PDL BioPharma, Inc. Q1 2009 Earnings Call Transcript

| About: PDL BioPharma, (PDLI)
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PDL BioPharma, Inc. (NASDAQ:PDLI) Q1 2009 Earnings Call Transcript May 7, 2009 4:30 PM ET


Carolyn Wang – IR, WeissComm Partners

John McLaughlin – President and CEO

Cris Larson – VP and CFO


Terry Kline – JP Morgan

Phil Nadeau – Cowen and Company

Joel Sendek – Lazard Capital Markets


Good afternoon and welcome to PDL BioPharma’s first quarter 2009 conference call. Today’s call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Carolyn Wang. Please go ahead.

Carolyn Wang

Good afternoon and thank you 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 investors section of our website at pdl.com.

The forward looking statements made in this presentation should be considered accurate only as of the date of this presentation, 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, Carolyn, and good afternoon everyone. With me today is Cris Larson, our Vice President and Chief Financial Officer. I was so excited to be at PDL BioPharma because we believe it represents a unique and rewarding opportunity for our stockholders.

We are generating revenues and profits from royalties on a diversified portfolio of approved and successful products. Our new and focused strategy seeks to optimize our assets to benefit stockholders without the conversion expense and considerable risk of internal research and development.

As you know PDL’s technology, which enables the humanization of anti-bodies has been licensed and utilized by leading biopharmaceutical companies to develop nine of the best-selling and well-known drugs in the world, most notably Avastin, Herceptin for several types of cancer and Tysabri for multiple sclerosis.

The PDL BioPharma patents that cover our technology are known as Queen et al family of patents. We are executing against three key business strategies. First, to manage the Queen at al patents state, second, to manage our license agreements with the biopharmaceutical companies, would use a technology and have licensed our patterns, and finally to use these assets in the associated royalty revenues they generate to maximize financial return for our stockholders.

We were pleased to begin appealing this goal by playing our first of two dividends of $0.50 per share on April 1. We are investigating means of monetizing our royalties so that we can bring future cash flow forward in time and pay to our stockholders sooner.

While we are terminating these efforts in the fall of 2008, we are currently exploring a variety of monetization alternatives and whether or not market conditions have improved sufficiently, so that we can increase returns for our stockholders.

We look forward to discussing our progress with you in future calls. In the first quarter, we added significant experience and financial expertise to our Board of Directors and management team.

We elected Fred Frank and Jody Lindell to the Board of Directors. Fred and Jody bring distinct and highly routed expertise to the Board. Fred who is the lead Director on PDL’s sport is Vice Chairman of Peter J. Solomon Company and former Vice Chairman of Barclays Capital, as well as Lehman Brothers before its acquisition by Barclays Capital.

Jody was President and Chief Executive Officer of S.G. Management, Inc., and a former partner KPMG where she was Partner-In-Charge of the Western Area Healthcare and Life Sciences practices, will serve as PDL’s audit committee share and its financial expert.

With Judy’s appointment and the reconstitution of the audit committee, we now fully comply with NASDAQ’s rules. In addition last week we announced the appointment of Karen Wilson as Vice President and Principal Accounting Officer.

We are pleased to have Karen join our team. She brings over 20 years of finance and accounting experience to PDL with specific expertise in life science companies. I will now turn the call over to Cris Larson our CFO to discuss the financial results of the first quarter and our 2009 guidance.

Cris Larson

Thank you, John. It is important to bear in mind that a lot of the information in the public domain about PDL for the prior year may still reflect the combined operations of PDL's current business, as well as the Biotech operations spun of to Facet Biotech in December 2008 and the commercial assets sold in March of 2008.

Today all of the comparative 2009 versus 2008 revenue and expense amounts that I will discuss represent only of the new. That is PDL without the commercial or Biotech operations.

Total revenues from continuing operations for the first quarter of 2009 were $62.6 million, a 25% increase from $50.2 million for the same period in 2008. The increase was primarily due to increases in royalty revenues driven by higher product sales of Avastin, Herceptin, and Lucentis, which are marketed by Genentech, a subsidiary of Roche and sales of Tysabri, which is marketed by Elan.

Royalty revenues are based on fourth quarter product sales by PDL's licensees and include those for Synagis, which is marketed by MedImmune, Inc. Total revenue and administrative expenses from continuing operations in the first quarter of 2009 were $4.7 million compared with $12.7 million in the first quarter of 2008.

The decrease was primarily driven by the reduced cost structure of our new Nevada operations where we currently have fewer than ten employees. Significant expense items for the first quarter of 2009 included $1.6 million in legal fees for patent prosecution, patent defense, and corporate compliance.

Our results also include $900,000 in software depreciation expense for which the software is now fully depreciated and no longer used in our new Nevada operations. Net income for the first quarter of 2009 was $37.5 million, or $0.23 per diluted share, compared with a net loss of $61.9 million in the same period of 2008, or a loss of $0.42 per diluted share.

Net cash provided by operating activities was $27.7 million for the first quarter of 2009, as compared with the net cash used by operating activities of $29.3 million in 2008. In addition, to cash provided by operating activities in the three months ended March 31, 2009, we recognized $18.1 million of excess tax benefits from stock-based compensation, and as such, the net increase in cash and cash equivalents was $45.8 million for the quarter.

At March 31, 2009, PDL had cash, cash equivalents, short-term investments and restricted cash of $193.2 million, compared with $147.5 million at December 31, 2008. I should note that on April 1 we paid a dividend of $59.7 million.

The second dividend of $0.50 per share will be paid on October 1, 2009. The record date for the October payment will be determined by our Board of Directors at its upcoming June meeting.

As a result of the April 1 dividend payment, we announced adjustment to the conversion rates on the Company's 2.75% convertible notes due in August 2023 and on 2% convertible notes due in February 2012.

The conversion ratios will be further adjusted later this year in connection with the October dividend payment. I now like to spend a moment reviewing our financial guidance for 2009, which is unchanged from that guidance we provided earlier this year.

We continued to anticipate revenue in 2009 to be in the range of $310 million to $325 million, which represents an increase of approximately 10% when compared with 2008. We expect revenue growth to continue to be driven primarily by increases in product sales by our licensees of Avastin, Herceptin, Lucentis and Tysabri.

Our revenue estimate includes royalties from non-humanized antibody products. Royalties from synergies are not included in our guidance subsequent to the first quarter of 2009. While MedImmune continues to pay us royalties on sales of Synagis, including as recently the first quarter of 2009, we have chosen to be conservative with regard to our financial guidance.

We remain confident in our legal position that Synagis infringes upon our Queen at al patents and that we are old royalties on those sales. I would also like to comment on Raptiva, for which royalties were not a significant driver of our 2009 revenue forecast.

In April of this year, Genentech announced a faced withdrawal of Raptiva in the United States because of safety concerns. In February 2009, marketing authorization for Raptiva was suspended in EU and in Canada for similar reasons.

Royalty revenues on sales of Raptiva in 2008 were $3.9 million or 1.3% of total revenue. I would also like to mention that recent acquisition of Genentech by Roche. It is not yet clear to us the extent to which the acquisition may improve the annual average royalty rate we receive on sales of Genentech product.

Genentech pays us secured royalty rate on annual sales for product manufacturer in the United States and used or sold anywhere in the world. The tiered royalty rate starts at 3% for net sales of $1.5 billion dropping to 1% for net sales exceeding $4 billion.

For products manufactured outside the United States we received a flat royalty rate of 3%. For details on our revenue guidance please see the forward-looking statements in our quarterly press release that we issued earlier today.

As a result of the 2008 divestiture of both of our commercial and our Biotech operation, we continue to expect general and administrative expenses to be in the range of $12 million to $15 million in 2009, a significant decrease from $51.5 million in 2008. A large portion of the 2009 expense projections are for patent effect and litigation costs.

Net income after taxes continues to be projected in the range of $185 million to $200 million. Making use of our federal net operating loss carry forward and tax credit, as well as reducing our state tax expense with our move to Nevada cash generated in 2009 is still expected to be in the range of $260 million to $280 million.

Now I would like to turn the call over to the operator for your questions.

Question-and- Answer Session


(Operator instructions) Your first question comes from Geoff Meacham with JP Morgan.

Terry Kline – JP Morgan

Hi guys, thanks for taking the question. This is Terry Kline for Geoff today. Just a question on potential to monetize the royalty stream, I guess as you see the credit markets improved, have you thought about starting another process to monetize that and has there been any discussions with third parties on that front?

John McLaughlin

Yes. This is John. We actually have started the process of least exploring it. So, we're looking at talking – or we are talking actually with some of the royalty buyers, as well as looking at a securitization process and frankly we are encouraged as you point out there has been some improvements in the credit markets. It is still little too early for us to tell us at this point whether or not we can generate the kind of returns that we think are going to be attractive for our shareholders, but we are making some nice progress.

Terry Kline – JP Morgan

Okay. And then, I believe you said that it is not yet clear how the Genentech royalty may improve, is that to imply that you do expect it to improve in some way?

John McLaughlin

Sure. Cris Larson, our CFO was referring to was there is a differential in the royalty rates between the products, which are made and sold in the United States versus those which are made and sold ex-US. And specifically applicable to the products that are made inside the United States is a tiered royalty and as sales increase the royalty goes down. Whereas for sales, excuse for products that is made outside the United States it is a flat 3% royalty with no decrease based on volume. And so there has been speculations like many multi-nationals, so we'll have to see what happens after the President's most recent multinational tax plan, but money multinational ship manufacturing overseas as we have sort of keeping their exposure to US tax rates low that is certainly a possibility we don't know whether it's going to occur, but that is because who is referring to.

Terry Kline – JP Morgan

Okay thanks.

John McLaughlin



Your next question comes from the line of Phil Nadeau from Cowen and Company.

Phil Nadeau – Cowen and Company

Good afternoon and thanks for taking my question. It's on the monetization of royalty stream, you said in your prepared remarks that you are going back to that process, could you give us some idea of, if you are seeing anything different now versus what we are saying when the process was tried last and just give us any sense of the timing for completing a deal?

John McLaughlin

Sure. Phil, thanks for your question. It is a little early this sort of comment as to whether it is going to better or worse. I think we’ve done a bunch of things to sort of make it a smooth process, you're getting some independent valuations of the portfolio, things like that to make it an easier process for those who might be interested, for example purchasing the royalties or participating a securitization, but it is really too early to tell whether or not the credit markets have improved sufficiently enough that we think we are going to get reasonable value that would generate an improved return for our shareholders. In terms of timing, I think the closer run would probably see something sort of through Midsummer of third-quarter that's probably the kind of timeframe we're talking about, that's an estimate we think, sometimes they go faster, sometimes they get slower, but as a guess estimate that is a good guess estimate.

Phil Nadeau – Cowen and Company

Okay. I apologize if this next question was asked, but my line was dropped momentarily, and it is on the MedImmune lawsuit, what is the next step there now that you’ve sent the letter to MedImmune, do they respond to the letter, kind of what will happen next?

John McLaughlin

Sure. In the normal course of such litigation proceedings, we would file our response to their law suit, so as you will recall the filed litigation in December of 2009 alleging that their products don't infringe, the patterns are invalid. Therefore, they don't know there was any money. In the next day or so we will file a response to their lawsuit. It will make a couple of points. First, it will talk about the fact that we believe their patterns, or excuse me their products do infringe and that royalties are owed. Second, it will again make the point that we think they are not entitled to lower royalty rates citing the exercise of rights we have under the MedImmune agreement, and then third it will assert certain legal affirmative defenses. So, a way to describe this is MedImmune has been paying us money, for the better part of ten years and there are legal principles, which I will describe quickly as sort of a stopple latches waver. And what they basically say is, if you have a claim you can't let it sit around for a while and you know some number of yours later decided and these are affirmative defenses that say, look you guys have been thinking about this for a while, you can't really just like the game jump in. And so all of those points will be made in a filing that they say we will probably go in some point in the next day or so.

Phil Nadeau – Cowen and Company

Okay. And the last question is on Actemra, according to my knowledge you should start receiving royalties from Roche on that when you get your royalty checks for Q1, is that your expectoration as well and has Roche in any way notified you that they will be begin paying royalties on their product?

John McLaughlin

So we don't have any notification from them and as you may know from others things that we typically don't see royalty payments for the first quarter. In this case, they wouldn't show up until later this month. So, we don't have any orders from them, we haven't received any check, but frankly it's not when checks are due at this point. It is our expectation where we would see royalty payments on the product.

Phil Nadeau – Cowen and Company

Okay great, thanks for taking my question.

John McLaughlin

Thank you


Your next question comes from the line of Joel Sendek with Lazard Capital.

Joel Sendek – Lazard Capital Markets

Hi thanks just a follow-up on the royalty rates from Genentech. So, two questions, first is, is there any possibility that you know the combined company will want to renegotiate at the most favorable rate, which is the US right, certainly that is my first question?

John McLaughlin

Joe, we had no contact from Genentech or Roche to that effect. We have a binding agreement with them. So if they were going to be such discussions there would have to be some mutual benefit for us and them.

Joel Sendek – Lazard Capital Markets

Got it. And just going back for the history is there any reason why Roche didn't try to renegotiate in the same way that Genentech did, I can't remember why they did or didn't?

John McLaughlin

So, I think a fair statement of the negotiations seem to be clear. I wasn’t here either. I think Genentech was frankly negotiating on behalf of both parties at the time.

Joel Sendek – Lazard Capital Markets

Okay. And then just back to your call today, when you answered the previous question about shifting manufacturing overseas, so the only real potential change you see that this likely would be that one, which is more from a tax perspective on their part, which you would be the beneficiary of just by the virtue of the way the agreements are structured US versus ex-US?

John McLaughlin


Joel Sendek – Lazard Capital Markets

Is that right? Okay, great. Okay, that's all, thanks.

John McLaughlin

Thank you.


(Operator instructions) Okay. At this time, we have no further questions. Do you have any remarks, Mr. McLaughlin?

John McLaughlin

Operator, thanks very much. Thanks to all who participated on the call for joining us today and we look forward to see many of you at our upcoming Investor Conferences. Have a good day all.


This concludes today’s conference call. You may now disconnect.

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