PDL BioPharma, Inc. (NASDAQ:PDLI)
Q4 2015 Earnings Conference Call
February 22, 2016 16:30 ET
Jennifer Williams - Investor Relations
John McLaughlin - President and Chief Executive Officer
Peter Garcia - Vice President and Chief Financial Officer
Phil Nadeau - Cowen and Company
Adnan Butt - RBC Capital Markets
Good afternoon and welcome to the PDL BioPharma’s Fourth Quarter and Full Year 2015 Earnings Call. Today’s call is being recorded. For opening remarks and introductions, I will now turn the call over to Jennifer Williams.
Hello and thank you 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 will see that in the Investor Relations section of the PDL website, which you will 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 maybe obtained in the Investors section of 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.
Thanks, Jennifer and good afternoon everyone. With us today is our Peter Garcia, our Vice President and Chief Financial Officer. As always in this call, I will provide a summary of recent events before Pete provides an overview of our financial performance for the quarter.
Before I begin my updates, I would like to highlight the strength of the quarterly and annual numbers we reported in our earnings release this afternoon. Our 2015 financial results were great with a particularly strong fourth quarter and we are pleased to report record quarterly and annual revenues, which included revenues for 2015 of $590.4 million and $178.1 million in the fourth quarter revenue as well as 9% growth in our earnings per share for the full year and 90% for the fourth quarter.
Please turn with me now to Slide 3. As you know, we are focused on investing wisely in order to increase long-term value for our shareholders. We have now committed over $1 billion related to our portfolio of assets that we have built over $300 million which was committed in 2015. The assets in our portfolio are high quality and we believe we are a financial partner of choice for companies, institutions seeking alternative forms of financing. Additionally, we are seeing more attractive assets and larger deals and our growing interest in royalty arrangements. We think this is being driven by less favorable conditions in the broader equity and debt markets. We think this trend will continue for at least the next year and possibly longer. In such a changed market environment, many companies and institutions will seek alternative sources of funding. PDL is very well-positioned to benefit in this environment as a reputable provider of alternative capital. Under the right circumstances, we will consider equity and opportunities.
With our long-term growth in mind, we are optimistic we can add income generating deals to our portfolio of assets on attractive terms for our investors. It is this favorable market environment that I just described combined with the pending expiration of the Queen et al. patents that led our Board of Directors to shift our dividend program to one that assesses our dividends on a quarterly basis like 99% of the dividend paying companies. The Board also declared the payment of $0.05 per share dividend for the first quarter of 2016, which is the departure from the $0.15 quarterly dividend that we have been paying for the past 5 years. The $0.05 dividend represents an approximately 6.5% yield on an annual basis based on today’s closing stock price and represents one of the highest dividend yields among healthcare related dividend paying companies.
Please turn with me now to Slide #4 where you will see a review of our transactions. This slide highlights the diverse portfolio of income generating assets with debt, royalty and hybrid transaction details. Most of our investments individually represent less than 10% of the total amount deployed and committed to-date. And in those that account for 10% or greater such as a Depomed, kaleo and ARIAD, the assets or collateral backing these investments are represented by two or more products within their respective investment. Our transactions resulted in approximately $105 million in revenue in 2015 and given that many of the royalty deals such as AcelRx, ARIAD and University of Michigan are relatively recent deals and/or based on recent or expected product launches, we believe these deals will collectively contribute significant revenue in 2016 when compared to 2015.
I want to focus on one of our first royalty investments for just a moment. I am referring to our royalty rights acquisition of Depomed’s diabetes product royalties. We reported back in November 2015 as a result of increased inventory levels at the distributor level. And due to delayed payments of Glumetza, we had not received any significant royalties on the Depomed assets in the first three quarters of 2015. This appears to be rectified as of Q4 of last year where we received $18.9 million in cash payments in October related to Q3 2015 royalties owed and also $5.3 million in November and $7.7 million in December both related to the respective prior month sales of Glumetza.
In addition, in January of this year, we received $15.5 million payment relating to December Glumetza sales, which was reduced by a $2 million credit from the period of overstocking in December 2015 to the $13.1 million that we previously disclosed. I would note that we believe this is the last of such credit. To put this five drug transaction in perspective, we received approximately $165 million of the $240.5 million advanced at the time of execution of the deal in October 2013 or 69% of that amount. We expect to continue to see royalties from this transaction until 2023, another 7 years or later. Because revenues are exceeding our internal models even after the introduction of the first generic earlier this month for Glumetza, after consultation with an independent third-party consulting group that helps us forecast these revenues, we have increased the valuation of this asset in Q4 2015 by approximately $13 million as reflected in our financials.
Before I turn the call over to Pete, I would also like to update you on recent developments from kaleo. As you may recall, in the fourth quarter of last year, we reported that Sanofi U.S. initiated a voluntary recall of Auvi-Q due to manufacturing issues. On February 18, 2016, we were advised by kaleo that Sanofi and kaleo will terminate their license and development agreement later this year. At that time, all U.S. and Canadian commercial and manufacturing rights to Auvi-Q will be returned to kaleo. kaleo tends to evaluate the timing and options for bringing Auvi-Q back to the market. We entered into a secured note purchase agreement with Accel 300, a wholly-owned subsidiary of kaleo, which as of December 31, 2015, had a principal balance of $144.8 million due to PDL. An interest reserve account previously setup as part of the note agreement will substantially cover interest payments due to PDL through the end of the second quarter of 2016 and kaleo has indicated that it intends to make payments due to PDL under the note agreement until Auvi-Q is returned to the market.
At this point, I will turn the call over to Pete to review our financials.
Thank you, John. Please turn with me now to our financial results on Slide #5. As John mentioned, 2015 was a strong year for us with record annual and quarterly revenues and also with a 9% annual growth in our earnings per share. Total revenues in 2015 increased 2% to $590.4 million from $581.2 million in 2014. Revenues for the year ended December 31, 2015 included $485.2 million in royalties from PDL’s licensees to the Queen et al. patents, $68.4 million in net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets, which included approximately $43.4 million in net cash royalty payments, $36.2 million in interest revenue from notes receivable debt financings, and $700,000 in realized gains from the sale of PDL’s investment in AxoGen common stock.
Our Queen et al. royalty revenues consists of royalties and maintenance fees earned on sales of products under license agreements associated with our Queen et al. patents. Royalty rights change in fair value, because of the revenues associated with the change in estimated fair value of our royalty rights assets, primarily Depomed, the Regents of the University of Michigan, Viscogliosi Brothers, ARIAD Pharmaceuticals and AcelRx Pharmaceuticals.
The full year 2015 revenue growth over the full year 2014 is driven by increased sales of Perjeta, Xolair and Kadcyla by PDL’s licensees, an increase in the estimated fair value of the acquired royalty rights from the company’s purchase of Depomed’s diabetes related royalties as well as foreign exchange gains and lower rebate paid to Novartis for Lucentis partially offset by decreased interest revenues due to the early payoffs of the AxoGen and Durata notes receivable. Total revenues for the fourth quarter of 2015 increased 52% to $178.1 million from $117.1 million in the fourth quarter of 2014.
Revenues for the fourth quarter of 2015 included $121.2 million in royalty payments from PDL’s licensees to the Queen et al. patent, $49.1 million in net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets, which included approximately $34.4 million in net cash royalty payments, $7.6 million in interest revenue from the notes receivable debt and $100,000 in realized gains from the sale of PDL’s investment in AxoGen common stock. The fourth quarter of 2015 revenue growth over the fourth quarter of 2014 is driven by the change in estimated fair value of our royalty rights assets, primarily Depomed, related primarily to the royalties from Glumetza, which John discussed earlier.
Operating expenses in 2015 were $40.1 million compared with $34.9 million in 2014. Operating expenses in the fourth quarter of 2014 – 2015 excuse me, were $16.5 million compared with $17.7 million in 2014. The increase in operating expenses for the year ended December 31, 2015, when compared to the year ended December 31, 2014, was a result of a restructuring loss of $4 million related to the LENSAR asset sale to ALPHAEON and an increase in general and administrative expenses of $3.9 million for closing and legal fees related to the LENSAR transaction and other legal expenses mostly related to $1.2 million in funding, the ongoing operation management of Wellstat Diagnostics and partially offset by a decrease in professional services from asset acquisition expenses. The decrease in operating expenses for the quarter ended December 31, 2015, when compared to the quarter ended December 31, 2014, was a result of the decrease in professional services from asset acquisition expenses and a decrease in compensation related expenses, partially offset by the LENSAR restructuring loss and other closing fees and an increase in legal expenses related to the operation management of Wellstat. To summarize the impact of the LENSAR asset, note receivable restructuring, in Q4 we recorded approximately $7.9 million of one-time operating expenses related to this transaction.
Net income in 2015 was $332.8 million or $2.03 per diluted share as compared with net income in 2014 of $322.2 million or $1.86 per diluted share. Net income for the fourth quarter of 2015 was $100.6 million or $0.61 per diluted share as compared with net income of $55.1 million in the same period of 2014 or $0.32 per diluted share. Net cash provided by operating activities in 2015 was $301.5 million compared with $292.3 million in the same period in 2014. PDL had cash, cash equivalents and short-term investments of $220.4 million and $293.7 million at December 31, 2015 and 2014, respectively. The decrease in cash was primarily attributable to the extinguishment of convertible notes, payment of dividends and term loan debt, offset by cash generated from operating activities and is further detailed in today’s press release and our soon to be filed Form 10-K.
I will now turn the call back over to John.
Thanks Pete. As you could see on Slide 6, we think that PDL represents a unique and exciting investment opportunity and that it affords of the opportunity for shareholders to invest in a strip of commercial stage or near commercial stage assets. As you can see, we have accumulated almost $1 billion worth of those assets in what for a provider of alternative sources of capital was reasonably unfavorable investing environment. As we suggested during the call, we anticipate that 2016 and 2017 will be more favorable investing environments for us given of the adverse turns in both equity and debt markets and we look forward to putting capital to work for the benefit of our shareholders. We also look forward to reporting to you on royalties from the Queen patents in the first quarter of this year as well as data from Lilly’s Phase 3 trial in Alzheimer’s mild patients in the fourth quarter of this year.
We have set our dividends for $0.05 per quarter and we will report on that in the – shortly into the second quarter as to how we are going to report our dividends there. After consultation with our Board of Directors and perhaps most importantly for institutional investors, we have a highly liquid stock trading at about 2.3 million shares a day, affording easy entrance and exit for those kinds of investors.
With that Operator, let us open the call up for questions.
Thank you. [Operator Instructions] And the first question is from Phil Nadeau of Cowen and Company. Your line is open.
Good afternoon. Thanks for taking my questions. First, on the Depomed royalty stream, what’s the update on the new combos with Invokana and [indiscernible], where are those in development, how soon could you start seeing royalties from them?
Phil, we will have to give you an update on that. We have been looking at them, but I actually don’t have the revised dates for you, but we will get it out here if I may.
Okay. Yes, that would be great. And second, on the Queen royalty stream, what is likely to happen with Takeda in bids royalties, have they formally kind of signed on to the Genentech like agreement or are their royalties going to end in Q1 or could we still see some modest tail of royalty payments as to the last manufactured product leaves the channel over the next few quarters?
Sure. So to answer your question, they are not party to the setup with Genentech/Roche. Their obligations are governed by when the product was manufactured prior to patent expiration in December 2014. So there is the potential it could go longer. It’s all going to depend upon how much inventory to add and what point in time.
Good and that’s very helpful. And last on your comments on the potential for doing more deals in 2016 as the environment changes, can you talk qualitatively a bit more about how quickly things have changed, is it that companies are now already kind of getting desperate for capital or do you find that with the valuations well or you are kind of on the list of the people that they are calling, although the pain isn’t quite acute yet enough for these companies, just a lot in the finance over the last year or so?
So, no – so you have actually touched on some of the themes. So I think it clearly bifurcates into two categories and that’s why we talk about ‘16 and ‘17. So with respect to ‘16, there are some who have it financed and so those are the ones who sort of I will try and get it done in the fourth quarter of ‘15 well, maybe a week till ‘16 and see how that goes. So those are probably the ones that are a large portion of our customer base for 2016 and particularly given the fact that their share prices were off, so they are not thrilled at selling equity even if the markets were as robustly open as they have been. If anything though to your point of your observation, ‘17 may be a better year as those who did raise cash in ‘14 or the first half of ‘15 spin down that cash, hopefully they have made progress in the development of their pipelines and they now need additional financial resources either to finish their filings or begin commercialization efforts.
Perfect that’s very helpful. Thanks for taking my questions.
Phil, I just want to give you an update, so we did look this up. So on Invokana, we are showing that the launch is expected for mid 2016 and then [indiscernible] these are both extended release, the launch is expected at the end of 2016. That’s the best information we have now, obviously we will keep you updated of that changes.
That’s very helpful. Thank you.
Thank you. And the next question comes from Adnan Butt of RBC Capital Markets. Your line is open.
Thanks, folks. So first, a bit more detail on kaleo, if you are able to provide it, does kaleo have the ability on its own to address the manufacturing issues and then commercialize, bring back Auvi-Q and if not what recourse does PDLI have for that particular deal?
Sure, Adnan. So, they do have the ability to both manufacture and commercialize themselves we believe. They actually have a second product if we get a smaller royalty on it provides – administers naloxone. They make that themselves. So they have their own manufacturing line to produce that one. What they are going to switch it over in their manufacturing line or take over their manufacturing line or assume the manufacturing line, the contract manufacturer has been making for Sanofi, we don’t have any insights on that and we don’t know. They do have a fair amount of cash. They are private company. They haven’t disclosed it, but they do have a fair amount of cash. They do have a small commercialization force for their naloxone product, which is delivered using the same kind of delivery system that Auvi-Q uses to deliver epinephrine. So how they are going to do it was they are going to build it all out or license it back out for some parts of it. It’s just too soon to tell. As we indicated, we got this notice on February 18. So, it’s kind of live theater.
Okay. And then in case to regain market share that is challenging, what are the backup sources of asset recovery that PDLI has?
So, we do have – so, we have rights to the revenues from it. I think we are reasonably optimistic that this is a product that we will get back to market. While we don’t know why they are ending the agreements? We can track things like the IMF sales that occurred particularly through the third quarter where we reported revenues in the fourth quarter on. And what we saw was initially an expansion of the overall market for epinephrine-based products and then particularly in the third quarter, we saw them taking market share away from the market leader. So, it’s a pretty nice product. It’s hard to imagine either they can’t commercialize it themselves that they won’t be able to find somebody else to do it and we have a right to receive those revenues once commercialization recommences.
Okay, thanks for that. And then on Glumetza, given the relative stability of payments from partners should we assume that the inventory challenges are resolved and now it’s just a matter of how the dynamics play out with the launch of the generics?
That’s what it appears to be, yes. That’s our understanding. It looks like – when we look at the inventory levels, they looked to be more approaching what you would expect to be normal levels. We do have a consultant that helps us try and engage these sorts of things. So, that’s what we are expecting, yes that at this point, it’s kind of more like your standard, you have got the first generic in, you have got two more coming in, in August and a more typical erosion curve from here on out. Yes.
And just a high level question, John, you have done a bunch of deals, is there – in this new environment, does the company have a bench towards royalty or debt or what’s your thoughts on that, please?
So, I think we are still skewed kind of more 60-40 royalty for debt. If you are going to continue to see that skew, it might push a little bit more towards royalty. We did mention just briefly in there in one sentence that you might see some instances where we take some equity positions in commercial stage EBITDA positive drug companies. There is a couple of opportunities there that we like. We have been financing a couple of those for other people. We might start taking a position in those directly. So, that might alter the mix a little bit beyond just sort of royalty and debt structures. That’s probably the only variant that I might call to your attention.
Thank you. And at this time, I would like to turn the call back over to John McLaughlin for closing remarks.
Operator thanks very much. Thank you all for joining us this afternoon on the call. We look forward to continue to update you on our progress and hope to see some of you at the RBC Health Conference later this week and the Cowen Healthcare Conference in March. Have a good day all.
Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.
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