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Executives

Jennifer Williams – Investor Relations

John McLaughlin – President, CEO, Acting CFO

Caroline Krumel – Vice President of Finance

Analysts

Charles Duncan – JMP Securities

Phil Nadeau – Cowen & Company

Adnan Butt – RBC Capital Markets

PDL BioPharma, Inc. (PDLI) Q1 2012 Earnings Call May 3, 2012 4:30 PM ET

Operator

Good afternoon and welcome to PDL BioPharma’s First Quarter 2012 Earnings 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.

Please go ahead ma’am.

Jennifer Williams

Hello and thank you all for joining us today. I’d like to first point out that there is a slide presentation associated with today’s earnings call and you’ll see that in the Investor Relations section of the PDL website which you’ll find at pdl.com.

Before we begin, let me remind you that the information we will cover today contains forward-looking statements regarding our financial performance and other matters, and our actual results may differ materially from those expressed or implied in the forward-looking statements.

Factors that may cause differences between current expectations and actual results are described in our filings with the Securities and Exchange Commission, copies of which may be obtained in the 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 Caroline Krumel Vice President of Finance. As always in this call, I’ll provide a summary of recent events and an overview of our financial results from the quarter.

As you can see in slide three, we were very pleased to announce last week that Bruce Tomlinson will be joining us as Vice President, CFO. Bruce joined us from InterMune, a public biopharmaceutical company where he was Chief Accounting Officer, Vice President of Finance and Corporate Controller. Bruce managed all accounting and treasury functions, financial reporting, systems and controls and Sarbanes-Oxley Compliance at InterMune.

He brings more than 20 years of financial and management experience which is very relevant to PDL including knowledge of convertible debt transactions and tax structures. He will join us here in Incline Village on June 11th and we will be happy to have him on board and know that you’ll be talking with him in the months ahead.

Turning to our financial results on slide four, total revenues for the first quarter of 2012 were $77.3 million compared to $83.3 million for the first quarter of 2011. As we noted in the press release, total revenue for 2012 included a $10 million settlement payment from UCB Pharma resolving all disputes between our two companies. Excluding the UCB payment, royalty revenue increased a little over 5%.

Royalty revenues for the first quarter of 2012 are based on fourth quarter 2011 sales by PDLs licensees. The growth in revenue for the first quarter of 2012 is primarily driven by increased royalties on sales of Herceptin, which is marketed by Genentech and Roche, Lucentis and Xolair both of which are marketed by Genentech and Novartis, and Tysabri which is marketed by Elan and Biogen Idec. Royalty revenue for the first quarter is net of payments made under our February 2011 settlement agreement with Novartis.

Turning to costs, our G&A expenses for the first quarter of 2012 were $6.9 million compared to $5.8 million in 2011. Total cash and equivalents as of March 31, 2012 were $192.5 million compared to $227.9 million as of December 31, 2011. The decrease in cash is primarily due to the second and final payment of $27.5 million to MedImmune under our February 20, 2011 settlement agreement.

Net cash provided by operating activities in the first quarter of 2012 was $17.9 million compared with net cash used of $13.2 million in equivalent period of 2011. Net income for the first quarter of 2012 was $40.2 million or $0.29 per diluted share as compared with net income of $44.5 million in the same period of 2011 or $0.25 per diluted share.

On slide five, you could see that adjusting for the effects of certain convertible note transactions and the resulting interesting expense, non-GAAP net income for the first quarter of 2012 on a fully diluted basis was $41.8 million or $0.30 per share compared to $44.5 million or $0.25 per share in that same period of 2011.

In accordance with our regular quarterly dividend policy, we paid the first of four dividends on March 14th to all stockholders of record as of March 7th for a total of $21 million.

You can see on slide six that, in connection with this dividend payment, the conversion price for the $1 million outstanding on our February 2015 notes is approximately $6.29 per share effective March 8, 2011. For our May 2015 notes, the conversion price is approximately $7.18 per share effective March 5, 2011. The conversion price for the new series 2012 notes is approximately $6.29 per share effective March 5, 2012.

Moving to slide seven, one of the things that has added to the growth trajectory of our royalty revenues is the fact that Genentech has been and continues to shift a percentage of manufactory for key products to facilities outside United States. Products that are both made and sold outside United States are not subject to our tiered royalty with Genentech but our book at a flat 3% royalty.

This chart shows ex-U.S. sales compared to ex-U.S. maiden sold Avastin and Herceptin. Please bear in mind that the sales occurred in the prior quarter and the dates in the chart refer to when we received royalties on those sales. As you can see, we saw an uptick in the amount of Herceptin made and sold outside of United States upon which royalties reported in the first quarter of 2012.

Avastin’s data about slacked with the fourth quarter, excuse me, as did Xolair. We do not have any insight decision process for product manufacturing at Genentech and Roche, but all we do know is that Roche completed 191 million Swiss francs upgraded expansion of it’s facility in Penzberg, Germany in June of last year where they currently manufacture Herceptin.

In addition, while Lucentis is not manufactured outside of United States to-date, we know that Roche built two new plants in Singapore which could be used to manufacture Lucentis and Avastin so there maybe upside in the royalty rate for multiple products moving forward.

In closing, I’d like to highlight a few items listed in slide eight that we believe makes PDL a unique investment opportunity. First of all, we have strong historic revenue growth from approved products that have not yet reached peak sales in the United States or internationally both from increasing sales, new indications and changes inside of manufacturing. In addition, several products in late stage clinical development will be coming to market in the next year or two.

Looking ahead, we are evaluating opportunities to expand and diversify our royalty revenue stream through the acquisition of new revenue generating assets. Over the course of the last 18 months, we have significantly reduced our expenses including substantial reduction in legal expenses and we carried no research and development expenses.

Our stock has unique characteristics with significant liquidity. Our daily volume averages about 1.5 million shares per day allowing for ready entry and exit for our stockholders.

Finally we paid regular quarterly dividends. This year we are either paid or will pay four $0.15 dividends for a total of $0.60 per share representing the highest dividend yield among biotech and pharma companies.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have a question from the line of Charles Duncan with JMP Securities. Please go ahead.

Charles Duncan – JMP Securities

Hi guys. Thanks for taking my question and congratulations on a good quarter progress. John, I had a question regarding ex-U.S. manufacturing. It all sounds good that more drugs could be made outside the U.S. and that has positive implications for the royalties paid. But let me ask you, if that could change the paradigm for at least the timelines in manufacturing and could that shorten the amount of inventory that companies need to build in anyway impacting the lengths of time that you get paid after the patent expires?

John McLaughlin

Thanks Charles and thanks for your question. It’s a good question. So, typically when manufacturers making antibodies, because it takes a long they do maintain campaigns as and after that we kind of have to scrub out the plants, clean it up and prepare for another campaign and that actually – the total period of time between manufacturing, cleanup and restart actually a fair amount of time. So it’s typically in the best interest of the manufacturer to do a fairly sizable batch. So could that change towards the possibility, it’s unlikely given sort of a typical manufacturing practices and again there is efficiencies in making bigger batches that lowers your cost of goods so there is a lot of reasons beyond just what are paid to us in royalties is to why you want to increase that size as much as you can to maintain those efficiencies of scale in the manufacturing process.

Charles Duncan – JMP Securities

So with these new manufacturing plans, you don’t expect that paradigm to change?

John McLaughlin

I don’t. I mean I think what we’ve got here is a fairly complicated situation going on. So I mean I think what you see here is with a vast and clearly sales have slowed down some Roche reported a 1% growth quarter-over-quarter this – this past quarter in their April 14th conference call. So clearly, they’re probably our guess is they’re probably bleeding down some inventory there, but the other thing is why did they expand the plants in Penzberg, Germany I think we’re all reasonably optimistic to produce a map. We’ll get approved after its PDUFA date in June. So they maybe looking to sight some of the manufacturing of that ex-U.S. and then we – they’ve also said that they intend to file a GDA1 conjugate again another antibody this year. We know that’s or I guess we believe that’ll get favorable consideration from the FDA. So that probably another product that they need to be sourcing manufacturing of it so they may in fact they got fairly complicated manufacturing picture going on and they maybe thinking about using some of that ex-U.S. capacity not only for the products that we’re talking about in our slides, but also potentially some of those future products.

Charles Duncan – JMP Securities

Let me ask you for TDM-1, do you believe that that would be the product that they need to take license from you?

John McLaughlin

It’s our view that that’s falls with under the current receptive license, because as you’re well aware it’s it basically Herceptin, I think are conjugated to our chemotherapeutic.

Charles Duncan – JMP Securities

Okay. That makes sense. And then, finally with regard to your efforts that you’ve spoke to in the past in terms of grabbing more royalty revenue from products, how are those efforts going, any update on that?

John McLaughlin

So Charles, we don’t have any specific updates for today. As you know, we’ve got Franklin Berger and Dr. Evan Bedil helping us. We’re having some very promising conversations but we don’t have anything specific to report today.

Charles Duncan – JMP Securities

Any goals or timelines in terms of bringing that effort to close?

John McLaughlin

So it’s a great question. And in our view that we should be trying to get these accomplished in years 2012 and 2013 at some point in 2014, we want to step back with our Board and shareholders and say, okay we’ve either done or not done the following number of deals. This is how we feel about those deals. And we should either continue or start winding the company up. But we’ve given some timeframes for to develop a track record which will allow us to evaluate. Is this in the best interest of our shareholders or should we start moving down out as fast as we can to our shareholders and wind up the company.

Charles Duncan – JMP Securities

That makes sense to me. Thanks for the added color, John.

John McLaughlin

Thank you.

Operator

Thank you. And our next question is from the line of Phil Nadeau with Cowen & Company. Please go ahead.

Phil Nadeau – Cowen & Company

Good afternoon and thanks for taking my questions. First is the follow-on on the ex-U.S. manufacturing. If we go back to couple of years, it seem like at that time Genentech and Roche were talking about moving more than manufacturing to sites outside the U.S. then it seems those have materialized over the last couple of years. John, do you have any understanding of why that is or any insight into why they’ve been slower in this process than they initially suggested?

John McLaughlin

No, we don’t Phil. We don’t have any specific insights. I mean that’s obviously it’s something we’re trying to get our arms around but we don’t have any specific insights. I think what we can speculate is, as I mentioned, part of what they were talking about moving overseas was Avastin. We know Avastin sales have decreased. In fact, they lost a fairly sizable chunk of sales when they lost the metastatic breast indication in the U.S. and we know that those sales are – while they maintain a portion of that label in the European Union, those sales have dropped there fairly dramatically too.

So this is really the first quarter for Avastin, where they saw on a currency sort of neutral basis, about 1% growth quarter-over-quarter that our speculation has been probably burning through some inventories before they start making more of the stuff, does have long shelf lives. You do want to be cognizant of the fact that there is shelf life and you probably want to burn through some of that.

I think some of it also has to do just with the complexities as I mentioned earlier of what they have coming down the pike in terms of products they have to make. I mean bear in mind prior to an approval as you will know you have to do three batches as your Qalats [ph] part of your approval package. And you want to do those at the facilities where you intend to make them, we don’t know where they’re running those Qalats right now but maybe that’s what they’re using some of that ex-U.S. capacity for. For example, the Penzberg plant where they expanded it where currently they were making only Herceptin. I’m sorry there is a lot of speculation there. We think some of those are pretty good gapping but to be clear, it’s speculation.

Phil Nadeau – Cowen & Company

Okay. That’s very helpful. Thanks. Second on SG&A, it seemed to tick up during the quarter, was that – was there any one-time items there or is that a sign of the work you’re doing to bring a new royalty streams?

John McLaughlin

It’s directly a function of the efforts with respect to the royalty streams.

Phil Nadeau – Cowen & Company

Okay. And then last, just any update on the Roche lawsuit and any developments there?

John McLaughlin

No. We’re in a period of discovery that’s going to extend for some period of time. The Court date is still summer of 2013. There has been no change there. At some point probably after discovery maybe later this year, early next year, there probably be some motions by the parties but it’s probably going to be pretty much discovery depositions, exchange of documents for the next couple of months.

Phil Nadeau – Cowen & Company

Okay great. Thanks for the update.

John McLaughlin

Thank you.

Operator

Thank you. And our next question is from the line of Jason Kantor with RBC Capital Markets. Please go ahead.

Adnan Butt – RBC Capital Markets

Hi, it’s Adnan on Jason Kantor’s behalf. In terms of looking for royalty bank assets, I guess you can shed some light. Have you been close on any deals or is it just hard to find good deals or is it a matter of price? That’s the first question. And then second related question, in terms of the higher expense rate, is that expected to be lumpy or is that new run rate going forward?

John McLaughlin

I’m on – we’re actually – we’re seeing a fair number of deals. I’m not getting to, I thought just but I’m not going to get into either closer or not, I guess in that respects in my view, it doesn’t council its sign. We don’t have any signs yet but we are seeing a lot of promising transactions.

On a go-forward basis, I do expect its run rate probably going to be closer to the number you’re seeing right now. I mean that’s just a function of some of the diligence that we’re doing. It maybe a little lumpy but I actually think probably given the number of third transactions we’re looking at, it probably represents what we’ll do on a quarterly basis from here on now.

Adnan Butt – RBC Capital Markets

Okay, thanks.

John McLaughlin

Sure.

Operator

Thank you. And this concludes the Q&A portion of today’s conference call. At this time I’d like to turn the call back to John McLaughlin for closing comments.

John McLaughlin

Operator, thank you and thanks to all of you for joining us today on this call. We look forward to seeing many of you at upcoming conferences including the JMP Securities and Goldman Sachs Conference in coming weeks. Thanks again for participating and have a good day.

Operator

Ladies and gentlemen thanks for your participation in today’s conference call. This does conclude the program and you may now disconnect. Thank you and have a wonderful day.

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