PDL BioPharma's (PDLI) CEO John McLaughlin on Q2 2016 Results - Earnings Call Transcript

| About: PDL BioPharma, (PDLI)

PDL BioPharma, Inc. (NASDAQ:PDLI)

Q2 2016 Earnings Conference Call

August 04, 2016 04:30 PM ET

Executives

Jennifer Williams - Investor Relations

John McLaughlin - Chief Executive Officer

Peter Garcia - Chief Financial Officer

Analysts

Max Jacobs - Edison Group

Joseph Throem - Cowen & Company

Operator

Good afternoon, and welcome to PDL BioPharma Second Quarter 2016 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. Ma'am, you may begin.

Jennifer Williams

Hello, and thank you all for joining us today. I would 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 Investor section on our website at pdl.com.

The forward-looking statements made during this conference call should be considered representative 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 will now turn the call over to John McLaughlin, President and CEO of PDL BioPharma.

John McLaughlin

Thanks, Jennifer, and good afternoon, everyone. With us today is Peter Garcia, our vice president and chief financial officer. As always on this call, I'll review our recent events before Pete provides an overview of our financial performance for the quarter. Please turn with me now to Slide number three. As, our primary focus remains on our long term growth as we continue to build value for our shareholders.

Since embarking on our strategy in late 2012 to build a portfolio of income generating assets, we have committed over $1.4 billion in this program to date. We have demonstrated we have the ability to do a wide variety of deal structures, which we can customize for each transaction, and thus have become the partner of choice for companies and institutions seeking alternative sources of capital. While we will continue to build on our portfolio of income generating assets, our equity transaction with Noden Pharma represents another platform for value creation, and we believe this will be a very successful business model for us and our shareholders.

Please turn with me now to slide four. There were no investments recorded in the second quarter of 2016. However, we previously announced a commitment of our first substantial equity investment in Noden in connection with a product acquisition that closed on July 1. This represents a shift in strategy for us. Our initial equity investment in Noden was $75 million, and in addition we provided up to $75 million in the form of intercompany loans to Noden, of which $34 million has been funded to date. The majority of the loans outstanding will be repaid to PDL once Noden closes on a debt financing, which is in process and expected to close in the third quarter of this year. Our equity investment in Noden will ultimately result in an 88% interest in the Company, but we will initially have a higher percentage ownership until management ownership interest vests over time.

Given our majority ownership of Noden, its financial statements will be consolidated with ours, and we expect it will be accretive to our cash earnings beginning in the third quarter of this year. Importantly, Noden provides a vehicle for additional product acquisitions. We are already in discussion about attractive assets to pursue as we see the acquisition market for specialty pharma products as currently favorable, which could represent a meaningful growth opportunity for us. There are many assets, and large pharmaceutical companies are currently looking to divest, and we are in a strong position to evaluate those.

By way of background, as you'll see in Slide number five, Noden Pharma is a global specialty pharmaceutical company headquartered in Dublin, Ireland, focused on acquiring and optimizing established medicines. Noden has closed an asset purchase agreement with Novartis AG whereby it acquired exclusive worldwide rights to manufacture, market and sell Tekturna and Tekturna HCT, as it is known in the U.S., and Rasilez, as is known in the rest of the world. Tekturna is a branded prescription medicine containing the active ingredient aliskiren, which is indicated for the treatment of hypertension. Tekturna HCT is a fixed dose combination of Tekturna and the diuretic hydrochlorothiazide. Aliskiren is the only direct renin inhibitor approved. It had global sales of approximately 154 million in 2015, and 72.8 million for the first six months through June 30, 2016. Noden will actually promote Tecturna and Tekturna HCT through a small commercial sales force. As you can imagine, we've done considerable due diligence on this product and we believe that we will see steady sales once commercialization has commenced.

As you can see on Slide number six, 17 transactions have been completed to date with four having concluded and 13 ongoing, which comprise our portfolio of high quality income-generating assets. We have deployed approximately 1.1 billion thus far and have a team that is entirely focused on evaluating income-generating assets. In addition to our equity investment in Noden, in early July we entered into a royalty purchase agreement with an individual inventor whereby we acquired that individual's rights to reserve certain royalties on sales of Kybella by Allergan in exchange for $9.5 million cash payment and up to $1 million in future milestone payments based upon product sales targets.

Kybella is a nonsurgical injectable for reducing moderate to severe fat on the upper neck otherwise known as double chin. Injection contains a naturally-occurring molecule, deoxycholic acid, which eats away at fat. When properly injected into sub-mental fat, the drug destroys fat cells. We found this transaction attractive for a number of reasons, two of which are Allergan as a manufacturing partner and the fact that Kybella is a cash pay product outside the traditional reimbursement environment. Please turn with me now to Slide number seven.

Our dividend program has been a priority of ours for many years, which we initiated when we were collecting royalties solely on license agreements relating to our Queen et al. patents. During the first and second quarters of 2016, we paid dividends of $0.05 per share and have paid our shareholders a total of $6.77 per share in cash dividends since the beginning of 2009. We have been diligent returning tangible value to our shareholders in recent years through our dividend program. However, given the plethora of investment opportunities and the exploration of most obligations to pay royalties under the Queen et al. patents, we have decided to eliminate our dividend program at this time to invest in the long-term growth of the Company. While we have had significant success in building our income-generating portfolio, our recent strategic shift of making equity investments into product-focused companies, specifically, Noden, dictates that our cash flow be reserved for future acquisitions. We believe this will ultimately provide greater long-term value to our shareholders.

Lastly, before I turn the call over to Pete, I would like to update you on recent developments related tour loans to Wellstat Diagnostics. As you may recall, late last year we filed a motion for summary judgment in the supreme court of New York. In this we requested that the court enter judgment against Wellstat Diagnostics guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses, including lawyers' fees incurred by PDL in enforcement of the related guarantees. The Wellstat Diagnostics guarantors' collateral includes all of the assets of each of the family of companies in the Wellstat group and certain other assets, and provides collateral beyond Wellstat Diagnostics assets.

Lastly, the supreme court of New York issued its decision granting PDL's motion for summary judgment and denying Wellstat Diagnostic's cross-motion requesting that the court find that the guarantees were rescinded. In this decision, the court held that the Wellstat Diagnostics guarantees are liable for all obligations owed by Wellstat Diagnostic to PDL. It did not set a specific dollar amount due, but ordered that a special referee be designated to determine the amount of the obligation owed, and awarded PDL its attorneys' fees and costs in an amount to be determined.

The supreme court of New York has also set a hearing later this month to consider whether certain expenditures of the Wellstat Diagnostic guarantors violated the court's status quo ante instruction that limits the guarantors' expenditures to those in the ordinary course of business and whether to issue a writ of attachment. Wellstat Diagnostic's guarantors' compliance with the court's instructions is important to the preservation of PDL's collateral. The Wellstat Diagnostics guarantors have filed a notice of appeal. However, this appeal does not stay the supreme court of New York from entering a monetary decision for the amount owned to PDL based on the decision of the special referee to be designated.

In addition, on August 2, the Delaware bankruptcy court announced its decision to grand PDL's motion to dismiss Defined Diagnostics, which was formerly known as Wellstat Diagnostics, Chapter 11 petition with prejudice as a bad faith filing, which should result in the receivership sale in the Maryland court proceeding promptly. These important rulings are very important and critically important steps in the process of recovering what is rightfully owed to PDL, and we look forward to updating you on our progress in the near future.

With that, I'll turn the call over to Pete to discuss our financials for the quarter. Pete?

Peter Garcia

Thank you, John. Please turn with me now to our summary bottom line financial results on Slide number eight. GAAP, diluted EPS was $0.03 and $0.37 for the three and six months ended June 30, 2016, respectively. And GAAP net income was $4.1 million and $60 million for the three and six months ended June 30, 2016, respectively. Our non-GAAP diluted earnings per share was $0.09 and $0.61 for the three and six months ended June 30, 2016, respectively. And non-GAAP net income was $15.1 million and $100.2 million for the three and six months ended June 30, 2016, respectively. The largest component of the difference in non-GAAP measure compared to GAAP is the exclusion of mark-to-market changes in fair value of our acquired royalty rights with a full reconciliation of the components detailed on this slide and in today's press release.

Turning to Slide number nine. Total revenues were $21 million and $124.2 million for the three and six months ended June 30, 2016, respectively. Revenues for the three months ended June 30, 2016 included royalties from our licensees to the Queen et al. patents of $14.2 million, which consisted of royalties earned on Q1 sales of Tysabri; net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets of negative $855,000; interest revenue from notes receivable financings to late stage healthcare companies of $7.3 million; and license and other revenues of $327,000.

Our total revenues decreased by 85% for the second quarter of 2016 when compared to the same period in 2015. The decrease in royalties from our licensees to the Queen et al. patents is due to the expiration of the patent license agreement with Genentech. We continue to receive Queen et al. patent royalties on the sale of Tysabri for products produced prior to the December 2014 patent expiration. The time frame for which we will continue to receive royalties is uncertain; however the amount received this quarter is comparable to our prior full quarter royalties on Tysabri. The decrease in royalty rights change in fair value was primarily driven by decreases in fair value of both the Depomed and University of Michigan royalty rights with $7.4 million decrease in the fair value of the Depomed royalty rights assets primarily as a result of higher gross to net adjustments for Glumetza. And a $7.6 million decrease in the fair value of the University of Michigan royalty right asset as a result of a delay in national pricing and reimbursement decisions in the European Union and Japan for Cerdelga.

We received $14.4 million in net cash royalty payments and milestone payments from our acquired royalty rights in the second quarter of 2016 compared to $1.2 million for the same period of 2015. Of these payments, $6 million was related to a milestone for FDA approval of Jentadueto XR, and a third approved product for which we will receive royalties from our Depomed royalty rights assets. We expect to begin receiving royalty rights on Jentadueto XR in the third quarter of this year. Since our acquisition of the Depomed royalty rights for $240.5 million less than three years ago, we have received $178.5 million in net cash payments to date.

Turning to year to date comparisons, total revenues decreased by 57% for the six months ended June 30, 2016 when compared to the same period in 2015, primarily from a decrease in the royalty from our licensees to the Queen et al. patents, and a reduction in the fair value of the Depomed royalty rights asset primarily as a result of higher gross to net adjustment for Glumetza.

Operating expenses were $9.9 million for the three months ended June 30, 2016 compared to $7.4 million for the same period of 2015. The increase in operating expenses for the three months ended June 30, 2016 as compared to the same period in 2015 was primarily a result of acquisition related costs of $3 million for the Noden transaction, which were advanced to Noden and our expected to be repaid to us by year end. For the six months ended June 30, 2016, operating expenses were $19.8 million compared to $15.1 million for the same period of 2015.

Turning to our cash position, we had cash, cash equivalents and investments of $190.9 million at June 30, 2016, compared to $220.4 million at December 31, 2015. The decrease in cash from December 31, 2015 was primarily attributable to the restriction of $105.9 million in cash for the Noden transaction, repayment of the March 2015 term loan for $25 million, payments of dividends of $16.4 million, and an additional note receivable purchase partially offset by proceeds from royalty right payments of $39.1 million and cash generated by operating activities of $94.8 million.

Included in the $190.9 million cash and investment balance is a $75 million investment in a certificate of deposit in which the liquidity will be restricted as of July 2016, and until August 2017, as a result of a bank guaranty related to the second payment due to Novartis for Tekturna, which is pledged against the certificate of deposit. This concludes our prepared remarks. Operator, at this time we are ready to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Max Jacobs with Edison Group. Your line is now open.

Max Jacobs

So, I have actually a few of them. First, can you just go over, like, what's the financial condition of Kaleo? Is there anything you can tell us about that?

John McLaughlin

Sure. There isn't a whole lot we can tell you about it. It's a private company, so they don't disclose a whole lot of public information. We have access to a bunch of nonpublic information about their financial condition, but unfortunately it's subject to a confidentiality agreement. I think, Max, the only thing we can say publicly about them is that they have been paying and have committed to continue to pay the various payments that are due under the agreement with them to service the financial transaction we struck with them.

Max Jacobs

And what happens if Auvi-Q, like they never figure out the manufacturing issue and let's say it never comes back?

John McLaughlin

At that point we have some rights to foreclose on it in terms of the royalties, etc. I mean, I think -- we don't think that's going to be an issue at this point. I think they're still trying to figure out whether they're going to do it themselves or partner, or something like that, but I don't think that's our concern at this point.

Max Jacobs

Okay, great. And then on, if you don't mind if I ask another one, on Cerdelga, I was just wondering, can you go over in a little bit more detail kind of why the writedown?

Peter Garcia

Hi, Max, this is Pete. So, as you are familiar with, we are, for the royalty rights assets we do fair value accounting. And so while our royalties that we've been receiving since the launch of Cerdelga in the U.S. have met our expectations, those in Japan and Europe have not. And when we went out with our third party to look at future forecasts, we identified that a lot of the countries that we had assumed would come online have been delayed due to reimbursement in the various countries. And so we revised our forecast, which effectively took down the value of that asset from $71 million at the end of the first quarter to approximately $64 million this quarter.

Max Jacobs

Okay, great. And just one more quick question. On Kybella, is there anything you can tell us about the size of that royalty?

John McLaughlin

It's not publicly disclosed, so we can't. We have disclosed it to an inventor, so typically those are reasonably low single digit royalties without saying what that one is. That is typically where they fall.

Max Jacobs

Okay. Okay, great. Thank you very much, guys. I'll get back in the queue.

Operator

Thank you. And our next question comes from Adnan Butt with RBC Capital Markets. Your line is now open.

Unidentified Analyst

This is [Ashad] (ph) on for Adnan. Thank you for the opportunity to ask a question. To start, can you just talk about the dividend? I know you've mentioned that you want to use the cash to invest in income generating assets, but is this something that's temporary in nature or something you'll consider bringing back on in the future? Or how are you thinking about it?

John McLaughlin

So, to be clear, what we said is we've eliminated a dividend, not spend it, so we've eliminated it for now. I mean, we always look at sort of what are the best ways to sort of return money to shareholders. That's not to say we won't look at it at some point in the future, but at this point the pipeline for deals looks pretty good, and that's why we use the word eliminate instead of suspend. We're just seeing a lot of deals. We're seeing some fairly interesting specialty pharma products. There is a window of opportunity here if want to avail ourselves of it.

Unidentified Analyst

Okay, fair enough. And then on the Noden transaction, are you able to give us more color on Tekturna demand in selling dynamics in greater detail at this point?

John McLaughlin

Well, we can tell you a little bit more about it based on research we've done. So, this is as part of our diligence. We do research ourselves with our team that evaluates these things. We do qualitative research, then we actually conduct or we hire a third-party consultant to do both qualitative and quantitative research. So, they build upon our calls with KOLs and payers qualitatively, and then they build a separate revenue model independent from the one we built. So, the feedback we got from them was that it's a very interesting third-line product. To be clear, that's not its label, but that's where it's most commonly used after ACE inhibitors and ARBs. But it's got a very nice profile in terms of safety and efficacy as long as you stay out of patients with diabetes and don't use it with other products where it's contraindicated. We found that it was promotionally sensitive, and that was an important criteria for us. Did in fact, when you talk to physicians and you show them the label, did that seem to influence their future prescribing habits, and the quantitative research said yes. So, it's an attractive product profile. It's the only direct renin inhibitor approved and we like that. Again, these are folks that have fairly serious hypertension that is not being addressed by first- or second-line therapies. They still have the hypertension problems and they're looking for a third-line therapy. That's Tecturna.

Unidentified Analyst

Okay great. Thanks John and thank you Pete. That's it for me.

Operator

Thank you. [Operator Instructions] And our next question comes from Joseph Throem with Cowen and Company. Your line is now open.

Joseph Throem

Hi. This is Joe on for Phil Nadeau. Thank you for taking my question. It's good the Wellstat filing is proceeding. I'm not too familiar with the process. Is there any clarity on maybe when the dollar amounts will be placed to these decisions at all?

John McLaughlin

Sure, sure. In business, a fairly typical proceeding in the courts in New York. So, what they've basically done is they sort of said, okay, we've looked at this, there are the guarantees, they are valid, they owe you the full amount due. And then what they do is they court turns it over to a special referee. These are sometimes retired judges or prominent lawyers who aren't as active in practice anymore, and it's basically the court, that special referee or special master, does the mathematical exercise of looking at the numbers we're going to provide and checking them and then rendering a decision. It can take a couple of months. While it's a simple mathematical exercise, they're a little backed up, so it can take a couple of months. We are hoping it will go a little faster than that simply because the math is pretty simple, but to be clear, it could take a couple of months.

Joseph Throem

Okay, that's great. And it looks like the Tysabri levels were pretty similar quarter to quarter. Do you have any indication maybe of how much is left in inventory or is that information that you don't really give?

John McLaughlin

Its information we don't have. So, to refresh your recollection, their obligation is predicated on a product that was produced prior to the expiration of the patents in late December of 2014, and as you've observed. But we just don't know what those levels are at this time.

Joseph Throem

Okay, great. And I guess, finally, if you have any sort of color on if Lilly is expecting the solamezumab data in Q4, and maybe if you've heard anything on how the approval might be affected by changing that primary endpoint recently?

John McLaughlin

I wish we had information on the second one. Even if we had it for ourselves, we don't. So, with respect to the first part of your question, though, Lilly did its conference call I want to say about a week ago, maybe last Tuesday or Wednesday. They did affirm that in fact they are anticipating having all data in, and they will release top line data in the fourth quarter of 2016. And that's what they said for the last couple of times. They have reaffirmed patients are on track, etcetera. Probably the only new disclosure they made was that they intend to start a Phase 3 trial using solamezumab in what are called prodromal patients. And to refresh your recollection, the trial that you asked about and most people are interested about are those who have mild Alzheimer disease. More and more the field is moving to earlier and earlier patients, so prodromal means you see on things like PET scans, a buildup of the beta amyloid plaque, but they're not symptomatic on typical Alzheimer scores. So, you've got buildup but they're asymptomatic at this point, and Lilly basically announced they were going to start that trial before they even had the readouts from the Phase 3, which was sort of an interesting announcement.

Joseph Throem

Sounds great. Alright great. Thank you so much. That's all I had for today.

Operator

Thank you. At this time I'm showing no further questions. Sorry, I apologize. We actually do have one more. And, again, it's from Max Jacobs with Edison Group.

Max Jacobs

I just have you might not be able to give me any color on this. But on Jentadueto XR, which recently got approved, I was just wondering, since CVS recently got on the news because they've gotten kind of harsh on some of the new launches, and even some of the kind of mainstays within diabetes are now on the exclusion list.

John McLaughlin

Yes, both CVS and Express Scripts, yes.

Max Jacobs

Yes. So, I was just wondering if you have any color on what the reimbursement situation will look like for Jentadueto XR?

John McLaughlin

Yes. So, if I'm recalling correctly, I just saw a listing from CVS and I'm trying to make sure it was CVS and not Express Scripts. But I thought I saw CVS and I thought Jentadueto XR was on that one as a reimbursed drug. I'm sorry, Pete is telling me it was Express Scripts, not CVS. Sorry, I don't remember CVS. But it was Express Scripts where they had it listed and where they were being reasonably harsh in terms of those where they thought they saw exorbitant price increases.

Operator

Again, at this time I'm showing no further questions. I would like to turn the call back over to Mr. McLaughlin for closing remarks.

John McLaughlin

Operator, thank you, and thanks to all of you for joining us on the call this afternoon. We are obviously excited about our newest transaction and look forward to sharing further developments with you in the months ahead. Have a good day, all.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a great evening.

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