solid of an understanding is it that they will – in fact their royalty should that be approved.

John McLaughlin

So forgive me, but I'm not going to comment on any conversations we have with Genentech or Roche. But under the Herceptin license it’s a broad license with respect to HER2, it does fall under that license in our view.

Phil Nadeau – Cowen & Company

Okay, thanks for taking my questions.

John McLaughlin

Thank you.

Operator

I'm not showing any further questions at this time. I’d like to turn the conference back over to John McLaughlin for closing comments.

John McLaughlin

Operator, thank you and thanks to all of our listeners for joining us on this call this afternoon, we look forward to seeing many of you at upcoming conferences including the RBC Capital Markets and Cowen Healthcare Conference in coming weeks. Thanks again for participating and have a good day.

Operator

Ladies and gentlemen, that concludes today’s presentation you may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!