John McLaughlin - President and Chief Executive Officer
PDL BioPharma Inc. (PDLI) UBS Global Life Sciences Conference September 19, 2012 2:00 PM ET
Good afternoon and thank you for thank you for coming to the 2012 UBS Global Life Sciences Conference. My name is, (Inaudible), and I am happy to be your host for the session. Our next presenters will be John McLaughlin, President and CEO, and Bruce Tomlinson, Vice President and CFO of PDL BioPharma. A breakout session in Carnegie will follow immediately after the presentation. Thank you.
Thank you very much, and welcome to PDL's presentation. This afternoon, I will be making some forward-looking statements. For additional information about the risks and uncertainties associated with those statements, please see our most recent filings with the Securities and Exchange Commission.
We think that PDL represents a unique and attractive opportunity among public healthcare companies and a rare and equally attractive opportunity among all publicly traded companies. Some of the reasons are depicted on this slide. You'll notice with less than 10 employees, we don't do any research, development, commercialization or manufacturing. We do have substantial royalty income as you can see the 2011 revenues were in excess of $350 million. Because we are such a small staff, expenses are quite low. You can see that we are profitable.
Perhaps one of the most important distinguishing characteristics is discussed on the next couple of lines though. Since 2009, we have been paying dividends. We established our dividend policy year in advance. You can see for 2012, we pay $0.15 per quarter, per share for total of $0.60 per share, and as well as you could specific the record dates. We have been accumulating cash. We are at about $230 million, and I'll talk more about our tender uses of that cash.
For institutional investors, perhaps the last line is as important as any of the lines. We have significant daily volume. We have a number of large shareholders, who have entered the stock, taken positions in the low tens of millions of shares and been able to enter in ayes of the stock without disturbing the price, so if you made money came in on Tuesday, and you made money by Thursday and you left. As long as you made money, we are happy to see you go, and hope that you will come back someday.
To talk for a second about the underlying technology, it's the humanization of antibodies, and this is the basis for our patents which generate the revenues and license agreements. We all develop antibodies when exposed, for example, to bacteria. If you get a cut, you develop naturally an antibody. In the 80s, a scientist hypothesized, that it might be possible to develop antibodies in non-human systems, and starting for example sites found predominantly on cancer cells.
One of the favorite systems to develop those antibodies were MICE, murine-derived antibodies. In issue with using murine-derived antibodies, particularly with frequent dosing in human beings is they are sometimes recognized as a foreign substance and the body begins to reject them before they can accomplish their therapeutic goals.
The advantages of the PDL technology are, it allows you take off the important regions from a mouse-derived antibody and graph them onto a human framework, and the important regions really focus on two particular characteristics, so it's binding and specificity.
Specificity means it only binds to what you want it to bind to, and one of the beauties of murine-derived antibodies is you can make them very specific. One of the difficulties with some of the other technologies, when you carry those over onto human frameworks, some of that specificity is lost, so you only want it to target the particular side that you are aiming at.
The other thing is it's affinity that is how tightly does it bind and the other positive attribute of the PDL technology is it maintains both, the binding and specificity seen on the murine-derived antibodies. As you can see in the bottom line, it's a very widely adopted technology. Annual sales are in excess of $17 billion a year and growing rapidly.
Our mission statement is quite simple here. We focus on the technology, the license agreements and optimizing return for our shareholders. One of the things we've embarked upon recently is looking for new revenue generating assets. Our patents expire and I'll talk about that in the second, but a common question from our shareholders is, okay, I like the dividend, I like the fact that you could declare quarterly. It's a regular dividend a year in advance, but if at some point that dividend is going to end, what are things you can do to continue to pay dividends, and part of the exercise that we have been underway for now about 12 months is to seek out new revenue generating assets. They could be royalty generating assets, they could be loan based on commercial stage products, but a key element of this is, they are commercial-stage products. We are agnostic as to therapeutic area. What we deem to be highly important though, is it has to have a differentiated product profile. We are not interested in five players in a marketing game, whereas TV ads next year can blow your market share out of the water. We are looking for something, where it could be first line, it could be second line, but it needs to be differentiated such that we know it's going to be there for a while.
For us a target acquisition value is $75 million to $150 million. We have done deals smaller than that sort of in the $50 million range. We have also bid on deals bigger than that. We are partners in the $600 million range, but that's really the sweet spot if you are looking for some sort of a guide.
We fortunate to have a very strong management team, because we are only ten persons, there isn't any room on the job training, so it's a seasoned, experienced group. We're also fortunate to have very strong board of directors with significant experience in all aspects of our operations.
To give you a quick overview of the revenue generating assets, you can see a number of them are from Genentech, Roche, no surprise there given the fact they established a leadership role in the commercialization of antibodies beginning with Herceptin back in 1999, you also see Tysabri there, and the most recent addition to the portfolio Perjeta, and we'll talk more about that in a second.
Another question that were commonly asked shareholders is, okay, how long are you going to get paid, and there is a couple of components to that answer. First, our patents expire typically towards the end of December 2014. We are a royalty play, so we get pay at quarter in arrears that get up to first quarter of 2015, but perhaps the more important component is actually depicted in these two bar charts here on the slide, so what you see here is a typical scale for the manufacturer at bulk and fill and finish point antibody, and there is a reason why they describe the manufacturing process of an antibody as a campaign like a small molecule which can be synthesized in a week or two weeks or really complex or maybe three weeks. You can see here that it takes several months, just seven months assuming everything sequences perfectly from bulk manufacturers who fill and finish, and by the way things rarely sequence perfectly in terms of organizing those two sorts of things.
For that reason, many of the manufacturers keep about 24 months or more worth of inventory on hand. Let's assume for a second though that they in fact that reduce down to about 12 months, recognizing it takes about seven months from start to finish to manufacture an antibody, then in fact that we get us paid upwards to first quarter 2016.
Because Genentech and Roche account for upwards of 70% of our revenues, we give you a little more granularity on how they pay us, and here you can see a simple chart depicting the royalty schemes that are applicable. You could see it's bifurcated between products that are made or sold in the United States, so that's year those two conditions and the royalty start for those products at 3%, which is very nice. Because it's calculated on an aggregate sales, and these are a blockbuster products, in fact we get down to that 1% tier. Typically in about the second quarter of their sales, you can see that for 2011, the blended rate for product that was made sold in the United States was about 1.4%.
In contrast for product that is both, made and sold outside the United States, you can see we received a flat royalty of 3%. The reason that maybe important is depicted in the bar chart on this slide, and what we are showing you here is in the gold bars, these are the ex-U.S. sales, and the blue bars are product that is made ex-U.S. and sold into those territories. To the extent that those two bars overlap, in fact we are getting a 3% royalty.
One of Roche's goals has been to move some of the manufacturing to the site of sale that is to move ex-U.S. manufacturing to source ex-U.S. markets. We simply know for example that they had a plant in Germany, at Penzberg, where they spent U.S. $180 million roughly to expand that and we have seen some uptick in Herceptin ex-U.S. manufacturing.
Avastin has been dancing around a little bit more probably to do as they burn off some of the inventory that they built up, and then had a slowdown in sales due to the withdrawal of their metastatic breast cancer label. This is something we continue to track carefully, because frankly there was increase in sales. Just a change inside of manufacturer, it moves us into the 3% royalty category.
If I may, let me turn for a second and talk about some of the approved products and give you some quick updates on those approved products. Avastin, there has been a lot going on. In fact, last year, we saw on a worldwide basis a decline in the sales of Avastin, when they lost the U.S. label for metastatic breast cancer in the U.S. and it was significantly curtailed in Europe.
What you see here is a series of impressive trials that they have run. Starting with cancer, where you see some nice improvements in PFS, but we haven't seen the overall survival data yet which we want to see before be being able to make a determination on this one. Perhaps more intriguing and certainly are more approvable in the short-term basis is the data in ovarian platinum resistant cancers, we see a nice pick up in PFS and overall response rates. They have also shown some nice data in colorectal cancer, so this is where it's currently approved for colorectal cancer.
These are the patients who progress and you continue treatment with Avastin, and you see some very nice clinical benefit there. Then last, but not least in glioblastoma, Avastin as you are well aware has approved the second line therapy in glioblastoma. The first line market is considerably bigger and you see some very nice data here in terms of improvement in PFS. We don't know what the specific numbers are and we are expecting to see them towards the end of the year with respect of PFS and overall survival next year.
Herceptin has been a steady grower since its approval back in 1999. You can see there that they've seen a nice growth rate in the first half of 2012 of 11%. This has been a very nice marriage in Roche in genetics part of its drug and diagnostic. This therapy is targeted for HER2 over-expressers in breast cancer and gastric cancer and they have nicely used the diagnostic, particularly in the gastric cancer market to expand its commercial potential.
Lucentis is an interesting product. There has been a fair amount of controversy around it, specifically a competitor launched late last year, Eylea from Regeneron, and it has a dosing advantage. It goes to every other month dosing after three months of induction dosing both, it and Lucentis require monthly dosing for the first three months, but after three months you have to continue the dose, Lucentis monthly, whereas Eylea can be dosed every other month.
Eylea has made some in-roads in the AMD market, particularly United States on a worldwide basis Lucentis continues to grow predominately because of the diabetic macular edema label ex-U.S., we anticipate they'll see some nice growth in the United States with the recent approval after that indication as well, and retinal vein occlusion is another label they have exclusive at least for another period of time, but clearly they are ceding market share in the AMD market.
Moving down to our Actemra, this was generally viewed as a second line therapy in the rheumatoid arthritis market. It targets IL-6. As you are well aware, most of these patients start on the methotrexate and then proceeded to TNF antibodies and generally rotate through the TNF antibodies. Roche did some very smart things here. One of the market leaders in the TNF antibody field is Humira. It has nice safety and efficacy and also it is subcu-tumors, a number of the TNF antibodies are IV, and you can see here really a two-pronged attack to try and expand into that market. First, they did a head-to-head comparison between Humira IV and Actemra, and everybody was skeptical to whether or not make it sure results equivalent never mind better and in fact what they showed was a superior result in terms of efficacy. Later on, they've done head-to-head trials against their own product in IV formulation and subcu formulation and clearly their ultimate goal is to have a subcu formulation of Actemra with a label that reflects superiority to Humira.
Perjeta is the most recent addition to the portfolio. This is an antibody which interferes with not only HER2, which is the target of Herceptin, but also affect dimerization of other members of HER family, 1, 3 and 4. It's been improved in conjunction with Herceptin and chemotherapy for use in metastatic breast cancer. Most of the market thought that this would be priced around $2,000, perhaps $3,000 and you can see it's upwards just under $6,000 per month in terms of treatment. Just recently they announced that it has been a secondary endpoint of overall survival. We don't know the details so they would release the data in upcoming meeting presumably before the end of the year.
What's interesting about this is, not only the approved indication where you see a six months step up in PFS, but also the adjuvant label as you are well aware that a substantial portion of Herceptin's sales come in metastatic breast cancers, where it uses adjuvant to surgery. The Phase-II data for Perjeta in this indication is striking. You see PCRs in the low 40s compared to Herceptin' and chemotherapeutic where you are kind of in the high 20s, low 30s, you see a very dramatic step up in CRs compared to them. It's currently in a Phase-III trial for this indication, and that's a very substantial indication.
There are number of products that are under license, or we believe should be under license that are still in development. I am just going to touch on a few of them today, so the first is T-DM1. This is Herceptin conjugated with the chemotherapeutic. There has been some very nice data generated here in terms of its improvement of PFS, overall survival response rate. I would also call to your attention the reduction in Grey 3 of higher side effect, so these are the ones that keep you in a hospital basically and you see they are cut almost in half, so our mantra unfortunately most oncology agents is with increased efficacy, you have increased side effects. This actually reverses that where you've got increased efficacy, but reduced side effects in half.
They filed on August 27th, they refused to file date towards the end of October, and at that point, we'll know whether it's been accepted for filing and also get some insight as to whether or not it's a regular or expedited approval. They are also looking to file this for first line therapy, although the anticipation is that that data won't be generated and sufficient for filing until probably about 2014.
The next two products, I am not going to spend much time are ocrelizumab in [urban] drug, Pertuzumab. These are both, think about them as son of Rituxan. Rituxan is a chimeric antibody that targets CD20. It's approved for both, oncology indications as well as overall immune indications and these are both humanized antibodies. As you can see, Genentech and Roche have bifurcated focusing ocrelizumab on the anti-inflammatory indications such as MS, and Pertuzumab in some of the blood cancer indication, such as CLL and non-Hodgkin's lymphoma.
They are quite optimistic that these will be substantial products. You can see they are forecasting sales in excess of $1 billion for ocrelizumab. We are expecting to see data in CLL later this year and they are anticipating they will file next year for that and they are giving it a similar peak sales estimate of $1 billion.
Moving down to bapineuzumab, I am not going to spend a whole lot of time on this, because there has been so much coverage in the poppier press, suffice it to say they get sizable and robust Phase-III and they did not see any significant improvement in the patients, and at least at this point, the consortium of J&J and Pfizer have announced that they have terminated further developments.
Perhaps more intriguing is the results from Lilly's solanezumab, so I think before any data was unblended, perhaps people gave bapineuzumab a low, but slightly higher chance of success than solanezumab. As you can see here, when Lilly broke the first of their Phase-III trials, the primary end point, it did not meet was both the cognitive and functional endpoint. They saw some very interesting data with respect to their cognitive endpoint, and before they broke the blind on the second Phase-III trial, what they did was they modified the endpoint, which you can do to focus on a cognitive end point in mild patients.
Interestingly enough, I did not hit the primary endpoint, but again looking at a pre-specified secondary subgroup analysis, they did see a benefit in mild patients, and this has now caused a number of the researchers to hypothesize that because of the long gestation period for this disease, in fact you need it much earlier than previously thought and thus why they are seeing an effect in the mild patients.
What we don't know is the magnitude of the benefit on the cognitive endpoints. We are hoping that at one or both of two upcoming presentations that they scheduled at Alzheimer's disease conferences, one at the beginning of October and one at the end of October. There will be more forthcoming as some of the details of the clinical trials. They have submit their talking with the regulators about our path forward, but we don't have much more insight than that.
One of the reasons this is important for us. I mean, obviously it's very important for the Alzheimer's patients is unlike all the products which I am talking about today to know how royalty on this particular product, so what that means is PDL helped engineer this antibody, they contributed know-how and thus they allowed a royalty based on that contribution. You can see it's a twelve-and-a-half-year old royalty and it's for 2%. Importantly, it only begins at the time of first commercialization, so if this these products were delayed two years for example for approval, the twelve-and-a-half-year royalty we commence at that point and run for thereafter for twelve-and-a-half years paid at 2%.
One of the questions we are common asked is, Genentech and Roche developing so many therapies for HER2 positive breast cancer, how did they all relate? And here is a simple bar chart depicting first, second and adjuvant breast cancer and sort of the timelines for each of the agents. For those of you who want to stay more carefully you can see the slide on our website.
The purpose on slide 26, it's really an eye chart. We are not trying to test here. What we are simply showing is there is a substantial amount of news flow over the next couple of years, and these are just looking at filings from Genentech and Roche in '12, '13 and '14. We are not suggesting that every single one of these are going to be successful. Some are line extensions. Few are new products, but clearly there's a substantial number of them. A substantial number of them will be approved and represent additional royalty generating opportunities for PDL.
Let me turn to our financials for a second. As you can see, we're reasonably profitable and you can see what our income was for the year. Our expenses are reasonably low, no surprise, given we have a small number of people. As I mentioned at the outset, we have been a cumulating cash for the purpose of acquiring additional revenue generating assets. You could see it's up to just under $230 million, and the nice thing about PDL is we are not a fixed fund. In fact, that replenishes each quarter with royalty payments.
We do have some debt on the books. You could see there are three convertible notes there. One of them is quite small. It's only $1 million, both of them we have largely left outstanding except when they dropped in value dramatically we pick them up on the cheap. They are due in February and May of 2015. The coupon rates on them are reasonably low two in 70s, two about 3.25%, and we think at this point it's in the best interest of shareholders, so leave them outstanding. You could see one of them we put a bond hedge to inflate the strike to $809.
At the very last line, we did have a recourse not there which we issued in 2009, we took the proceeds of that node and did a special dividend to the shareholders to pay it out. We have been paying back that note and in fact it will be fully paid off in this quarter and we will not do another one of those notes.
Turning to legal matters, we do have a dispute with Genentech. It stems from a fax they sent us in August of 2010. Just that the fax was, we Genentech are writing at the behest of Roche and Novartis, because we are not sure we owe you royalties on European sales. Since they have sent that fax, they have paid all royalties due including in those in European territory in full, on time, without caveat or reservation, and that's been more than two years.
One of the things that perplex this a little bit, when we got the fax was, we thought it was violative of a settlement agreement entered between PDL and Genentech in 2003, which precludes Genentech challenging or assisting anybody in challenging our patents, and we have so notified them and in fact we brought action in state court to get a determination as to whether or not that fax constitutes a challenge of the settlement agreement, so to be clear this is not a patent case. It's a contract case. The question is did the sending of that fax constitute a violation of the settlement agreement, and there is penalty spelled out in the settlement agreement of higher royalty rates retroactively and prospectively that are substantial.
As you can see, there has been various motions by Genentech and Roche to try and get out of this litigation. They had been unsuccessful, we are currently in discovery and this case will go to trial probably in some point 2013. It's currently scheduled for October 2013, and the only caveat issue is to take that far out they tend to slip and they tend not to come in.
As I mentioned at the outset, our current patents, our own patents will expire towards the end of 2014. We are in the process of trying to identify additional revenue generating assets. Some point in late 2013, or early 2014, we will go down one of these forks in the road. We will decide either we found sufficient generating assets to continue the company, or we haven't and we will wind up the company in '15 and '16.
Let me conclude by summarizing some of the aspects of PDLs that are important to investors. It has a strong historic revenue growth. I have shown you some of the potential for not only new products, but new indications for existing products. It does represent a portfolio approach of products, so you are not betting on a single candidate. We significantly reduced our expenses, we don't have an R&D burn and we intend to keep our expenses reasonably low, attractive for institutional investors is the substantial daily liquidity, and last but not least we pay dividend annually, we've established our bonafides in terms dividend paying, returning money to shareholders since 2009.
Thank you very much for your attention.