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PDL BioPharma Inc. (NASDAQ:PDLI)

Q2 2012 Results Earnings Call

August 2, 2012 4:30 PM ET

Executives

John McLaughlin – President and CEO

Bruce Tomlinson – Chief Financial Officer

Analysts

Roy Buchanan – JMP Securities

John – RBC Capital Markets

Phil Nadeau – Cowen & Company

Operator

Good afternoon. And welcome to the PDL BioPharma's Second Quarter 2012 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.

Jennifer Williams

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

Thank you Jennifer and good afternoon everyone. Also with me today is Bruce Tomlinson, our Chief Financial Officer. As always in this call, I'll provide a summary of recent events, and then Bruce will review our quarterly financial results.

I'd like to begin on slide number three with an overview of our newest royalty stream. In June of this year, Genentech and Roche have notified that Pertuzumab, which is being sold under the brand name Perjeta, is a licensed product under our license agreement. Genentech and Roche set a price of $5,900 per month, higher than most expectations on Wall Street and wants Perjeta one business day after its approval.

This is a very exciting therapy, approved in combination with Herceptin and chemotherapy for the first line treatment of women with HER2-Positive Metastatic Breast Cancer. In the pivotal trial, Perjeta, Herceptin and chemo showed a 6.1 month improvement in progression free survival, compared to patients receiving only Herceptin and chemo.

Recently, Genentech and Roche announced that Perjeta also met its secondary endpoint of overall survival in this trial. They have said that the precise value will be disclosed before the end of the year.

In addition, Perjeta is being studied in the Phase-III trial in the adjuvant setting. Please recall that Phase-II data, which shows patients on Perjeta, Herceptin, and Chemo in the adjuvant setting had a pathological complete response or PCR of 45.8%, compared to 29% for those HER-2 Positive breast cancer patients receiving only Herceptin and chemotherapy. Genentech and Roche have guided that they believe the annual peak sales of Perjeta will exceed $1 billion.

There has been significant attention in the press and on Wall Street with respect to two other licensed antibodies, both targeting beta-amyloid, although in different manners, and both being studied to determine if they could slow the progression of Alzheimer's disease, in patients with mild to moderate symptoms. These antibodies are of bapineuzumab, being developed by Pfizer and J&J, and solanezumab being developed by Eli Lilly.

Unfortunately for patients with Alzheimer's disease, it was recently reported that the first of the two U.S. bapineuzumab trials did not meet its endpoint. This was the trial studying patients with an allele known as ApoE4, and for which (inaudible) was held, based on various analyses of the Phase-II Bapi data, that shows better results in its non-ApoE4 carriers.

On Tuesday of this week, Pfizer disclosed that analysis is underway of the second U.S. Phase-III trial studying Alzheimer's patients, who do not carry the ApoE4 allele. Pfizer said during its earnings call, that these data will be presented in September. It is also possible if Pfizer, and or J&J will take a top line release of this data, sooner than that.

With respect to solanezumab, Lilly has stated that the data from its two Phase 3 trials will be disclosed in the second half of 2012, with many expecting some disclosure at one or both of the Alzheimer conferences at the beginning and end of October. Lilly has disclosed that it has enrolled apoE4 and non-apoE4 carriers in its trials and that it intends to stratify such patients in its statistical analysis. We have no information on the number of apoE4 and non-apoE4 carriers in their trials.

To be clear, most Wall Street analysts attach a low probability of success to either the BAPI or SOLA trials, but also agree that each would be a several $1 billion blockbuster drug integrate to meet its product profile in the Phase 3 trials and be approved.

In early July, we entered into a transaction with Merus Labs and before discussing the specifics of the transaction, it may be useful to review on slide number four why are we considering such transactions.

As you may know PDL's current revenues are largely generated by licenses under our Queen et al. patents. The last of those patents expire at the end of 2014. PDL will likely continue to be pain for a period of time after that patent expiration based on the sales of products made before the patents expired in those product sales occur after patent expiration.

At some point however almost all of PDL's licensees will no longer be required to pay PDL royalties. In such event, PDL will likely cease to operate and be able to pay further dividends. Not surprisingly the most common comment from our investors goes something like, we like the dividends but we don't like the fact that they will pay it, can you do something about that?

The fact that we surveyed 43 shareholders large and small and found that tenement was universally shared and our shareholders want us to look for other revenue generating assets. We have been doing so.

Some of the deals that we are considering are to buy royalties on drugs or medical devices while others are for loan secured by revenue generating products, plus two other are hybrid between the two, some portion royalty, some part loan.

We are different as to whether it is a loan, a royalty structure, or a hybrid of the two. What we are concerned about is the quality of the revenue generating asset, the likelihood of being repaid excuse me and the return on the investments, benefit of our shareholders.

As you seen on slide number five, the Merus transaction provides $35 million to Merus in connection with its acquisition of rights to Emselex and Enablex two brand names that extended release tablets are sold in Europe and certain countries in Canada. This loan bears an interst rate of 13.5%. As part of the same transaction, we also provided a $20 million line of credit on behalf of Merus, which may be drawn to satisfy the remaining purchase price obligation.

If drawn, the outstanding principal release of the letter of credit bears an interest rate at 14% and final maturity of the facility is March 2050. We along with Merus believe that a strong strategic partnership has been planned. It helped Merus accomplished its corporate objectives, while PDL increases its return to its shareholders.

We are pleased with the Merus transaction. The experiment that is ongoing is whether we can conclude a number of revenue generating transactions that increase and extend the return for our shareholders.

At this time, I would like to turn the call over to Bruce to discuss our financial results.

Bruce Tomlinson

Thanks, John. Beginning on slide six, you can see that our royalty revenues for the second quarter of 2012 were $125.9 million, compared to $122.1 million for the second quarter of 2011, which represents a little more than a 3% increase. Royalty revenues for the second quarter of 2012 are based on the first quarter 2012 sales by PDL licensees.

The growth in revenue for the second quarter of 2012 is primarily driven by increased royalties on sales of Herceptin, which is marketed by Genentech and Roche and Lucentis, which is marketed by Genentech and Novartis. We also experienced increased royalties on Xolair, marketed by Genentech and Novartis and Tysabri, which is marketed by Elan and Biogen Idec. Royalty revenue for the second quarter is net of payments made under our February 2011 settlement agreement with Novartis.

Now turning to costs, our general and administrative expenses for the second quarter of 2012 were $5.1 million compared with $3.8 million in the same period of 2011. Total cash equivalents and investments as of June 30, 2012 were $229.3 million compared to $227.9 million as of December 31, 2011. Net cash provided by operating activities in the second quarter of 2012 was 122.8 million compared with 87.9 million in the equivalent period of 2011.

And finally net income for the quarter of 2012 was $73.5 million or $0.52 per diluted share as compared with net income of $70 million in the same period of 2011 or $0.38 per diluted share.

It is important to note that the per diluted share numbers in 2012, both for the quarter and the first six months are higher as compared to 2011, due to an increase in revenues and the elimination of 44 million shares from our per share calculation.

We were able to accomplish this reduction in shares by restructuring two of our convertible notes in 2011 and early 2012 due to net share settle. In accordance with our regular quarterly dividend policy, we paid the second of four dividends on June 14 to all stockholders of record, as of June 7 for a total of $21 million.

You can see on slide 7 that in connection with this dividend payment, the conversion rates for our convertible notes adjusted, for our May 2015 notes, the conversion price is now approximately $7.02 per share. For our February 2015 notes and the series 2012 notes, the conversion price is now approximately $6.14 per share.

At this time operator, 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.

Roy Buchanan – JMP Securities

Hi, guys. This is Roy in for Charles. A couple of quick questions. I wondered if you could go into maybe, I don't know, detail but describe the process with Roche and how's that proceeding?

John McLaughlin

I'm sorry, could you be a little more specific in terms of what you'd like us to address with respect to Roche?

Roy Buchanan – JMP Securities

The legal proceedings?

John McLaughlin

Sure. So as you're well aware, we have an action filed in State Court in Nevada. It's been pending for a little while. We're anticipating that discovery will be ongoing for several more months. After that, there's typically some motions called motions for summary judgment to try and simplify the case. The trial date is currently set for October of 2013 and probably the only caution I would add is the trial dates that far out because it has a tendency to flip sometimes. We don't know that's going to happen, but it does have a tendency to slip. And usually it's not in, it's usually out.

Roy Buchanan – JMP Securities

Okay. And a little bit of a follow-up, but apologize for naivety but Roche never – the facts that they sent you, they never, I guess, acted on that in Europe. That was just -- that just resulted in you filing suit in Nevada. Is that correct?

John McLaughlin

Sure. So I think there's two parts to your question and let me try and get both of them and if I miss something, please jump in. So the first part is, is yes they have made a repayment to us in full, on time for both US and those portions they were, that their letter challenges, ex-US. So yes, and they've not filed any challenges ex-US to the patents in Europe or any place else.

The second part is the action in Nevada is -- it's not patent case or a case involving the European patents. It's actually a contract case. So the question is whether or not when Genentech sent that [fax] at the behest of Roche and Novartis challenging the patents, whether that constituted a challenge to our 2003 settlement agreement and a settlement agreement is a contract and that's why I say this is breach of contract case, not a patent case. And the question is under the settlement agreement, whether or not that fax constitutes a challenge which breaches a settlement agreement and that's what's before the court.

Roy Buchanan – JMP Securities

Right. Okay. I guess I'm not a lawyer, but it seems strange that they -- it seem like maybe they were looking to pick a patent fight by sending this fax, but they don't seem to really acted on it. I wonder if they're waiting for the resolution of the Nevada action and it just seems a bit odd like they opened a can of worms, some sense?

John McLaughlin

Yeah, don't know if I can help you much there. They don't usually share. I wish they'd share their legal strategy with us, but not so far.

Roy Buchanan – JMP Securities

Okay. And then a couple quick questions on the Merus transaction or agreement. How long did you do due diligence on that and I guess what were the major gaining factors that drove you to agree to that agreement? Thank you.

John McLaughlin

So I'm not going to discuss how long we did due diligence on it. Suffice it to say, we [due diligence] on it long enough that we got comfortable with it. But to the point in your question and it's a good question. I think the thing we focus on are the quality assets, as I mentioned, the likelihood that we can be repaid and the likelihood we can get a nice return for our shareholders. That's really a focus. And the point I was trying to make earlier, and thanks for asking this question is, is we're a little indifferent as to whether it's a royalty structure, a loan structure or some combination of the two. It's really a focus on the quality assets and the likelihood of returns for our shareholders been the focus.

Roy Buchanan – JMP Securities

Okay. Thank you, guys.

John McLaughlin

Operator

Our next question comes from Adnan Butt with RBC Capital Markets. You can ask your question, Adnan.

John – RBC Capital Markets

Hello. This is [John] for Adnan. Can you hear me?

John McLaughlin

Sure, John. How are you doing?

John – RBC Capital Markets

I'm good. How are you?

John McLaughlin

Good

John – RBC Capital Markets

I was just wondering if you can provide a little bit more guidance on how much of your balance sheet is committed to deals, and how much cash do you have free for other deals?

John McLaughlin

Yes, it's always – it's a great. It's not a -- as you're well aware, it's not a static number. Certainly we've shown you what the cash is on the balance sheet right now but bear in mind we're not -- unlike a fund where you (inaudible) you rate X number of dollars and you have X number of dollars to spend.

Our cash actually gets replenished each quarter based upon the revenues that we receive as our royalty income. And in fact, we expect our free cash flow to jump after we pay off one of our notes, the secured notes in the third quarter. The last payment due on that and Bruce it's a little over $22 million if I'm remembering right?

Bruce Tomlinson

Yes, about $23 million and it will be paid in Q3 of 2012.

John McLaughlin

So in fact our pre-cash jumps. Obviously, you have to set aside money for dividends which we set a dividend at the beginning of each year. We announced it $0.60 this year. It’s a regular dividend.

We'll go through the same process the beginning of next year. We have to think about that. And then if some point in the future as being closer to 2015, we do have some convertible debt that is paid off, so we have to think about that.

But in terms of -- unlike a fund, it's not a static number and we do have a fair amount of flexibility beyond those immediate obligations of setting aside some for dividends and the longer term obligation of making sure we can satisfy the convertible debts.

John – RBC Capital Markets

Thank you. Just as a follow up then, will maturity of all debt deals be around 2015?

John McLaughlin

Unlikely. It's going to vary from transaction to transaction. That will happen to be 2015. I would not be surprised if you saw other deals with longer terms.

John – RBC Capital Markets

All right. Thank you.

Operator

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

Phil Nadeau – Cowen & Company

Good afternoon. Thanks for taking my questions. Also some questions on the Merus transaction. Is this loan a senior debt in their capital structure? Is there anything above it?

John McLaughlin

Senior.

Phil Nadeau – Cowen & Company

Senior. And you mentioned that's secure by the assets. Are there restrictions on what Merus can do with those assets? For example, is it allowed to re-partner or partner any of its – (inaudible) or isn't that restricted?

John McLaughlin

There are restrictions on terms of what their activities are. Obviously, we want to be careful in terms of how they operate and we do have a lock-on, not only their current asset but any new assets they bring in. So it's a pretty broad scope in terms of the coverage, the seniority, and there are some pretty standard financial covenants there.

Phil Nadeau – Cowen & Company

Okay. And then just the last question, I'm familiar with Merus. What other assets does it have? Is this still purchased from Novartis as main asset, or are there other interesting things in this portfolio?

John McLaughlin

At this point it's main asset, Phil. These are folks -- what they're doing is they're trying to build the company, they're looking for similar size asset by big pharma spin-offs, products that are reasonable stable and revenues reasonably mature in their life upon which they can build the business and I think that's -- they've been pretty public about their aspirations.

Phil Nadeau – Cowen & Company

Okay, great. Thanks for taking my questions.

John McLaughlin

Thank you.

Operator

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

John McLaughlin

Thanks to all of you for joining us on this call this afternoon. We look forward to seeing many of you at upcoming conferences including two in September, the UBS Global Life Sciences Conference and Rodman & Renshaw Global Investment Conference. 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.

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